

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	27 34

	Item 1A.	Risk Factors	28 35

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28 35

	Item 3.	Defaults Upon Senior Securities	28 35

	Item 4.	Mine Safety Disclosures	28 35

	Item 5.	Other Information	28

	~~Item 6.~~	~~Exhibits~~35	28

~~SIGNATURES~~	29Item 6.	Exhibits	35


SIGNATURES			36

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

~~ATRM HOLDINGS, INC.~~

~~CONDENSED CONSOLIDATED BALANCE SHEETS~~

~~(in thousands, except share and per share data)~~

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

ATRM HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)(unaudited)

	June 30, 2018			December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	275		$	48
Restricted cash	927			482
Accounts receivable, net	5,032			3,840
Costs and estimated profit in excess of billings	—			565
Inventories	2,083			1,285
Fair value of contingent earn-out receivable, current	220			373
Other current assets	251			216
Total current assets	8,788			6,809
Property, plant and equipment, net	4,356			4,456
Fair value of contingent earn-out receivable, noncurrent	—			61
Intangible assets, net	1,431			1,589
Total assets	$	14,575		$	12,915

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Notes payable	$	7,099		$	5,969
Current portion of long-term debt	521			1,068
Trade accounts payable	6,692			4,856
Customer deposits	333			—
Billings in excess of costs and estimated profit	—			983
Accrued compensation	492			416
Other accrued liabilities	1,872			2,370
Total current liabilities	17,009			15,662
Long-term debt	4,536			3,061
Deferred income taxes	28			28
Total long-term liabilities	4,564			3,089
Total liabilities	21,573			18,751

Commitments and contingencies

Shareholders' deficit:
Preferred stock, $.001 par value; 2,000,000 shares authorized; 579,746 shares issued and outstanding at June 30, 2018 and 546,466 shares issued and outstanding at December 31, 2017	1			—
Common stock, $.001 par value; 7,500,000 shares authorized as of June 30, 2018 and December 31, 2017, respectively; 2,396,219 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively	2			2
Additional paid-in capital	83,055			83,014
Accumulated deficit	(90,056		)	(88,852		)
Total shareholders' deficit	(6,998		)	(5,836		)
Total liabilities and shareholders' deficit	$	14,575		$	12,915

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 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

ATRM HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Net sales	$	10,475		$	10,823		$	18,159		$	20,227
Costs and expenses:
Cost of sales	8,999			9,853			16,043			18,036
Selling, general, and administrative expenses	1,423			1,916			2,834			3,619
Goodwill impairment charge	—			3,020			—			3,020
Total costs and expenses	10,422			14,789			18,877			24,675
Operating loss	53			(3,966		)	(718		)	(4,448		)

Other (expense) income:
Interest expense, net	(238		)	(846		)	(475		)	(1,409		)
Change in fair value of contingent earn-outs, net	2			242			4			430
Loss before income taxes	(183		)	(4,570		)	(1,189		)	(5,427		)
Income tax expense	(11		)	(4		)	(15		)	(8		)
Net loss	(194		)	(4,574		)	(1,204		)	(5,435		)
Preferred stock dividend	(422		)	—			(832		)	—
Net loss attributable to common shareholders	$	(616	)	$	(4,574	)	$	(2,036	)	$	(5,435	)

Net loss per share, basic and diluted	$	(0.26	)	$	(1.93	)	$	(0.85	)	$	(2.30	)
Weighted average common shares outstanding, basic and diluted	2,396			2,366			2,396			2,366

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)~~

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

ATRM HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)(unaudited)

	Six months ended June 30,
	2018			2017
Cash flows from operating activities:
Net loss	$	(1,204	)	$	(5,435	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense	362			547
Amortization expense, deferred financing costs	49			273
Share-based compensation expense	41			34
Gain on sale of equipment	(2		)	(8		)
Unrealized loss on lumber derivatives	6			—
Deferred income taxes	—			6
Change in fair value of contingent earn-out receivable	(4		)	(354		)
Change in fair value of contingent earn-out payable	—			(76		)
Accrued interest	—			613
Imputed interest on seller deferred payment obligations	54			36
Goodwill impairment charge	—			3,020
Changes in operating assets and liabilities:
Accounts receivable	(1,192		)	(1,349		)
Costs and estimated profit in excess of billings	565			202
Inventories	(798		)	4
Other current assets	(41		)	(33		)
Trade accounts payable	1,836			764
Customer deposits	333			—
Billings in excess of costs and estimated profit	(983		)	42
Accrued compensation	76			65
Other accrued liabilities	(498		)	—
Net cash used in operating activities	(1,400		)	(1,649		)
Cash flows from investing activities:
Proceeds from earn-out consideration	218			234
Purchase of property and equipment	(31		)	(106		)
Proceeds from sale of equipment	16			34
Net cash provided by investing activities	203			162
Cash flows from financing activities:
Proceeds from issuance of long-term debt	1,400			567
Proceeds from revolving line of credit	17,065			22,744
Principal payments on revolving line of credit	(15,984		)	(21,455		)
Payment of deferred financing costs	—			16
Principal payments on long-term debt	(612		)	(1,048		)
Net cash provided by financing activities	1,869			824
Net increase (decrease) in cash, cash equivalents and restricted cash	672			(663		)
Cash, cash equivalents and restricted cash at beginning of period	530			1,397
Cash, cash equivalents and restricted cash at end of period	$	1,202		$	734
Supplemental cash flow information
Cash paid for interest expense	$	417		$	690
Supplemental disclosure of non-cash investing and financing activities
PIK payment of preferred stock dividend	$	(410	)	$	—
Deferred financing costs recorded in accounts payable	$	—		$	55
Decrease in other accrued liabilities for restructuring of contingent earn-out payable	$	—		$	(891	)
Increase in long-term debt for restructuring of contingent earn-out payable	$	—		$	891

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

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	~~BASIS OF PRESENTATION~~

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited ~~Condensed Consolidated Financial Statements~~condensed 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. Unless the context otherwise requires, references in the ~~Notes~~notes to ~~Condensed Consolidated Financial Statements~~condensed consolidated financial statements to (i) “ATRM,” the “Company,” “we,” “us” and “our,” refer to ATRM Holdings, Inc. and its consolidated subsidiaries, (ii) “KBS” refers to our Maine-based modular housing manufacturing business operated by our wholly-owned subsidiary KBS Builders, Inc. and (iii) “EBGL” refers to our Minnesota-based operations including Glenbrook Building Supply, Inc. (“Glenbrook”), a retail supplier of lumber and other building supplies, and 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.~~

products.

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~~residential and ~~residential~~commercial buildings in a production facility located in Prescott, Wisconsin.

Our previous wholly-owned subsidiary, Maine Modular Haulers, Inc. (“MMH”) was used to 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 Company’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, ~~2016,~~2017 has been derived from our audited financial statements. In the opinion of management, the unaudited interim ~~Condensed Consolidated Financial Statements~~condensed 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 ~~March 31, 2017~~June 30, 2018 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 Statements~~condensed 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 Statements~~condensed consolidated financial statements should be read in conjunction with the ~~Consolidated Financial Statements~~consolidated financial statements and accompanying footnotes included in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~

2017.

2.	~~FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES~~

2. GOING CONCERN, 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.~~profitability. We have incurred significant operating losses in recent years and, as of ~~March 31, 2017,~~June 30, 2018, we had an accumulated deficit of approximately ~~$81~~$90.1 million. Working 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,~~June 30, 2018, we had outstanding debt of approximately ~~$20.5~~$12.2 million.

These factors raise substantial doubt about the Company's ability to continue as a going concern.

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 ~~March 31, 2017,~~June 30, 2018, we had outstanding debt totaling approximately ~~$20.5~~$12.2 million. Our debt ~~included:~~primarily included (i) ~~$2.3~~$4.2 million principal outstanding on KBS’s $4.0 million revolving credit facility under a loan and security agreement (as amended, the "KBS Loan Agreement") with Gerber Finance Inc. (“("Gerber ~~Finance”) (the “KBS Loan Agreement”~~Finance"), ~~$1.8 million principal outstanding on EBGL’s $3.0 million revolving credit facility under a loan 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~~(as amended, the “Acquisition Loan Agreement”);, and (ii) ~~$4.5~~$2.9 million principal ~~amount of unsecured promissory notes issued to Lone Star Value Investors, LP (“LSVI”~~outstanding on EBGL’s $3.0 million revolving credit facility under a revolving credit loan agreement (the "Premier Loan Agreement") ~~and $7.6 million principal amount of unsecured promissory notes issued to Lone Star Value Co-Invest I, LP (“LSV Co-Invest I”~~with Premier Bank ("Premier"), which became effective on June 30, 2017 and replaced the prior $3.0 million revolving credit facility under a loan and security agreement 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 sellers of KBS, 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.Gerber Finance (the "EBGL Loan Agreement"). We also ~~had~~have obligations to make ~~$0.75~~$0.5 million in deferred cash payments to the sellers of EBGL, payable in ~~quarterly~~monthly installments of ~~$250,000,~~$0.1 million, inclusive of interest, through ~~October~~November 1, ~~2017. As noted~~2018 and have $1.4 million in ~~Note 19, the deferred payments~~unsecured promissory notes payable to ~~the sellers of EBGL were restructured in June 2017.~~

~~Jeffrey E. Eberwein, Chairman of the Company’s Board of Directors (the “Board”), is the manager of~~ Lone Star Value ~~Investors GP, LLC (“LSVGP”~~Co-Invest I, LP ("LSV Co-Invest I"), a related party, with interest payable semi-annually with any unpaid principal and interest due on January 12, 2020, (“LSVI Co-Invest I Notes Payable”, otherwise referred to herein and defined below as the ~~general partner of LSVI~~LSV Co-Invest I January Note and LSV Co-Invest I ~~and the sole member of Lone Star Value Management, LLC (“LSVM”), the investment manager of LSVI.~~

June Note).

At the applicable test dates, we were not in compliance with the following financial covenants under our loan ~~agreements with Gerber Finance:~~agreements: (i) a requirement for KBS to maintain a minimum leverage ratio of 7:1 for the fiscal year ended December 31, ~~2016,~~2017, as its actual

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

leverage ratio for such period was negative; (ii) a requirement for KBS not to incur a net annual post-tax loss in any fiscal year of the loan agreements, as KBS’s net annual post-tax loss for the fiscal year ended December 31, ~~2016~~2017 was ~~$3.2~~$1.9 million; and (iii) a requirement to deliver 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.~~2017. In August 2017, Gerber Finance provided us with a waiver for these events. As of December 31, ~~2017,~~2018, KBS was not in compliance with the financial ~~covenant~~covenants under the KBS Loan Agreement requiring no net annual post-tax loss for KBS or the minimum leverage ratio covenant as of these test dates. Additionally, KBS was not in compliance with the ~~next test date,~~requirement to deliver 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, ~~2017. We have begun discussions with Gerber Finance as to obtaining a waiver for these events. If~~2018. 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. In April 2019 and June 2019, we ~~fail to obtain~~obtained a waiver from Gerber Finance for these events. In addition, the Company and Gerber Finance agreed to eliminate the minimum leverage ratio covenant for years after 2018.

As of December 31, 2018, EBGL was not in compliance with the following covenants under the Premier Loan Agreement: (i) requirement to maintain a Debt Service Coverage Ratio for the calendar year of at least 1.0; and (ii) a requirement to deliver the Company's fiscal year-end audited financial statements within 120 days of the end of each calendar year. The occurrence of any event of default under the Premier Loan Agreement may result in EBGL’s obligations under the Premier Loan Agreement becoming immediately due and payable. In April 2019, we obtained a waiver from Premier for these events through August 1, 2019 (the current maturity date of the Premier Loan Agreement).

If the Company fails to comply with any financial covenants under our loan agreements with Gerber Finance or Premier going forward, the applicable lender(s) may demand the repayment of the credit facilities amount outstanding and any unpaid interest thereon.

We have 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 implemented a new dynamic pricing model for 2018, which was designed to determine its bid price quoted to customers on the most current cost information to better ensure full recovery of its manufacturing costs and improve overall gross margins;

In July 2017, KBS made the final payment due to the primary seller of KBS, freeing up $0.1 million per month of cash flows to be used for operations;

In November 2018, EBGL made the final payment due to the sellers of EBGL, freeing up $0.1 million per month of cash flows to be used for operations;

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 $11.0 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;

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In September 2017, we converted $13.3 million of the Company’s outstanding debt, including accrued interest, to the Company’s 10.00% Series B Cumulative Preferred Stock ("Series B Stock");

As discussed in Notes 13 and 18, in January 2018 and in June 2018, the Company issued unsecured promissory notes in the principal amounts of $0.5 million and $0.9 million, respectively, to LSV Co-Invest I to provide additional working capital for the Company;

In April 2019, KBS and EBGL executed sale leasebacks of several of its real estate properties (see further discussion in Note 18); and

We continue to look for opportunities to refinance our remaining debt on more favorable terms.

