UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2016March 31, 2017

 

OR

 

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

 

For the transition period from _____________ to ______________

 

Commission file number 001-36318

 

ATRM HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Minnesota41-1439182

Minnesota

(State or Other Jurisdiction

of
Incorporation or Organization)

 

41-1439182

(I.R.S. Employer

Identification No.)

5215 Gershwin Avenue N., Oakdale, Minnesota 55128

3050 Echo Lake Ave., Suite 300, Mahtomedi, Minnesota

(Address of Principal Executive Offices)

 

55115

(Zip Code)

 

(651) 704-1800

(Registrant’s Telephone Number, Including Area Code)

 

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X][  ] No [  ][X]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X][  ] No [  ][X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ]Accelerated filer [  ]Non-accelerated filer [  ]Smaller reporting company [X]
Emerging growth company [  ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of August 15, 2016, 2,266,219 shares of Common Stock of the Registrant were outstanding.

As of March 22, 2018, 2,396,219 shares of Common Stock of the Registrant were outstanding.

 

 

 

 

 

ATRM HOLDINGS, INC.

INDEX

 

   Page
PART I. FINANCIAL INFORMATION 
  
 Item 1.Consolidated Financial Statements 
    
  Condensed Consolidated Balance Sheets as of June 30, 2016March 31, 2017 (unaudited) and December 31, 2015201631
    
  Condensed Consolidated Statements of Operations for the three and six months ended June 30,March 31, 2017 and 2016 and 2015 (unaudited)42
    
  Condensed Consolidated Statements of Cash Flows for the sixthree months ended June 30,March 31, 2017 and 2016 and 2015 (unaudited)53
    
  Notes to Condensed Consolidated Financial Statements (unaudited)641419
    
 Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations15 201925
    
 Item 3.Quantitative and Qualitative Disclosures About Market Risk1925
    
 Item 4.Controls and Procedures1926
    

PART II. OTHER INFORMATION 
  
 Item 1.Legal Proceedings2027
    
 Item 1A.Risk Factors2128
    
 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds2128
    
 Item 3.Defaults Upon Senior Securities2128
    
 Item 4.Mine Safety Disclosures2128
    
 Item 5.Other Information2128
   
 Item 6.Exhibits2128
    
SIGNATURES2229

 

2

 

PART I.1. FINANCIAL INFORMATION

Item 1. Financial Statements

 

ATRM HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

  June 30, 2016  December 31, 2015 
  (Unaudited)    
ASSETS        
Current assets:        
Cash and cash equivalents $315  $624 
Accounts receivable, net  2,319   2,563 
Costs and estimated profit in excess of billings  1,173   472 
Inventories  1,163   1,241 
Fair value of contingent earn-out, current  363   329 
Other current assets  163   173 
Total current assets  5,496   5,402 
         
Property, plant and equipment, net  4,210   4,452 
         
Fair value of contingent earn-out, noncurrent  380   548 
Goodwill  1,733   1,733 
Intangible assets, net  1,254   1,355 
         
Total assets $13,073  $13,490 
         
LIABILITIES AND SHAREHOLDERS’ DEFICIT        
         
Current liabilities:        
Note payable – revolving line of credit $3,337  $ 
Current portion of long-term debt  1,145   1,105 
Trade accounts payable  4,185   3,491 
Billings in excess of costs and estimated profit  696   765 
Accrued compensation  285   104 
Other accrued liabilities  1,679   1,984 
Total current liabilities  11,327   7,449 
         
Long-term debt, less current portion  8,640   10,252 
Deferred income taxes  17   13 
         
Commitments and contingencies        
         
Shareholders’ deficit:        
Common stock, $.001 par value; 3,000,000 shares authorized; 2,266,219 and 2,206,219 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively  2   2 
Additional paid-in capital  69,540   69,425 
Accumulated deficit  (76,453)  (73,651)
Total shareholders’ deficit  (6,911)  (4,224)
         
Total liabilities and shareholders’ deficit $13,073  $13,490 

The accompanying notes are an integral part of the condensed consolidated financial statements.

ATRM HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

  Three months ended
June 30,
  Six months ended
June 30,
 
  2016  2015  2016  2015 
             
Net sales $5,901  $6,800  $10,952  $13,601 
Costs and expenses:                
Cost of sales  5,406   6,620   10,840   13,502 
Selling, general and administrative expenses  1,160   1,113   2,187   2,130 
Total costs and expenses  6,566   7,733   13,027   15,632 
                 
Operating loss  (665)  (933)  (2,075)  (2,031)
Other income (expense):                
Interest expense  (423)  (402)  (724)  (789)
Change in fair value of contingent earn-out  1      2    
Settlement gain     3,687      3,687 
Income (loss) from operations before income taxes  (1,087)  2,352   (2,797)  867 
Income tax (expense)  (1)  (2)  (5)  (2)
Net income (loss) $(1,088) $2,350  $(2,802) $865 
                 
Income (loss) per share:                
Basic $(0.49) $1.98  $(1.27) $0.73 
Diluted $(0.49) $1.95  $(1.27) $0.72 
                 
Weighted average common shares outstanding:                
Basic  2,223   1,186   2,214   1,186 
Diluted  2,223   1,205   2,214   1,196 

The accompanying notes are an integral part of the condensed consolidated financial statements.

ATRM HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

  Six months ended
June 30,
 
  2016  2015 
Cash flows from operating activities:        
Net income (loss) $(2,802) $865 
Adjustments to reconcile net income (loss) to net cash used in operating activities:        
Depreciation expense  156   159 
Amortization expense, intangible assets  101   221 
Amortization expense, deferred financing costs  36    
Share-based compensation expense  115   20 
Provision for bad debts     13 
Settlement gain     (3,687)
Facility expense accrual credit     (54)
Loss on sale of equipment  25    
Deferred income taxes  4   9 
Change in fair value of contingent earn-out  (2)   
Changes in operating assets and liabilities:        
Accounts receivable  244   (1,203)
Costs and estimated profit in excess of billings  (701)  693 
Inventories  78   212 
Other current assets  10   43 
Trade accounts payable  639   (497)
Billings in excess of costs and estimated profit  (69)  386 
Accrued compensation  181   222 
Other accrued liabilities  (305)  (131)
Net cash used in operating activities  (2,290)  (2,729)
         
Cash flows from investing activities:        
Purchase of property and equipment  (48)  (19)
Proceeds from earn-out consideration  136   912 
Sale of equipment  109    
Net cash generated by investing activities  197   893 
         
Cash flows from financing activities:        
Proceeds from revolving line of credit  9,675    
Principal payments on revolving line of credit  (6,144)   
Payment of deferred financing costs  (175)   
Principal payments on long-term debt  (1,572)  (26)
Proceeds from issuance of long-term debt     1,000 
Net cash generated by financing activities  1,784   974 
         
Net decrease in cash and cash equivalents  (309)  (862)
         
Cash and cash equivalents at beginning of period  624   1,996 
         
Cash and cash equivalents at end of period $315  $1,134 
         
Supplemental cash flow information:        
Cash paid for interest expense $692  $483 
Settlement Agreement:        
-      reduction of note payable to seller $  $3,226 
-      forgiveness of accrued interest $  $461 
Deferred financing costs recorded in accounts payable $55  $ 
  March 31, 2017  December 31, 2016 
  (Unaudited)    
ASSETS        
Current assets:        
Cash and cash equivalents $569  $1,247 
Restricted cash  280   150 
Accounts receivable, net  4,448   2,604 
Costs and estimated profit in excess of billings  866   1,045 
Inventories  1,304   1,404 
Fair value of contingent earn-out receivable, current  548   359 
Other current assets  409   237 
Total current assets  8,424   7,046 
         
Property, plant and equipment, net  4,335   4,393 
Fair value of contingent earn-out receivable, noncurrent  150   202 
Goodwill  3,020   3,020 
Intangible assets, net  1,925   2,117 
Total assets $17,854  $16,778 
LIABILITIES AND SHAREHOLDERS’ DEFICIT        
Current liabilities:        
Notes payable – revolving lines of credit $4,114  $3,420 
Current portion of long-term debt  1,132   1,675 
Trade accounts payable  4,719   3,776 
Billings in excess of costs and estimated profit  813   652 
Accrued compensation  440   407 
Fair value of contingent earn-out payable  991   967 
Other accrued liabilities  1,727   2,264 
Total current liabilities  13,936   13,161 
         
Long-term debt, less current portion  15,212   14,069 
Deferred income taxes  21   19 
         
Commitments and contingencies        
         
Shareholders’ deficit:        
Common stock, $.001 par value; 3,000,000 shares authorized; 2,366,219 shares issued and outstanding at March 31, 2017 and December 31, 2016  2   2 
Additional paid-in capital  69,719   69,702 
Accumulated deficit  (81,036)  (80,175)
Total shareholders’ deficit  (11,315)  (10,471)
         
Total liabilities and shareholders’ deficit $17,854  $16,778 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

51

ATRM HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

  Three months ended March 31, 
  2017  2016 
       
Net sales $9,404  $5,051 
Costs and expenses:        
Cost of sales  8,183   5,434 
Selling, general and administrative expenses  1,703   1,027 
Total costs and expenses  9,886   6,461 
         
Operating loss  (482)  (1,410)
Other (expense) income:        
Interest expense  (563)  (301)
Change in fair value of contingent earn-outs, net  188   1 
Loss before income taxes  (857)  (1,710)
Income tax expense  (4)  (4)
Net loss $(861) $(1,714)
         
Net loss per share, basic and diluted $(0.36) $(0.78)
         
Weighted average common shares outstanding, basic and diluted  2,366   2,206 

The accompanying notes are an integral part of the condensed consolidated financial statements.

2

ATRM HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

  Three months ended
March 31,
 
  2017  2016 
Cash flows from operating activities:        
Net loss $(861) $(1,714)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation  88   80 
Amortization expense, intangible assets  192   51 
Amortization expense, deferred financing costs  52   9 
Share-based compensation expense  17   67 
Loss on sale of equipment     9 
Deferred income taxes  2   2 
Change in fair value of contingent earn-out receivable  (213)  (1)
Change in fair value of contingent earn-out payable  24    
Imputed interest on seller deferred payment obligations  18    
Paid-in-kind Interest (“PIK Interest”)  613    
Changes in operating assets and liabilities:        
Accounts receivable  (1,844)  1,492 
Costs and estimated profit in excess of billings  179   (274)
Inventories  100   297 
Other current assets  (172)  (7)
Trade accounts payable  943   (1,127)
Billings in excess of costs and estimated profit  161   (225)
Accrued compensation  33   156 
Other accrued liabilities  (537)  (669)
Net cash used in operating activities  (1,205)  (1,854)
         
Cash flows from investing activities:        
Proceeds from earn-out consideration  76   38 
Purchase of property and equipment  (42)  (48)
Sale of equipment  11   1 
Net cash generated by (used in) investing activities  45   (9)
         
Cash flows from financing activities:        
Proceeds from issuance of long-term debt  500    
Proceeds from revolving line of credit  9,029   3,683 
Principal payments on revolving line of credit  (8,386)  (749)
Payment of deferred financing costs     (155)
Principal payments on long-term debt  (531)  (1,299)
Net cash generated by financing activities  612   1,480 
         
Net decrease in cash, cash equivalents and restricted cash  (548)  (383)
         
Cash, cash equivalents and restricted cash at beginning of period  1,397   624 
         
Cash, cash equivalents and restricted cash at end of period $849  $241 
         
Supplemental cash flow information:        
Cash paid for interest expense $213  $635 
Deferred financing costs recorded in accounts payable $55  $55 

The accompanying notes are an integral part of the condensed consolidated financial statements.

3

 

ATRM HOLDINGS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statementsCondensed Consolidated Financial Statements include the accounts of ATRM Holdings, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. ReferencesUnless the context otherwise requires, references in the notesNotes to the condensed consolidated financial statementsCondensed Consolidated Financial Statements to (i) “ATRM,” “the Company,the “Company,” “we,” “us” orand “our,” unless the context otherwise requires, refer to ATRM Holdings, Inc. and its consolidated subsidiaries, and their respective predecessors. Our(ii) “KBS” refers to our Maine-based modular housing manufacturing business which we acquired in 2014, is operated by our wholly-owned subsidiariessubsidiary KBS Builders, Inc. and (iii) “EBGL” refers to our Minnesota-based operations including EdgeBuilder, Inc. (“EdgeBuilder”), a manufacturer of structural wall panels, permanent wood foundation systems and other engineered wood products, and Glenbrook Building Supply, Inc. (“Glenbrook”), a retail supplier of lumber and other building supplies.

Through our wholly-owned subsidiaries, KBS, Glenbrook and EdgeBuilder, we manufacture modular buildings for commercial and residential applications in production facilities located in South Paris and Waterford, Maine, operate a retail lumber yard located in Oakdale, Minnesota, and manufacture structural wall panels, permanent wood foundation systems and other engineered wood products for use in construction of commercial and residential buildings in a production facility located in Prescott, Wisconsin.

Our previous wholly-owned subsidiary, Maine Modular Haulers, Inc. (collectively referred(“MMH”) was used to as “KBS”).provide transportation, logistics and other related services for the transportation of KBS’s completed modular buildings. In 2016, the Company decided that the shipping of KBS’s modular buildings could be done more efficiently and more economically on an outsourced basis. Under the outsourced model, KBS now directly coordinates the transportation and logistics of the delivery of its modular buildings and contracts with third-party hauling companies to transport the modules. As part of the decision to move to an outsourced transportation model, we disposed of MMH’s trucks to an unrelated third party and the frames (trailers) were transferred (at book value) to KBS from MMH. MMH was officially dissolved on March 21, 2017.

