UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 000-22166
ATRM HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Minnesota | | 41-1439182 |
(State or Other Jurisdiction of
Incorporation or Organization) | | (I.R.S. Employer
Identification No.) |
| 3050 Echo Lake Ave., Suite 300, Mahtomedi, Minnesota | | 55115 |
| ( Address of Principal Executive Offices) | | (Zip Code) |
(651) 704-1800
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer [ ] | Accelerated filer [ ] | Non-accelerated filer [ ] | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 12, 2015, 2,266,219 shares of Common Stock of the Registrant were outstanding.
ATRM HOLDINGS, INC.
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
ATRM HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | | September 30,
2015 | | | December 31,
2014 | |
| | | (Unaudited) | | | | |
| ASSETS | | | | | | | | |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 1,743 | | | $ | 1,996 | |
| Accounts receivable, net | | | 3,727 | | | | 2,804 | |
| Costs and estimated profit in excess of billings | | | 987 | | | | 1,791 | |
| Inventories | | | 1,781 | | | | 1,936 | |
| Fair value of contingent earn-out, current | | | 508 | | | | 1,200 | |
| Other current assets | | | 186 | | | | 117 | |
| Total current assets | | | 8,932 | | | | 9,844 | |
| | | | | | | | | |
| Property, plant and equipment, net | | | 4,545 | | | | 4,740 | |
| | | | | | | | | |
| Fair value of contingent earn-out, noncurrent | | | 642 | | | | 1,100 | |
| Goodwill | | | 1,733 | | | | 1,733 | |
| Intangible assets, net | | | 1,406 | | | | 1,688 | |
| | | | | | | | | |
| Total assets | | $ | 17,258 | | | $ | 19,105 | |
| | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Note payable | | $ | — | | | $ | 5,500 | |
| Current portion of long-term debt | | | 1,091 | | | | 45 | |
| Trade accounts payable | | | 4,697 | | | | 5,129 | |
| Billings in excess of costs and estimated profit | | | 709 | | | | 288 | |
| Accrued compensation | | | 269 | | | | 84 | |
| Other accrued liabilities | | | 2,422 | | | | 2,492 | |
| Total current liabilities | | | 9,188 | | | | 13,538 | |
| | | | | | | | | |
| Long-term debt, less current portion | | | 10,531 | | | | 9,542 | |
| Deferred income taxes | | | 11 | | | | — | |
| | | | | | | | | |
| Commitments and contingencies | | | | | | | | |
| | | | | | | | | |
| Shareholders’ deficit: | | | | | | | | |
| Common stock, $.001 par value; 3,000,000 shares authorized; 2,206,219 and 1,186,473 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively | | | 2 | | | | 1 | |
| Additional paid-in capital | | | 69,374 | | | | 66,335 | |
| Accumulated deficit | | | (71,848 | ) | | | (70,311 | ) |
| Total shareholders’ deficit | | | (2,472 | ) | | | (3,975 | ) |
| | | | | | | | | |
| Total liabilities and shareholders’ deficit | | $ | 17,258 | | | $ | 19,105 | |
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
September 30, | | | Nine months ended
September 30, | |
| | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
| | | | | | | | | | | | | |
| Net sales | | $ | 6,426 | | | $ | 10,310 | | | $ | 20,027 | | | $ | 22,699 | |
| Costs and expenses: | | | | | | | | | | | | | | | | |
| Cost of sales | | | 6,912 | | | | 9,845 | | | | 20,414 | | | | 21,431 | |
| Selling, general and administrative expenses | | | 1,534 | | | | 1,142 | | | | 3,664 | | | | 4,423 | |
| Goodwill impairment charge | | | — | | | | — | | | | — | | | | 3,705 | |
| Total costs and expenses | | | 8,446 | | | | 10,987 | | | | 24,078 | | | | 29,559 | |
| | | | | | | | | | | | | | | | | |
| Loss from continuing operations | | | (2,020 | ) | | | (677 | ) | | | (4,051 | ) | | | (6,860 | ) |
| Other income (expense): | | | | | | | | | | | | | | | | |
| Interest expense | | | (318 | ) | | | (277 | ) | | | (1,107 | ) | | | (493 | ) |
| Change in fair value of contingent earn-out | | | (62 | ) | | | — | | | | (62 | ) | | | 103 | |
| Settlement gain | | | — | | | | — | | | | 3,687 | | | | — | |
| Loss from continuing operations before income taxes | | | (2,400 | ) | | | (954 | ) | | | (1,533 | ) | | | (7,250 | ) |
| Income tax benefit (expense) | | | (2 | ) | | | — | | | | (4 | ) | | | 464 | |
| Loss from continuing operations | | | (2,402 | ) | | | (954 | ) | | | (1,537 | ) | | | (6,786 | ) |
| Income from discontinued operations, net of income taxes | | | — | | | | — | | | | — | | | | 861 | |