On September 10, 2018, ATRM entered into a non-binding letter of intent (the “LOI”) relating to the acquisition of ATRM (the "ATRM Acquisition") by Digirad Corporation ("Digirad") (NASDAQ: DRAD). Under the terms contemplated in the LOI, ATRM stockholders would have received consideration consisting of 0.4 shares of Digirad common stock for each share of outstanding ATRM common stock acquired by the Company in the ATRM Acquisition (see Note 18 for additional information). Although the LOI expired by its terms on December 31, 2018, Digirad and ATRM have had additional discussions regarding the terms and conditions of a proposed transaction and the consideration to be paid for ATRM shares. The parties are currently discussing that the consideration would notbe Digirad shares of common stock, but some other form of security. In addition, on May 15, 2019, Digirad and ATRM entered into an Agreement which provides that, in the event the ATRM Acquisition does not close on or prior to December 31, 2019, ATRM will reimburse Digirad of certain consulting and related fees paid by Digirad on behalf of ATRM. We anticipate the ATRM Acquisition to close in the third quarter of 2019; however, the parties have not reached any definitive agreement, and there can be no assurance regarding timing of completion of regulatory approvals, which could delay timing of the closing and any ATRM Acquisition would remain subject to the satisfaction of customary closing conditions.

Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern. We cannot predict with certainty the outcome of our actions to generate liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned.

If we continue to experience operating losses, and we are not able to generate additional liquidity through the mechanisms described above or through some combination of other actions, we may not be able to continue operations. Additionally, a failure to generate additional liquidity could negatively impact our access to materials or services that are important to the operation of our business. In addition, these losses could further trigger violations of covenants under our debt agreements, resulting in accelerated payment of these loans.

There can be no assurance that our existing cash reserves, together with funds generated by our operations and any future financings, will be sufficient 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 our 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~~

Other intangible assets with indefinite lives, such as tradenames, are assessed annually in order 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;~~

	●	~~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.

their carrying value exceeds their fair value. In addition, tothey are tested on an interim basis if an event occurs or circumstances change between annual tests that would more likely than not reduce their fair value below carrying value. If we determine the ~~above actions, although not a binding commitment, LSVM has advised us~~fair value of ~~its present intention to continue to financially support the Company~~goodwill or other indefinite-lived intangible assets is less than their carrying value, an impairment loss is recognized. Impairment losses, if any, are reflected in operating income or loss 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.

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”).period incurred. The Company ~~operates~~performs its annual tests of trademarks during the ~~businesses~~second quarter of ~~EdgeBuilder and Glenbrook on~~each fiscal year. As a ~~combined basis, and such businesses are referred to on a combined basis as EBGL.~~

~~EBGL’s results are included in~~result of 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 PRONOUNCEMENT~~

assessment we concluded that there was no impairment.

3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In ~~November 2015,~~August 2018, the Financial Accounting Standards Board ("FASB") issued ~~ASU~~Accounting Standards Update ("ASU") No. ~~2015-17,~~~~Income Taxes (Topic 740~~)~~: Balance Sheet Classification~~2018-13, which eliminates disclosures, modifies existing disclosures and adds new Fair Value disclosure requirements to Topic 820 for the range and weighted average of ~~Deferred Taxes(“ASU 2015-17”). ASU 2015-17 was issued~~significant unobservable inputs used to ~~simplify the presentation of deferred income taxes.~~develop Level 3 fair value measurements. The ~~amendments in this guidance require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.~~ ASU ~~2015-17~~ is effective for ~~financial statements issued for~~ annual and interim reporting periods beginning after December 15, 2019. The Company is currently in the process of evaluating the impact the adoption of this ASU will have on the Company’s consolidated financial statements.

In July 2018, the FASB issued ASU 2018-09, "Codification Improvements", which does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several different FASB ASC areas based on comments and

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

suggestions made by various stakeholders. Certain updates are applicable immediately, while others provide for a transition period to adopt as part of the next fiscal year beginning after December 15, 2018. The Company does not expect the adoption of this guidance to have a material impact on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize the assets and ~~interim periods within those annual periods. As required, ATRM adopted these updates~~liabilities that arise from leases on the balance sheet. A lessee should recognize in its balance sheet a liability to make lease payments and an asset representing its right to use the underlying asset for the lease term. The new standard is effective for the Company on January 1, 2019. The amendments should be applied either at the beginning of the earliest period presented using a modified retrospective approach or as of the adoption date using a modified retrospective approach. The Company will adopt the standard effective January 1, ~~2017.~~2019 and has chosen to use the effective date as our date of initial application. The new standard provides a number of optional practical expedients in transition. The Company has elected to apply the ‘package of practical expedients’ which allow us to not reassess (i) whether existing or expired arrangements contain a lease, (ii) the lease classification of existing or expired leases, or (iii) whether previous initial direct costs would qualify for capitalization under the new lease standard. The Company has also elected to apply (i) the practical expedient which allows us to not separate lease and non-lease components, and (ii) the short-term lease exemption for all leases with an original term of less than 12 months, for purposes of applying the recognition and measurements requirements in the new standard. The Company expects that adoption of this standard will add a right to use asset of $0.7 million and an additional lease liability of $0.7 million. The Company does not expect a material impact to the consolidated statement of operations or cash flows.

5.	~~RESTRICTED CASH~~

Subsequent to the issuance of ASU 2016-02, the FASB issued ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842. This ASU will have the same effective date and transition requirements as ASU 2016-02.

4. REVENUE RECOGNITION

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." This new standard replaced most existing revenue recognition guidance in U.S. GAAP and codified guidance under FASB ASC Topic 606 Revenue from Contracts with Customers ("ASC 606"). The underlying principle of this new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services.

The Company adopted ASU No. 2014-09 as of January 1, 2018 using the modified retrospective method. Under this method, results for the reporting period beginning after January 1, 2018 are presented under ASC 606, while prior period amounts continue to be reported in accordance with the Company's historic accounting practices under FASB ASC Topic 605, Revenue Recognition ("ASC 605").

In accordance with the new guidance, the Company recognizes revenue at an amount that reflects the consideration that the Company expects to be entitled to receive in exchange for transferring goods or services to its customers. The Company's policy is to record revenue when control of the goods transfers to the customer. Net sales are comprised of gross revenues from sales of products less trade discounts and rebates.

The Company's historic accounting practice under ASC 605 was to apply the percentage of completion method. Percentage of completion is determined using a units-of-production methodology based on modules delivered in accordance with the terms of the contract (KBS) and cost-to-cost method with cost determined based on costs incurred to date related to each performance obligation identified in the wall panel (EBGL) contracts. Under ASC 606, it was determined that since the Company does not meet the criteria to recognize revenue over time, point in time revenue recognition should be applied. While the Company had previously recognized revenue upon delivery, it had also applied the uncompleted construction contract accounting to record a "Costs" and estimated profit in excess of billings and a "Billings" in excess of costs and estimated profit amount each reporting period. With the adoption of ASC 606, recording estimates of completion by specific contract activity will no longer be required.

The Company’s contracts do not offer a right to return any of the products sold unless covered under the assurance-type warranty offered. Assurance-type warranties provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications. Such warranties do not represent a separate performance obligation. The Company does not offer additional service-type warranties for its products.

Costs incurred to obtain a customer contract are not material to the Company for the KBS or EBGL revenue streams. The Company elected to apply the practical expedient to not capitalize costs to obtain contracts with a duration of one year or less, which are expensed and included within Cost of sales in the Condensed Consolidated Statements of Operations.

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company generally requires deposits prior to the start of production of customer orders. The Company will not finance any part of the sale. The full balance is due upon delivery. Below is a summary of deposits utilized during the year by operating segment:



	Modular Home Manufacturing			Structured Wall Panel Manufacturing			Total
(in thousands)
March 31, 2018	$	1,070		$	300		$	1,370
Revenue recognized that was included in deposit at beginning of period	(1,070		)	(300		)	(1,370		)
Increase due to cash received, excluding amounts recognized as revenue during the period	291			42			333
June 30, 2018	$	291		$	42		$	333

The Company has expanded its financial statement disclosures as required by this new standard. See Note 17, "Operating Segments" for additional disclosures provided as a result of this ASU.

A summary of the amount by which each financial statement line item was affected in the current reporting period by ASC 606 as compared with the guidance that was in effect prior to adoption is set forth in the tables below:



	Impact of ASC 606 Adoption on Condensed Consolidated Balance Sheet as of June 30, 2018
(in thousands)	As reported under ASC 606		Adjustments			Balances without adoption of ASC 606
Inventory	$	2,083	$	(669	)	$	1,414
Costs and estimated profit in excess of billings	—		773			773
Billings in excess of costs and estimated profit	—		514			514
Customer deposits	333		(333		)	—



	Impact of ASC 606 Adoption on Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2018
(in thousands)	As reported under ASC 606			Adjustments			Balances without adoption of ASC 606
Inventory	$	(798	)	$	669		$	(129	)
Costs and estimated profit in excess of billings	565			(773		)	(208		)
Billings in excess of costs and estimated profit	(983		)	(514		)	(1,497		)
Customer deposits	333			333			—

5.CASH, CASH EQUIVALENTS AND RESTRICTED CASH

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

Cash Flows (unaudited)(in thousands):



	June 30, 2018		December 31, 2017
Cash and cash equivalents	$	275	$	48
Restricted cash	927		482
Total cash, cash equivalents, and restricted cash shown in the Condensed Consolidated Statement of Cash Flows	$	1,202	$	530

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Amounts included in restricted cash represent ~~those~~$0.9 million 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~~

loan agreement and an additional $56.7 thousand on deposit with INTL FC Stone related to our lumber commodity hedging program.

6. FAIR VALUE MEASUREMENTS

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

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



	June 30, 2018			December 31, 2017
Lumber derivative contracts (Level 1)	$	(6	)	$	9

Contingent earn-out receivable (based on Level 3 inputs):
Current portion	$	220		$	373
Noncurrent portion	—			61
Total	$	220		$	434

Our Level 1 assets (lumber derivative contracts) fair value is based upon quoted market prices and is included in other current assets in the Condensed Consolidated Balance Sheet.

The following table summarizes the activity for our Level 3 assets and liabilities measured on a recurring basis ~~(in~~(unaudited)(in thousands):

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 )



	Earn-out Receivable ⁽¹⁾
Balance at December 31, 2017	$	434
Add – adjustment based on re-assessments	5
Subtract – settlements	(219		)
Balance at June 30, 2018	$	220


⁽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 ~~March 31, 2017,~~June 30, 2018, is summarized in the table below:

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

7.	~~ACCOUNTS RECEIVABLE, NET~~

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

7. DERIVATIVES

The Company occasionally enters into lumber derivative contracts in order to protect its gross profit margins from fluctuations caused by volatility in lumber prices. At June30, 2018, the Company had a net long (buying) position of 880,000 board feet under eight lumber derivatives contracts with a fair value of $(6.0) thousand, which is included in other current assets. At June 30, 2017, the Company had no lumber derivative contracts outstanding. The Company had restricted cash on deposit with the broker totaling $56.7 thousand at June 30, 2018.