 

The condensed consolidated balance sheetCompany’s corporate headquarters is located at Glenbrook’s offices in Oakdale, Minnesota, a suburb of St. Paul.

The Condensed Consolidated Balance Sheet at December 31, 20152016, has been derived from our audited financial statements. In the opinion of management, the unaudited interim condensed consolidated financial statementsCondensed Consolidated Financial Statements include all adjustments (consisting only of normal, recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the three and six months ended June 30, 2016March 31, 2017 are not necessarily indicative of the operating results to be expected for the full year or any future period.

 

The accompanying unaudited condensed consolidated financial statementsCondensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted, pursuant to such rules and regulations. Therefore, these condensed consolidated financial statementsCondensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statementsConsolidated Financial Statements and accompanying footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016.

4

 

2.FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

 

We acknowledge that the Company continues to face a challenging operating environment, and while we continue to focus on improving our overall profitability, we reported an operating loss for the quarter ended March 31, 2017. We have incurred significant operating losses in recent years and, as of June 30, 2016,March 31, 2017, we had an accumulated deficit of approximately $76$81 million. There can be no assurance thatWorking capital has remained negative over the past several years. Cash used in operating activities, while improved as compared to the quarter ended March 31, 2016, remains negative for the quarter ended March 31, 2017. This has required us to generate funds from investing and financing activities. At March 31, 2017, we will generate sufficient revenue in the future to cover our expenses and achieve profitability on a consistent basis or at all.had outstanding debt of approximately $20.5 million.

 

We have issued various unsecured promissory notes to finance our acquisitionacquisitions of KBS in 2014and EBGL and to provide for our general working capital needs since the acquisition (see Notes 11 and 12). On February 23, 2016, as described in Note 11,needs. As of March 31, 2017, we entered intohad outstanding debt totaling approximately $20.5 million. Our debt included: (i) $2.3 million principal outstanding on KBS’s $4.0 million revolving credit facility under a loan and security agreement with Gerber Finance Inc. (“Gerber Finance”) that provides KBS with a(the “KBS Loan Agreement”), $1.8 million principal outstanding on EBGL’s $3.0 million revolving line of credit with borrowing availability of up to $4.0 million (the “Loan Agreement”). As of June 30, 2016, we had outstanding debt totaling approximately $13.0 million. This debt included $3.3 million (net of deferred financing costs) owedfacility under a line of creditloan and security agreement with Gerber Finance (the “EBGL Loan Agreement”) and $3.0 million principal outstanding under a loan and security agreement with Gerber Finance used to finance the acquisition of EBGL (the “Acquisition Loan AgreementAgreement”); (ii) $4.5 million principal amount of unsecured promissory notes issued to Lone Star Value Investors, LP (“LSVI”) and $1.2$7.6 million principal amount of unsecured promissory notes issued to Lone Star Value Co-Invest I, LP (“LSV Co-Invest I”), with interest payable semiannually and any unpaid principal and interest due on April 1, 2019 (as noted in Note 19, the promissory notes issued to LSVI and LSV Co-Invest I were exchanged for preferred stock on September 29, 2017); and (iii) $0.4 million principal amount outstanding under an unsecured promissory note issued to the primary sellersellers of KBS. Our debtKBS, payable in monthly installments of $100,000, inclusive of interest, through July 1, 2017, which have since been paid in full, with the final payment made as scheduled in July 2017. We also included $4.0had obligations to make $0.75 million principal amount of a promissory note issued to Lone Star Value Investors, LP (“LSVI”) and $4.5 million principal amount of promissory notes issued to Lone Star Value Co-Invest I, LP (“LSV Co-Invest I”). Interest on these notes is payable semiannually and any unpaid principal and interest is due on April 1, 2019.

The Company received a waiver from LSVI and LSV Co-Invest I with respectin deferred cash payments to the Company’ssellers of EBGL, payable in quarterly installments of $250,000, inclusive of interest, through October 1, 2017. As noted in Note 19, the deferred payments underto the LSVI and the LSV Co-Invest I promissory notes due on July 5, 2016, totaling approximately $445,000, permitting the Company to make these payments at any time on or before August 31, 2016. On August 12, 2016, the Company and LSVI and LSV Co-Invest I amended the LSVI and LSV Co-Invest I promissory notes allowing the Company, at its sole option, to elect to make any interest payment in-kind (“PIK Interest”) at an annual ratesellers of 12% (versus the 10% interest rate applied to cash payments) for that period. As of August 12, 2016, the Company has elected the PIK Interest option for the six-month period endedEBGL were restructured in June 30, 2016 now due on August 31, 2016. As a result, interest expense for the six months ended June 30, 2016, totaling $534,000 (calculated at the PIK Interest rate of 12%), includes the incremental interest expense of approximately $89,000.2017.

Jeffrey E. Eberwein, our Chairman of ourthe Company’s Board of Directors (the “Board”), is the manager of Lone Star Value Investors GP, LLC (“LSVGP”), the general partner of LSVI and LSV Co-Invest I, and the sole member of Lone Star Value Management, LLC (“LSVM”), the investment manager of LSVI.

 

We intendAt the applicable test dates, we were not in compliance with the following financial covenants under our loan agreements with Gerber Finance: (i) a requirement for KBS to pursue new financing atmaintain a minimum leverage ratio of 7:1 for the parent company levelfiscal year ended December 31, 2016, as its actual leverage ratio for such period was negative; (ii) a requirement for KBS not to replace all orincur a portionnet annual post-tax loss in any fiscal year of the debt owingloan agreements, as KBS’s net annual post-tax loss for the fiscal year ended December 31, 2016 was $3.2 million; and (iii) a requirement to LSVIdeliver the Company’s fiscal year-end financial statements reviewed by an independent certified accounting firm acceptable to Gerber Finance within 105 days from the fiscal year ended December 31, 2016. In August 2017, Gerber Finance provided us with a waiver for these events. As of December 31, 2017, KBS was not in compliance with the financial covenant requiring no net annual post-tax loss for KBS or the minimum leverage ratio covenant as of the next test date, December 31, 2017. We have begun discussions with Gerber Finance as to obtaining a waiver for these events. If we fail to obtain a waiver from Gerber Finance, Gerber Finance may demand the repayment of the credit facilities amount outstanding and LSV Co-Invest I and to provide for our general working capital needs. There can be no assurance we will be successful in obtaining such financing on terms favorable to us or at all. Until such time as we obtain additional financing, ATRM may be dependent on LSVI and LSV Co-Invest I, or other third parties, to provide for our general working capital needs. Although not a binding commitment, LSVM has advised us of its present intention to continue to financially support the Company as we pursue new financing.any unpaid interest thereon.

 

There can be no assurance that our existing cash reserves, together with funds generated by our operations borrowings available under the Loan Agreement and any future financings, will be sufficient to satisfy our debt payment obligations.obligations, to avoid liquidity issues and/or fund operations beyond this fiscal year. Our inability to generate funds from our operations and/or obtain financing sufficient to satisfy our debt payment obligations may result in suchour obligations being accelerated by our lenders, which would likely have a material adverse effect on our business, financial condition and results of operations. In addition, continued operating losses could further trigger violations of covenants under our debt agreements, resulting in accelerated payment of these loans. Given these uncertainties, there can be no assurance that our existing cash reserves will be sufficient to avoid liquidity issues and/or fund operations beyond this fiscal year.

 

During 2016 and 2017, we implemented several strategic initiatives, effected certain actions and continued to consider additional actions to improve the Company’s overall profitability and increase cash flows, including:

KBS’s strategic shift away from large commercial projects with significant site work to focus on its core competency of manufacturing modular buildings;
KBS’s efforts to improve operating efficiencies, including reconfiguring the South Paris factory to increase production, investments in automated equipment to reduce labor costs, implementing lean manufacturing techniques, and elimination of duplicate overhead costs through the shut-down of the Waterford factory;

5

Reduction in KBS workforce including manufacturing, sales, engineering and front-office staff;
KBS increased pricing on its base ranch model in 2017, and in November 2017, instituted a 6% lumber surcharge on all new orders to help offset the significant rise in lumber and other raw materials costs;
KBS has implemented a new dynamic pricing model for 2018, which is designed to determine its bid price quoted to customers using the most current cost information;
KBS is exploring opportunities to monetize the Waterford facility, including a potential sale or lease to a third party;
In July 2017, KBS made the final payment due to the primary seller of KBS, freeing up $100,000 per month of cash flows to be used for operations;

In October 2016, the Company acquired the EBGL businesses, which we believe that, after a transitional period, will generate net income and positive cash flows for the Company;

In 2017, we instituted a lumber hedging program for EBGL to assist in preserving existing margins against the potential large fluctuations in lumber raw material prices;
In August 2016, we amended certain of our debt agreements to allow the Company to pay PIK Interest on approximately $11 million of our debt, reducing strain on current cash flows;

As disclosed in Note 19, in June 2017, we refinanced EBGL’s revolving credit facility and amended the terms of our agreement with EdgeBuilder Wall Panels, Inc. and Glenbrook Lumber & Supply, Inc. (collectively, the “EBGL Sellers”) providing for deferred payments to obtain more favorable lending and payment terms and reduce total fees paid under these agreements;

As disclosed in Note 19, in September 2017, we converted $13.3 million of the Company’s outstanding debt, including accrued interest, to preferred stock;
As disclosed in Note 19, in January 2018, the Company issued an unsecured promissory note in the principal amount of $0.5 million to LSV Co-Invest I to provide additional working capital for the Company; and
We continue to look for opportunities to refinance our remaining debt on more favorable terms.

Although we cannot predict with certainty the outcome of any individual action to generate liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned, we believe that through these actions taken as a whole, and management’s continued efforts to improve operating results and find additional liquidity resources, we can satisfy our estimated liquidity needs for the next twelve months.

In addition to the above actions, although not a binding commitment, LSVM has advised us of its present intention to continue to financially support the Company in the event that additional financing is required. From 2014 through 2017, and again in 2018, LSVM has provided financial support in the form of financing through various debt agreements disclosed in Note 14 and Note 19. Based on LSVM’s historical support of the Company, management believes that additional financing may be provided by LSVM or its affiliates, if necessary, in the future.

Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern. We believe that the actions discussed above have either already occurred or are probable of occurring, and mitigate the substantial doubt raised by our historical operating results, as well as satisfy our estimated liquidity needs for the twelve months from the issuance of the Condensed Consolidated Financial Statements.

6

3.BUSINESS COMBINATION

On October 4, 2016, the Company acquired certain assets of the EBGL Sellers through the Company’s wholly-owned subsidiaries EdgeBuilder and Glenbrook, respectively, pursuant to the terms of an Asset Purchase Agreement, dated as of the same date, by and among the Company, EdgeBuilder, Glenbrook, the EBGL Sellers and the individual owners of the EBGL Sellers (the “EBGL Acquisition”). The Company operates the businesses of EdgeBuilder and Glenbrook on a combined basis, and such businesses are referred to on a combined basis as EBGL.

EBGL’s results are included in our consolidated statement of operations since October 4, 2016, the date of the EBGL Acquisition. The following unaudited pro forma financial information presents the combined results of ATRM and the EBGL Sellers for the three-month period ended March 31, 2016 as if the EBGL Acquisition had occurred on January 1, 2016 (in thousands, except per share amount):

  2016 
Pro forma net sales $10,080 
Pro forma net loss  (1,111)
Pro forma loss per share – basic and diluted  (0.48)

The above unaudited pro forma financial information is not necessarily indicative of what our consolidated results of operations actually would have been or what results may be expected in the future.

4.RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTSPRONOUNCEMENT

 

In AprilNovember 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)ASU No. 2015-03,2015-17,Interest - ImputationIncome Taxes (Topic 740): Balance Sheet Classification of Interest (Subtopic 835-30): SimplifyingDeferred Taxes(“ASU 2015-17”). ASU 2015-17 was issued to simplify the Presentationpresentation of Debt Issuance Costs (“ASU 2015-03”).deferred income taxes. The amendments in this guidance require that debt issuance costs related todeferred tax liabilities and assets be classified as noncurrent in a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amountclassified statement of that debt liability, consistent with debt discounts. In August 2015, the FASBfinancial position. ASU 2015-17 is effective for financial statements issued ASU No. 2015-15,Interest – Imputation of Interest (Subtopic 835-30): Presentationfor annual periods beginning after December 15, 2016, and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which allows for the presentation of debt issuance costs related to line-of-credit arrangements as either a direct deduction from the carrying amount of the debt liability in accordance with ASU 2015-03, or as an asset with subsequent amortization of the debt issuance costs ratably over the term of the arrangement.interim periods within those annual periods. As required, ATRM adopted these updates effective January 1, 2016 and elected to present the deferred financing costs associated with the Loan Agreement as a deduction from the carrying amount of such debt.2017.

 

4.5.RESTRICTED CASH

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheet that sum to the total of the same such amounts shown in the condensed consolidated statement of cash flows.

  3/31/2017 
    
Cash and cash equivalents $569 
Restricted cash  280 
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated balance sheet $849 

7

Amounts included in restricted cash represent those on deposit with Gerber Finance from time-to-time as additional collateral to support borrowing under the KBS revolving line of credit facility.