| Net loss | | $ | (2,402 | ) | | $ | (954 | ) | | $ | (1,537 | ) | | $ | (5,925 | ) |
| Income (loss) per share – basic and diluted: | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | (1.80 | ) | | $ | (0.88 | ) | | $ | (1.24 | ) | | $ | (6.29 | ) |
| Discontinued operations | | | — | | | | — | | | | — | | | | 0.80 | |
| Net loss | | $ | (1.80 | ) | | $ | (0.88 | ) | | $ | (1.24 | ) | | $ | (5.49 | ) |
| | | | | | | | | | | | | | | | | |
| Weighted average common shares outstanding – basic and diluted | | | 1,331 | | | | 1,079 | | | | 1,235 | | | | 1,079 | |
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)
| | | Nine months ended
September 30, | |
| | | 2015 | | | 2014 | |
| Cash flows from operating activities: | | | | | | | | |
| Net loss | | $ | (1,537 | ) | | $ | (5,925 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Depreciation and amortization expense | | | 519 | | | | 997 | |
| Share-based compensation expense | | | 86 | | | | 5 | |
| Provision for bad debts | | | 48 | | | | — | |
| Settlement gain | | | (3,687 | ) | | | — | |
| Facility expense accrual credit | | | (54 | ) | | | — | |
| Gain on sale of equipment | | | (4 | ) | | | — | |
| Deferred income taxes | | | 11 | | | | — | |
| Change in fair value of contingent earn-out | | | 62 | | | | (103 | ) |
| Goodwill impairment charge | | | — | | | | 3,705 | |
| Gain on sale of discontinued operations | | | — | | | | (1,128 | ) |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (971 | ) | | | (609 | ) |
| Costs and estimated profit in excess of billings | | | 804 | | | | (2,028 | ) |
| Inventories | | | 155 | | | | 498 | |
| Other current assets | | | (69 | ) | | | (207 | ) |
| Other assets | | | — | | | | 338 | |
| Trade accounts payable | | | (432 | ) | | | (1,275 | ) |
| Billings in excess of costs and estimated profit | | | 421 | | | | 132 | |
| Accrued compensation | | | 185 | | | | 6 | |
| Other accrued liabilities | | | 445 | | | | 1,011 | |
| Net cash used in operating activities | | | (4,018 | ) | | | (4,583 | ) |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Proceeds from earn-out consideration | | | 1,088 | | | | 428 | |
| Purchase of property and equipment | | | (47 | ) | | | (193 | ) |
| Sale of equipment | | | 9 | | | | — | |
| Purchase of business, net of cash acquired | | | — | | | | (4,568 | ) |
| Net cash generated by (used in) investing activities | | | 1,050 | | | | (4,333 | ) |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Proceeds from issuance of common stock, net of offering expenses | | | 2,954 | | | | — | |
| Proceeds from issuance of long-term debt | | | 1,059 | | | | 11,000 | |
| Principal payments on long-term debt | | | (1,298 | ) | | | (35 | ) |
| Payment of debt assumed and paid at closing of business purchase | | | — | | | | (1,401 | ) |
| Net cash generated by financing activities | | | 2,715 | | | | 9,564 | |
| | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | (253 | ) | | | 648 | |
| | | | | | | | | |
| Cash and cash equivalents at beginning of period | | | 1,996 | | | | 1,260 | |
| | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 1,743 | | | $ | 1,908 | |
| | | | | | | | | |
| Supplemental cash flow information: | | | | | | | | |
| Cash paid for interest expense | | $ | 1,036 | | | $ | 167 | |
| Settlement agreement: | | | | | | | | |
| – reduction of note payable to seller | | $ | 3,226 | | | $ | — | |
| – forgiveness of accrued interest | | $ | 461 | | | $ | — | |
| Note payable to seller issued as partial consideration for purchase of business | | $ | — | | | $ | 5,500 | |
| Contingent earn-out receivable received as part of product line disposition | | $ | — | | | $ | 2,200 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
ATRM HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements include the accounts of ATRM Holdings, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. References in the notes to the condensed consolidated financial statements to “ATRM,” “the Company,” “we,” “us” or “our”, unless the context otherwise requires, refer to ATRM Holdings, Inc. and its subsidiaries and their respective predecessors. Our modular housing business is operated by our wholly-owned subsidiaries KBS Builders, Inc. and Maine Modular Haulers, Inc. (collectively referred to as “KBS”).