Gains and losses from derivative instruments, none of which are designated as hedging instruments, are recorded in cost of goods sold in the Company’s statements of operations and included the following (unaudited)(in thousands):



	Three Months Ended June 30, 2018			Six Months Ended June 30, 2018
Realized gains, net	$	95		$	137
Unrealized loss, net	(68		)	(6		)
Total	$	27		$	131

8.ACCOUNTS RECEIVABLE, NET

Accounts receivable consists of the following ~~(in~~(unaudited)(in thousands):

March 31, 2017 December 31, 2016
(Unaudited)

Contract billings $ 4,294 $ 2,330
Retainage 158 370
Subtotal 4,452 2,700
Less – allowance for doubtful accounts (4 ) (96 )
Accounts receivable, net $ 4,448 $ 2,604



	June 30, 2018			December 31, 2017
Contract billings	$	4,989		$	3,751
Retainage	190			274
Subtotal	5,179			4,025
Less – allowance for doubtful accounts	(147		)	(185		)
Accounts receivable, net	$	5,032		$	3,840

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

8.	~~INVENTORIES~~

~~At March 31, 2017 and December 31, 2016, inventories totaling approximately $1.3 million and $1.4 million, respectively, consisted~~

9.INVENTORIES

Inventory is comprised of ~~raw materials inventory. There are no finished goods or work-in-process inventory included in~~ the ~~inventory balances as of March 31, 2017 or December 31, 2016.~~

9.	~~GOODWILL AND INTANGIBLE ASSETS, NET~~

following (in thousands):



	June 30, 2018		December 31, 2017
Raw materials	$	1,414	$	1,285
Finished goods	243		—
Work-in-process	426		—
Inventories, net	$	2,083	$	1,285

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

10. INTANGIBLE ASSETS, NET

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

March 31, 2017
(unaudited) December 31, 2016
Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value

Indefinite-lived intangible assets:
Goodwill $ 3,020 $ — $ 3,020 $ 3,020 $ — $ 3,020
Trademarks 394 — 394 394 — 394
Total 3,414 — 3,414 3,414 — 3,414

Finite-lived intangible assets:
Customer relationships 2,097 (665 ) 1,432 2,097 (586 ) 1,511
Purchased backlog 1,290 (1,191 ) 99 1,290 (1,078 ) 212
Total 3,387 (1,856 ) 1,531 3,387 (1,664 ) 1,723

Total intangible assets $ 6,801 $ (1,856 ) $ 4,945 $ 6,801 $ (1,664 ) $ 5,137



	June 30, 2018							December 31, 2017
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value		Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
Indefinite-lived intangible assets:
Tradenames	$	394	$	—		$	394	$	394	$	—		$	394
Finite-lived intangible assets:
Customer relationships	2,097		(1,060		)	1,037		2,097		(902		)	1,195
Purchased backlog	—		—			—		1,290		(1,290		)	—
Total	2,097		(1,060		)	1,037		3,387		(2,192		)	1,195
Total intangible assets	$	2,491	$	(1,060	)	$	1,431	$	3,781	$	(2,192	)	$	1,589

Amortization expense amounted to approximately ~~$192,000~~$79.0 thousand and $158.0 thousand for the three and six months ended ~~March 31, 2017,~~June 30, 2018, respectively, and approximately ~~$51,000~~$192.0 thousand and $370.0 thousand for the three and six months ended ~~March 31, 2016.~~June 30, 2017, respectively. Estimated amortization of purchased intangible assets over the next five years is as follows ~~(in~~(unaudited)(in thousands):

2017 (nine months) $ 336
2018 315
2019 315
2020 315
2021 164
Thereafter 86
Total $ 1,531

~~10.~~

~~UNCOMPLETED CONSTRUCTION CONTRACTS~~

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

March 31, 2017 December 31, 2016
(Unaudited)

Costs incurred on uncompleted contracts $ 9,899 $ 6,575
Inventory purchased for specific contracts 780 837
Estimated profit 1,667 1,150
Subtotal 12,346 8,562
Less billings to date (12,293 ) (8,169 )
Total $ 53 $ 393

Included in the following balance sheet captions:
Costs and estimated profit in excess of billings $ 866 $ 1,045
Billings in excess of costs and estimated profit (813 ) (652 )
Total $ 53 $ 393

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

~~11.~~

~~ACCOUNTS PAYABLE RETAINAGE~~

Accounts payable of approximately $4.7 million at 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 $0.4 million. Retainage balances at March 31, 2017, are expected to be settled within the next 12 months.

~~12.~~

~~OTHER ACCRUED LIABILITIES~~



2018 (six months)	$	158
2019	315
2020	315
2021	164
2022	85
Thereafter	—
Total	$	1,037

11. OTHER ACCRUED LIABILITIES

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

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



	June 30, 2018		December 31, 2017
Accrued taxes ⁽¹⁾	$	1,440	$	1,562
Accrued health insurance costs	170		285
Accrued sales rebates	111		420
Accrued interest expense	78		20
Accrued warranty	53		50
Other	20		33
Total other accrued liabilities	$	1,872	$	2,370

⁽¹⁾ Primarily includes accrued sales and use taxes.

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

Three months ended March 31,
2017 2016
(unaudited)
Accrual balance, beginning of period $ 49 $ 39
Accruals for warranties 1 29
Settlements made — (29 )
Accrual balance, end of period $ 50 $ 39

~~13.~~

~~NOTES PAYABLE~~



	Six Months Ended June 30,
	2018		2017
Accrual balance, beginning of period	$	50	$	49
Accruals for warranties	3		3
Accrual balance, end of period	$	53	$	52

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

12. NOTES PAYABLE

As of ~~March 31, 2017,~~June 30, 2018, we had outstanding ~~notes payable~~revolving lines of credit of approximately ~~$4.1~~$7.1 million. Our notes payable primarily included (i) ~~$2.3~~$4.2 million principal outstanding on KBS’s $4.0 million revolving credit facility under the KBS Loan Agreement and (ii) ~~$1.8~~$2.9 million principal outstanding on EBGL’s $3.0 million revolving credit facility under the ~~EBGL~~Premier Loan ~~Agreement.~~

Agreement, net of an immaterial amount of unamortized financing fees.

KBS Loan Agreement

The KBS Loan Agreement provides KBS with a revolving line of credit with borrowing availability of up to $4.0 million. Availability under the line of credit is based on a formula tied to KBS’s eligible accounts receivable, inventory, real estate and 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. Under the terms of the agreement, the KBS Loan Agreement was extended automatically for an additional one-year period ending on February 22, 2020. 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 KBS Loan Agreement also provides for certain fees payable to Gerber Finance during its 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 maintain a maximum leverage ratio (as defined in the KBS Loan Agreement) and 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,~~June 30, 2018, approximately ~~$2.4~~$4.2 million was outstanding under the KBS Loan Agreement, which, after offset of ~~approximately $0.1 million~~an immaterial amount of unamortized deferred financing costs, is presented at a net amount of approximately ~~$2.3~~$4.2 million on the Condensed Consolidated Balance Sheet.

The parties to the Acquisition Loan Agreement have amended 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.

The parties to the KBS Loan Agreement have amended the KBS Loan Agreement to provide for increased availability under the KBS Loan Agreement to KBS under certain circumstances, including for new equipment additions, and certain other changes, as well as a waiver of certain covenants.

On September 29, 2017, the parties to both the KBS Loan Agreement and the Acquisition Loan Agreement amended the respective loan agreements in conjunction with the Exchange with Lone Star Value Investors, LP ("LSVI") and LSV Co-Invest I (see discussion below).

In connection with amending the KBS Loan Agreement, Jeffrey E. Eberwein, Chairman of the Company’s Board of Directors (the “Board”), executed a guaranty dated November 20, 2017 in favor of Gerber Finance unconditionally guaranteeing up to $0.5 million of KBS’s obligations under the KBS Loan Agreement arising from certain permitted over advances. 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.

Through a series of correspondence between KBS and Gerber Finance, on or about January 15, 2018, which the parties to the KBS Loan Agreement deemed to be the Seventh Agreement of Amendment to the Loan and Security Agreement, the parties clarified certain definitions in the KBS Loan Agreement.

As of December 31, 2018 and 2017, KBS was not in compliance with the financial ~~covenant~~covenants requiring no net annual post-tax loss for KBS or the minimum leverage ratio covenant as of these test dates. Additionally, KBS was not in compliance with the ~~next test date,~~requirement to deliver 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, 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.

~~The~~ In April 2019 and June 2019, we obtained a waiver from Gerber Finance for these events. In addition obtaining a waiver for these covenants, the Company and Gerber Finance agreed to eliminate the minimum leverage ratio covenant for fiscal years after 2018 (see Note 18). If the Company fails to comply with any financial covenants under our loan agreements with

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Gerber Finance going forward, Gerber Finance may demand the repayment of the credit facilities amount outstanding and any unpaid interest thereon.

EBGL Line of Credit

On October 4, 2016, concurrently with the EBGL Acquisition, the Company entered the EBGL Loan Agreement ~~provides~~with Gerber Finance providing EBGL with a revolving working capital line of credit of up to $3.0 million. Availability under the EBGL Loan Agreement iswas based on a formula tied to the borrowers’ eligible accounts receivable, inventory and equipment. The initial term of the EBGL Loan Agreement iswas set to expire on October 3, 2018, but ~~extends~~extended 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 iswas payable upon the expiration of the term of the EBGL Loan Agreement. Initially, availability under the EBGL Loan Agreement was limited to $1.0 million, which amount could be increased to up to $3.0 million in increments of ~~$500,000~~$0.5 million upon the request of the borrowers and in the discretion of Gerber Finance. ~~As of March 31, 2017, maximum availability was set at $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~~contained representations, warranties, affirmative and negative covenants, events of default and other provisions customary for financings of this type. Financial covenants ~~require~~required that EBGL ~~maintains~~maintained 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 19, the EBGL Loan Agreement was replaced by a new working capital line of credit 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 disclosed in Note 19, theThe Company refinanced the EBGL Loan Agreement through a new $3.0 million revolving working capital line of credit with Premier ~~Bank~~ on June 30, 2017.

~~14.~~

~~LONG-TERM DEBT~~

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. 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 was scheduled to expire on June 30, 2018, but was extended by Premier until February 1, 2019. In February 2019, the Premier Loan Agreement was extended further by Premier until August 1, 2019. The Premier Loan Agreement may be further 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.

As of December 31, 2017 and 2018, EBGL was not in compliance with the following covenants under the Premier Loan Agreement: (i) requirement to maintain a Debt Service Coverage Ratio for the calendar year of at least 1.0; and (ii) a requirement to deliver the Company's fiscal year-end audited financial statements within 120 days of the end of each calendar year. The occurrence of any event of default under the Premier Loan Agreement may result in EBGL’s obligations under the Premier Loan Agreement becoming immediately due and payable. In April 2019, we obtained a waiver from Premier for these events through August 1, 2019 (the current maturity date of the Premier Loan Agreement).

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, Chairman of the Company's Board, 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.

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

13. LONG-TERM DEBT

Long-term debt is comprised of the following ~~(in~~(unaudited)(in thousands):

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~~



	June 30, 2018			December 31, 2017
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 (automatically extended to December 31, 2019 as neither party elected to terminate), supported by pledge agreement between LSVI and Gerber Finance of up to $3.0 million plus additional fees	$	3,000		$	3,000
Promissory note 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 January 12, 2020	900			—
Promissory note 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 January 12, 2020	500			—
Amended deferred payments to EBGL Sellers, inclusive of interest (imputed at 15.14%), monthly payments of $100,000 beginning on August 1, 2017 through November 1, 2018; amount paid in full in November 2018	488			1,034
Vehicle financing, interest at 5.9% per annum, due June 20, 2023	87			—
EBGL computer equipment and software financing, secured by underlying assets, interest at 9.0% per annum, payable in monthly installments of $1,105 per month, through May 2022	44			48
KBS software installment payment agreement, unsecured, interest at 8.0% per annum, payable in monthly installments of $1,199 through September 2020	28			35
Revolving equipment credit line, unsecured	10			12
Total long-term debt	5,057			4,129
Current portion	(521		)	(1,068		)
Noncurrent portion	$	4,536		$	3,061

Promissory Notes Sales to LSV Co-Invest I ~~promissory notes,~~

On January 12, 2018, the Company ~~at its sole option, may elect~~issued 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.~~

~~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.~~million in exchange for the same amount in cash (the “LSV Co-Invest I January Note”). The ~~note~~LSV Co-Invest I January 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 January Note bears interest at 10.0% per annum, with interest payable ~~semiannually in January and July;~~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. ~~Except~~Any unpaid principal and interest under the LSV Co-Invest I January Note is due on January 12, 2020. The Company may prepay the LSV Co-Invest I January 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 January 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 disclosed in Note 19, subsequent to March 31, 2017,~~dated as of the ~~Company, LSVI, and~~same date. The LSV Co-Invest I ~~entered into an exchange agreement whereby the outstanding LSVI and~~June Note bears interest at 10.0% per annum, with interest payable semiannually; provided, however, LSV Co-Invest I may elect to receive any interest payment entirely in-kind at an annual rate of 12.0%. Any unpaid principal and interest under the LSV Co-Invest I June Note is due on June 1, 2020. The Company may prepay the LSV Co-Invest I June Note at any

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 June 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 June 1, 2018, LSV Co-Invest I held 353,060 shares of Series B Stock and an unsecured promissory ~~notes, along with accrued interest, were exchanged for 132,548~~note issued January 12, 2018 (the “LSV Co-Invest I January Note”) in the principal amount of $0.5 million. Also, as of June 1, 2018, LSVI, an affiliate of LSV Co-Invest I, held 209,800 shares of Series B Stock, and Lone Star Value Investors GP, LLC (“LSVGP”) held 3,005 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 107,297common stock. Additionally, as of June 1, 2018, 415,012 shares of ~~our common stock issued upon~~ the ~~conversion of a convertible promissory note held by LSVI in 2014.~~

~~As of March 31, 2017, LSVI owned 1,067,885 shares of our~~Company’s common stock, or approximately ~~45.1%~~17% of ~~our~~its outstanding shares, ~~including 900,000 shares purchased in a common stock rights offering we completed in September 2015.~~were owned directly by Jeffrey E. Eberwein, ~~ATRM’s~~ Chairman of the ~~Board,~~Board. Mr. Eberwein is the manager of LSVGP, the general partner of LSVI and LSV Co-Invest I, and ~~the~~ sole member of ~~LSVM,~~Lone Star Value Management, LLC, the investment manager of LSVI.