6.FAIR VALUE MEASUREMENTS

 

Financial assets reported at fair value on a recurring basis included the following at June 30, 2016March 31, 2017 (in thousands):

 

 Level 1 Level 2 Level 3  Level 1 Level 2 Level 3 
Contingent earn-out receivable related to transfer of former product line:            
Contingent earn-out receivable related to the transfer of test handler product line:            
Current portion $  $  $363  $  $  $548 
Noncurrent portion        380          150 
Total $  $  $743  $  $  $698 
Contingent earn-out payable related to the EBGL Acquisition $  $  $(991)

The following table summarizes the Level 3 activity for our contingent earn-out receivableLevel 3 assets and liabilities measured on a recurring basis (in thousands):

 

  Level 3 
    
Balance at December 31, 2015 $877 
Add - adjustments based on fair value assessments at March 31, 2016 and June 30, 2016  2 
Subtract – settlements  (136)
Balance at June 30, 2016 $743 
  Earn-out
Receivable (1)
  Earn-out
Payable (2)
 
       
Balance at December 31, 2016 $561  $(967)
Add – adjustment based on re-assessments  213    
Add – net increase based on re-assessments     (24)
Subtract – settlements  (76)   
Balance at March 31, 2017 $698  $(991)

(1)Earn-out receivable related to the transfer of our test handler product line in 2014.
(2)Earn-out payable related to the EBGL Acquisition.

 

Quantitative information about Level 3 fair value measurements on a recurring basis at June 30, 2016March 31, 2017, is summarized in the table below:

 

Fair Value Asset Valuation Technique Unobservable Input Amount
Contingent earn-outEarn-out receivable related to transfer of formertest handler product line Discounted cash flow Total projected revenue Performance weighted average Discount rate 

$

1211.3 million

60% to 125%

10 %

    Revenue growth rate  0%
Contingent earn-out payable Discounted cash flow Performance weighted average60% to 125%
Estimated gross profit for earn-out period Discount rate 

$3.4 million

10

%

 

5.7.ACCOUNTS RECEIVABLE, NET

 

Accounts receivable consists of the following (in thousands):

 

 June 30, 2016 December 31, 2015  March 31, 2017 December 31, 2016 
 (Unaudited)    (Unaudited)   
          
Contract billings $2,272  $2,586  $4,294  $2,330 
Retainage  347   347   158   370 
Subtotal  2,619   2,933   4,452   2,700 
Less - allowance for doubtful accounts  (300)  (370)
Less – allowance for doubtful accounts  (4)  (96)
Accounts receivable, net $2,319  $2,563  $4,448  $2,604 

 

Retainage balances at June 30, 2016 are expected to be collected within the next twelve months.

 

8

6.8.INVENTORIES

 

InventoriesAt March 31, 2017 and December 31, 2016, inventories totaling approximately $1.3 million and $1.4 million, respectively, consisted of raw materials inventory. There are comprisedno finished goods or work-in-process inventory included in the inventory balances as of the following (in thousands):March 31, 2017 or December 31, 2016.

 

  June 30, 2016  December 31, 2015 
  (Unaudited)    
       
Raw materials $1,088  $1,120 
Finished goods  75   121 
Total inventories $1,163  $1,241 
7.9.GOODWILL AND INTANGIBLE ASSETS, NET

 

Intangible assets are comprised of the following (in thousands):

 

 June 30, 2016 December 31, 2015  March 31, 2017
(unaudited)
 December 31, 2016 
 Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value  Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value 
 (unaudited)              
Indefinite-lived intangible assets:                                                
Goodwill $1,733  $  $1,733  $1,733  $  $1,733  $3,020  $  $3,020  $3,020  $  $3,020 
Trademarks  290      290   290      290   394      394   394      394 
Total  2,023      2,023   2,023      2,023   3,414      3,414   3,414      3,414 
                                                
Finite-lived intangible assets:                                                
Customer relationships  1,420   (456)  964   1,420   (355)  1,065   2,097   (665)  1,432   2,097   (586)  1,511 
Purchased backlog  990   (990)     990   (990)     1,290   (1,191)  99   1,290   (1,078)  212 
Total  2,410   (1,446)  964   2,410   (1,345)  1,065   3,387   (1,856)  1,531   3,387   (1,664)  1,723 
                                                
Total intangible assets $4,433  $(1,446) $2,987  $4,433  $(1,345) $3,088  $6,801  $(1,856) $4,945  $6,801  $(1,664) $5,137 

 

Amortization expense amounted to approximately $51,000 and $101,000$192,000 for the three and six months ended June 30, 2016, respectively,March 31, 2017, and approximately $61,000 and $221,000$51,000 for the three and six months ended June 30, 2015, respectively.March 31, 2016. Estimated amortization of purchased intangible assets over the next five years is as follows (in thousands):

 

2016 (six months) $102 
2017  203 
2017 (nine months) $336 
2018  203   315 
2019  203   315 
2020  203   315 
2021  164 
Thereafter  50   86 
Total $964  $1,531 

 

8.10.UNCOMPLETED CONSTRUCTION CONTRACTS

 

The status of uncompleted construction contracts is as follows (in thousands):

 

 June 30, 2016 December 31, 2015  March 31, 2017 December 31, 2016 
 (Unaudited)    (Unaudited)   
          
Costs incurred on uncompleted contracts $1,964  $1,155  $9,899 $6,575 
Inventory purchased for specific contracts  1,076   1,819   780   837 
Estimated profit  364   142   1,667   1,150 
Subtotal  3,404   3,116   12,346   8,562 
Less billings to date  (2,927)  (3,409)  (12,293)  (8,169)
Total $477  $(293) $53  $393 
                
Included in the following balance sheet captions:                
Costs and estimated profit in excess of billings $1,173  $472  $866  $1,045 
Billings in excess of costs and estimated profit  (696)  (765)  (813)  (652)
Total $477  $(293) $53  $393 

 

The Company had approximately $8.1$10.4 million of work under contract remaining to be recognized at June 30, 2016.March 31, 2017.

9

9.11.ACCOUNTS PAYABLE RETAINAGE

 

Accounts payable of approximately $4.2$4.7 million at June 30,March 31, 2017, included retainage amounts due to subcontractors of approximately $0.2 million. Accounts payable of approximately $3.8 million at December 31, 2016 included retainage amounts due to subcontractors totaling approximately $0.5 million. Accounts payable of approximately $3.5 million at December 31, 2015 included retainage amounts due to subcontractors totaling approximately $0.5$0.4 million. Retainage balances at June 30, 2016March 31, 2017, are expected to be settled within the next twelve12 months.

 

10.12.OTHER ACCRUED LIABILITIES

 

Other accrued liabilities are comprised of the following (in thousands):

 

  June 30, 2016  December 31, 2015 
  (Unaudited)    
       
Accrued interest expense $544  $502 
Accrued severance and related costs  120   331 
Accrued sales taxes  549   562 
Accrued health insurance costs  208   133 
Accrued sales rebates  205   402 
Accrued warranty  47   39 
Other  6   15 
Total other current accrued liabilities $1,679  $1,984 

In connection with a restructuring of our KBS operations during the third quarter of 2015, we terminated a total of six employees. Accrued severance costs of $120,000 as of June 30, 2016 are payable in equal weekly amounts through October 2016.

  March 31, 2017  December 31, 2016 
  (Unaudited)    
       
Accrued interest expense $374  $637 
Accrued sales taxes  892   739 
Accrued health insurance costs  108   96 
Accrued sales rebates  213   327 
Accrued warranty  50   49 
Other  90   416 
Total other accrued liabilities $1,727  $2,264 

 

Changes in accrued warranty are summarized below (in thousands):

 

 Six months ended June 30,  Three months ended March 31, 
 2016 2015  2017 2016 
      (unaudited)   
Accrual balance, beginning of period $39  $78  $       49  $39 
Accruals for warranties  37   13   1   29 
Settlements made  (29)  (33)     (29)
Accrual balance, end of period $47  $58  $50  $39 

 

11.13.NOTES PAYABLE

 

On February 23, 2016, ATRM andAs of March 31, 2017, we had outstanding notes payable of approximately $4.1 million. Our notes payable included (i) $2.3 million principal outstanding on KBS’s $4.0 million revolving credit facility under the KBS entered into the Loan Agreement with Gerber Finance, providingand (ii) $1.8 million principal outstanding on EBGL’s $3.0 million revolving credit facility under the EBGL Loan Agreement.

10

The KBS Loan Agreement provides KBS with a revolving line of credit with borrowing availability of up to $4.0 million. The initial term of the Loan Agreement expires on February 22, 2018, but extends automatically for additional one-year periods unless a party provides prior written notice of termination. Availability under the line of credit is based on a formula tied to KBS’s eligible accounts receivable, inventory, equipmentreal estate and real estate.other collateral. The KBS Loan Agreement was scheduled to expire on February 22, 2018, but, under the terms of the agreement, was extended automatically for an additional one-year period ending on February 22, 2019. The KBS Loan Agreement will extend again automatically for an additional one-year period unless a party provides prior written notice of termination. Upon the final expiration of the term of the KBS Loan Agreement, the outstanding principal balance is payable in full. Borrowings bear interest at the prime rate plus 2.75%, with interest payable monthly. The outstanding principal balance is payable upon expiration of the term of the Loan Agreement. TheKBS Loan Agreement also provides for certain fees payable to the LenderGerber Finance during its term.term, including a 1.5% annual facilities fee and a 0.10% monthly collateral monitoring fee. KBS’s obligations under the KBS Loan Agreement are secured by all of its property and assets and are guaranteed by ATRM. Unsecured promissory notes issued by KBS and ATRM are subordinate to KBS’s obligations under the KBS Loan Agreement. The KBS Loan Agreement contains representations, warranties, affirmative and negative covenants, events of default and other provisions customary for financings of this type. Financial covenants require that KBS maintainsmaintain a maximum leverage ratio (as defined in the KBS Loan Agreement) of 7:1 at December 31, 2016 and that KBS not incur a net annual post-tax loss in any fiscal year during the term of the KBS Loan Agreement. At March 31, 2017, approximately $2.4 million was outstanding under the KBS Loan Agreement, which, after offset of approximately $0.1 million of unamortized deferred financing costs, is presented at a net amount of approximately $2.3 million on the Condensed Consolidated Balance Sheet.

As of December 31, 2017, KBS was not in compliance with the financial covenant requiring no net annual post-tax loss for KBS or the minimum leverage ratio covenant as of the next test date, December 31, 2017. We have begun discussions with Gerber Finance as to obtaining a waiver for these events. Should the Company be unable to obtain a waiver from Gerber Finance, it would become an event of default. The occurrence of any event of default under the KBS Loan Agreement may result in KBS’s obligations under the KBS Loan Agreement becoming immediately due and payable.

KBS made an initial draw of approximately $2.6 million against the

The EBGL Loan Agreement provides EBGL with a revolving working capital line of credit of up to $3.0 million. Availability under the EBGL Loan Agreement is based on February 23, 2016a formula tied to the borrowers’ eligible accounts receivable, inventory and equipment. The initial term of the EBGL Loan Agreement is set to expire on October 3, 2018, but extends automatically for additional one-year periods unless a party provided prior written notice of termination. Borrowings bear interest at the prime rate plus 2.75%, with interest payable monthly and the outstanding principal balance owingis payable upon the expiration of the term of the EBGL Loan Agreement. Initially, availability under the EBGL Loan Agreement was approximately $3.3limited to $1.0 million, which amount could be increased to up to $3.0 million in increments of $500,000 upon the request of the borrowers and in the discretion of Gerber Finance. As of March 31, 2017, maximum availability was set at June 30, 2016. We incurred approximately $230,000 of debt issuance costs in connection with$2.0 million under the EBGL Loan Agreement. Obligations under the EBGL Loan Agreement were secured by all of the borrowers’ assets and were guaranteed by the Company and its other subsidiaries. The EBGL Loan Agreement contains representations, warranties, affirmative and negative covenants, events of default and other provisions customary for financings of this type. Financial covenants require that EBGL maintains a minimum tangible net worth and a minimum debt service coverage ratio. As of March 31, 2017, the Company expected that it would be in compliance with these financial covenants at the next test date, December 31, 2017; however, as discussed in Note 2, we present unamortized debt issuance costs as19, the EBGL Loan Agreement was replaced by a deduction from the carrying amount of thenew working capital line of credit balance.with a new lender. At March 31, 2017, approximately $2.0 million was outstanding under the EBGL Loan Agreement, which, after offset of approximately $0.2 million of unamortized deferred financing costs, is presented at a net amount of approximately $1.8 million on the Condensed Consolidated Balance Sheet. As of June 30, 2016,disclosed in Note 19, the net carrying value ofCompany refinanced the EBGL Loan Agreement through a new $3.0 million revolving working capital line of credit was as follows:with Premier Bank on June 30, 2017.

 

Line of credit balance $3,531 
Unamortized debt issuance costs  (194)
Line of credit balance, net $3,337 
11

 

In April 2014, as partial consideration for the purchase of KBS, we issued a $5.5 million promissory note to the primary seller of KBS. We were unable to repay the note on its maturity date, December 1, 2014. In April 2015, we asserted certain indemnification and other claims against the sellers of KBS and on June 26, 2015 we entered into a settlement agreement with the sellers related to such claims. The settlement agreement provided for, among other things, the amendment of the note to reduce its principal amount from $5.5 million to $2.5 million and the forgiveness of all then-accrued interest related to the note. The Company recorded a gain of $3.7 million in the three- and six-month periods ended June 30, 2015 related to the settlement. The amended principal amount is payable in monthly installments of $100,000 on the first business day of each month, which began on July 1, 2015. See Note 12.