The condensed consolidated balance sheet at December 31, 2014 has been derived from our audited financial statements. In the opinion of management, the unaudited interim 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 nine months ended September 30, 2015 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 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 should be read in conjunction with the consolidated financial statements and accompanying footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2014.
Beginning in fiscal year 2013, ATRM implemented a series of strategic initiatives intended to stabilize the Company and return it to profitability. In July 2013, we sold the assets related to our Reliability Test Products (“RTP”) line of products to Cascade Microtech, Inc. (“Cascade”). On April 2, 2014, we acquired KBS, a business that manufactures modular housing units for commercial and residential applications. On April 22, 2014, we entered into an agreement to transfer the assets related to our test handler product line to BSA (as defined below) in return for a future stream of earn-out payments based on the product line’s revenues.
We have incurred significant operating losses and, as of September 30, 2015, we had an accumulated deficit of approximately $72 million. There can be no assurance that the strategic initiatives described above will lead to sufficient revenue in the future to cover our expenses and achieve profitability for ATRM on a consistent basis or at all. In addition, we incurred substantial debt in connection with the acquisition of KBS. To finance the acquisition, we issued $6.5 million in promissory notes to Lone Star Value Investors, LP (“LSVI”) and a $5.5 million promissory note (the “KBS Note”) to the sellers with an original maturity date of October 1, 2014. We reached an agreement with the holder of the KBS Note to extend its maturity date to December 1, 2014 but we were unable to repay the note on that date. On June 26, 2015, as discussed in Note 13, we reached an agreement with the holder of the KBS Note to reduce its principal balance to $2.5 million, which amount is payable in monthly installments of $100,000, inclusive of interest, on the first business day of each month, which began on July 1, 2015. Since the acquisition of KBS in April 2014, we have received cash to fund our working capital needs from LSVI and its affiliate Lone Star Value Co-Invest I, LP (“LSV Co-Invest I”) in exchange for unsecured promissory notes issued to these entities.
In September 2015, we completed a stock offering in which we sold 1,019,746 shares of our common stock and received approximately $3.0 million, net of offering expenses. From the proceeds of the stock offering, we repaid $1.0 million of debt owed to LSVI and retained the remainder for working capital. We intend to pursue new financing to refinance all or a portion of our debt and to provide for our general working capital needs going forward.
As of the September 30, 2015, the Company’s total debt owed under promissory notes, including the Amended and Restated KBS Note (as defined below), was approximately $11.6 million. We have implemented significant changes to improve the performance of our KBS operations, including organizational changes and the implementation of improved contracts, processes and controls.
Jeffrey E. Eberwein, the Company’s Chairman of the Board, is the manager of Lone Star Value Investors GP, LLC (“LSVGP”), the general partner of LSVI and LSV Co-Invest I, and sole member of Lone Star Value Management, LLC (“LSVM”), the investment manager of LSVI. ATRM may be dependent on LSVI and LSV Co-Invest I, or other third parties, for working capital financing to fund the Company’s operations until such time as it obtains new financing to refinance all or a portion of its debt. Although not a binding commitment, LSVM has advised ATRM of its present intention to continue to financially support the Company as it pursues alternative financing. There can be no assurance we will be successful in obtaining any such new financing with terms favorable to us or at all. 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.
