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 September 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)

(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):

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 November 11, 2016, 2,396,219 shares of Common Stock of the Registrant were outstanding.

ATRM HOLDINGS, INC.

INDEX

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

ATRM HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

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)

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)

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

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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. References in the notes to the condensed consolidated financial statements to “ATRM,” “the Company,��� “we,” “us” or “our”, unlessUnless the context otherwise requires, references in the Notes to Condensed Consolidated Financial Statements to (i) “ATRM,” the “Company,” “we,” “us” and “our,” 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 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, 2015,2016, 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 nine months ended September 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.

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 September 30, 2016,March 31, 2017, we had an accumulated deficit of approximately $79$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 revolving line of credit with borrowing availability of up to $4.0 million (the “KBS Loan Agreement”). As of September 30, 2016, we had, $1.8 million principal outstanding debt totaling approximately $12.9 million. This debt included $2.8on EBGL’s $3.0 million (net of deferred financing costs) owedrevolving credit facility 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 KBSacquisition 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 approximately $1.0$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 includes $4.3 million principal amount outstanding under a promissory note issued to Lone Star Value Investors, LP (“LSVI”) and $4.8 million principal amount outstanding under 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.

On August 12, 2016, the Company, LSVI and LSV Co-Invest I amended the LSVI and LSV Co-Invest I promissory notes allowing the Company, at its sole option, to electhad obligations to make any interest payment$0.75 million in paid in kind interest (“PIK Interest”) at an annual rate of 12% (versus the 10% interest rate applied todeferred cash payments) for that period. The Company elected the PIK Interest option for the six-month period ended June 30, 2016. Accordingly, interest for the six months ended June 30, 2016, totaling $534,000 (calculated at the PIK Interest rate of 12%), was addedpayments to the balancesellers of EBGL, payable in quarterly installments of $250,000, inclusive of interest, through October 1, 2017. As noted in Note 19, the LSVI and LSV Co-Invest I promissory notes.deferred payments to the sellers of EBGL were restructured in June 2017.

Jeffrey E. Eberwein, our Chairman of the 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 KBS 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 one yearthis 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:

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 September 30, 2016.the issuance of the Condensed Consolidated Financial Statements.

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):

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.

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 KBS Loan Agreement as a deduction from the carrying amount of such debt.2017.

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.

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.

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

Assets reported at fair value on a nonrecurring basis included the following at September 30, 2016 (in thousands):

The following table summarizes the Level 3 activity for our earn-out receivable related to the transfer of our test handler product line (in thousands):

The following table summarizes the Level 3 activity for our goodwillassets and liabilities measured on a non-recurringrecurring basis (in thousands):

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

Quantitative information about Level 3 fair value measurements on a nonrecurring basis at September 30, 2016 is summarized in the table below:

Accounts receivable consists of the following (in thousands):

Retainage balances are expected to be collected within the next twelve months.

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.

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

Due to continued losses at KBS, we evaluated the KBS goodwill for impairment at September 30, 2016, and determined it was impaired. Accordingly, we recorded an impairment charge of $1.7 million in the quarter ended September 30, 2016.

Amortization expense amounted to approximately $51,000 and $152,000$192,000 for the three and nine months ended September 30, 2016, respectively,March 31, 2017, and approximately $61,000 and $282,000$51,000 for the three and nine months ended September 30, 2015, respectively.March 31, 2016. Estimated amortization of purchased intangible assets over the next five years is as follows (in thousands):

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

The Company had approximately $7.8$10.4 million of work under contract remaining to be recognized at September 30, 2016.March 31, 2017.

Accounts payable of approximately $4.8$4.7 million at September 30, 2016,March 31, 2017, included retainage amounts due to subcontractors of approximately $0.5$0.2 million. Accounts payable of approximately $3.5$3.8 million at December 31, 20152016 included retainage amounts due to subcontractors totaling approximately $0.5$0.4 million. Retainage balances at September 30, 2016March 31, 2017, are expected to be settled within the next 12 months.

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

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 $15,000 as of September 30, 2016, are payable in equal weekly amounts through October 2016.

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

On February 23, 2016, ATRM and KBS entered intoAs 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 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.

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 KBS 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 KBS Loan Agreement. The KBS Loan Agreement also provides for certain fees payable to Gerber 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 this time,March 31, 2017, approximately $2.4 million was outstanding under the CompanyKBS Loan Agreement, which, after offset of approximately $0.1 million of unamortized deferred financing costs, is projecting that it willpresented at a net amount of approximately $2.3 million on the Condensed Consolidated Balance Sheet.