~~ATRM’s entry into~~ The Company’s sale of the ~~securities purchase agreements with LSVI and~~LSV Co-Invest I June Note to LSV Co-Invest I was approved by ~~a Special Committee~~the independent members of ~~our Board consisting solely of independent directors.~~

~~15.~~

~~STOCK INCENTIVE PLAN AND SHARE-BASED COMPENSATION~~

the Board.

14. 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

The Company has a stock incentive plan that was approved by the Board and became effective on December 4, 2014 (the “2014 Plan”) upon approval by shareholders. The 2014 Plan is administered by the Compensation Committee of the Board. The purpose of the 2014 Plan is to provide employees, consultants and Board members 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.

Under the 2014 Plan, prior to January 1, 2016, 60,000 restricted shares of the Company’s common stock were granted to its directors and its then Chief Financial Officer. The shares vested one year after the grant date 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 $67,000 for the three months ended March 31, 2016 and is included in the caption “Selling, general and administrative expenses” in our Condensed Consolidated Statement of Operations.

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 was amounted to approximately ~~$17,000~~$16.9 thousand and $33.8 thousand for the three and six months ended ~~March 31,~~June 30, 2017, respectively, 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~~$20.1 thousand has been recognized on a straight-line basis through October 19, ~~2017.~~

~~2003 Stock Incentive Plan~~

A2017, subject to forfeitures.

On December 18, 2017, ATRM granted 70,000 restricted shares of the Company's common stock ~~incentive plan approved by our shareholders~~to its directors and ~~adopted in May 2003 (the “2003 Plan”) terminated in February 2013. Stock options granted under~~its Chief Financial Officer (10,000 shares each). The shares vest one year after the ~~2003 Plan continue~~grant date and the fair value of the awards was determined to be ~~exercisable according~~$1.18 per share, the closing price of our common stock on the grant date. Compensation expense related to ~~their individual terms. The following table summarizes stock option activity under the 2003 Plan~~these grants amount to approximately $20.6 thousand and $41.0 thousand for the three and six months ended ~~March 31, 2017:~~

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 March 31, 2017,~~ ~~are nonqualified options, all of which expired unexercised at varying dates through November 2017. The aggregate intrinsic values~~June 30, 2018, and is included in the ~~table above are zero because the option exercise prices for all outstanding options exceeded ATRM’s closing stock price~~caption "Selling, general and administrative expenses" in our Condensed Consolidated Statement of Operations. The remaining compensation expense of approximately $38.5 thousand will be recognized on~~March 31, 2017.~~

~~16.~~

~~INCOME TAXES~~

a straight-line basis through December 18, 2018, subject to forfeitures.

15. 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.” 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 ~~March 31, 2017,~~June 30, 2018, we haverecorded a deferred tax liability of ~~$20,700~~$28.2 thousand 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.

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~17.~~

~~LEGAL PROCEEDINGS~~

(Unaudited)

16. 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 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 court of appeal 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 case~~~~RJR Nabisco, Inc. v. The European Community~~~~, No. 15-138. A decision in the~~~~RJR 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 the~~RJR Nabiscodecision.~~ sole remaining RICO claim. On August 26, 2016, the district court granted ATRM’s motion for summary judgment and 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 render~~On July 2, 2018, the Ninth District Court of Appeals rendered its decision onaffirming the ~~appeal within 90 days. We continue to believe that~~District Court’s opinion and upheld the ~~claims asserted in this matter do not have any merit and intend to vigorously defend the action.~~

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

~~At the time~~dismissal 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 Nelton Court were supplied by KBS Building Systems, Inc. (“KBS-BSI”) pursuant to a contract with KBE Building Corporation (“KBE”). KBE has asserted claimscase against ~~KBS-BSI, KBS and ATRM arising out of alleged delays, and for the repair of certain alleged defects in the modular units supplied~~ATRM. UTHE did not appeal that decision to the ~~project. KBE’s claim seeks an unspecified amount~~Supreme Court of ~~damages. The action~~the United States by the October 1, 2018 deadline. As such, this Ninth Circuit affirmance of the case dismissal stands, and the lawsuit has been ~~transferred to~~successfully and completely defeated by 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 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 pay $300,000 to the plaintiff.

Company.

From time to time, in the ordinary course of ATRM’s business, it is party to various other disputes, claims and legal proceedings. In the opinion of management, based on information available at this time, such disputes, claims and proceedings will not have a material effect on ATRM’s condensed consolidated financial statements.

~~18.~~

~~OPERATING SEGMENTS~~

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

17. OPERATING SEGMENTS

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.~~2017. 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.

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	Modular Home Manufacturing					Structural Wall Panel Manufacturing					Total
Three Months Ended June 30,	2018		2017			2018		2017			2018		2017
Segment net sales	$	4,942	$	6,282		$	5,533	$	4,541		$	10,475	$	10,823
Depreciation and amortization expense	132		123			50		144			182		267
Interest expense, net	84		93			130		384			214		477
Segment net (loss) income	65		(340		)	104		(3,463		)	169		(3,803		)
Total segment assets	7,586		7,884			5,876		4,934			13,462		12,818
Expenditures for segment assets	—		10			101		54			101		64



	Modular Home Manufacturing						Structural Wall Panel Manufacturing						Total
Six Months Ended June 30,	2018			2017			2018			2017			2018			2017
Segment net sales	$	9,791		$	11,890		$	8,368		$	8,337		$	18,159		$	20,227
Depreciation and amortization expense	264			246			98			301			362			547
Interest expense, net	174			178			264			512			438			690
Segment net (loss) income	(219		)	(305		)	(177		)	(3,742		)	(396		)	(4,047		)
Total segment assets	7,586			7,884			5,876			4,934			13,462			12,818
Expenditures for segment assets	12			28			106			77			118			105

Reconciliation of Segment Information (unaudited)(in thousands)

The following table presents the reconciliation of revenues (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

Other Significant Adjustments Segment Totals Adjustments Consolidated Totals

Depreciation and amortization expense $ 280 $ — $ 280
Interest expense $ 214 $ 349 $ 563



Three Months Ended June 30,	2018		2017
Total net sales for reportable segments	$	10,475	$	10,823
Consolidated net sales	$	10,475	$	10,823



Six Months Ended June 30,	2018		2017
Total net sales for reportable segments	$	18,159	$	20,227
Consolidated net sales	$	18,159	$	20,227

The ~~adjustment to~~following table presents the reconciliation of net loss (unaudited)(in thousands):



Three Months Ended June 30,	2018			2017
Total net income (loss) for reportable segments	$	169		$	(3,803	)
Unallocated amounts:
Other corporate expenses	(330		)	(539		)
Interest expense	(24		)	(369		)
Change in fair value of contingent earn-out	2			141
Provision for income taxes	(11		)	(4		)
Consolidated net loss	$	(194	)	$	(4,574	)

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Six Months Ended June 30,	2018			2017
Total net loss for reportable segments	$	(396	)	$	(4,047	)
Unallocated amounts:
Other corporate expenses	(760		)	(1,016		)
Interest expense	(37		)	(718		)
Change in fair value of contingent earn-out	4			354
Provision for income taxes	(15		)	(8		)
Consolidated net loss	$	(1,204	)	$	(5,435	)

The following table presents the reconciliation of assets (unaudited)(in thousands):



	June 30,		December 31,
	2018		2017
Total assets for reportable segments	$	13,462	$	12,009
Other assets	1,113		906
Consolidated assets	$	14,575	$	12,915

The following table presents the reconciliation other significant adjustments (unaudited)(in thousands):



	Segment Totals				Unallocated Amounts				Consolidated Totals
Three Months Ended June 30,	2018		2017		2018		2017		2018		2017
Depreciation and amortization expense	$	182	$	267	$	—	$	—	$	182	$	267
Interest expense	214		477		24		369		238		846



	Segment Totals				Unallocated Amounts				Consolidated Totals
Six Months Ended June 30,	2018		2017		2018		2017		2018		2017
Depreciation and amortization expense	$	362	$	547	$	—	$	—	$	362	$	547
Interest expense	438		690		37		719		475		1,409

The unallocated amounts of 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~~unallocated amounts 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.

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.

~~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.

18. SUBSEQUENT EVENTS

Amendments to Gerber Finance Loan Agreements

On ~~June 30, 2017,~~October 1, 2018, the parties to the KBS Loan Agreement entered into an Eighth Agreement of Amendment to the Loan and Security Agreement to extend the availability of up to $0.6 million of over advances to KBS above the borrowing base in order to provide KBS with additional working capital. The overadvance was scheduled to be paid down by $75.0 thousand per week beginning January 4, 2019 in order to be fully repaid on or before February 23, 2019 to coincide with the expiration date of the line of credit. As the line was automatically renewed through February 23, 2020, Gerber Finance has subsequently agreed to begin the scheduled pay down of $75.0 thousand per week to begin on February 15, 2019 for eight weeks with final repayment scheduled for April 8, 2019. The $0.6 million overadvance was paid in full on April 3, 2019.

On February 22, 2019, the Company entered into a ~~Third~~Ninth Agreement of Amendment to Loan and Security Agreement ~~providing for increased availability under~~(the “Ninth KBS Loan Amendment”) to amend the terms of the KBS Loan Agreement to extend the availability of up to $0.6 million of over advances through no later than February 23, 2020 in order to provide KBS ~~under certain circumstances, and certain other changes, as well as a waiver of certain covenants.~~

with additional working capital. The overadvance was paid in full in April 2019.

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On ~~June 30, 2017,~~April 1, 2019, the Company entered into a ~~Second~~Tenth Agreement of Amendment to Loan and Security Agreement (the “Tenth KBS Loan Amendment”) to amend the ~~Acquisition Loan Agreement to waive certain covenants and to make certain amendments in connection with the termination~~terms 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 (the “Fifth EBGL Loan Amendment”) to amend the terms of the Acquisition Loan Agreement. The Tenth KBS Loan Amendment and the ~~parties to~~Fifth EBGL Loan Amendment amended the terms of the KBS Loan Agreement and the Acquisition Loan Agreement, ~~entered into a Third Agreement~~respectively, to permit the Company’s acquisition of ~~Amendment~~Lone Star Value Management, LLC (“LSVM”) and to ~~Loan~~clarify the parties’ rights and ~~Security Agreement~~duties 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 certainconnection therewith, among other ~~changes.~~ things.

In connection with ~~this amendment to~~each of the Ninth KBS Loan ~~Agreement, Jeffrey E.~~Amendment and the Tenth KBS Loan Amendment, Mr. Eberwein ~~a director of the Company,~~ executed a reaffirmation of guaranty ~~dated November 20, 2017~~ in favor of Gerber Finance ~~unconditionally guaranteeing up~~relating to ~~$500,000~~his unconditional guaranty of $0.6 million of KBS’s obligations under the KBS Loan Agreement arising from ~~certain~~the $0.6 million of over advances permitted ~~overadvances.~~ under the Ninth KBS Loan Amendment.

On ~~December 22, 2017,~~April 15, 2019, the Company ~~also~~ entered into ~~a Fourth~~an Eleventh Agreement of Amendment to Loan and Security Agreement (the “Eleventh KBS Loan Amendment”) to amend the terms of the ~~Acquisition~~KBS Loan Agreement to ~~reflect~~(i) provide for increased borrowing capability; (ii) to eliminate the Leverage Ratio financial covenant required by Schedule III (Financial Covenants); and (iii) to amend the Net Loss covenant required by Schedule III (Financial Covenants). In addition, the Eleventh KBS Loan Amendment provided a waiver for certain ~~changes made~~covenants for the 2017 and 2018 fiscal years. In connection with the Eleventh KBS Loan Amendment, Mr. Eberwein executed a reaffirmation of agreements in favor of Gerber Finance relating to his unconditional guaranty as described above and any other documents related to KBS.

Merger with Digirad Corporation

On September 10, 2018, Digirad announced that its board of directors had approved the conversion of Digirad into a diversified holding company and in conjunction with that new structure, that it would be acquiring the Company. Under the terms contemplated in the LOI, ATRM stockholders would have received consideration consisting of 0.4 shares of Digirad common stock for each share of outstanding ATRM common stock acquired by the Company in the ATRM Acquisition. Although the LOI expired by its terms on December 31, 2018, Digirad and ATRM have had additional discussions regarding the terms and conditions of a proposed transaction and the consideration to be paid for ATRM shares. The parties are currently discussing that the consideration would notbe Digirad shares of common stock, but some other form of security. In addition, on May 15, 2019, Digirad and ATRM entered into an Agreement which provides that, in the event the ATRM Acquisition does not close on or prior to December 31, 2019, ATRM will reimburse Digirad of certain consulting and related fees paid by Digirad on behalf of ATRM. We anticipate the ATRM Acquisition to close in the third quarter of 2019; however, the parties have not reached any definitive agreement, and there can be no assurance regarding timing of completion of regulatory approvals, which could delay timing of the closing and any ATRM Acquisition would remain subject to the ~~KBS Loan Agreement.~~

~~Preferred~~satisfaction of customary closing conditions.