 

12.14.LONG-TERM DEBT

 

Long-term debt consistsis comprised of the following (in thousands):

 

  June 30, 2016  December 31, 2015 
  (Unaudited)    
       
Promissory note payable to LSVI, issued on April 1, 2014, unsecured, 10% per annum interest payable semi-annually in July and January, with any unpaid principal and interest due on April 1, 2019 (1) $4,000  $5,000 
         
Promissory notes payable to LSV Co-Invest I, unsecured, 10% per annum interest payable semi-annually in July and January, with any unpaid principal and interest due on April 1, 2019 (2)  4,500   4,500 
         
Promissory note payable, unsecured, payable in monthly installments of $100,000 through July 2017, interest imputed at 9.5% (3)  1,231   1,757 
         
Installment payment agreement, 8.0% per annum interest, payable in monthly installments of $1,199 through September 2020 (4)  51   56 
         
Notes payable, secured by equipment, 6.6% per annum interest, with varying maturity dates through September 2018  3   44 
         
Total long-term debt  9,785   11,357 
Current portion  (1,145)  (1,105)
Noncurrent portion $8,640  $10,252 
  March 31, 2017  December 31, 2016 
  (Unaudited)    
       
Promissory note payable to LSVI, a related party, unsecured, interest of 10% per annum (12% per annum PIK Interest) payable semi-annually in July and January, with any unpaid principal and interest due on April 1, 2019 $4,522  $4,261 
         
Promissory notes payable to LSV Co-Invest I, a related party, unsecured, interest of 10% per annum (12% per annum PIK Interest) payable semi-annually in July and January, with any unpaid principal and interest due on April 1, 2019  7,625   6,773 
         
Promissory note payable to KBS, sellers, unsecured, interest imputed at 9.5%, payable in monthly installments of $100,000 (principal and interest) through July 2017  392   678 
         
Software installment payment agreement, unsecured, interest at 8.0% per annum, payable in monthly installments of $1,199 through September 2020  43   46 
         
Notes payable, secured by equipment, interest at 6.6% to 9.5% per annum, with varying maturity dates through September 2018  16   22 
         
Promissory note payable to Gerber Finance, secured, interest at the current prime rate plus 3.0% payable monthly with any unpaid principal and interest due on December 31, 2018  3,000   3,000 
         
Revolving equipment credit line, unsecured  15    
         
Deferred payments to EBGL Sellers, secured, interest imputed at 10.0%, quarterly payments of principal and interest of $250,000 beginning April 1, 2017 through October 1, 2017; as disclosed in Note 19, the Company amended the terms of the deferred payments to EBGL Sellers on June 30, 2017  731   964 
         
Total long-term debt  16,344   15,744 
Current portion  (1,132)  (1,675)
Noncurrent portion $15,212  $14,069 

 

Under the terms of the amended LSVI and LSV Co-Invest I promissory notes, the Company, at its sole option, may elect to make any interest payment in PIK Interest at an effective rate of 12% per annum (versus the 10% interest rate applied to cash payments) for that period. The Company elected the PIK Interest option for its interest payments in 2016 and recorded approximately $1.1 million of PIK Interest as part of the principal balance of the LSVI and LSV Co-Invest I promissory notes at December 31, 2016 and March 31, 2017. Subsequently, the Company has elected the PIK Interest option for its interest payments in 2017.

(1)In April 2014, we issued the promissory note to LSVI in the original principal amount of $6.0 million. The proceeds from the note were used to finance a portion of the purchase price for the acquisition of KBS. ATRM made principal payments on the note of $1.0 million on each of December 30, 2014 and February 25, 2016. The note is subordinate to obligations under the Loan Agreement.
(2)In 2014, in order to provide additional working capital to ATRM, we issued two promissory notes to LSV Co-Invest I in the amounts of $2.5 million and $2.0 million, respectively. The notes are subordinate to obligations under the Loan Agreement.
(3)Promissory note payable to the principal seller of KBS. The note does not accrue interest unless it is in default, in which case the annual interest rate would be 10%. The Company has imputed interest at an annual rate of 9.5%.
(4)Agreement to finance the purchase of software license rights and consulting services related to the implementation of enterprise management information system.12

On March 31, 2017, ATRM entered into an additional Securities Purchase Agreement with LSV Co-Invest I. Pursuant to this agreement, LSV Co-Invest I purchased for $0.5 million in cash, an unsecured promissory note dated March 31, 2017, made by ATRM in the principal amount of $0.5 million. The note bears interest at 10.0% per annum, with interest payable semiannually in January and July; provided, however, LSV Co-Invest I may elect to receive any PIK Interest at an annual rate of 12.0%, so long as any such interest payment is made either (x) entirely in PIK Interest or (y) 50% cash and 50% PIK Interest. Except for the principal amount and the PIK Interest feature, the terms of this promissory note are identical to the terms of the previous LSVI and LSV Co-Invest I promissory notes.

As disclosed in Note 19, subsequent to March 31, 2017, the Company, LSVI, and LSV Co-Invest I entered into an exchange agreement whereby the outstanding LSVI and LSV Co-Invest I promissory notes, along with accrued interest, were exchanged for 132,548 shares of the Company’s 10.0% Series B Cumulative Preferred Stock.

The Company is party to a Registration Rights Agreement with LSVI, providing LSVI with certain demand and piggyback registration rights, effective at any time after July 30, 2014, with respect to the 107,297 shares of our common stock issued upon the conversion of a convertible promissory note held by LSVI in 2014.

As of June 30, 2016,March 31, 2017, LSVI owned 1,067,885 shares of our common stock, or approximately 47.1%45.1% of our outstanding shares.shares, including 900,000 shares purchased in a common stock rights offering we completed in September 2015. Jeffrey E. Eberwein, ATRM’s Chairman of the Board, of Directors, is the manager of LSVGP, the general partner of LSVI and LSV Co-Invest I, and the sole member of LSVM, the investment manager of LSVI.

ATRM’s sale of promissory notes toentry into the securities purchase agreements with LSVI and LSV Co-Invest I werewas approved by a Special Committee of our Board of Directors consisting solely of independent directors.

 

13.15.STOCK INCENTIVE PLAN AND SHARE-BASED COMPENSATION

 

ATRM uses the fair value method to measure and recognize share-based compensation. We determine the fair value of stock options on the grant date using the Black-Scholes option valuation model. We determine the fair value of restricted stock awards based on the quoted market price of our common stock on the grant date. We recognize the compensation expense for stock options and restricted stock awards on a straight-line basis over the vesting period of the applicable awards.

 

2014 Incentive Plan

 

Our 2014 Incentive Plan (the “2014 Plan”)The Company has a stock incentive plan that was approved by ourthe Board of Directors on October 9, 2014 and became effective on December 4, 2014 (the “2014 Plan”) upon approval by shareholders. The 2014 Plan is administered by the Compensation Committee of our Board of Directors.the Board. The purpose of the 2014 Plan is to provide employees, consultants and members of our Board of Directorsmembers the opportunity to acquire an equity interest in the Company through the issuance of various stock-based awards such as stock options and restricted stock. 100,000

Under the 2014 Plan, prior to January 1, 2016, 60,000 restricted shares of the Company’s common stock are authorized to be issued pursuant to the 2014 Plan.

On June 5, 2015, ATRMwere granted restricted stock awards for a total of 60,000 shares of the Company’s common stock to its directors and chief financial officer.its then Chief Financial Officer. The shares vested one year after the grant date. Thedate and the fair value of the awards was determined to be $4.48 per share, the closing price of our common stock on the grant date. Compensation expense related to these grants amounted to approximately $48,000 and $115,000$67,000 for the three and six months ended June 30,March 31, 2016 respectively, and is included in the caption “Selling, general and administrative expenses” in our condensed consolidated statementCondensed Consolidated Statement of operations.Operations.

13

On October 19, 2016, ATRM granted 30,000 restricted shares of the Company’s common stock to its Chief Executive Officer, Chief Financial Officer and former Chief Financial Officer (10,000 shares each). The shares vest one year after the grant date and the fair value of the awards was determined to be $2.25 per share, the closing price of our common stock on the grant date. Compensation expense related to these grants amounted to approximately $20,000$17,000 for the three and six months ended June 30, 2015March 31, 2017, and is included in the caption “Selling, general and administrative expenses” in our condensed consolidated statementCondensed Consolidated Statement of operations. As of June 30, 2016, these shares are fully vested and allOperations. The remaining compensation expense related to these grantsof approximately $37,000 has been fully recognized.recognized on a straight-line basis through October 19, 2017.

 

2003 Stock Incentive Plan

 

A stock incentive plan approved by our shareholders and adopted in May 2003 (the “2003 Plan”) terminated in February 2013. Stock options granted under the 2003 Plan continue to be exercisable according to their individual terms. The following table summarizes stock option activity under the 2003 Plan for the sixthree months ended June 30, 2016:March 31, 2017:

 

  Number of Shares  Weighted Average Exercise Price  Weighted Average Remaining Contract Term  Aggregate Intrinsic Value (in thousands) 
Outstanding, January 1, 2016  27,500  $6.88         
No activity during the six months ended June 30, 2016              
Outstanding, June 30, 2016  27,500  $6.88   1.0 year  $0 
                 
Exercisable, June 30, 2016  27,500  $6.88   1.0 year  $0 
  Number
of Shares
  Weighted Average Exercise Price  Weighted Average Remaining Contract Term  Aggregate
Intrinsic
Value (in thousands)
 
Outstanding, January 1, 2017  27,500  $6.88         
Options expired during the three months ended March 31, 2017  (16,200) $7.75         
Outstanding, March 31, 2017  11,300  $5.64   0.62 years  $0 
                 
Exercisable, March 31, 2017  11,300  $5.64   0.62 years  $0 

All stock options outstandingat June 30, 2016March 31, 2017, are nonqualified options, all of which expireexpired unexercised at varying dates through November 2017. The aggregate intrinsic values in the table above are zero because the option exercise prices for all outstanding options exceeded ATRM’s closing stock price on June 30, 2016.March 31, 2017.

 

14.16.INCOME TAXES

 

We record the benefit we will derive in future accounting periods from tax losses and credits and deductible temporary differences as “deferred tax assets”.assets.” We record a valuation allowance to reduce the carrying value of our net deferred tax assets if, based on all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Since 2009, we have maintained a valuation allowance to fully reserve our deferred tax assets. We recorded a full valuation allowance in 2009 because we determined there was not sufficient positive evidence regarding our potential for future profits to outweigh the negative evidence of our three-year cumulative loss position at that time. We expect to continue to maintain a full valuation allowance until we determine that we can sustain a level of profitability that demonstrates our ability to realize these assets. To the extent we determine that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders’ equity.

 

At June 30, 2016,March 31, 2017, we have recorded a deferred tax liability of $16,500$20,700 for the taxable differences related to our indefinite livedindefinite-lived intangible assets when calculating our valuation allowance due to the unpredictability of the reversal of these differences.

 

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15.17.LEGAL PROCEEDINGS

The Company is and may become involved in various lawsuits as well as other certain legal proceedings that arise in the ordinary course of business. Information regarding certain material proceedings is provided below.

 

UTHE Technology Corporation v. Aetrium Incorporated

 

Since December 1993, an action brought by UTHE Technology Corporation (“UTHE”) against ATRM and its then sales manager for Southeast Asia (“Sales Manager”), asserting federal securities claims, a RICO claim, and certain state law claims, had been stayed in the United States District Court for the Northern District of California. UTHE’s claims were based on its allegations that four former employees of a Singapore company, which UTHE formerly owned, conspired to and did divert business from the subsidiary, and in turn UTHE, and directed that business to themselves and a secret company they had formed, which forced UTHE to sell its subsidiary shares to the former employee defendants at a distressed price. The complaint alleged that ATRM and the Sales Manager participated in the conspiracy carried out by the former employee defendants. In December 1993, the case was dismissed as to the former employee defendants because of a contract requiring UTHE and them to arbitrate their claims in Singapore. The District Courtdistrict court stayed the case against ATRM and the Sales Manager pending the resolution of arbitration in Singapore involving UTHE and three of the former employee defendants, but not involving ATRM or the Sales Manager. ATRM received notice in March 2012 that awards were made in the Singapore arbitration against one or more of the former employee defendants who were parties to the arbitration. In June 2012, UTHE filed a motion to reopen the case against ATRM and the Sales Manager and to lift the stay, which the court granted. On September 13, 2013, the court entered final judgment dismissing all remaining claims UTHE asserted against ATRM in the litigation. On September 23, 2013, UTHE appealed the district court judgment to the United States Court of Appeal for the Ninth Circuit only as to the dismissal of UTHE’s RICO claim. The appeal was argued in a court hearing on November 19, 2015. On December 11, 2015, the Courtcourt of Appealappeal issued an order reversing the district court’s grant of summary judgment of UTHE’s RICO claim and remanded the case back to the district court for further proceedings. On April 20, 2016, the district court stayed the case pending a decision in the Supreme Court caseRJR Nabisco, Inc. v. The European Community, No. 15-138. A decision in theRJR Nabisco case was issued on June 20, 2016. On July 14, 2016, ATRM filed a motion for summary judgment in the district court seeking dismissal in light of theRJR Nabiscodecision. A hearing is scheduled onOn August 26, 2016, the district court granted ATRM’s motion for August 18, 2016. If the case is not dismissed on summary judgment trialand dismissed the case. On September 19, 2016, UTHE filed its appeal to the Ninth Circuit of the district court’s grant of summary judgment and dismissal. The parties completed the appellate briefing on February 13, 2017. Oral arguments were held by the appellate court on February 14, 2018. The court is expected to be scheduled inrender its decision on the fourth quarter of 2016.appeal within 90 days. We continue to believe that the claims asserted in this matter do not have any merit and intend to vigorously defend the action. While it is not possible to predict the outcome of these legal proceedings, the cost associated with such proceedings could have a material adverse effect on our consolidated results of operations, financial position or cash flows of a future period.