As of December 31, 2017, KBS was not be in compliance with these covenants atthe 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, 2016, and has2017. We have begun discussions with Gerber Finance as to obtaining a waiver.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 theThe 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, 2016,a 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 KBSEBGL Loan Agreement was approximatelylimited 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 September 30, 2016. We incurred approximately $230,000 of debt issuance costs in connection with$2.0 million under the KBSEBGL 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 3, 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 September 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:

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 andwith Premier Bank 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 related to the settlement in June 2015, which is reflected in the nine-month period ended September 30, 2015. 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 12.2017.

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

On August 12, 2016,Under the Company and LSVI and LSV Co-Invest Iterms of the amended the LSVI and LSV Co-Invest I promissory notes, allowing the Company, at its sole option, tomay 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. As of August 31, 2016, theThe Company elected the PIK Interest option for the six-month period ended June 30, 2016. As a result,its interest expense for the nine months ended September 30,payments in 2016 includesand recorded approximately $1.1 million of PIK Interest related to the LSVI and LSV Co-Invest I promissory notes for the semi-annual interest period ended June 30, 2016, totaling $534,000 (calculated at the PIK Interest rateas part of 12% per annum), which includes the incremental interest of approximately $89,000 for that interest period. This interest has been added to the principal balance of those promissory notes. For the three months ended September 30, 2016, the Company accrued interest expense on the LSVI and LSV Co-Invest I promissory notes at a rate of 12% per annum, based on its current intention to exerciseDecember 31, 2016 and March 31, 2017. Subsequently, the Company has elected the PIK Interest option for its interest payments in 2017.

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 semi-annualprincipal amount of $0.5 million. The note bears interest period ending Decemberat 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, 2016.2017, 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 September 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, 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 agreements with LSVI and LSV Co-Invest I was approved by a Special Committee of our Board of Directors consisting solely of independent directors.

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 its then chief financial officer.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 $0 and $115,000$67,000 for the three and nine months ended September 30,March 31, 2016 respectively, and $66,000 and $86,000 for the three and nine months ended September 30, 2015, respectively, and is included in the caption “Selling, general and administrative expenses” in our condensed consolidated statementCondensed Consolidated Statement of operations. TheseOperations.

On October 19, 2016, ATRM granted 30,000 restricted shares became fully vested as of June 30, 2016,the Company’s common stock to its Chief Executive Officer, Chief Financial Officer and all compensationformer 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 haveamounted to approximately $17,000 for the three months ended March 31, 2017, and is included in the caption “Selling, general and administrative expenses” in our Condensed Consolidated Statement of Operations. The remaining compensation expense of 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 ninethree months ended September 30, 2016:March 31, 2017:

All stock options outstandingat September 30, 2016,March 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 September 30, 2016.March 31, 2017.

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 September 30, 2016,March 31, 2017, we have recorded a deferred tax liability of $18,000$20,700 for the taxable differences related to our indefinite-lived intangible assets when calculating our valuation allowance due to the unpredictability of the reversal of these differences.

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. On August 26, 2016, the district court granted ATRM’s motion for summary judgment and dismissed the case was dismissed.case. On September 19, 2016, UTHE filed its appeal to the Ninth Circuit of the district court’s grant of summary judgment. UTHE’s opening appeal brief is duejudgment and dismissal. The parties completed the appellate briefing on December 28, 2016. The Company will have until January 30, 2017, to submit its response brief, to which UTHE will have until February 13, 2017, to file a response brief.2017. Oral arguments were held by the appellate court on February 14, 2018. The court will set a date for hearing oral arguments, after which the court willis expected to render its decision on the appeal.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.

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 unspecified amount of damages. 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. We continue2018, but that date will likely be continued because all of the parties have participated in mediation and settlement 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 believe thatpay $300,000 to the plaintiff.

From time to time, in the ordinary course of ATRM’s business, it is party to various other disputes, claims asserted inand legal proceedings. In the opinion of management, based on information available at this matter dotime, such disputes, claims and proceedings will not have any merit and intend to vigorously defend the action.a material effect on ATRM’s consolidated financial statements.

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 manages 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):

Reconciliation of Segment Information (in thousands)

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.