~~On September 29, 2017,~~and another 363,651 shares of Series B Stock are owned directly by LSV Co-Invest I. Through these relationships and other relationships with affiliated entities, Mr. Eberwein may be deemed the ~~Company,~~beneficial owner of the securities owned by LSVI and LSV Co-Invest ~~I entered into an Exchange Agreement, dated as~~I. Mr. Eberwein disclaims beneficial ownership of Series B Stock, except to the ~~same date (the “Exchange Agreement”), pursuant to which the Company issued to LSVI and~~extent of his pecuniary interest therein. 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 thealso holds unsecured promissory notes of the Company ~~(the “Notes”) held by LSVI and~~in the principal amount totaling $1.4 million, the LSV Co-Invest I ~~(the “Exchange”). The~~ Notes ~~had~~Payable, and LSVM holds an ~~aggregate of $13.3~~unsecured note with a principal amount totaling $0.3 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.

Note.

On September 29, 2017, in connection with the Exchange, the Company entered into amendments to its 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~~Digirad

On ~~January 12,~~December 14, 2018, the Company issued to ~~LSV Co-Invest I~~Digirad an unsecured promissory note in the principal amount of ~~$0.5~~$0.3 million in exchange for the same amount in cash (the ~~“LSV Co-Invest I~~“Digirad 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~~Digirad 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~~for the first 12 months of its term, and 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~~ per annum for the remaining 12 months. All unpaid principal and interest under the ~~LSV Co-Invest I~~Digirad Note is due on ~~January 12,~~December 14, 2020. The Company may prepay the ~~LSV Co-Invest I~~Digirad Note at any time after a specified amount of advance notice to ~~LSV Co-Invest I~~Digirad (subject to certain restrictions under the Company’s existing loan agreements). The ~~LSV Co-Invest I~~Digirad 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.

Promissory Note Sale to Lone Star Value Management, LLC

On December 17, 2018, the Company issued to LSVM an unsecured promissory note in the principal amount of ~~January 12, 2018, LSVI owned 1,067,885 shares~~$0.3 million in exchange for the same amount in cash (the “LSVM Note”). The LSVM Note was issued pursuant to a securities purchase

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

agreement by and between the Company and LSVM dated as of ~~our common stock, or approximately 45.1%~~the same date. The LSVM Note bears interest at 10.0% per annum, with interest payable annually; provided, however, LSVM may elect to receive any interest payment entirely in-kind at a rate of ~~our~~12.0% per annum. Any unpaid principal and interest under the LSVM Note is due on November 30, 2020. The Company may prepay the LSVM Note at any time after a specified amount of advance notice to LSVM (subject to certain restrictions under the Company’s existing loan agreements). The LSVM Note provides for customary events of default, the occurrence of any of which may result in the principal and unpaid interest then outstanding ~~shares, including 900,000 shares purchased in a common stock rights offering we completed in September 2015.~~ becoming immediately due and payable.

Jeffrey E. Eberwein, ~~ATRM’s~~the Chairman of the Company’s Board, owns approximately 17.4% of the outstanding common stock of ATRM. Mr. Eberwein is also the Chief Executive Officer and the sole member of LSVM, which is the investment manager of LSVI. Mr. Eberwein is also the manager of LSVGP, the general partner of LSVI and LSV Co-Invest I. As of December 17, 2018, LSVI owns 216,094 shares of Series B Stock, LSVGP held 3,005 shares of the Company’s common stock, and another 363,651 shares of Series B Stock are owned directly by LSV Co-Invest I. LSV Co-Invest I also holds unsecured promissory notes of the Company in the principal amount totaling $1.4 million, the LSV Co-Invest I Notes Payable. Through these relationships and other relationships with affiliated entities, Mr. Eberwein may be deemed the ~~sole member~~beneficial owner of the securities owned by LSVI and LSV Co-Invest I. Mr. Eberwein disclaims beneficial ownership of Series B Stock, except to the extent of his pecuniary interest therein.

Digirad Joint Venture and Services Agreement

On December 14, 2018, the Company entered into a Joint Venture Agreement with Digirad (the "Joint Venture Agreement"), forming Star Procurement, LLC ("Star Procurement"), with each of ATRM and Digirad holding a 50% interest. The purpose of the joint venture is for Star Procurement to purchase from third parties and sell building materials and related goods to KBS Builders, Inc., the Company's wholly owned subsidiary. Star Procurement entered into a Services Agreement (the "Services Agreement") on January 2, 2019 with KBS in connection with the joint venture. Digirad's initial capital contribution to the joint venture was $1.0 million. ATRM did not make an initial capital contribution.

Acquisition of Lone Star Value Management

On April 1, 2019, the Company entered into a Membership Interest Purchase Agreement (the “LSVM Purchase Agreement”) with LSVM and Mr. Eberwein. Pursuant to the terms of the LSVM Purchase Agreement, Mr. Eberwein sold all of the issued and outstanding membership interests of LSVM to the ~~investment manager~~Company (the “LSVM Acquisition”) for a purchase price of ~~LSVI. ATRM’s~~$100.00, subject to a working capital adjustment provision. The LSVM Acquisition closed simultaneously with the execution and delivery of the LSVM Purchase Agreement, and was deemed effective as of January 1, 2019 for accounting purposes, as a result of which LSVM became a wholly-owned subsidiary of ATRM. Pursuant to the LSVM Purchase Agreement, the current assets (as well as the $0.3 million LSVM December 2018 Note issued by the Company) and current liabilities existing prior to January 1, 2019 remain with Mr. Eberwein. The LSVM Purchase Agreement contains representations, warranties, covenants and indemnification provisions customary for transactions of this type. The Company's entry into the ~~securities purchase agreement with LSV Co-Invest I was~~LSVM Purchase Agreement and the LSVM Acquisition were unanimously approved by a ~~Special Committee~~special committee of ~~our~~the Board ~~consisting~~comprised solely of independent directors.

As of the date of these condensed consolidated financial statements, the initial accounting for the LSVM Acquisition was incomplete, as the Company continues to determine the fair value of the acquired assets and liabilities. As of the date of these condensed consolidated financial statements, the initial accounting for this acquisition was incomplete as the Company is currently working to determine the fair value of the acquired assets and liabilities.

Sale of Maine Facilities

On April 3, 2019, 947 Waterford Road, LLC (“947 Waterford”) entered into a Purchase and Sale Agreement (the “Waterford Purchase Agreement”) with KBS, pursuant to which 947 Waterford purchased certain real property and related improvements (including buildings) located in Waterford, Maine (the “Waterford Facility”) from KBS (the “Waterford Transaction”), and acquired the Waterford Facility. The Waterford Purchase Agreement contains representations, warranties and covenants of KBS and 947 Waterford that are customary for a transaction of this nature. The purchase price of the Waterford Facility is $1.0 million, subject to adjustment for taxes and other charges and assessments.

947 Waterford is a wholly-owned indirect subsidiary of Digirad, formed for the purpose of acquiring and holding the Waterford Facility.

On April 3, 2019, 300 Park Street, LLC (“300 Park”) entered into a Purchase and Sale Agreement (the “Park Purchase Agreement”) with KBS, pursuant to which 300 Park purchased certain real property and related improvements and personal property (including buildings, machinery and equipment) located in Paris, Maine (the “Park Facility”) from KBS (the “Park Transaction”), and acquired the Park Facility. The Park Purchase Agreement contains representations, warranties and covenants

ATRM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

of KBS and 300 Park that are customary for a transaction of this nature. The purchase price of the Park Facility is $2.9 million, subject to adjustment for taxes and other charges and assessments.

On April 3, 2019, KBS entered into a separate lease agreement with each of 947 Waterford (the “Waterford Lease”) and 300 Park (the “Park Lease”). The Waterford Lease has an initial term of 120 months, which is subject to extension. The base rental payments associated with the initial term under the Waterford Lease are estimated to be between $1.2 million and $1.3 million in the aggregate. The Park Lease has an initial term of 120 months, which is subject to extension. The base rental payments associated with the initial term under the Park Lease are estimated to be between $3.3 million and $3.6 million in the aggregate.

On April 3, 2019, KBS entered into a lease agreement (the “Oxford Lease”) with 56 Mechanic Falls Road, LLC (“56 Mechanic”), in connection with that certain real property and related improvements and personal property owned by RJF – Keiser Real Estate, LLC (“RJF”) (including buildings, fixtures, and other improvements on the land, and all machinery and equipment and other personal property, if any, owned by RJF and located on the property) located in Oxford, Maine (the “Oxford Premises”). The Oxford Lease was amended as of April 18, 2019 (the “Oxford Lease Amendment”) to provide that the commencement date will be the later of the closing of the sale of the Oxford Premises (the "Oxford Transaction"), which occurred on March 27, 2019, and the date that possession of the leased premises is able to be delivered to KBS, which is anticipated to occur on or prior to June 30, 2019. The Oxford Transaction is pursuant to that certain Purchase and Sale Agreement between 56 Mechanic and RJF. The Oxford Lease has an initial term of 120 months, which is subject to extension. The base rental payments associated with the initial term under the Oxford Lease are estimated to be between $1.4 million and $1.6 million in the aggregate. ATRM has unconditionally guaranteed the performance of all obligations under each of the Leases to be performed by KBS, including, without limitation, the payment of all required rent.

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, 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, ~~2016~~2017 (the ~~“2016~~“2017 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,” 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,” or “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 ~~2016~~2017 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

Overview

engineered wood products for use in construction of ~~commercial~~residential and ~~residential~~commercial buildings in a production facility located in Prescott, Wisconsin.

Our common stock, par value $0.001 per share, trades on the OTC Pink marketplace of the OTC Markets Group, Inc. under the symbol “ATRM.”

Recent Developments

Amendments to Gerber Finance Loan Agreements

On ~~June 30, 2017, EBGL~~October 1, 2018, the parties to the KBS Loan Agreement entered into an Eighth Agreement of Amendment to the ~~Premier~~ Loan and Security Agreement ~~with Premier providing EBGL with a working capital line of credit~~to extend the availability of up to ~~$3.0 million.~~$0.6 million of over advances to KBS above the borrowing base in order to provide KBS with additional working capital. The ~~Premier Loan Agreement replaced~~overadvance was scheduled to be paid down by $75.0 thousand per week beginning January 4, 2019 in order to be fully repaid on or before February 23, 2019 to coincide with the ~~EBGL Loan Agreement with~~expiration date of the line of credit. As the line was automatically renewed through February 23, 2020, Gerber Finance ~~which~~has subsequently agreed to begin the scheduled pay down of $75.0 thousand per week to begin on February 15, 2019 for eight weeks with final repayment scheduled for April 8, 2019. The $0.6 million overadvance was ~~terminated~~paid in full on ~~the same date.~~

April 3, 2019.

On ~~June 30, 2017,~~February 22, 2019, the Company entered into a Ninth Agreement of Amendment to Loan and ~~EdgeBuilder Wall Panels, Inc. and Glenbrook Lumber & Supply, Inc. (collectively~~Security Agreement (the "Ninth KBS Loan Amendment") to amend 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~~KBS Loan Agreement to extend the availability of up to $0.6 million of over advances through no later than February 23, 2020 in order to provide KBS with additional working capital. The overadvance was paid in full in April 2019.

On April 1, 2019, the Company entered into a Tenth Agreement of Amendment to Loan and Security Agreement (the “Tenth KBS Loan Amendment”) to amend the terms of the KBS Loan Agreement, and a Fifth Agreement of Amendment to Loan and Security Agreement (the “Fifth EBGL Loan Amendment”) to amend the terms of the Acquisition Loan Agreement. The Tenth KBS Loan Amendment and the Fifth EBGL Loan Amendment amended the terms of the KBS Loan Agreement and the Acquisition Loan Agreement, respectively, to permit the Company’s ~~Current Report on Form 8-K filed~~acquisition of Lone Star Value Management, LLC (“LSVM”) and to clarify the parties’ rights and duties in connection therewith, among other things.

In connection with each of the Ninth KBS Loan Amendment and the Tenth KBS Loan Amendment, Mr. Eberwein executed a reaffirmation of guaranty in favor of Gerber Finance relating to his unconditional guaranty of $0.6 million of KBS’s obligations under the KBS Loan Agreement arising from the $0.6 million of over advances permitted under the Ninth KBS Loan Amendment.