Avila Plumbing & Heating Contractor, Inc. v. Modular Fun I, Inc. f/k/a KBS Building Systems, Inc. & KBS Builders, Inc. (Maine Superior Court, Oxford County, CV-15-39)

Avila Plumbing and Heating Contractor, Inc. (“Contractor”) had alleged that Modular Fun I, Inc., f/k/a KBS Building Systems Inc. & KBS Builders, Inc. (the “KBS Parties”) had failed to pay Contractor $476,477.46 that Contractor had claimed it was entitled to pursuant to contracts between it and the KBS Parties. Contractor had claimed it entered into agreements with the KBS Parties in relation to two separate projects to supply materials and furnish services relating to the design and installation of plumbing and HVAC systems. Contractor had claimed it did the work and furnished the materials contracted for and that the KBS Parties had not paid it pursuant to the contract. KBS had countersued for breach of contract and negligence, claiming that Contractor had failed to properly complete the plumbing and HVAC services it was retained to perform on one of the projects. The general contractor on that project had refused to pay KBS $518,842 that KBS was owed citing significant deficiencies in work performed and materials installed by Contractor as its reason for withholding payment from KBS. KBS had filed a lien in the amount of $518,842 on the property where such project is located and had brought a separate suit against the general contractor and others in Middlesex Superior Court in Massachusetts to enforce its lien and collect the amount owed to KBS on the project. The case was dismissed on April 12, 2016.

 

KBE Building Corporation v. KBS Builders, Inc., and ATRM Holdings, Inc., et.et al.

 

At the time of the KBS acquisition in April 2014, KBS purchased receivables for a construction project known as the Nelton Court Housing Project (“Nelton Court”) in Hartford, CT, and also performed certain “punch-list” and warranty work. Modular units for the Nelton Court project were supplied by KBS Building Systems, Inc. (“KBS-BSI”) pursuant to a contract with KBE Building Corporation (“KBE”). KBE has asserted claims against KBS-BSI, KBS and ATRM arising out of alleged delays, and for the repair of certain alleged defects in the modular units supplied to the project. KBE’s claim seeks an un-specifiedunspecified amount of damages. The action is still in the pleadings stage. The action has been transferred to the complex litigation docket of the Hartford Superior Court. The Hartford Superior Court has set a trial date for February 2018, but that date will likely be continued because all of the parties have participated in mediation and remainssettlement negotiations are ongoing, so no depositions have yet been conducted. On December 18, 2017, KBS was notified that a global settlement had been reached between all defendants and the plaintiff. Under the settlement, KBS’s insurance carriers have agreed to pay $300,000 to the plaintiff.

From time to time, in the pleadings stage with discovery stayed byordinary course of ATRM’s business, it is party to various other disputes, claims and legal proceedings. In the Court until theopinion of management, based on information available at this time, of an August 15, 2016 status conference.such disputes, claims and proceedings will not have a material effect on ATRM’s consolidated financial statements.

 

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16.18.SUBSEQUENT EVENTOPERATING SEGMENTS

 

On August 12,Prior to the EBGL Acquisition in October 2016, the Company’s operating results reflected the operating results of KBS, along with certain corporate overhead and corporate borrowing activity. Since the EBGL Acquisition, the Company alongmanages and organizes its business in two distinct reportable segments: (i) modular building manufacturing and (ii) structural wall panel and wood foundation manufacturing, including building supply retail operations. The modular building manufacturing segment, through KBS, manufactures modular buildings for both single-family residential homes and larger, commercial building projects. The structural wall panel and wood foundation manufacturing segment (which also includes the building supply retail operations) manufactures structural wall panels for both residential and commercial projects as well as permanent wood foundation systems for residential homes, through the EdgeBuilder subsidiary, in addition to operating a local building supply retail operation, through the Glenbrook subsidiary. The Company also has corporate level activities and expenditures which are not considered a reportable segment.

Each segments’ accounting policies are the same as those described in the summary of significant accounting policies, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. There are no intersegment sales.

The Company’s reportable business segments are strategic business units that offer different products and services. Each segment is managed separately because they have different manufacturing processes and market to different customer bases, in geographically different markets.

The following table presents certain financial information regarding each reportable segment as of and for the three months ended March 31, 2017 (in thousands):

  Modular Home Manufacturing  Structural Wall Panel Manufacturing  Total 
          
Segment net sales $5,608  $3,796  $9,404 
Depreciation and amortization expense  123   156   279 
Interest expense, net  85   129   214 
Segment net income (loss)  35   (279)  (244)
Total segment assets  7,867   8,463   16,330 
Expenditures for segment assets  19   23   42 

Reconciliation of Segment Information (in thousands)

Revenues   
Total net sales for reportable segments $9,404 
Other net sales   
Consolidated net sales $9,404 
Net loss    
Total net loss for reportable segments $244 
Other net sales   
Unallocated amounts:    
Other corporate expenses  477 
Interest expense  349 
Change in fair value of contingent earn-out receivable  (213)
Provision for income taxes  4 
Consolidated net loss $861 
Assets    
Total assets for reportable segments $16,330 
Other assets  1,524 
Consolidated assets $17,854 

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Other Significant Adjustments Segment Totals  Adjustments  Consolidated Totals 
          
Depreciation and amortization expense $280  $  $280 
Interest expense $214  $349  $563 

The adjustment to interest expense is the amount of interest incurred by the Company at the parent level, but not allocated to the operating segments. The other adjustments reflect amounts incurred at the parent not allocated to the operating segments. None of the other adjustments are considered significant.

19.SUBSEQUENT EVENTS

EBGL Line of Credit

On June 30, 2017, EBGL entered into a Revolving Credit Loan Agreement (the “Premier Loan Agreement”) with Premier Bank (“Premier”) providing EBGL with a working capital line of credit of up to $3.0 million. The Premier Loan Agreement replaced the EBGL Loan Agreement with Gerber Finance, which was terminated on the same date. Availability under the Premier Loan Agreement is based on a formula tied to EBGL’s eligible accounts receivable, inventory and equipment, and borrowings bear interest at the prime rate plus 1.50%, with interest payable monthly and the outstanding principal balance payable upon expiration of the term of the Premier Loan Agreement. The Premier Loan Agreement also provides for certain fees payable to Premier during its term. The initial term of the Premier Loan Agreement expires on June 30, 2018, but may be extended from time to time at our request, subject to approval by Premier. EBGL’s obligations under the Premier Loan Agreement are secured by all of their inventory, equipment, accounts and other intangibles, fixtures and all proceeds of the foregoing.

The Premier Loan Agreement contains representations, warranties, affirmative and negative covenants, events of default and other provisions customary for financings of this type. The occurrence of any event of default under the Premier Loan Agreement may result in the obligations of EBGL becoming immediately due and payable.

As a condition to closing the Premier Loan Agreement, each of the Company and Jeffrey E. Eberwein, a director of the Company, executed a guaranty, dated as of the same date, in favor of Premier, absolutely and unconditionally guaranteeing all of EBGL’s obligations under the Premier Loan Agreement.

In connection with EBGL’s entry into the Premier Loan Agreement, and on the same date, EBGL repaid in full all of their obligations under and terminated the EBGL Loan Agreement. Pursuant to the termination of the EBGL Loan Agreement, all obligations of the Company in favor of Gerber Finance in connection with the EBGL Loan Agreement were extinguished.

Amended Asset Purchase Agreement

On June 30, 2017, the Company and the EBGL Sellers agreed to amend that certain Asset Purchase Agreement, dated as of October 4, 2016 (as amended, the “EBGL Asset Purchase Agreement”). Under the terms of this amendment, EBGL’s obligations to pay certain deferred payments to the EBGL Sellers ($0.75 million) and the contingent earn-out payment ($1.0 million) were replaced with set monthly payments totaling $1.8 million, payable with an initial $0.2 million payment made on or about July 3, 2017, and 16 monthly installments of $0.1 million beginning August 1, 2017, and ending on November 1, 2018.

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Amendments to Gerber Finance Loan Agreements

On June 30, 2017, the parties to the KBS Loan Agreement entered into a Third Agreement of Amendment to Loan and Security Agreement providing for increased availability under the KBS Loan Agreement to KBS under certain circumstances, and certain other changes, as well as a waiver of certain covenants.

On June 30, 2017, the Company entered into a Second Agreement of Amendment to Loan and Security Agreement to amend the Acquisition Loan Agreement to waive certain covenants and to make certain amendments in connection with the termination of the EBGL Loan Agreement and refinancing under the Premier Loan Agreement.

On July 20, 2017, the parties to the KBS Loan Agreement entered into a Fourth Agreement of Amendment to Loan and Security Agreement providing for increased availability under the KBS Loan Agreement to KBS for new equipment additions, as well as a waiver for certain covenants.

On September 29, 2017, the parties to the KBS Loan Agreement entered into a Fifth Agreement of Amendment to Loan and Security Agreement and the parties to the Acquisition Loan Agreement entered into a Third Agreement of Amendment to Loan and Security Agreement in conjunction with the Exchange with LSVI and LSV Co-Invest I, amended(see discussion below).

On December 22, 2017, the parties to the KBS Loan Agreement entered into a Sixth Agreement of Amendment to Loan and Security Agreement providing for increased availability under the KBS Loan Agreement to KBS under certain circumstances, and certain other changes. In connection with this amendment to the KBS Loan Agreement, Jeffrey E. Eberwein, a director of the Company, executed a guaranty dated November 20, 2017 in favor of Gerber Finance unconditionally guaranteeing up to $500,000 of KBS’s obligations under the KBS Loan Agreement arising from certain permitted overadvances. On December 22, 2017, the Company also entered into a Fourth Agreement of Amendment to Loan and Security Agreement to amend the terms of the Acquisition Loan Agreement to reflect certain changes made to the KBS Loan Agreement.

Preferred Stock Exchange

On September 29, 2017, the Company, LSVI and LSV Co-Invest I entered into an Exchange Agreement, dated as of the same date (the “Exchange Agreement”), pursuant to which the Company issued to LSVI and LSV Co-Invest I a total of 132,548 shares of a new class of 10.00% Series B Cumulative Preferred Stock, par value $0.001 per share (the “Series B Stock”), of the Company in exchange for the return and cancellation of all of the unsecured promissory notes allowingof the Company (the “Notes”) held by LSVI and LSV Co-Invest I (the “Exchange”). The Notes had an aggregate of $13.3 million unpaid principal and accrued and unpaid interest outstanding at the time of their cancellation. The material terms of the Series B Stock are described in the Company’s Current Report on Form 8-K filed with the SEC on October 4, 2017.

On September 29, 2017, in connection with the Exchange, the Company entered into a Registration Rights Agreement, dated as of the same date (the “Registration Rights Agreement”), with LSVI and LSV Co-Invest I. The Registration Rights Agreement provides that at any time after October 15, 2018, upon the written request of the holders of at least 66 2/3% of the shares of Series B Stock issued in the Exchange that qualify as registrable securities as defined therein, the Company will prepare and file with the SEC a registration statement covering the resale of those shares by their holders.

At the time of the Exchange, LSVI also owned 1,067,885 shares of the Company’s common stock, or approximately 45% of the shares outstanding. Additionally, 10,000 shares of the Company’s common stock were held in an account managed by LSVM, an affiliate of LSVI and LSV Co-Invest I. Jeffrey E. Eberwein, Chairman of the Board, is the manager of LSVGP, the general partner of LSVI and LSV Co-Invest I, and the sole member of LSVM, the investment manager of LSVI, and therefore may be deemed to beneficially own the securities owned by LSVI and the securities held in the account managed by LSVM. The terms of the Exchange Agreement and the Series B Stock were negotiated and approved by a special committee of the Board consisting solely of disinterested and independent directors.

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On September 29, 2017, in connection with the Exchange, the Company entered into amendments to its sole option,two Loan and Security Agreements (as amended, the “Loan Agreements”) with Gerber Finance to permit the Exchange and the Company’s payment of dividends on the Series B Stock in-kind, by the issuance of additional shares of Series B Stock, in accordance with the terms of the Series B Stock (as described below). Under the Loan Agreements, the Company is not permitted to pay dividends on the Series B Stock in cash without the consent of Gerber Finance. Additionally, in connection with the Exchange, the subordination agreements by and among the Company, LSVI, LSV Co-Invest I and Gerber Finance, providing for the subordination of the Company’s obligations under the Notes to its obligations to Gerber Finance, were terminated.

Charter Amendments

At the Company’s 2017 Annual Meeting of Shareholders held on December 4, 2017, shareholders approved amendments to its Amended and Restated Articles of Incorporation (the “Existing Charter”) to:

(i)increase the number of authorized shares of the Company’s capital stock from 3,200,000 to 10,000,000, and make corresponding changes to the number of authorized shares of the Company’s common stock and preferred stock;
(ii)effect a 4-for-1 forward stock split of the Series B Stock; and
(iii)effect an extension to December 5, 2020 of the provisions of the Existing Charter designed to protect the tax benefits of the Company’s net operating loss carryforwards by generally restricting any direct or indirect transfers of the Company’s common stock that increase the direct or indirect ownership of the Company’s common stock by any Person (as defined in the Existing Charter) from less than 4.99% to 4.99% or more of the Company’s common stock, or increase the percentage of the Company’s common stock owned directly or indirectly by a Person owning or deemed to own 4.99% or more of the Company’s common stock (the “Extended Protective Amendment”).

On December 4, 2017, the Company filed Articles of Amendment with the Office of the Secretary of State of the State of Minnesota to effect these amendments.