EBGL Asset PurchaseLine of Credit

On October 4, 2016, the Company acquired certain assets of EdgeBuilder Wall Panels, Inc. and Glenbrook Lumber & Supply, Inc. (collectively, the “Sellers”) through the Company’s newly-formed wholly-owned subsidiaries EdgeBuilder, Inc. (“EdgeBuilder”) and Glenbrook Building Supply, Inc. (“Glenbrook”), respectively, pursuant to the terms of an Asset Purchase Agreement, dated as of the same date (the “Purchase Agreement”), by and among the Company, EdgeBuilder, Glenbrook, the Sellers and the individual owners of the 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”.

Consideration for theJune 30, 2017, EBGL Acquisition included approximately $4.0 million in cash, of which approximately $3.0 million (net of liability assumed) was paid at closing and $1.0 million is payable in four equal installments on the first day of each of the next four fiscal quarters, and 100,000 shares of the Company’s common stock, and a potential earn-out payment of up to $1.0 million based upon the amount by which EBGL’s gross profit over the 12 months commencing October 1, 2016, exceeds a specified target and the assumption of certain liabilities of the Sellers related to the purchased assets. The cash portion of the purchase price is subject to a post-closing adjustment based on the amount of inventory and pre-paid expenses included in the purchased assets, and the shares are subject to transfer restrictions for 12 months following the closing.

Estimated total purchase price is as follows:

Preliminary fair values of assets and liabilities acquired in the transaction are as follows:

We incurred expenses for professional fees associated with the EBGL Acquisition of approximately $0.4 million in the nine months ended September 30, 2016. These costs are included in the caption “Selling, general and administrative expenses” in our condensed consolidated statement of operations.

Financing from Gerber Finance Inc.

On October 4, 2016, concurrently with the closing of the EGBL Acquisition, the Company entered into a Revolving Credit Loan and Security Agreement dated as of the same date (the “EBGL Acquisition“Premier Loan Agreement”), with EBGL as the borrowers, the Company and its wholly-owned subsidiaries KBS Builders, Inc. and Maine Modular Haulers, Inc. as guarantors, and Gerber Finance as the lender, pursuant to which Gerber Finance provided EBGL with $3.0 million in financing for the EBGL Acquisition. On October 4, 2016, concurrently with the closing of the EBGL Acquisition, the same parties also entered into a Loan and Security Agreement, dated as of the same date (the “EBGL LOC Loan Agreement”Premier Bank (“Premier”), pursuant to which Gerber Finance agreed to provide providing EBGL with a working capital line of credit of up to $3.0 million. The EBGL AcquisitionPremier Loan Agreement andreplaced the EBGL LOC Loan Agreement are referred to collectively aswith Gerber Finance, which was terminated on the “EBGL Loan Agreements”.

Borrowingssame date. Availability under the EBGL AcquisitionPremier 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 3.00%1.50%, with interest payable monthly and the outstanding principal balance payable upon expiration of the term of the EBGL AcquisitionPremier Loan Agreement. The Premier Loan Agreement also provides for certain fees payable to Premier during its term. The initial term of the EBGL AcquisitionPremier Loan Agreement expires on December 31,June 30, 2018, but extends automatically for additional one-year periods unless a party provides prior written notice of termination. Availability under the EBGL LOC Loan Agreement is based on a formula tied to the borrowers’ eligible accounts receivable, inventory and equipment, and borrowings bear interest at the prime rate plus 2.75%, with interest payable monthly and the outstanding principal balance payable upon expiration of the term of the EBGL LOC Loan Agreement. Initially, availability under the EBGL LOC Loan Agreement is limited to $1.0 million, which amount may be increasedextended from time to uptime at our request, subject to $3.0 million in increments upon request of the borrowers and in the discretion of Gerber Finance. The initial term of the EBGL LOC Loan Agreement expires on October 3, 2018, but extends automatically for additional one-year periods unless a party provides prior written notice of termination.

The EBGL Loan Agreements provide for certain fees payable to Gerber Finance during their terms, including but not limited to a monthly minimum loan amount fee and an annual facility fee. The borrowers’approval by Premier. EBGL’s obligations under the EBGLPremier Loan AgreementsAgreement are secured by all of their propertyinventory, equipment, accounts and assetsother intangibles, fixtures and are guaranteed byall proceeds of the Company and its other subsidiaries. foregoing.

The EBGLPremier Loan Agreements containAgreement contains representations, warranties, affirmative and negative covenants, events of default and other provisions customary for agreementsfinancings of this type. Financial covenants include maintenance of a minimum tangible net worth and a minimum debt service coverage ratio at fiscal year end. The occurrence of any event of default under any EBGLthe Premier Loan Agreement may result in the obligations thereunderof EBGL becoming immediately due and payable.