On April 15, 2019, the Company entered into an Eleventh Agreement of Amendment to Loan and Security Agreement (the “Eleventh KBS Loan Amendment”) to amend the terms of the KBS Loan Agreement to (i) provide for increased borrowing capability; (ii) to eliminate the Leverage Ratio financial covenant required by Schedule III (Financial Covenants); and (iii) to amend the Net Loss covenant required by Schedule III (Financial Covenants). In addition, the Eleventh KBS Loan Amendment provided a waiver for certain covenants for the 2017 and 2018 fiscal years. In connection with the ~~SEC on October 4, 2017.~~

Eleventh KBS Loan Amendment, Mr. Eberwein executed a reaffirmation of agreements in favor of Gerber Finance relating to his unconditional guaranty as described above and any other documents related to KBS.

Promissory Notes Sales to LSV Co-Invest I

On January 12, 2018, the Company issued to Lone Star Value Co-Invest I, LP ("LSV Co-Invest II") 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 January Note”). The LSV Co-Invest I January 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 January 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 January Note is due on January 12, 2020. The Company may prepay the LSV Co-Invest I January 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 January 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 Company's Board of Directors (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.

On June 1, 2018, the Company issued to LSV Co-Invest I an additional unsecured promissory note in the principal amount of $0.9 million in exchange for the same amount in cash (the “LSV Co-Invest I June Note”). The LSV Co-Invest I June 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 June Note bears interest at 10.0% per annum, with interest payable semiannually; provided, however, LSV Co-Invest I may elect to receive any interest payment entirely in-kind at an annual rate of 12.0%. Any unpaid principal and interest under the LSV Co-Invest I June Note is due on June 1, 2020. The Company may prepay the LSV Co-Invest I June 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 June 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 June 1, 2018, LSV Co-Invest I held 353,060 shares of the Company’s 10.00% Series B Cumulative Preferred Stock ("Series B Stock") and the LSV Co-Invest I January Note in the principal amount of $0.5 million. Also, as of June 1, 2018, LSVI, an affiliate of LSV Co-Invest I, held 209,800 shares of Series B Stock, and LSVGP held 3,005 shares of the Company’s common stock. Additionally, as of June 1, 2018, 415,012 shares of the Company’s common stock, or approximately 17% of its outstanding shares, were owned directly by Jeffrey E. Eberwein, Chairman of the Company’s Board. Mr. Eberwein is the manager of LSVGP, the general partner of LSVI and LSV Co-Invest I, and sole member of Lone Star Value Management, LLC, the investment manager of LSVI. The Company’s sale of the LSV Co-Invest I June Note to LSV Co-Invest I was approved by the independent members of the Company’s Board of Directors.

Merger with Digirad Corporation

On September 10, 2018, Digirad announced that its board of directors had approved the conversion of Digirad into a diversified holding company and in conjunction with that new structure, that it would be acquiring the Company (the "ATRM Acquisition"). Under the terms contemplated in a non-binding letter of intent (the "LOI"), ATRM stockholders would have received consideration consisting of 0.4 shares of Digirad common stock for each share of outstanding ATRM common stock acquired by the Company in the ATRM Acquisition (see Note 26 for additional information). Although the LOI expired by its terms on December 31, 2018, Digirad and ATRM have had additional discussions regarding the terms and conditions of a proposed transaction and the consideration to be paid for ATRM shares. The parties are currently discussing that the consideration would notbe Digirad shares of common stock, but some other form of security. In addition, on May 15, 2019, Digirad and ATRM entered into an Agreement which provides that, in the event the ATRM Acquisition does not close on or prior to December 31, 2019, ATRM will reimburse Digirad of certain consulting and related fees paid by Digirad on behalf of ATRM. We anticipate the ATRM Acquisition to close in the third quarter of 2019; however, the parties have not reached any definitive agreement, and there can be no assurance regarding timing of completion of regulatory approvals, which could delay timing of the closing and any ATRM Acquisition would remain subject to the satisfaction of customary closing conditions.

As of September 10, 2018, Jeffrey E. Eberwein, the Chairman of the Company’s Board, owns approximately 17.4% of the outstanding common stock of ATRM. Mr. Eberwein also is the Chairman of the Board of Digirad and beneficially owns 869,152 shares of Digirad's common stock, or approximately 4.3% of the shares outstanding. Mr. Eberwein is also the Chief Executive Officer of Lone Star Value Management, LLC, which is the investment manager of LSVI. LSVI owns 216,094 shares of the Company’s Series B Stock and another 363,651 shares of Series B Stock are owned directly by LSV Co-Invest I. Through these relationships and other relationships with affiliated entities, Mr. Eberwein may be deemed the beneficial owner of the securities owned by LSVI and LSV Co-Invest I. Mr. Eberwein disclaims beneficial ownership of Series B Stock, except to the extent of his pecuniary interest therein.

Promissory Note Sale to Digirad

On December 14, 2018, the Company issued to Digirad an unsecured promissory note in the principal amount of $0.3 million in exchange for the same amount in cash (the “Digirad Note”). The Digirad Note bears interest at 10.0% per annum for the first 12 months of its term, and at 12.0% per annum for the remaining 12 months. All unpaid principal and interest under the Digirad Note is due on December 14, 2020. The Company may prepay the Digirad Note at any time after a specified amount of advance notice to Digirad (subject to certain restrictions under the Company’s existing loan agreements). The Digirad 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.

Promissory Note Sale to Lone Star Value Management, LLC

On December 17, 2018, the Company issued to LSVM an unsecured promissory note in the principal amount of $0.3 million in exchange for the same amount in cash (the “LSVM Note”). The LSVM Note was issued pursuant to a securities purchase agreement by and between the Company and LSVM dated as of the same date. The LSVM Note bears interest at 10.0% per annum, with interest payable annually; provided, however, LSVM may elect to receive any interest payment entirely in-kind at a rate of 12.0% per annum. Any unpaid principal and interest under the LSVM Note is due on November 30, 2020. The Company may prepay the LSVM Note at any time after a specified amount of advance notice to LSVM (subject to certain restrictions under the Company’s existing loan agreements). The LSVM 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.

Jeffrey E. Eberwein, the Chairman of the Company’s Board, owns approximately 17.4% of the outstanding common stock of ATRM. Mr. Eberwein is also the Chief Executive Officer and the sole member of Lone Star Value Management, LLC, which is the investment manager of LSVI. Mr. Eberwein is also the manager of LSVGP, the general partner of LSVI and LSV Co-Invest I. As of December 17, 2018, LSVI owns 216,094 shares of the Company’s 10.00% Series B Stock, LSVGP held 3,005 shares of the Company’s common stock, and another 363,651 shares of Series B Stock are owned directly by LSV Co-Invest I. LSV Co-Invest I also holds unsecured promissory notes of the Company in the principal amount totaling $1.4 million. Through these relationships and other relationships with affiliated entities, Mr. Eberwein may be deemed the beneficial owner of the securities owned by LSVI and LSV Co-Invest I. Mr. Eberwein disclaims beneficial ownership of Series B Stock, except to the extent of his pecuniary interest therein.

Digirad Joint Venture and Services Agreement

Acquisition of Lone Star Value Management

On April 1, 2019, the Company entered into a Membership Interest Purchase Agreement (the “LSVM Purchase Agreement”) with LSVM and Mr. Eberwein. Pursuant to the terms of the LSVM Purchase Agreement, Mr. Eberwein sold all of the issued and outstanding membership interests of LSVM to the Company (the “LSVM Acquisition”) for a purchase price of $100.00, subject to a working capital adjustment provision. The LSVM Acquisition closed simultaneously with the execution and delivery of the LSVM Purchase Agreement, and was deemed effective as of January 1, 2019 for accounting purposes, as a result of which LSVM became a wholly-owned subsidiary of ATRM. Pursuant to the LSVM Purchase Agreement, the current assets (as well as the $0.3 million LSVM December 2018 Note issued by the Company) and current liabilities existing prior to January 1, 2019 remain with Mr. Eberwein. The LSVM Purchase Agreement contains representations, warranties, covenants and indemnification provisions customary for transactions of this type. The Company's entry into the LSVM Purchase Agreement and the LSVM Acquisition were unanimously approved by a special committee of the Board comprised solely of independent directors. As of the date of these condensed consolidated financial statements, the initial accounting for the LSVM Acquisition was incomplete, as the Company continues to determine the fair value of the acquired assets and liabilities. As of the date of these condensed consolidated financial statements, the initial accounting for this acquisition was incomplete as the Company is currently working to determine the fair value of the acquired assets and liabilities.

Sale of Maine Facilities

947 Waterford is a wholly-owned indirect subsidiary of Digirad, formed for the purpose of acquiring and holding the Waterford Facility.

property (including buildings, machinery and equipment) located in Paris, Maine (the “Park Facility”) from KBS (the “Park Transaction”), and acquired the Park Facility. The Park Purchase Agreement contains representations, warranties and covenants of KBS and 300 Park that are customary for a transaction of this nature. The purchase price of the Park Facility is $2.9 million, subject to adjustment for taxes and other charges and assessments.

Results of Operations

Net ~~Loss.~~Sales. Net ~~loss~~sales were approximately $10.5 million for the three months ended ~~March 31, 2017, was~~June 30, 2018 compared with approximately ~~$0.9 million as compared to net loss of approximately $1.7~~$10.8 million for the same period in ~~2016. This improvement in operating results from the prior year~~2017. The $0.3 million decrease was primarily due to ~~the acquisition of EBGL’s operations completed~~a decrease in ~~October 2016,~~KBS’s net sales, which ~~added an overall gross margin of $0.4 million, and an improvement in overall gross margins at KBS due to operational improvements as discussed below.~~

~~Net Sales~~~~. Net sales~~ were approximately ~~$9.4~~$4.9 million for the three months ended ~~March 31, 2017,~~June 30, 2018 as compared ~~with approximately $5.1~~to $6.3 million for the same period in ~~2016;~~2017, partially offset by an increase ~~of approximately $4.3 million. The addition of the~~in EBGL ~~operations,~~net sales which were ~~acquired in October 2016, added~~ approximately $3.8 million in net sales for the three months ended March 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$5.3 million for the three months ended ~~March 31, 2016. KBS’s growth~~June 30, 2018 compared to $4.6 million for the comparable period in 2017. The decrease in KBS net sales was ~~driven~~ primarily bydue to a decrease in commercial developer sales as the ~~sale~~Company adjusts to the strategic shift away from large commercial projects with significant site work to focus on its core competency of ~~single-family homes,~~manufacturing modular buildings for residential customers, as disclosed in Note 2 to the condensed consolidated financial statements.

Net sales were approximately $18.2 million for the six months ended June 30, 2018, compared with approximately $20.2 million for the same period in 2017. The $2.0 million decrease was primarily due to a decrease in KBS’s net sales, which ~~increased~~were approximately $9.8 million for the six months ended June 30, 2018, as compared to $11.9 million for the same period in 2017. EBGL net sales were primarily unchanged and were approximately $8.4 million for the six months ended June 30, 2018 compared to $8.4 million for the comparable period in 2017. The decrease in KBS net sales was primarily due to a decrease in commercial developer sales as the Company adjusts to the strategic shift away from large commercial projects with significant site work to focus on its core competency of manufacturing modular buildings for residential customers, as disclosed in Note 2 to the condensed consolidated financial statements.

Cost of Sales. Cost of sales amounted to approximately ~~$3.5~~$9.0 million for the three months ended ~~March 31, 2016~~June 30, 2018, compared 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 of 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 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.

~~Cost of Sales~~~~. Cost of sales amounted to approximately $8.2 million for the three months ended March 31, 2017, compared with approximately $5.4~~$9.9 million for the same period in ~~2016.~~2017. This ~~increase~~decrease of approximately ~~$2.8~~$0.9 million was due to the addition the addition of the EBGL operations, which were acquired in October 2016, which added approximately $3.4 million in cost of sales for the three months ended 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~~net sales ~~for~~at KBS ~~as compared to the prior year~~and also reflects the results of ~~KBS’s~~the Company's strategic initiatives at KBS including more selectivity in the commercial projects the ~~company~~Company undertakes, improved project pricing ~~(including implementing~~(implementing regular price increases to its customers) and ongoing cost control and efficiency measures, as disclosed in Note 2 to the ~~Condensed Consolidated Financial Statements,~~condensed consolidated financial statements, resulting in lower direct and overhead costs. ~~Additionally,~~

Cost of sales amounted to approximately $16.0 million for the six months ended June 30, 2018, compared to approximately $18.0 million for the same period in 2017. This decrease of approximately $2.0 million was due to the ~~strong backlog as~~decrease in net sales at KBS and EBGL and also reflects the results 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. TheCompany's strategic initiatives at KBS ~~coupled with an~~including more selectivity in the commercial projects the Company undertakes, improved ~~sales mix~~project pricing (implementing regular price increases to its customers) and ~~high capacity utilization rates, have resulted~~ongoing cost control and efficiency measures, as disclosed in ~~higher gross margins for the first three months of 2017 as compared~~Note 2 to the ~~same period~~condensed consolidated financial statements, resulting in ~~2016.~~

lower direct and overhead costs.