Our inability to generate funds or obtain financing sufficient to satisfy our debt payment obligations may result in such obligations being accelerated by our lenders, which would likely have a material adverse effect on our business, financial condition and results of operations. Given these uncertainties, there can be no assurance that our existing cash reserves will be sufficient to avoid liquidity issues and/or fund operations beyond one year from September 30, 2015.
| 3. | RECENT ACCOUNTING PRONOUNCEMENT |
In January 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-01,Income Statement - Extraordinary and Unusual Items(“ASU 2015-01”), as part of its initiative to reduce complexity in accounting standards. ASU 2015-01 eliminates the concept of extraordinary items from generally accepted accounting principles. The amendments in the update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted if the guidance is applied from the beginning of the fiscal year of adoption. As permitted, the Company adopted the provisions of ASU 2015-01 effective January 1, 2015.
In May 2014, the FASB issued ASU 2014-09,Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance addresses, in particular, contracts with more than one performance obligation, as well as the accounting for some costs to obtain or fulfill a contract with a customer; and provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers. With respect to public entities, ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted only as of annual periods beginning after December 31, 2016. The implementation of this guidance is not expected to have a material impact on our consolidated financial position or results of operations.
On April 2, 2014, the Company entered into an agreement with KBS Building Systems, Inc. and certain of its affiliates and their owner, pursuant to which we purchased substantially all of KBS Building Systems’ assets related to its business of manufacturing, selling, and distributing modular housing units for residential and commercial use. Consideration for the acquisition included $5.0 million in cash paid at closing, the KBS Note in the principal amount of $5.5 million and the assumption of certain other liabilities. In addition, we assumed certain debt of approximately $1.4 million which we paid at closing. The acquired assets included approximately $0.4 million in cash, resulting in a net purchase price of approximately $10.1 million. Goodwill recorded in connection with the KBS acquisition was subsequently written down and we recorded a $3.7 million goodwill impairment charge in the nine months ended September 30, 2014. In June 2015, as described in Note 13, we entered into a settlement agreement with the sellers of KBS, in which the principal amount of the KBS Note was reduced from $5.5 million to $2.5 million and related accrued interest was forgiven. Accordingly, we recorded a settlement gain of $3.7 million in the nine months ended September 30, 2015.
KBS results are included in our condensed consolidated statement of operations since April 2, 2014, the date of acquisition. The following unaudited pro forma financial information presents the combined results of ATRM and KBS Buildings Systems for the nine months ended September 30, 2014 as if the acquisition had occurred on January 1, 2014 (in thousands):
| | | Nine months ended
September 30, 2014 | |
| Pro forma net sales | | $ | 32,543 | |
| Pro forma loss from continuing operations | | | (7,593 | ) |
| Pro forma net loss | | | (6,732 | ) |
| Pro forma loss per share – basic and diluted | | | (6.24 | ) |
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.
We incurred expenses for professional fees associated with the KBS acquisition of approximately $0.8 million in the nine months ended September 30, 2014. These costs are included in the caption “Selling, general and administrative expenses” in our condensed consolidated statement of operations.
| 5. | SALE OF PRODUCT LINE - DISCONTINUED OPERATIONS |
On April 22, 2014, we entered into an Agreement (the “BSA Agreement”) with Boston Semi Equipment LLC (“BSE”) and Boston Semi Automation LLC (“BSA”), a wholly owned subsidiary of BSE, pursuant to which we transferred our assets and certain liabilities related to our business of designing, manufacturing, marketing and servicing equipment used in the handling of integrated circuits (“test handler product line”) to BSA.