As a condition to closing the extensionPremier Loan Agreement, each of credit to the borrowersCompany 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 Agreements,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.

Amendments to Gerber Finance Loan Agreements

On June 30, 2017, the parties to the KBS Loan Agreement entered into a subordination agreement,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 holdersother 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 (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 of 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.

On September 29, 2017, in connection with the Exchange, the Company entered into amendments to their existing subordination agreements,its two Loan and Security Agreements (as amended, the “Loan Agreements”) with Gerber Finance to permit the Exchange and the Company pursuant to whichCompany’s payment of dividends on the obligationsSeries 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 such parties are subordinatedpay 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 theits obligations to Gerber Finance, under the EBGL Loan Agreements.were terminated.

Financing from Lone Star ValueCharter 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:

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 LP

On October 4, 2016,January 12, 2018, the Company issued to LSV Co-Invest I an unsecured promissory note made by the Company in the principal amount of $2.0$0.5 million in exchange for $2.0 millionthe same amount in cash (the “October 2016 LSV“LSV Co-Invest I Note”). The October 2016 LSV Co-Invest I Note was issued pursuant to a securities purchase agreement by and between the Company and LSV Co-Invest I.I dated as of the same date. The October 2016 LSV Co-Invest I Note bears interest at 10.0% per annum, with interest payable semiannually; provided, however, for interest accruing during the 365 days after the issuance of the October 2016 LSV Co-Invest I Note, the Company may elect to makereceive any interest payment inas 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. LSV Co-Invest I may elect to receive PIK Interest in lieu of cash starting 366 days after the issuance of the October 2016 LSV Co-Invest I Note. Any unpaid principal and interest under the October 2016 LSV Co-Invest I Note is due on April 1, 2019.January 12, 2020. The Company may prepay the October 2016 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 with Gerber Finance)agreements). The October 2016 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.

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.

ATRM HOLDINGS, INC.

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.

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 ninethree months ended September 30, 2016,March 31, 2017, was approximately $5.3$0.9 million as compared to net loss of approximately $1.5$1.7 million for the same period in 2015. The change2016. This improvement in operating results from the prior year period was primarily due to a nonrecurring, non-cash $1.7the acquisition of EBGL’s operations completed in October 2016, which added an overall gross margin of $0.4 million, impairment charge takenand an improvement in September 2016 related to the write-down of the KBS goodwill in addition to a one-time settlement gain of approximately $3.7 million recognized in the 2015 periods, without a similar gain in the 2016 periods partially offset by improvedoverall gross margins and lower overall operating costsat KBS due to ongoing cost control measures. For the three months ended September 30, 2016, the Company incurred a net loss of approximately $2.5 million, which included the nonrecurring, non-cash $1.7 million goodwill impairment charge recorded in September 2016. This compares to a net loss of approximately $2.4 million for the same period in 2015. The decrease of $0.1 million was primarily related to the $1.7 million goodwill impairment charge taken in 2016, partially offset by $0.5 million in increased sales, $0.6 million in lower cost of goods sold and $0.5 million in lower selling, general and administrative expenses versus the same period of the prior year (see further discussion below).operational improvements as discussed below.

Net Sales. Net sales were approximately $17.9$9.4 million for the ninethree months ended September 30, 2016,March 31, 2017, compared with approximately $20.0$5.1 million for the same period in 2015. While net sales for the first nine months2016; an increase of approximately $4.3 million. The addition of the year decreased byEBGL operations, which were acquired in October 2016, added approximately $2.1$3.8 million versus the prior year, the Company believes that its strategic initiatives at KBS are beginning to show positive results. While the nine-month results show a decrease in net sales the results for the three months ended September 30, 2016, show thatMarch 31, 2017. The remaining increase of $0.5 million is related to the 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 to approximately $5.1 million for the three months ended March 31, 2016. KBS’s growth in net sales was driven primarily by the sale of single-family homes, which increased overfrom approximately $3.5 million for the prior year.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 net sales for the nine months ended September 30, 2016, versus the prior year was primarily attributablecommercial project revenue reflects KBS’s previously announced strategic plan to a decrease in sales of commercial structures and to a lesser extent a decrease in sales offocus on its residential homes. Sales of residential homes amounted to approximately $14.1 million for the nine months ended September 30, 2016, compared with approximately $14.7 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 $3.8 million for the nine months ended September 30, 2016, compared with approximately $5.3 million for the same period in 2015. We have completed the service work related to these “legacy” projects and believe we are now in a position to grow our commercialhome business, with project scopes and terms that are more favorable to KBS than in the past. KBS continueswhile continuing to be selective in the major commercial projects it selectsselects. Net revenue from the sales of single-family homes represented 82% and is seeking out good quality69% of total KBS net revenue for the three-month periods ended March 31, 2017 and 2016, respectively. Conversely, net revenue from commercial projects with desirable customers. Salesrepresented 18% and 31% of total KBS net revenue for the three monthsthree-month periods ended September 30,March 31, 2017 and 2016, increased to $6.9 million compared with $6.4 millionrespectively. Additionally, the increase in sales of single-family homes at KBS for the samethree-month period in 2015. This was primarily dueended March 31, 2017, as compared to the three-month period ended March 31, 2016, included an improved sales mix of its residential single-family homes, which contributed to the increase in net sales related to commercial projects which totaled approximately $1.4 million for the three months ended September 30, 2016, as compared to only $0.6 million for the three months ended September 30, 2015. This increase was partially offset by a decrease in net sales from residential single family homes, which for the three months ended September 30, 2016, totaled approximately $5.5 million as compared to approximately $5.8 million for the three months ended September 30, 2015.overall gross margins.