Selling, General and ~~Administrative~~.Administrative. Selling, general and administrative (“SG&A”) expense was approximately ~~$1.7~~$1.4 million and ~~$1.0~~$1.9 million for the three months ended ~~March 31,~~June 30, 2018 and 2017, respectively. SG&A expense was approximately $2.8 million and ~~2016,~~$3.6 million for the six months ended June 30, 2018 and 2017, respectively. The ~~increase~~decrease in SG&A expense ~~of $0.7 million~~in the three and six months ended June 30, 2018 and 2017 is primarily ~~attributable~~due to ongoing cost control measures at KBS, as disclosed in Note 2 to the ~~addition~~condensed consolidated financial statements.

Goodwill Impairment Charge. We completed a goodwill impairment assessment as of June 30, 2017, and determined that the value of goodwill related to the EBGL Acquisition was zero versus the carrying value of goodwill of $3.0 million as of that date. Since the acquisition of the EBGL operations, ~~which~~the results of those operations had underperformed the pre-acquisition expectations from a net sales, gross profit margin and net income perspective. Additionally, given the significant increase in raw material costs, more specifically, lumber and sheet goods, the projection of EBGL’s profits 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~~projected 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~~be lower than initially expected. Accordingly, management’s updated projections for the EBGL ~~Acquisition, as well as higher costs for KBS related to commissions and bank services charges incurred in 2017~~operations could not ~~incurred~~support the carrying value of goodwill. Accordingly, we recorded a goodwill impairment charge in the ~~same period~~amount of $3.0 million in ~~2016. Commissions~~the three and six months ended June 30, 2017. Goodwill was fully impaired at ~~KBS relate to~~ the ~~addition~~end of ~~outside sales representatives in 2016 and bank service charges related to the KBS line of credit with Gerber Finance added in February 2016.~~2017.

Interest Expense. Interest expense ~~increased by approximately $0.3 million~~decreased from approximately ~~$0.3~~$0.8 million for the three months ended ~~March 31, 2016~~June 30, 2017 to approximately ~~$0.6~~$0.2 million for the three months ended ~~March 31, 2017. This increase~~June 30, 2018 and decreased from approximately $1.4 million for the six months ended June 30, 2017 to approximately $0.5 million for the six months ended June 30, 2018. The decrease is attributable to the ~~increase~~decrease in overall debt for the Company from approximately ~~$12.8~~$21.7 million at ~~March 31, 2016,~~June 30, 2017 to approximately ~~$20.5~~$12.2 million at ~~March 31, 2017.~~June 30, 2018. The decrease in overall debt was a result of the implementation of our strategic initiatives in fiscal 2017 (see Note 2 to the condensed consolidated financial statements). See Notes 1312 and 1413 to the ~~Condensed Consolidated Financial Statements~~condensed consolidated financial statements for the ~~period~~six months ended ~~March 31, 2017,~~June 30, 2018, for further details onof the Company’s outstanding debt. ~~In addition to~~

Change in Fair Value of Contingent Earn-outs, net. We assess the ~~overall increase~~fair value of our contingent earn-outs at the end of each quarter. The contingent earn-out receivable included in ~~outstanding debt, the increase in interest expense~~our balance sheets at June 30, 2018 and 2017 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~~transfer of ~~12%~~our test handler product line to Boston Semi Automation LLC in April 2014. Change in fair value of contingent earn-out receivable during the three and six months ended ~~March 31, 2017, versus~~June 30, 2018 represented a net decrease of approximately $0.2 million and $0.4 million, respectively, in the ~~cash interest rate~~fair value of ~~10% for the same period in 2016. The Company elected the PIK Interest option for the three-month period ended March 31, 2017.~~this earn-out as a result of timing and payments.

Income ~~Taxes~~.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, a decrease in shareholders’ deficit. We recorded income tax expense of ~~$4,000~~$11.0 thousand and $4.0 thousand for the three months ended ~~March 31,~~June 30, 2018 and 2017, respectively, and ~~2016,~~$15.0 thousand and $8.0 thousand for the six months ended June 30, 2018 and 2017, 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.

Net Loss. Net loss for the three months ended June 30, 2018 was approximately $0.2 million as compared to net loss of approximately $4.6 million for the same period in 2017. Net loss for the six months ended June 30, 2018 was approximately $1.2 million as compared to net loss of approximately $5.4 million for the same period in 2017. The decrease was primarily due to the factors described above.

Financial Condition, Liquidity and Capital Resources

Cash, ~~and~~ cash equivalents ~~including~~and restricted cash ~~decreased~~increased by approximately ~~$0.6~~$0.7 million in the ~~three~~six months ended ~~March 31, 2017.~~

June 30, 2018.

~~Cash~~Net cash used in operating activities. In the six months ended June 30, 2018, cash flows used in operating activities. were approximately $1.4 million, consisting primarily of our net loss of $1.2 million and a net decrease in operating assets and liabilities of $0.7 million which primarily included an increase in accounts receivable of $1.2 million, partially offset by an increase in trade accounts payable of $1.8 million. These decreases in operating assets and liabilities were offset by depreciation and amortization expense of $0.4 million. Also, please refer to Note 4 "Revenue Recognition" in the notes to our condensed consolidated financial statements for an explanation of changes due to the adoption of ASC 606.

In the ~~three~~six months ended ~~March 31,~~June 30, 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~~$1.6 million, consisting primarily of our net loss of approximately ~~$1.7~~$5.4 million ~~and approximately $0.4 million in working capital changes,~~which were partially offset by (i) the non-cash goodwill impairment charge

of approximately ~~$0.2~~$3.0 million, (ii) non-cash PIK Interest of approximately $0.6 million, and (iii) approximately $0.9 million of non-cash depreciation amortization and share-based compensation ~~expense.~~expense, as well as $0.4 million for the non-cash changes in fair value and changes in net working capital of approximately $0.3 million. Working capital changes ~~using cash~~for the six months ended June 30, 2017 netted to approximately $0.3 million and included a ~~$0.3~~$1.3 million increase in costs and estimated profit in excess of billings and decreases of approximately $1.1 million, $0.2 million, and $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 $1.5 million and $0.3 million intrade accounts receivable ~~and inventories, respectively, and a $0.2 million increase in accrued compensation. The decreases in accounts receivable, inventories and accounts payable were primarily attributable~~due to the ~~lower sales~~timing of customer payments and increased production activity in the ~~first~~ quarter ~~of fiscal year 2016 compared to the fourth quarter of fiscal year 2015. The increase in costs and estimated profit in excess of billings resulted primarily from~~ended June 30, 2017, offset by an increase in ~~work in process related~~accounts payable of $0.8 million due to ~~projects scheduled for delivery in the second quarter of fiscal year 2016. The decrease in billings in excess of costs~~higher production levels and ~~estimated profit reflected primarily the delivery of modules for two multi-tenant buildings in the first quarter of fiscal year 2016. The decrease~~a net increase in other ~~accrued liabilities included the settlement~~working capital of ~~approximately $0.3 million in accrued sales rebates and decreases of approximately $0.3 million and $0.1 million in accrued interest expense and accrued severance costs, respectively.~~

$0.2 million.

~~Cash flows generated~~Net cash provided by investing activities. ~~Cash~~Net cash flows ~~from~~provided by investing activities were ~~insignificant~~approximately $0.2 million for the ~~three-month periods ending March 31,~~six-month period ended June 30, 2018 which included $0.2 million proceeds from earn-out consideration. During the six months ended June 30, 2017 included $0.2 million of proceeds from earn-out consideration, partially offset by $0.1 million net purchases of property and ~~2016, amounting to less than $0.1 million.~~equipment.

~~Cash flows generated~~Net cash provided by financing activities. In the ~~three~~six months ended ~~March 31,~~June 30, 2018, cash flows provided by financing activities were approximately $1.9 million, which included $1.4 million of proceeds from the issuance of long-term debt and approximately $1.1 million of net advances under the KBS Loan Agreement and the EBGL Loan Agreement, partially offset by approximately $0.6 million to reduce principal balances of our long-term debt.

In the six months ended June 30, 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 $1.5~~$0.8 million, which included approximately ~~$2.9~~$1.3 million of net advances under the KBS Loan Agreement and the EBGL Loan Agreement, $0.6 million of proceeds from the issuance of long-term debt, partially offset by ~~payments of~~ approximately ~~$0.2 million for financing costs under this line of credit, and approximately $1.3~~$1.0 million to reduce principal balances of our long-term debt.

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 ~~March 31, 2017,~~June 30, 2018, we had outstanding debt totaling approximately ~~$20.5~~$12.2 million. Our debt primarily included (i) ~~$2.3~~$4.2 million principal outstanding on KBS’s $4.0 million revolving credit facility under a loan and security agreement (as amended, the ~~KBS~~"KBS Loan ~~Agreement, $1.8~~Agreement") with Gerber Finance Inc. ("Gerber Finance"), and $3.0 million principal outstanding under a loan and security agreement with Gerber Finance used to finance the acquisition of EBGL (as amended, the “Acquisition Loan Agreement”), and (ii) $2.9 million principal outstanding on EBGL’s $3.0 million revolving credit facility under a revolving credit loan agreement (the "Premier Loan Agreement") with Premier Bank ("Premier"), which became effective on June 30, 2017 and replaced the ~~EBGL Loan Agreement and~~prior $3.0 million ~~principal outstanding~~revolving credit facility under ~~the Acquisition~~a loan and security agreement with Gerber Finance (the "EBGL 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 sellers of KBS, payable in monthly installments of $100,000, inclusive of interest, through July 1, 2017.Agreement"). We also ~~had~~have obligations to make ~~$0.75~~$0.5 million in deferred cash payments to the sellers of EBGL, payable in ~~quarterly~~monthly installments of ~~$250,000,~~$0.1 million, inclusive of interest, through ~~October~~November 1, ~~2017.~~ ~~Since March 31, 2017, we~~2018 and have ~~made~~$1.4 million unsecured promissory notes payable to LSV Co-Invest I, a related party, with interest payable semi-annually with any unpaid principal and interest due on January 12, 2020, (“LSVI Co-Invest I Notes Payable”, otherwise referred to herein and defined below as the ~~following changes to the Company’s outstanding debt:~~

	●	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.~~

~~Jeffrey E. Eberwein, our Chairman of the Board, is the manager of LSVGP, the general partner of LSVI~~LSV Co-Invest I January Note and LSV Co-Invest I June Note).

At the applicable test dates, we were not in compliance with the following financial covenants under our loan agreements: (i) a requirement for KBS to maintain a minimum leverage ratio of 7:1 for the fiscal year ended December 31, 2017, as its actual leverage ratio for such period was negative; (ii) a requirement for KBS not to incur a net annual post-tax loss in any fiscal year of the loan agreements, as KBS’s net annual post-tax loss for the fiscal year ended December 31, 2017 was $1.9 million; and (iii) a requirement to deliver 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, 2017. In August 2017, Gerber Finance provided us with a waiver for these events.As of December 31, 2018, KBS was not in compliance with the financial covenants under the KBS Loan Agreement requiring no net annual post-tax loss for KBS or the minimum leverage ratio covenant as of these test dates. Additionally, KBS was not in compliance with the requirement to deliver the Company's fiscal year-end financial statements reviewed by an independent certified accounting firm acceptable to Gerber Finance within P105D from the fiscal year ended December 31, 2018. 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. In April 2019 and June 2019, we obtained a waiver from Gerber Finance for these events. In addition, the Company and Gerber Finance agreed to eliminate the minimum leverage ratio covenant for years after 2018. The Company currently projects that it will be in compliance with the covenant requiring no net annual post-tax loss for KBS for 2019.

any event of default under the Premier Loan Agreement may result in EBGL’s obligations under the Premier Loan Agreement becoming immediately due and payable. In April 2019, we obtained a waiver from Premier for these events through August 1, 2019 (the current maturity date of the Premier Loan Agreement).

KBS’s strategic shift away from large commercial projects with significant site work to focus on its core competency of manufacturing modular buildings;

Reduction in KBS workforce including manufacturing, sales, engineering and front-office staff;

In July 2017, KBS made the final payment due to the primary seller of KBS, freeing up $0.1 million per month of cash flows to be used for operations;

In November 2018, EBGL made the final payment due to the sellers of EBGL, freeing up $0.1 million per month of cash flows to be used for operations;

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;

In September 2017, we converted $13.3 million of the Company’s outstanding debt, including accrued interest, to the Company’s Series B Stock;

In April 2019, KBS and EBGL executed sale leasebacks of several of its real estate properties (see further discussion in Note 18); and

We continue to look for opportunities to refinance our remaining debt on more favorable terms.