The BSA Agreement provides that BSA will pay to ATRM a royalty on all revenue related to the test handler product line through December 31, 2018. The royalty percentage was 12.75% for the three month period ended September 30, 2015 and decreases 0.75% each quarter thereafter. Royalties earned are subject to certain qualifications and adjustments. The first royalty payment covering the period April 22, 2014 through December 31, 2014 amounted to approximately $770,000 and was received in January 2015. We received payments of approximately $142,000 and $176,000 in the quarters ended June 30, 2015 and September 30, 2015, respectively. Future royalty payments are due 60 days after the end of each calendar quarter.
Following the sale of our RTP product line to Cascade in 2013 and the transfer of our test handler product line to BSA in April 2014, ATRM has no manufacturing operations remaining in North St. Paul, Minnesota. The original lease term for our North St. Paul facility, which consisted of approximately 45,000 square feet, was scheduled to expire on August 31, 2015. Approximately one-half of the space in this facility had been subleased to Cascade and BSA through the end of the lease term. We also entered into administrative services agreements with Cascade and BSA that provided for copier and computer network services through the end of the lease term. The remaining half of the facility was unutilized. As a result of the divestitures of our businesses in Minnesota, we determined that ATRM would not receive full economic benefit from its facility, copier and IT equipment leases at its North St. Paul location over their remaining terms, and liabilities related to these contracts should be recorded at net settlement value at April 22, 2014 (the “cease-use date”). We recorded a charge of approximately $264,000 related to these contracts in the quarter ended June 30, 2014. As of September 30, 2015, the accrued facility expense totaled approximately $9,000 and is included in the caption “Other accrued liabilities” in our condensed consolidated balance sheet. See Note 12.
On May 1, 2015, we entered into an agreement with the owner of the leased facility in North St. Paul to accelerate the expiration of the lease from August 31, 2015 to May 1, 2015. We also entered into agreements with Cascade and BSA to terminate their subleases effective May 1, 2015. The early terminations of these agreements were executed at the request of the owner of the facility at no cost to ATRM. Effective May 1, 2015, we relocated our corporate office from the North St. Paul facility to a nearby suburb of St. Paul, Minnesota where we lease office space on a month to month basis. As a result of the early termination of the North St. Paul facility lease and subleases, we recorded a gain of approximately $54,000 in the quarter ended June 30, 2015, resulting from a reduction in the facility exit accrual. This gain is included in the caption “Selling, general and administrative expenses” in our condensed consolidated statement of operations for the nine-month period ended September 30, 2015.
Condensed operating results for the test handler product line are presented as discontinued operations in our consolidated statements of operations for the nine month period ended September 30, 2014 and are summarized below (in thousands):
| | | Nine months ended
September 30, 2014 | |
| Net sales | | $ | 2,376 | |
| Costs and expenses: | | | | |
| Cost of sales | | | 1,400 | |
| Operating expenses | | | 779 | |
| Total costs and expenses | | | 2,179 | |
| Income from discontinued operations | | | 197 | |
| Gain on sale of discontinued operations | | | 1,128 | |
| Income before income taxes | | | 1,325 | |
| Income tax expense | | | (464 | ) |
| Income from discontinued operations | | $ | 861 | |
The Company had no discontinued operations for the three and nine-month periods ended September 30, 2015 or the three month period ended September 30, 2014.