Cost of Sales. Cost of sales amounted to approximately $17.2$8.2 million for the ninethree months ended September 30, 2016,March 31, 2017, compared with approximately $20.4$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 $6.3 million for the three months ended September 30, 2016, compared withMarch 31, 2017. This increase due to the EBGL Acquisition was partially offset by the decrease of approximately $6.9$0.6 million in the cost of sales for the same period in 2015.KBS. Despite the increasegrowth in KBS’s net revenues over the prior first quarter, KBS’s costs of sales for the quarter, thedecreased. This decrease in cost of sales versusfor KBS as compared to the prior year third quarter isreflects the resultresults of the Company’s concerted efforts to beKBS’s strategic initiatives including more selective onselectivity in the commercial projects the company undertakes, improved project pricing (including implementing price increases to its customers) and ongoing cost control measures.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 an 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 2016.

Selling, General and Administrative. Selling, general and administrative (“SG&A”) expense was approximately $3.2$1.7 million and $3.7$1.0 million for the ninethree months ended September 30,March 31, 2017, and 2016, and 2015, respectively. The decreaseincrease in SG&A expense of $0.5$0.7 million is primarily attributable to non-recurring severance coststhe addition of the EBGL operations, which were acquired in October 2016, which added approximately $0.4$0.5 million recorded in September 2015of selling, general and administrative expenses (including $0.1 million of amortization expense related to the restructuring ofacquired 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 operations in 2015. No such expense wasrelated to commissions and bank services charges incurred in 2016. SG&A expense was approximately $1.0 million the three months ended September 30, 2016, as compared with $1.5 million for2017 not incurred in the same period in 2015. The decrease2016. Commissions at KBS relate to the addition of approximately $0.4 million is primarily attributableoutside sales representatives in 2016 and bank service charges related to a $0.4 million reductionthe KBS line of credit with Gerber Finance added in severance costs discussed above.February 2016.

Goodwill Impairment Charge.We completed a goodwill impairment assessment as of September 30, 2016, and determined that the value of goodwill was zero versus the carrying value of goodwill of $1.7 million as of that date. While the Company continues to implement its strategic plans for change at KBS and these changes are beginning to materialize in KBS’s operating results, KBS’s performance has lagged behind management’s expectations and we have been unable to fully perform to our projected levels of revenue and net income. Despite improving operating results, actual results have continued to fall short of expectations. Accordingly, until we can perform to the levels of our expectations, we determined that it was prudent to adjust our projections in our impairment analysis to reflect the historical shortfalls in results. Accordingly, we recorded a goodwill impairment charge in the amount of approximately $1.7 million in the three and nine months ended September 30, 2016. No impairment charge was recorded in the three and nine months ended September 30, 2015.

Interest Expense. Interest expense remained unchanged atincreased by approximately $1.1$0.3 million for the nine months ended September 30, 2016, and 2015. While the Company was able to reduce interest related to the reduction in the principal of the promissory note owed to the seller of KBS as a result of the negotiated settlement, the Company had increased interest expense related to the Gerber revolving working capital line of credit at KBS as well as increased interest expense related to the PIK Interest option on the LSVI and LSV Co-Invest I promissory notes. Interest expense for the three months ended September 30, 2016, wasfrom approximately $0.4 million versus $0.3 million for the three months ended September 30, 2016. TheMarch 31, 2016 to approximately $0.6 million for the three months ended March 31, 2017. This increase is primarilyattributable 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 Company accruing interest on theNotes held by LSVI and LSV Co-Invest I, promissory noteswhich were accrued at the PIK Interest rate of 12% (versus 10% effectiveduring the three months ended March 31, 2017, versus the cash interest rate of 10% for the cash payment of interest)same period in 2016 as it expects to elect2016. The Company elected the PIK Interest option for the current interest period.