Promissory Note Sale to LSV Co-Invest I

On January 12, 2018, the Company issued to LSV Co-Invest I an unsecured promissory note in the principal amount of $0.5 million in exchange for the same amount in cash (the “LSV Co-Invest I Note”). The LSV Co-Invest I Note was issued pursuant to a securities purchase agreement by and between the Company and LSV Co-Invest I dated as of the same date. The LSV Co-Invest I Note bears interest at 10.0% per annum, with interest payable semiannually; provided, however, LSV Co-Invest I may elect to makereceive any interest payment in-kindas PIK Interest at an annual rate of 12% (versus12.0%, so long as any such interest payment is made either (x) entirely in PIK Interest or (y) 50% cash and 50% PIK Interest. Any unpaid principal and interest under the 10% interest rate applied to cash payments) for that period.LSV Co-Invest I Note is due on January 12, 2020. The Company has electedmay prepay the PIK Interest optionLSV Co-Invest I Note at any time after a specified amount of advance notice to LSV Co-Invest I (subject to certain restrictions under the Company’s existing loan agreements). The LSV Co-Invest I Note provides for customary events of default, the six-month period ended June 30, 2016 nowoccurrence of any of which may result in the principal and unpaid interest then outstanding becoming immediately due on August 31, 2016.and payable.

As of January 12, 2018, LSVI owned 1,067,885 shares of our common stock, or approximately 45.1% of our outstanding shares, including 900,000 shares purchased in a common stock rights offering we completed in September 2015. Jeffrey E. Eberwein, ATRM’s Chairman of the Board, is the manager of LSVGP, the general partner of LSVI and LSV Co-Invest I, and the sole member of LSVM, the investment manager of LSVI. ATRM’s entry into the securities purchase agreement with LSV Co-Invest I was approved by a Special Committee of our Board consisting solely of independent directors.

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ATRM HOLDINGS, INC.

 

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

 

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements,Condensed Consolidated Financial Statements, and the notes thereto, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 20152016 (the “2015“2016 10-K”). All figures in the following discussion are presented on a consolidated basis. All dollar amounts and percentages presented herein have been rounded to approximate values.

 

Forward-Looking Statements

 

This report may contain “forward-looking statements”,statements,” as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not based on historical fact and involve assessments of certain risks, developments, and uncertainties in our business looking to the future. Such forward-looking statements can be identified by the use of terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “estimate”, “intend”, “continue”,“may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “intend,” “continue,” or “believe”,“believe,” or the negatives or other variations of these terms or comparable terminology. Forward-looking statements may include projections, forecasts, or estimates of future performance and developments. These forward-looking statements are based upon assumptions and assessments that we believe to be reasonable as of the date of this report. Whether those assumptions and assessments will be realized will be determined by future factors, developments, and events, which are difficult to predict and may be beyond our control. Actual results, factors, developments, and events may differ materially from those we assumed and assessed. Risks, uncertainties, contingencies, and developments, including those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and those identified in “Risk Factors” in the 20152016 10-K, could cause our future operating results to differ materially from those set forth in any forward-looking statement. There can be no assurance that any such forward-looking statement, projection, forecast or estimate contained can be realized or that actual returns, results, or business prospects will not differ materially from those set forth in any forward-looking statement. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments.

 

Recent Developments

Prior to October 2016, ATRM’s sole business was the manufacturing, selling and distributing modular housing units for residential and commercial use. On October 4, 2016, we completed the EBGL Acquisition, adding Glenbrook and EdgeBuilder to our operations. Currently, through our wholly-owned subsidiaries, KBS, Glenbrook and EdgeBuilder, we manufacture modular buildings for commercial and residential applications in production facilities located in South Paris and Waterford, Maine, operate a retail lumber yard located in Oakdale, Minnesota, and manufacture structural wall panels, permanent wood foundation systems and other engineered wood products for use in construction of commercial and residential buildings in a production facility located in Prescott, Wisconsin.

On June 30, 2017, EBGL entered into the Premier Loan Agreement with Premier providing EBGL with a working capital line of credit of up to $3.0 million. The Premier Loan Agreement replaced the EBGL Loan Agreement with Gerber Finance, which was terminated on the same date.

On June 30, 2017, the Company and EdgeBuilder Wall Panels, Inc. and Glenbrook Lumber & Supply, Inc. (collectively the “EBGL Sellers”) amended the EBGL Asset Purchase Agreement, replacing EBGL’s obligations to pay certain deferred payments to the EBGL Sellers ($0.75 million) and the contingent earn-out payment ($1.0 million) with set monthly payments totaling $1.8 million, payable with an initial $200,000 payment made on or about July 3, 2017, and 16 monthly installments beginning August 1, 2017, and ending on November 1, 2018.

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On September 29, 2017, we completed the Exchange, issuing to LSVI and LSV Co-Invest I a total of 132,548 shares of Series B Stock in exchange for the return and cancellation of all of the Notes held by LSVI and LSV Co-Invest I. The Notes had an aggregate of $13.3 million unpaid principal and accrued and unpaid interest outstanding at the time of their cancellation. The material terms of the Series B Stock are described in the Company’s Current Report on Form 8-K filed with the SEC on October 4, 2017.

On January 12, 2018, the Company issued to LSV Co-Invest I an unsecured promissory note in the principal amount of $0.5 million in exchange for the same amount in cash (the “LSV Co-Invest I Note”). The LSV Co-Invest I Note was issued pursuant to a securities purchase agreement by and between the Company and LSV Co-Invest I dated as of the same date. The LSV Co-Invest I Note bears interest at 10.0% per annum, with interest payable semiannually; provided, however, LSV Co-Invest I may elect to receive any interest as PIK Interest at an annual rate of 12.0%, so long as any such interest payment is made either (x) entirely in PIK Interest or (y) 50% cash and 50% PIK Interest. Any unpaid principal and interest under the LSV Co-Invest I Note is due on January 12, 2020. The Company may prepay the LSV Co-Invest I Note at any time after a specified amount of advance notice to LSV Co-Invest I (subject to certain restrictions under the Company’s existing loan agreements). The LSV Co-Invest I Note provides for customary events of default, the occurrence of any of which may result in the principal and unpaid interest then outstanding becoming immediately due and payable.

Results of Operations

 

Net Loss. Net loss for the sixthree months ended June 30, 2016March 31, 2017, was approximately $2.8$0.9 million as compared to net incomeloss of approximately $0.9$1.7 million for the same period in 2015. For the three months ended June 30, 2016, net loss was approximately $1.1 million as compared to net income of approximately $2.4 million for the same period2016. This improvement in 2015. The changeoperating results from the prior year periods was primarily due to a one-time settlement gainthe acquisition of approximately $3.7EBGL’s operations completed in October 2016, which added an overall gross margin of $0.4 million, recognizedand an improvement in the 2015 periods, without a similar gain in the 2016 periods.overall gross margins at KBS due to operational improvements as discussed below.

 

Net Sales. Net sales were approximately $11.0$9.4 million for the sixthree months ended June 30, 2016March 31, 2017, compared with approximately $13.6$5.1 million for the same period in 2015.2016; an increase of approximately $4.3 million. The decrease was primarily attributable to a decrease in sales of commercial structures and to a lesser extent a decrease in sales of residential homes. Sales of residential homes amounted to approximately $8.4 million for the six months ended June 30, 2016 compared with approximately $8.7 million for the same period in 2015. The decrease was primarily attributable to generally lower sales volume in the first half of 2016 and delays in re-opening our Waterford factory. Sales of commercial structures were approximately $2.3 million for the six months ended June 30, 2016 compared with approximately $4.9 million for the same period in 2015. Sales in 2016 included approximately $1.5 million for two multi-tenant buildings that were originally scheduled to be delivered in May 2015. As previously disclosed, the deliveryaddition of the modules for this projectEBGL operations, which were delayed due to issues at the customer site and a lawsuit filed by an adjoining land owner, neither of which involved KBS. Otherwise, commercialacquired in October 2016, added approximately $3.8 million in net sales decreased significantly in recent quarters as we worked to close out several commercial projects that we assumed at the time of the KBS acquisition in April 2014 and implemented our strategy to reduce low-margin site work we historically performed on such projects. We have completed the service work related to these “legacy” projects and believe we are now in a position to grow our commercial business with project scopes and terms that are more favorable to KBS than in the past. Sales for the three months ended June 30, 2016 decreasedMarch 31, 2017. The remaining increase of $0.5 million is related to $5.9the growth of net sales for KBS. KBS’s net revenues for the three months ended March 31, 2017 were approximately $5.6 million as compared with $6.8to approximately $5.1 million for the same periodthree months ended March 31, 2016. KBS’s growth in 2015 duenet sales was driven primarily by the sale of single-family homes, which increased from approximately $3.5 million for the three months ended March 31, 2016 to approximately $4.6 million for the three months ended March 31, 2017. This $1.1 million increase in the sale of single-family homes was partially offset by a decrease in revenue related to commercial projects of approximately $0.6 million from approximately $1.6 million for the three months ended March 31, 2016 to approximately $1.0 million for the three months ended March 31, 2017. The decrease in commercial project revenue reflects KBS’s previously announced strategic plan to focus on its residential home business, while continuing to be selective in the major commercial projects it selects. Net revenue from the sales due to a slower than anticipated startof single-family homes represented 82% and 69% of total KBS net revenue for the three-month periods ended March 31, 2017 and 2016, respectively. Conversely, net revenue from commercial projects represented 18% and 31% of total KBS net revenue for the three-month periods ended March 31, 2017 and 2016, respectively. Additionally, the increase in sales of single-family homes at KBS for the three-month period ended March 31, 2017, as compared to the building season as discussed above.three-month period ended March 31, 2016, included an improved sales mix of its residential single-family homes, which contributed to the increase in overall gross margins.

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Cost of Sales. Cost of sales amounted to approximately $10.8$8.2 million for the sixthree months ended June 30, 2016March 31, 2017, compared with approximately $13.5$5.4 million for the same period in 2015. The decrease in 20162016. This increase of approximately $2.8 million was attributed primarilydue to lower commercial project sales, partially offset by reduced costs related to legacy projects. Cost of goods sold in both 2016 and 2015 reflected inefficiencies associated with seasonally slower sales activity typically experienced in the first quarter as we retained skilled workers foraddition the upcoming building season. Additionally, for the second quarter of 2016, we incurred additional costs related to bringing our second factory back up to full production level in anticipationaddition of the peak building season. CostEBGL operations, which were acquired in October 2016, which added approximately $3.4 million in cost of sales amounted to approximately $5.4 million for the three months ended June 30,March 31, 2017. This increase due to the EBGL Acquisition was partially offset by the decrease of approximately $0.6 million in the cost of sales for KBS. Despite the growth in KBS’s net revenues over the prior first quarter, KBS’s costs of sales decreased. This decrease in cost of sales for KBS as compared to the prior year reflects the results of KBS’s strategic initiatives including more selectivity in the commercial projects the company undertakes, improved project pricing (including implementing price increases to its customers) and ongoing cost control and efficiency measures, as disclosed in Note 2 to the Condensed Consolidated Financial Statements, resulting in lower direct and overhead costs. Additionally, due to the strong backlog as of December 31, 2016, going into the first quarter, KBS was able to operate its South Paris factory at or near full capacity through the entire first quarter of 2017 as compared to the first quarter of 2016 where the factory operated at only approximately half capacity throughout the quarter due to a seasonal weakness in sales and limited backlog. The strategic initiatives at KBS, coupled with approximately $6.6 millionan improved sales mix and high capacity utilization rates, have resulted in higher gross margins for the first three months of 2017 as compared to the same period in 2015. The decrease was primarily attributable to lower residential sales during the three months ended June 30, 2016 as compared with the same period of the prior year.2016.

 

Selling, General and Administrative. Selling, general and administrative (“SG&A”) expense was approximately $2.2$1.7 million and $2.1 million for the six months ended June 30, 2016 and 2015, respectively. Share-based compensation expense amounted to approximately $115,000 in the six months ended June 30, 2016 compared with approximately $20,000 for the same period in 2015. This expense increase was offset by a decrease of approximately $120,000 in amortization expense related to intangible assets. SG&A expense was approximately $1.2 million the three months ended June 30, 2016 as compared with $1.1 million for the same period in 2015. The increase of $0.1 million is primarily attributable to higher share-based compensation expense related to the restricted stock granted in June 2015.

Interest Expense. Interest expense was approximately $0.7 million for the six months ended June 30, 2016 compared with approximately $0.8 million for the same period in 2015. The decrease was primarily attributable to a settlement agreement we negotiated in June 2015 with the primary seller of KBS, which included a reduction in the principal amount of the promissory note owed to such individual partially offset by the increased rate on the LSVI and LSV Co-Invest I notes as a result of the PIK Interest election for the six-month period ended June 30, 2016. Interest expense remained unchanged at approximately $0.4$1.0 million for the three months ended June 30,March 31, 2017, and 2016, respectively. The increase in SG&A expense of $0.7 million is primarily attributable to the addition of the EBGL operations, which were acquired in October 2016, which added approximately $0.5 million of selling, general and administrative expenses (including $0.1 million of amortization expense related to the acquired intangible assets) to the Company’s operating results. In addition, SG&A increased due to higher legal fees incurred related to post-acquisition related matters with respect to the EBGL Acquisition, as well as higher costs for KBS related to commissions and bank services charges incurred in 2017 not incurred in the same period in 2016. Commissions at KBS relate to the addition of outside sales representatives in 2016 and 2015. Althoughbank service charges related to the effective interest rateKBS line of credit with Gerber Finance added in February 2016.