| 6. | FAIR VALUE MEASUREMENTS |
Financial assets reported at fair value on a recurring basis included the following at September 30, 2015 (in thousands):
| | | Level 1 | | | Level 2 | | | Level 3 | |
| Contingent earn-out receivable related to the transfer of test handler product line: | | | | | | | | | | | | |
| Current portion | | $ | — | | | $ | — | | | $ | 508 | |
| Noncurrent portion | | | — | | | | — | | | | 642 | |
| Total | | $ | — | | | $ | — | | | $ | 1,150 | |
The following table summarizes the Level 3 activity for our earn-out receivable related to the transfer of our test handler product line (in thousands):
| | | Level 3 | |
| Balance at December 31, 2014 | | $ | 2,300 | |
| Adjustment based on fair value assessment at September 30, 2015 | | | (62 | ) |
| Subtract - settlements | | | (1,088 | ) |
| Balance at September 30, 2015 | | $ | 1,150 | |
Quantitative information about Level 3 fair value measurements on a recurring basis at September 30, 2015 is summarized in the table below:
| Fair Value Asset | | Valuation Technique | | Unobservable Input | | Amount | |
| Earn-out receivable related | | Discounted cash flow | | Total projected revenue | | | $16 million | |
| to transfer of test handler | | | | Revenue growth rate | | | 0 | % |
| product line | | | | Performance weighted average | | | 60% to 125 | % |
| | | | | Discount rate | | | 10 | % |
| 7. | ACCOUNTS RECEIVABLE, NET |
Accounts receivable consists of the following (in thousands):
| | | September 30, 2015 | | | December 31, 2014 | |
| | | (Unaudited) | | | | |
| Contract billings | | $ | 3,184 | | | $ | 2,235 | |
| Retainage | | | 1,343 | | | | 1,369 | |
| Subtotal | | | 4,527 | | | | 3,604 | |
| Less - allowance for doubtful accounts | | | (800 | ) | | | (800 | ) |
| Accounts receivable, net | | $ | 3,727 | | | $ | 2,804 | |
Retainage balances are expected to be collected within the next twelve months.
Inventories are comprised of the following (in thousands):
| | | September 30, 2015 | | | December 31, 2014 | |
| | | (Unaudited) | | | | |
| Raw materials | | $ | 1,574 | | | $ | 1,729 | |
| Finished goods | | | 207 | | | | 207 | |
| Total inventories | | $ | 1,781 | | | $ | 1,936 | |
| 9 | GOODWILL AND INTANGIBLE ASSETS, NET |
Intangible assets are comprised of the following at September 30, 2015 (in thousands):
| | | Gross
Carrying
Amount | | | Accumulated
Amortization | | | Net
Carrying
Value | |
| Indefinite-lived intangible assets: | | | | | | | | | | | | |
| Goodwill | | $ | 1,733 | | | $ | — | | | $ | 1,733 | |
| Trademarks | | | 290 | | | | — | | | | 290 | |
| Total | | | 2,023 | | | | — | | | | 2,023 | |
| | | | | | | | | | | | | |
| Finite-lived intangible assets: | | | | | | | | | | | | |
| Customer relationships | | | 1,420 | | | | (304 | ) | | | 1,116 | |
| Purchased backlog | | | 990 | | | | (990 | ) | | | — | |
| Total | | | 2,410 | | | | (1,294 | ) | | | 1,116 | |
| | | | | | | | | | | | | |
| Total intangible assets | | $ | 4,433 | | | $ | (1,294 | ) | | $ | 3,139 | |
Amortization expense amounted to approximately $61,000 and $200,000 for the three months ended September 30, 2015 and 2014, respectively, and approximately $282,000 and $841,000 for the nine months ended September 30, 2015 and 2014, respectively. Estimated amortization of purchased intangible assets over the next five years is as follows (in thousands):
| 2015 (three months) | | | $ | 51 | |
| 2016 | | | | 203 | |
| 2017 | | | | 203 | |
| 2018 | | | | 203 | |
| 2019 | | | | 203 | |
| Thereafter | | | | 253 | |
| Total | | | $ | 1,116 | |
| 10. | UNCOMPLETED CONSTRUCTION CONTRACTS |
The status of uncompleted construction contracts is as follows (in thousands):
| | | September 30, 2015 | | | December 31, 2014 | |
| | | (Unaudited) | | | | |
| | | | | | | |
| Costs incurred on uncompleted contracts | | $ | 16,648 | | | $ | 21,282 | |
| Inventory purchased for specific contracts | | | 1,904 | | | | 445 | |
| Estimated profit | | | 601 | | | | 2,717 | |
| Subtotal | | | 19,153 | | | | 24,444 | |
| Less billings to date | | | (18,875 | ) | | | (22,941 | ) |
| Total | | $ | 278 | | | $ | 1,503 | |
| | | | | | | | | |
| Included in the following balance sheet captions: | | | | | | | | |
| Costs and estimated profit in excess of billings | | $ | 987 | | | $ | 1,791 | |
| Billings in excess of costs and estimated profit | | | (709 | ) | | | (288 | ) |
| Total | | $ | 278 | | | $ | 1,503 | |
The Company had approximately $5.7 million of work under contract remaining to be recognized at September 30, 2015.