Settlement Gain.As noted above, in the nine monthsthree-month period ended September 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 all then-accrued interest related to the note was forgiven. There was no similar gain for the same period 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 $7,000 and $4,000 for the ninethree months ended September 30,March 31, 2017 and 2016, and 2015, 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.

Financial Condition, Liquidity and Capital Resources

Cash and cash equivalents, including restricted cash, decreased by approximately $0.5$0.6 million in the ninethree months ended September 30, 2016.March 31, 2017.

Cash flows used in operating activities. In the ninethree months ended September 30, 2016,March 31, 2017, cash flows used in operating activities were approximately $1.2 million, consisting primarily of changes in working capital of approximately $1.1 million and our net loss of approximately $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 three-month period ended March 31, 2017, netted to approximately $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 $5.3$1.7 million and approximately $0.4 million in working capital changes, partially offset by the non-cash goodwill impairment charge of approximately $1.7 million, non-cash PIK Interest of approximately $0.5 million, approximately $0.6$0.2 million of non-cash depreciation, amortization and share-based compensation expense, and changes in net working capital of approximately $0.7 million.expense. Working capital changes for the nine-month period ended September 30, 2016, netted to approximately $0.7 andusing cash included a $1.2$0.3 million increase in trade accounts payable due to the timing of payments and increased production activity in the quarter ended September 30, 2016, while decreases in accounts receivable of $1.1 million and increases in costs and estimated profit in excess of billings of $1.1 million related to homes completed but not yet shipped as of September 30, 2016. Other changes in working capital included an increase of approximately $0.1 million in other current assets and decreases of approximately $0.3$1.1 million, $0.2 million, and $0.6$0.7 million in accounts payable, billings in excess of costs and estimated profit, and other accrued liabilities, respectively, partially offset by a decreasedecreases of approximately $0.2$1.5 million in inventory and an increase of approximately $0.3 million in accounts receivable and inventories, respectively, and a $0.2 million increase in accrued compensation.

In The decreases in accounts receivable, inventories and accounts payable were primarily attributable to the nine months ended September 30, 2015, cash flows usedlower sales and production activity in operating activities was approximately $4.0 million, consisting primarilythe first quarter of our net lossfiscal year 2016 compared to the fourth quarter of approximately $5.2 million (excluding a $3.7 million non-cash settlement gain), partially offset by approximately $0.6 million in non-cash depreciation, amortization and share-based compensation expense and approximately $0.5 million in working capital changes. Working capital changes generating cash included decreases of approximately $0.8 millionfiscal year 2015. The increase in costs and estimated profit in excess of billings and increasesresulted primarily from an increase in work in process related to projects scheduled for delivery in the second quarter of $0.4 millionfiscal year 2016. The decrease in billings in excess of costs and estimated profit $0.2 millionreflected primarily the delivery of modules for two multi-tenant buildings in accrued compensation and $0.4 million in other accrued liabilities, partially offset by a $1.0 million increase in accounts receivable and a decreasethe first quarter of approximately $0.4 million in accounts payable. 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 primarily reflected a relatively higher average percentage of completion of KBS commercial projects in progress at September 30, 2015 compared with that at December 31, 2014.fiscal year 2016. The decrease in accounts payable resulted primarily from the timing of payments. The increase in other accrued liabilities included a $0.4the settlement of approximately $0.3 million accrual for severance costs related to the restructuringin accrued sales rebates and decreases of our KBS operations described aboveapproximately $0.3 million and a $0.2 million accrual for reimbursement of certain fees and expenses of a related party, partially offset by decreases of $0.1 million in each of accrued health insurance costsinterest expense and accrued facility costs.severance costs, respectively.

Cash flows generated by investing activities. Cash flows from investing activities were approximately $0.3 millioninsignificant for the nine-month period ended September 30,three-month periods ending March 31, 2017 and 2016, as compared with $1.1 million for the nine-month period ended September 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 nine months ended September 30, 2016 were approximately $0.2 million versus $1.1 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.less than $0.1 million.