Interest Expense. Interest expense increased by approximately $0.3 million from approximately $0.3 million for the three months ended June 30,March 31, 2016 wasto approximately $0.6 million for the three months ended March 31, 2017. This increase is attributable to the increase in overall debt for the Company from approximately $12.8 million at March 31, 2016, to approximately $20.5 million at March 31, 2017. See Notes 13 and 14 to the Condensed Consolidated Financial Statements for the period ended March 31, 2017, for further details on the Company’s outstanding debt. In addition to the overall increase in outstanding debt, the increase in interest expense is also attributable to the higher interest rate related to the Notes held by LSVI and LSV Co-Invest I, which were accrued at the PIK Interest rate of 12% during the three months ended March 31, 2017, versus the cash interest rate of 10% for the three months ended June 30, 2015 due tosame period in 2016. The Company elected the PIK Interest electionoption for the six-monththree-month period ended June 30, 2016, the overall principal balance was lower by $1 million for the three months ended June 30, 2016 as compared to the same period in 2015 due to a principal payment made during the first quarter of 2016.

Settlement Gain.As noted above, in the three and six months ended June 30, 2015, we recorded a settlement gain of approximately $3.7 million as a result of the settlement agreement with the primary seller of KBS whereby, among other things, the principal amount on the seller’s note was reduced from $5.5 million to $2.5 million and the forgiveness of all then-accrued interest related to the note. There was no similar gain for the same periods of 2016.March 31, 2017.

 

Income Taxes. Since 2009, we have maintained a valuation allowance to fully reserve our deferred tax assets. We expect to continue to maintain a full valuation allowance until we determine that we can sustain a level of profitability that demonstrates our ability to realize these assets. To the extent we determine that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increasea decrease in shareholders’ equity.deficit. We recorded income tax expense of $5,000$4,000 for the sixthree months ended June 30,March 31, 2017 and 2016, respectively, which included deferred income tax expense associated with taxable differences related to our indefinite-lived intangible assets which are omitted from the calculation of our valuation allowance due to the unpredictability of the reversal of these differences.

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Financial Condition, Liquidity and Capital Resources

 

Cash and cash equivalents, including restricted cash, decreased by approximately $0.3$0.6 million in the sixthree months ended June 30, 2016.March 31, 2017.

 

Cash flows used in operating activities. In the sixthree months ended June 30, 2016,March 31, 2017, cash flows used in operating activities waswere approximately $2.3$1.2 million, consisting primarily of changes in working capital of approximately $1.1 million and our net loss of approximately $2.8$0.9 million and the non-cash net changes in the fair value of our contingent earnouts of approximately $0.2 million, partially offset by the non-cash PIK Interest of approximately $0.6 million, approximately $0.4 million of non-cash depreciation amortization and share-based compensation expense. Working capital changes for the six-monththree-month period ended June 30, 2016March 31, 2017, netted to approximately zero$1.1 million including an increase of approximately $1.8 million in accounts receivable resulting from the increased sales activity and the timing differences in billings to customers and payments received from customers, and a decrease of approximately $0.5 million in other accrued liabilities, primarily accrued interest. These were partially offset by increases of approximately $0.9 million in trade accounts payable and $0.2 million in billings in excess of costs and estimated profit.

In the three months ended March 31, 2016, cash flows used in operating activities was approximately $1.9 million, consisting primarily of our net loss of approximately $1.7 million and approximately $0.4 million in working capital changes, partially offset by approximately $0.2 million of non-cash depreciation, amortization and share-based compensation expense. Working capital changes using cash included a $0.7$0.3 million increase in costs and estimated profit in excess of billings and decreases of approximately $0.1$1.1 million, $0.2 million, and $0.3$0.7 million in accounts payable, billings in excess of costs and estimated profit, and other accrued liabilities, respectively, partially offset by decreases of approximately $0.2$1.5 million and $0.1$0.3 million in accounts receivable and inventories, respectively, and increases of approximately $0.6 million anda $0.2 million increase in accounts payable and accrued compensation, respectively.compensation. The decreases in accounts receivable, inventories and inventoriesaccounts payable were primarily attributable to the lower sales and production activity in the first halfquarter of fiscal year 2016 compared to the endfourth quarter of fiscal year 2015. The increase in accounts payable is primarily related to ramping up activities in advance of the building season. The increase in costs and estimated profit in excess of billings resulted primarily from an increase in work in process related to projects scheduled for delivery in the thirdsecond quarter of fiscal year 2016. The decrease in billings in excess of costs and estimated profit reflected primarily the delivery of modules for two multi-tenant buildings in the first quarter of fiscal year 2016. The decrease in other accrued liabilities is primarily related to decreases in accrued builder sales rebates and accrued severance.

In the six months ended June 30, 2015, cash flows used in operating activities was approximately $2.7 million, consisting primarily of our net loss of approximately $2.8 million (excluding a $3.7 million non-cash settlement gain) and approximately $0.3 million in working capital changes, partially offset by approximately $0.4 million in non-cash depreciation and amortization expense. Working capital changes using cash included an increase of approximately $1.2 million in accounts receivable and decreases of approximately $0.5 million in accounts payable and $0.1 million in other accrued liabilities, partially offset by decreases of approximately $0.7 million in costs and estimated profit in excess of billings and $0.2 million in inventories and increases of approximately $0.4 million in billings in excess of costs and estimated profit and $0.2 million in accrued compensation. The increases in accounts receivable and billings in excess of costs and estimated profit and the decreases in costs and estimated profit in excess of billings and inventories primarily reflected a relatively higher average percentage of completion of KBS commercial projects in progress at June 30, 2015 compared with that at December 31, 2014. The decrease in accounts payable resulted primarily from the timing of payments. The decrease in other accrued liabilities included the settlement of approximately $0.2$0.3 million in accrued sales rebates and a decreasedecreases of approximately $0.2$0.3 million and $0.1 million in accrued health insurance expenses, partially offset by a $0.3 million increase ininterest expense and accrued interest expense.severance costs, respectively.

 

Cash flows generated by investing activities. Cash flows from investing activities were $0.2 millioninsignificant for the six-month period ended June 30,three-month periods ending March 31, 2017 and 2016, as compared with $0.9 million for the six-month period ended June 30, 2015. The decrease was primarily the result of lower royalty payments received relatedamounting to the transfer of a former product line to a third party in fiscal year 2014. Royalty payments for the six months ended June 30, 2016 were approximatelyless than $0.1 million versus $0.9 million for the same period in 2015. In addition to lower sales volume in 2016, the royalty rate was reduced from approximately 14% (on average) to approximately 9.5% (on average) in 2016 per agreement.million.

 

Cash flows generated by financing activities. In the sixthree months ended June 30,March 31, 2017, cash flows generated by financing activities was approximately $0.6 million, which included $0.5 million proceeds from the issuance of the promissory note to LSV Co-Invest I on March 31, 2017 and approximately $0.7 million of net advances under the revolving lines of credit for KBS and EBGL, offset by approximately $0.5 million in payments on our long-term debt including a scheduled payment of $0.25 million to the EBGL Sellers and three scheduled payments totaling $0.3 million to the primary seller of KBS.

In the three months ended March 31, 2016, cash flows generated by financing activities was approximately $1.8$1.5 million, which included approximately $3.5$2.9 million of net advances under the KBS Loan Agreement, partially offset by the payments of approximately $0.2 million for financing costs under this line of costs related to our entry into the Loan Agreementcredit, and approximately $1.6$1.3 million to reduce principal balances of our long-term debt. In

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We acknowledge that the six monthsCompany continues to face a challenging operating environment, and while we continue to focus on improving our overall profitability, we reported an operating loss for the quarter ended June 30, 2015, cash flows generated by financing activities was approximately $1.0 million, which consisted primarily of $1.0 million received from the sale of a $1.0 million promissory note to LSVI.

March 31, 2017. We have incurred significant operating losses in recent years and, as of March 31, 2017, we had an accumulated deficit of approximately $81 million. Working capital has remained negative over the past several years. BeginningCash used in 2013, we implemented several strategic initiatives intendedoperating activities, while improved as compared to stabilize the Company and returnquarter ended March 31, 2016, remains negative for the quarter ended March 31, 2017. This has required us to profitability, including the salesgenerate funds from investing and financing activities. At March 31, 2017, we had outstanding debt of two semiconductor equipment product lines in July 2013 and April 2014, respectively. Also in April 2014, we acquired KBS because we believe there is significant growth opportunity in the modular housing industry and it provides ATRM with the potential to return to profitability. However, there can be no assurance that KBS will generate sufficient revenue in the future to cover our expenses and allow us to achieve profitability, on a consistent basis or at all.

As discussed in Note 11 to our condensed consolidated financial statements, on February 23, 2016, we entered into a Loan Agreement with Gerber Finance providing KBS with a credit facility with borrowing availability of up to $4.0approximately $20.5 million.

 

We have issued various promissory notes to finance our acquisitions of KBS and EBGL and to provide for our general working capital needs. As of June 30, 2016,March 31, 2017, we had outstanding debt totaling approximately $13.0$20.5 million. Our debt included $3.3(i) $2.3 million (net of deferred financing costs) owingprincipal outstanding on KBS’s $4.0 million revolving credit facility under the KBS Loan Agreement, $1.8 million principal outstanding on EBGL’s $3.0 million revolving credit facility under the EBGL Loan Agreement and $1.2$3.0 million principal outstanding under the Acquisition Loan Agreement, (ii) $4.5 million principal amount of Notes issued to LSVI and $7.6 million principal amount of Notes issued to LSV Co-Invest I, with interest payable semiannually and any unpaid principal and interest is due on April 1, 2019, and (iii) $0.4 million principal amount outstanding under an unsecured promissory note issued to the primary sellersellers of KBS, which amount is payable in monthly installments of $100,000, inclusive of interest, through July 1, 2017. Our debtWe also includedhad obligations to make $0.75 million in deferred cash payments to the $4.0 million principal amountsellers of a promissory note issuedEBGL, payable in quarterly installments of $250,000, inclusive of interest, through October 1, 2017. Since March 31, 2017, we have made the following changes to LSVI and $4.5 million principal amount of promissory notes issued to LSV Co-Invest I. Interest on the LSVI and LSV Co-Invest I notes is payable semi-annually and any unpaid principal and interest is due on April 1, 2019.Company’s outstanding debt:

 

We received a waiver from LSVI and LSV Co-Invest I with respect to our interest payments under the LSVI and LSV Co-Invest I promissory notes due on July 5, 2016, totaling approximately $445,000, permitting us to make these payments at any time on or before August 31, 2016. On August 12, 2016, the Company and LSVI and LSV Co-Invest I amended the LSVI and LSV Co-Invest I promissory notes allowing the Company, at its sole option, to elect to make any interest payment in PIK Interest at an annual rate of 12% (versus the 10% interest rate applied to cash payments) for that period. As of August 12, 2016, the Company has elected the PIK Interest option for the six-month period ended June 30, 2016 now due on August 31, 2016. As a result, interest expense for the six months ended June 30, 2016, totaling $534,000 (calculated at the PIK Interest rate of 12%), includes the incremental interest of approximately $89,000.

On June 30, 2017, the EBGL Loan Agreement was repaid in full in conjunction with EBGL entering into a new revolving credit agreement with Premier Bank, which refinanced the amounts outstanding at that time under the EBGL Loan Agreement;

On September 29, 2017, the promissory notes issued to LSVI and LSV Co-Invest I which were outstanding as of March 31, 2017, along with accrued interest through September 29, 2017, were exchanged for shares of the Company’s Series B Cumulative Preferred Stock;

The remaining $0.4 million principal amount outstanding on the unsecured promissory note issued to the primary sellers of KBS was paid in full, as scheduled, with the final payment made in July 2017;
In June 2017, the $0.75 million deferred cash payments due to the sellers of EBGL, along with the $1.0 million contingent earnout payable, were replaced with set monthly payments totaling $1.8 million payable with an initial $0.2 million payment on or about July 3, 2017, and 16 monthly installments of $0.1 million beginning August 1, 2017, and ending on November 1, 2018; and
In January 2018, the Company issued a new, unsecured promissory note in the principal amount of $0.5 million to LSV Co-Invest I to provide for additional working capital for the Company.

 

We intend to pursue new financing at the parent level to replace all or a portionJeffrey E. Eberwein, our Chairman of the debt owing toBoard, is the manager of LSVGP, the general partner of LSVI and LSV Co-Invest I, and to provide for our general working capital needs. the sole member of LSVM, the investment manager of LSVI.

There can be no assurance wethat our existing cash reserves, together with funds generated by our operations and any future financings, will be successfulsufficient to satisfy our debt payment obligations, to avoid liquidity issues and/or fund operations beyond this fiscal year. Our inability to generate funds from our operations and/or obtain financing sufficient to satisfy our payment obligations may result in obtainingour obligations being accelerated by our lenders, which would likely have a material adverse effect on our business, financial condition and results of operations. In addition, continued operating losses could further trigger violations of covenants under our debt agreements, resulting in accelerated payment of these loans. Given these uncertainties, there can be no assurance that our existing cash reserves will be sufficient to avoid liquidity issues and/or fund operations beyond this fiscal year.