On September 10, 2018, ATRM entered into a non-binding LOI relating to the acquisition of ATRM by Digirad Corporation ("Digirad") (NASDAQ: DRAD). Under the terms contemplated in the LOI, ATRM stockholders would have received consideration consisting of 0.4 shares of Digirad common stock for each share of outstanding ATRM common stock acquired by the Company in the ATRM Acquisition (see Note 18 for additional information). Although the LOI expired by its terms on December 31, 2018,

Digirad and ATRM have had additional discussions regarding the terms and conditions of a proposed transaction and the ~~sole member~~consideration to be paid for ATRM shares. The parties are currently discussing that the consideration would notbe Digirad shares of ~~LSVM,~~common stock, but some other form of security. In addition, on May 15, 2019, Digirad and ATRM entered into an Agreement which provides that, in the ~~investment manager~~event the ATRM Acquisition does not close on or prior to December 31, 2019, ATRM will reimburse Digirad of ~~LSVI.~~

certain consulting and related fees paid by Digirad on behalf of ATRM. We anticipate the ATRM Acquisition to close in the third quarter of 2019; however, the parties have not reached any definitive agreement, and there can be no assurance regarding timing of completion of regulatory approvals, which could delay timing of the closing and any ATRM Acquisition would remain subject to the satisfaction of customary closing conditions.

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;~~

●		~~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 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. 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.



Item 3.	Quantitative and Qualitative Disclosures About Market Risk

~~Not applicable.~~

None.



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”~~"Exchange Act")). Based on their evaluation of our disclosure controls and procedures and due to the material weaknesses described below, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of ~~March 31, 2017,~~June 30, 2018, 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.

Management’s Annual Report on Internal Control over Financial Reporting

Our management, with oversight by the Board, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2018, based on the criteria established in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this evaluation and due to the material weaknesses described below, our management, including our chief executive officer and chief financial officer, concluded that our internal control over financial reporting was not effective as of June 30, 2018.

Description of Material Weaknesses

~~In April 2014, we acquired the assets~~

Our internal control over financial reporting is supported by written policies and ~~assumed certain liabilities related~~procedures that (1) pertain to the ~~operations~~maintenance of ~~KBS~~records that, in reasonable detail, accurately and ~~subsequently,~~fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in ~~October 2016, we acquired~~accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

We have identified certain ~~assets related~~deficiencies in the principles associated with each component of the COSO framework, as described below, which our management concluded constitute material weaknesses, either individually or in the aggregate.

Control Environment

We did not maintain an effective control environment based on the criteria established in the COSO framework to enable the ~~operations~~identification and mitigation of ~~EBGL. Prior~~risks of material accounting errors based on:

An insufficient number of personnel with an appropriate level of GAAP knowledge and experience to create the ~~acquisitions,~~proper environment for effective internal control over financial reporting and to ensure that (i) there were adequate processes for oversight, (ii) there was accountability for the ~~KBS~~performance of internal control over financial reporting responsibilities, and ~~EBGL operations~~(iii) corrective activities were ~~privately-owned businesses with very limited administrative~~appropriately applied, prioritized, and ~~accounting resources, outdated accounting software and generally weak accounting~~implemented in a timely manner.

Our oversight processes and procedures that guide individuals in applying internal control ~~procedures.~~over financial reporting were not adequate in preventing or detecting material accounting errors.

The Company does not utilize a perpetual inventory system for tracking inventory at KBS. The Company’s processes and controls for tracking costs through the production processes and cost of sales was not considered effective.

Risk Assessment

We did not design and implement an effective risk assessment based on the criteria established in the COSO framework, specifically relating to: (i) identifying, assessing, and communicating appropriate objectives, (ii) identifying and analyzing risks to achieve these objectives, and (iii) identifying and assessing changes in the business that could impact our system of internal controls.

Control Activities

We did not design and implement effective control activities based on the criteria established in the COSO framework. Specifically, the control activities did not adequately (i) address relevant risks, (ii) provide evidence of performance, (iii) provide appropriate segregation of duties, or (iv) operate at a level of precision to identify all potentially material errors.

Information and Communication

We did not generate and provide quality information and communication based on the criteria established in the COSO framework, specifically relating to communicating accurate information internally and externally, including providing information pursuant to objectives, responsibilities, and functions of internal control.

Monitoring Activities

We did not design and implement effective monitoring activities based on the criteria established in the COSO framework. Specifically, we did not maintain effective monitoring controls to ascertain whether the components of internal control are present and functioning.

Remediation Plan and Status for Material Weaknesses in Internal Control over Financial Reporting

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017, management concluded as of December 31, 2017 that several material weaknesses existed at that date. Management has been engaged in ~~KBS’s and EBGL’s financial reporting processes with respect~~remediation

efforts to ~~(1)~~address the material weaknesses. We have made enhancements to our control ~~over accounts payable cut-offs, (2) inventory accounting, (3) contract accounting and (4) inadequate segregation of duties in certain accounting processes,~~environment from various activities including the ~~payroll, cash receipts~~following:

Engage external consultants to provide support related to more complex applications of GAAP and ~~disbursements processes~~document and ~~management of user access rights in~~assess our accounting ~~system, partly as a result of our limited size~~policies and ~~accounting staff.~~

~~Remediation of Material Weaknesses~~

~~We are working to remediate these material weaknesses. Since the April 2014 acquisition of KBS, we have implemented organizational changes to strengthen the accounting~~procedures for existing accounts and other administrative functions at KBS 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. processes.

At EBGL, we are in the process of implementing improvements in internal processes, procedures and controls and establishing regular reporting and routine management oversight. ~~EBGL~~

The Company is in the process of ~~upgrading~~analyzing its ~~financial management information~~ system ~~which is expected~~limitations and designing or implementing system upgrades to be ~~fully operational by the end of 2017. The upgrade of the old system, which was over 20 years old, will significantly improve EBGL’s financial reporting capabilities~~able to properly track production costs.

We continue to redesign and ~~provide enhanced controls.~~

~~Although significant progress has been made in improving the controls at KBS, additional time is required~~implement internal control activities. We continue to ~~fully develop adequate processes,~~establish policies and procedures and enhance corporate oversight over process-level controls and structures to ~~determine whether such processes~~ensure that there is appropriate assignment of authority, responsibility, and ~~controls are effective. At EBGL, the improvements are at an early state, so we expect it will take significant additional time~~accountability 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~~enable remediating our material weaknesses.

While we have made inand expect to make additional improvements to our ~~efforts~~internal controls, we may determine that additional steps beyond those described above may be necessary to remediate ~~these~~the material weaknesses.

~~Changes in Internal Control Over Financial Reporting~~

~~As a result~~ While we intend to resolve all of the material control deficiencies ~~at KBS and EBGL~~ discussed above, we ~~determined~~cannot provide any assurance that ~~we have material weaknesses in~~these remediation efforts will be successful, will be completed quickly, or that our internal control over financial ~~reporting.~~reporting will be effective as a result of these efforts by any particular date. We ~~are working~~have not yet quantified the cost to ~~remediate these material weaknesses as discussed above.~~

implement our planned remediation activities related to our existing or acquired businesses, which have not been fully assessed.

PART II. OTHER INFORMATION



Item 1.	Legal Proceedings

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 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 court of appeal 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 case RJR Nabisco, Inc. v. The European Community, No. 15-138. A decision in the RJR 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 the ~~RJR Nabisco decision.~~sole remaining RICO claim. On August 26, 2016, the district court granted ATRM’s motion for summary judgment and 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 render~~On July 2, 2018, the Ninth District Court of Appeals rendered its decision onaffirming the ~~appeal within 90 days. We continue to believe that~~District Court’s opinion and upheld the ~~claims asserted in this matter do not have any merit and intend to vigorously defend the action.~~

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

~~At the time~~dismissal 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 Nelton Court were supplied by KBS Building Systems, Inc. (“KBS-BSI”) pursuant to a contract with KBE Building Corporation (“KBE”). KBE has asserted claimscase against ~~KBS-BSI, KBS and ATRM arising out of alleged delays, and for the repair of certain alleged defects in the modular units supplied~~ATRM. UTHE did not appeal that decision to the ~~project. KBE’s claim seeks an unspecified amount~~Supreme Court of ~~damages. The action~~the United States by the October 1, 2018 deadline. As such, this Ninth Circuit affirmance of the case dismissal stands, and the lawsuit has been ~~transferred to~~successfully and completely defeated by the complex litigation docket of the Hartford Superior Court. 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 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 pay $300,000 to the plaintiff.

Company.



Item 1A.	Risk Factors

Not applicable.



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

None.



Item 3.	Defaults on Senior Securities

None.



Item 4.	Mine Safety Disclosures

None.



Item 5.	Other Information

None.



Item 6.	Exhibits



4.1	Promissory Note, dated ~~March 31, 2017,~~June 1, 2018, made by ATRM Holdings, Inc. for the benefit of Lone Star Value Co-Invest I, ~~LP.~~LP (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on June 7, 2018).
	10.1	Securities Purchase Agreement, dated as of ~~March 31, 2017,~~June 1, 2018, by and between ATRM Holdings, Inc. and Lone Star ~~Value~~ Co-Invest I, ~~LP.~~LP (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on June 7, 2018).
	31.1	Certification of Principal Executive Officer ~~pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~
	~~31.2~~	~~Certification of~~and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101.INS	XBRL Instance Document
	101.SCH	XBRL Taxonomy Extension Schema
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase
	101.DEF	XBRL Taxonomy Extension Definition Linkbase
	101.LAB	XBRL Taxonomy Extension Label Linkbase
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase

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: ~~March 23, 2018~~June 26, 2019	By:	/s/ Daniel M. Koch
		Daniel M. Koch
		President and Chief Executive Officer (Principal Executive ~~Officer)~~

~~Date: March 23, 2018~~	~~By:~~	~~/s/ Stephen A. Clark~~
		~~Stephen A. Clark~~
		~~Chief~~Officer and Principal Financial ~~Officer (Principal Financial and Accounting~~ Officer)



Minnesota		41-1439182
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)



5215 Gershwin Avenue N., Oakdale, Minnesota		55128
(Address of Principal Executive Offices)		(Zip Code)



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

			Emerging growth company [ ]


			Page
PART I. FINANCIAL INFORMATION

	Item 1.	Condensed Consolidated Financial Statements

		Condensed Consolidated Balance Sheets as of ~~March 31, 2017~~June 30, 2018 (unaudited) and December 31, ~~2016~~2017	1 3

		Condensed Consolidated Statements of Operations for the three and six months ended ~~March 31,~~June 30, 2018 and 2017 ~~and 2016~~ (unaudited)	2 4

		Condensed Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~March 31,~~June 30, 2018 and 2017 ~~and 2016~~ (unaudited)	3 5

		Notes to Condensed Consolidated Financial Statements (unaudited)	~~4 – 19~~ 6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20~~– 25~~ 23

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25 31

	Item 4.	Controls and Procedures	26 31

	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

	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

	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

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

	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

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

	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	)

	March 31, 2017 (unaudited)							December 31, 2016
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value		Gross Carrying Amount		Accumulated Amortization			Net Carrying Value

Indefinite-lived intangible assets:
Goodwill	$	3,020	$	—		$	3,020	$	3,020	$	—		$	3,020
Trademarks		394		—			394		394		—			394
Total		3,414		—			3,414		3,414		—			3,414

Finite-lived intangible assets:
Customer relationships		2,097		(665	)		1,432		2,097		(586	)		1,511
Purchased backlog		1,290		(1,191	)		99		1,290		(1,078	)		212
Total		3,387		(1,856	)		1,531		3,387		(1,664	)		1,723

Total intangible assets	$	6,801	$	(1,856	)	$	4,945	$	6,801	$	(1,664	)	$	5,137

2017 (nine months)	$	336
2018		315
2019		315
2020		315
2021		164
Thereafter		86
Total	$	1,531

	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

	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

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

Other Significant Adjustments	Segment Totals		Adjustments		Consolidated Totals

Depreciation and amortization expense	$	280	$	—	$	280
Interest expense	$	214	$	349	$	563

Fair Value Asset

Valuation Technique

Unobservable Input

Unobservable Input
Amount

~~Earn-out~~Contingent earn-out receivable related to transfer of test handler product line

Discounted cash flow

Total ~~projected~~ revenue ~~Performance weighted average Discount rate~~for the remaining royalty period

$~~11.3~~6.9 million
~~60% to 125%~~
~~10 %~~

Discount rate

2.41% to 2.64%