During 2015, 2016, and into 2017, we implemented several strategic initiatives, effected certain actions and continued to consider additional actions to improve the Company’s overall profitability and increase cash flows, including:

KBS’s strategic shift away from large commercial projects with significant site work to focus on its core competency of manufacturing modular buildings;
KBS’s efforts to improve operating efficiencies, including reconfiguring the South Paris factory to increase production, investments in automated equipment to reduce labor costs, implementing lean manufacturing techniques, and elimination of duplicate overhead costs through the shut-down of the Waterford factory;
Reduction in KBS workforce including manufacturing, sales, engineering and front-office staff;
KBS increased pricing on its base ranch model in 2017, and in November 2017, instituted a 6% lumber surcharge on all new orders to help offset the significant rise in lumber and other raw materials costs;
KBS has implemented a new dynamic pricing model for 2018, which is designed to determine its bid price quoted to customers using the most current cost information;
KBS is exploring opportunities to monetize the Waterford facility, including a potential sale or lease to a third party;
In July 2017, KBS made the final payment due to the primary seller of KBS, freeing up $100,000 per month of cash flows to be used for operations;

In October 2016, the Company acquired the EBGL businesses, which we believe that, after a transitional period, will generate net income and positive cash flows for the Company;

In 2017, we instituted a lumber hedging program for EBGL to assist in preserving existing margins against the potential large fluctuations in lumber raw material prices;

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In August 2016, we amended certain of our debt agreements to allow the Company to pay PIK Interest on approximately $11 million of our debt, reducing strain on current cash flows;
In June 2017, we refinanced EBGL’s revolving credit facility and amended the terms of our agreement with the EBGL Sellers providing for deferred payments to obtain more favorable lending and payment terms and reduce total fees paid under these agreements;
In September 2017, we converted $13.3 million of the Company’s outstanding debt, including accrued interest, to preferred stock;
In January 2018, the Company issued an unsecured promissory note in the principal amount of $0.5 million to LSV Co-Invest I to provide additional working capital for the Company; and
We continue to look for opportunities to refinance our remaining debt on more favorable terms.

Although we cannot predict, with certainty, the outcome of any individual action to generate liquidity, including the availability of additional debt financing, or whether such new financing, on terms favorableactions would generate the expected liquidity as currently planned, we believe that through these actions taken as a whole, and management’s continued efforts to us or at all. Until such time asimprove operating results and find additional liquidity resources, we obtain additional financing, we may be dependent on LSVI and LSV Co-Invest I, or other third parties,can satisfy our estimated liquidity needs for the next twelve months.

In addition to provide for our general working capital needs. Althoughthe above actions, although not a binding commitment, LSVM has advised us of its present intention to continue to financially support the Company in the event that additional financing is required. From 2014 through 2017, and again in 2018, LSVM has provided financial support in the form of financing through various debt agreements. Based on LSVM’s historical support of the Company, management believes that additional financing may be provided by LSVM or its affiliates, if necessary, in the future.

Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as we pursue new financing.

There can be no assurancea going concern. We believe that our cashthe actions discussed above have either already occurred or are probable of occurring, and cash equivalents, together with funds generatedmitigate the substantial doubt raised by our operations and any future financings, will be sufficient tohistorical operating results, as well as satisfy our debt payment obligations. In addition, in order to execute our long-term growth strategy, which may include additional acquisitions, we may need to raise additional funds through public or private equity offerings, debt financings, or other means.estimated liquidity needs for the twelve months from the issuance of the consolidated financial statements.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

Not applicableapplicable.

 

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Item 4.Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, our chief executive officer and our chief financial officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on their evaluation of our disclosure controls and procedures, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of June 30, 2016,March 31, 2017, to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow for timely decisions regarding required disclosure.

 

Description of Material WeaknessWeaknesses

 

KBS, whichIn April 2014, we acquired the assets and assumed certain liabilities related to the operations of KBS and subsequently, in April 2014, represents our primary business activity.October 2016, we acquired certain assets related to the operations of EBGL. Prior to the acquisition,acquisitions, the KBS and EBGL operations were a privately-owned businessbusinesses with very limited administrative and accounting resources, outdated accounting software and generally weak accounting processes and internal control procedures. Specifically, material weaknesses existed in KBS’s and EBGL’s financial reporting processes with respect to (1) control over accounts payable cut-offs, (2) inventory accounting, (3) contract accounting and (4) inadequate segregation of duties in certain accounting processes, including the payroll, cash receipts and disbursements processes and management of user access rights in our accounting system, partly as a result of our limited size and accounting staff.

 

Remediation of Material WeaknessWeaknesses

 

We are working to remediate these material weaknesses. Since the April 2014 acquisition of KBS, we hired an accounting professional in July 2014 with relevant experience to assist in the effort to implement improvements at KBS andhave implemented additional organizational changes in 2015 to strengthen the accounting and other administrative functions at KBS. We have implementedKBS and improvements in processes, procedures and controls, including in the areas of payroll processing, contract accounting, proper transaction cutoffs, inventory controls, financial reporting and management oversight. In January 2016, we installed a new management information system at KBS that we believe, when fully implemented, will significantly improve our reporting and controls. DuringAt EBGL, we are in the second quarterprocess of 2016, we continued to implement newimplementing improvements in internal processes, procedures with respect to inventory accounting and controls as well as continued work onand establishing regular reporting and routine management oversight. EBGL is in the integrationprocess of upgrading its financial management information system which is expected to be fully operational by the end of 2017. The upgrade of the new management information system. old system, which was over 20 years old, will significantly improve EBGL’s financial reporting capabilities and provide enhanced controls.

Although significant progress has been made in improving the controls at KBS, additional time is required to fully develop adequate processes, procedures and controls and to determine thatwhether such processes and controls are effective. At EBGL, the improvements are at an early state, so we expect it will take significant additional time to fully develop and implement an adequate system of internal controls. We will continue to work to improve such processes, procedures and controls, and will disclose in future periods the progress we have made in our efforts to remediate these material weaknesses.

 

Changes in Internal Control Over Financial Reporting

 

As a result of the control deficiencies at KBS and EBGL discussed above, we determined that we have material weaknesses in our internal control over financial reporting. We are working to remediate these material weaknesses as discussed above.

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PART II. OTHER INFORMATION

Item 1.Legal Proceedings

 

Item1. Legal ProceedingsThe Company is and may become involved in various lawsuits as well as other certain legal proceedings that arise in the ordinary course of business. Information regarding certain material proceedings is provided below.

 

UTHE Technology Corporation v. Aetrium Incorporated

 

Since December 1993, an action brought by UTHE Technology Corporation (“UTHE”) against ATRM and its then sales manager for Southeast Asia (“Sales Manager”), asserting federal securities claims, a RICO claim, and certain state law claims, had been stayed in the United States District Court for the Northern District of California. UTHE’s claims were based on its allegations that four former employees of a Singapore company, which UTHE formerly owned, conspired to and did divert business from the subsidiary, and in turn UTHE, and directed that business to themselves and a secret company they had formed, which forced UTHE to sell its subsidiary shares to the former employee defendants at a distressed price. The complaint alleged that ATRM and the Sales Manager participated in the conspiracy carried out by the former employee defendants. In December 1993, the case was dismissed as to the former employee defendants because of a contract requiring UTHE and them to arbitrate their claims in Singapore. The District Courtdistrict court stayed the case against ATRM and the Sales Manager pending the resolution of arbitration in Singapore involving UTHE and three of the former employee defendants, but not involving ATRM or the Sales Manager. ATRM received notice in March 2012 that awards were made in the Singapore arbitration against one or more of the former employee defendants who were parties to the arbitration. In June 2012, UTHE filed a motion to reopen the case against ATRM and the Sales Manager and to lift the stay, which the court granted. On September 13, 2013, the court entered final judgment dismissing all remaining claims UTHE asserted against ATRM in the litigation. On September 23, 2013, UTHE appealed the district court judgment to the United States Court of Appeal for the Ninth Circuit only as to the dismissal of UTHE’s RICO claim. The appeal was argued in a court hearing on November 19, 2015. On December 11, 2015, the Courtcourt of Appealappeal issued an order reversing the district court’s grant of summary judgment of UTHE’s RICO claim and remanded the case back to the district court for further proceedings. On April 20, 2016, the district court stayed the case pending a decision in the Supreme Court caseRJR Nabisco, Inc. v. The European Community,, No. 15-138. A decision in theRJR Nabisco case was issued on June 20, 2016. On July 14, 2016, ATRM filed a motion for summary judgment in the district court seeking dismissal in light of theRJR Nabiscodecision. A hearing is scheduled onOn August 26, 2016, the district court granted ATRM’s motion for August 18, 2016. If the case is not dismissed on summary judgment trialand dismissed the case. On September 19, 2016, UTHE filed its appeal to the Ninth Circuit of the district court’s grant of summary judgment and dismissal. The parties completed the appellate briefing on February 13, 2017. Oral arguments were held by the appellate court on February 14, 2018. The court is expected to be scheduled inrender its decision on the fourth quarter of 2016.appeal within 90 days. We continue to believe that the claims asserted in this matter do not have any merit and intend to vigorously defend the action. While it is not possible to predict the outcome of these legal proceedings, the cost associated with such proceedings could have a material adverse effect on our consolidated results of operations, financial position or cash flows of a future period.

 

Avila Plumbing & Heating Contractor, Inc. v. Modular Fun I, Inc. f/k/a KBS Building Systems, Inc. & KBS Builders, Inc. (Maine Superior Court, Oxford County, CV-15-39)

Avila Plumbing and Heating Contractor, Inc. (“Contractor”) had alleged that Modular Fun I, Inc., f/k/a KBS Building Systems Inc. & KBS Builders, Inc. (the “KBS Parties”) had failed to pay Contractor $476,477.46 that Contractor had claimed it was entitled to pursuant to contracts between it and the KBS Parties. Contractor had claimed it entered into agreements with the KBS Parties in relation to two separate projects to supply materials and furnish services relating to the design and installation of plumbing and HVAC systems. Contractor had claimed it did the work and furnished the materials contracted for and that the KBS Parties had not paid it pursuant to the contract. KBS had countersued for breach of contract and negligence, claiming that Contractor had failed to properly complete the plumbing and HVAC services it was retained to perform on one of the projects. The general contractor on that project had refused to pay KBS $518,842 that KBS was owed citing significant deficiencies in work performed and materials installed by Contractor as its reason for withholding payment from KBS. KBS had filed a lien in the amount of $518,842 on the property where such project is located and had brought a separate suit against the general contractor and others in Middlesex Superior Court in Massachusetts to enforce its lien and collect the amount owed to KBS on the project. The case was dismissed on April 12, 2016.

KBE Building Corporation v. KBS Builders, Inc., and ATRM Holdings, Inc., et.et al.

 

At the time of the KBS acquisition in April 2014, KBS purchased receivables for a construction project known as the Nelton Court Housing Project (“Nelton Court”) in Hartford, CT, and also performed certain “punch-list” and warranty work. Modular units for the Nelton Court project were supplied by KBS Building Systems, Inc. (“KBS-BSI”) pursuant to a contract with KBE Building Corporation (“KBE”). KBE has asserted claims against KBS-BSI, KBS and ATRM arising out of alleged delays, and for the repair of certain alleged defects in the modular units supplied to the project. KBE’s claim seeks an un-specifiedunspecified amount of damages. The action is still in the pleadings stage. The action has been transferred to the complex litigation docket of the Hartford Superior CourtCourt. The court has set a trial date for February 2018, but that date will likely be continued because all of the parties have participated in mediation and remainssettlement negotiations are ongoing, so no depositions have yet been conducted. On December 18, 2017, KBS was notified that a global settlement had been reached between all defendants and the plaintiff. Under the settlement, KBS’s insurance carriers have agreed to pay $300,000 to the plaintiff.

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From time to time, in the pleadings stage with discovery stayed byordinary course of ATRM’s business, it is party to various other disputes, claims and legal proceedings. In the Court until theopinion of management, based on information available at this time, of an August 15, 2016 status conference.such disputes, claims and proceedings will not have a material effect on ATRM’s consolidated financial statements.

 

Item1A. Risk Factors

Item 1A.Risk Factors

 

Not applicable.

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

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

 

None.

Item 3. Defaults on Senior Securities

Item 3.Defaults on Senior Securities

 

None.

Item 4. Mine Safety Disclosures

Item 4.Mine Safety Disclosures

 

None.

Item 5.Other Information

 

Item 5. Other InformationNone.

 

Amendment to Promissory Notes of ATRM Holdings, Inc.

On August 12, 2016, the Company, along with LSVI and LSV Co-Invest I, amended the LSVI and LSV Co-Invest I promissory notes allowing the Company, at its sole option, to elect to make any interest payment in-kind at an annual rate of 12% (versus the 10% interest rate applied to cash payments) for that period.

Item 6. Exhibits

Item 6.Exhibits

 

 31.14.1Promissory Note, dated March 31, 2017, made by ATRM Holdings, Inc. for the benefit of Lone Star Value Co-Invest I, LP.
 10.1Securities Purchase Agreement, dated as of March 31, 2017, by and between ATRM Holdings, Inc. and Lone Star Value Co-Invest I, LP.
31.1Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 31.2Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 32.1Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 101.INSXBRL Instance Document
 
101.SCHXBRL Taxonomy Extension Schema
 
101.CALXBRL Taxonomy Extension Calculation Linkbase
 
101.DEFXBRL Taxonomy Extension Definition Linkbase
 
101.LABXBRL Taxonomy Extension Label Linkbase
 
101.PREXBRL Taxonomy Extension Presentation Linkbase

 

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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.

 

ATRM HOLDINGS, INC.
(Registrant)

Date: August 15, 2016March 23, 2018By:/s/ Daniel M. Koch
  Daniel M. Koch
  President and Chief Executive Officer (Principal Executive Officer)
   
Date: August 15, 2016March 23, 2018By:/s/ Stephen A. Clark
  Stephen A. Clark
  Chief Financial Officer (Principal Financial and Accounting Officer)

EXHIBIT INDEX

31.1Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema
101.CALXBRL Taxonomy Extension Calculation Linkbase
101.DEFXBRL Taxonomy Extension Definition Linkbase
101.LABXBRL Taxonomy Extension Label Linkbase
101.PREXBRL Taxonomy Extension Presentation Linkbase

 

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