| 11. | ACCOUNTS PAYABLE RETAINAGE |
Accounts payable includes retainage amounts due to subcontractors of approximately $637,000 and $497,000 at September 30, 2015 and December 31, 2014, respectively. Retainage balances are expected to be settled within the next twelve months.
| 12. | OTHER ACCRUED LIABILITIES |
Other accrued liabilities are comprised of the following (in thousands):
| | | September 30, 2015 | | | December 31, 2014 | |
| | | (Unaudited) | | | | |
| Accrued interest expense | | $ | 281 | | | $ | 671 | |
| Accrued severance and related costs | | | 421 | | | | — | |
| Accrued sales taxes | | | 874 | | | | 873 | |
| Accrued health insurance costs | | | 181 | | | | 305 | |
| Accrued sales rebates | | | 299 | | | | 363 | |
| Accrued warranty | | | 57 | | | | 78 | |
| Accrued service costs | | | 100 | | | | — | |
Accrued reimbursement of fees and expenses of related party | | | 186 | | | | — | |
| Accrued facility expenses | | | 9 | | | | 138 | |
| Other | | | 14 | | | | 64 | |
| Total other current accrued liabilities | | $ | 2,422 | | | $ | 2,492 | |
In connection with a restructuring of our KBS operations during the third quarter of 2015, we terminated a total of six employees, including two former KBS officers. Pursuant to employment agreements, we recorded a severance charge of approximately $421,000 at September 30, 2015. The severance amounts will be paid in equal weekly amounts over one year. The severance charge is included in “Selling, general and administrative expenses” in our condensed consolidated statement of operations for the three and nine-month periods ended September 30, 2015.
In September 2015, our board of directors approved a request by LSVM to be reimbursed for approximately $186,000 of unreimbursed fees and expenses paid by LSVM in connection with a meeting of ATRM shareholders in 2012, including proxy related expenditures, subsequent shareholder meetings and requests, and other board of directors-related fees. The reimbursement expense is included in “Selling, general and administrative expenses” in our condensed consolidated statement of operations for the three and nine-month periods ended September 30, 2015. The reimbursement was paid on October 1, 2015. Jeffrey E. Eberwein, ATRM’s Chairman of the Board, is the sole member of LSVM.
Changes in accrued warranty are summarized below (in thousands):
| | | Nine months ended September 30, | |
| | | 2015 | | | 2014 | |
| Accrual balance, beginning of period | | $ | 78 | | | $ | — | |
| Accruals for warranties | | | 10 | | | | 58 | |
| Settlements made | | | (31 | ) | | | (58 | ) |
| Accrual assumed in KBS acquisition | | | — | | | | 47 | |
| Accrual balance, end of period | | $ | 57 | | | $ | 47 | |
As described in Notes 2 and 4, as partial consideration for the KBS acquisition, we issued the KBS Note in the principal amount of $5.5 million. We were unable to repay the note on its maturity date, December 1, 2014. Under the terms of the note, the holder had a right to charge interest at 10.0% per annum for any period during which we were in default. In April 2015, we asserted certain indemnification and other claims against the sellers of KBS and on June 26, 2015 we entered into a settlement agreement with the sellers related to such claims. The settlement agreement provides for, among other things, the amendment and restatement of the KBS Note (the “Amended and Restated KBS Note”) to reduce the principal amount from $5.5 million to $2.5 million and the forgiveness of all then-accrued interest related to the KBS Note as disclosed below. The revised principal amount is payable in monthly installments of $100,000 on the first business day of each month, which began on July 1, 2015. The Amended and Restated KBS Note does not accrue interest unless it is in default, in which case the annual interest rate would be 10%. Since this acquisition purchase price adjustment was outside the 12 month measurement period from the acquisition date, the change was credited to earnings. The Company recorded a gain of approximately $3.7 million in the nine-month period ended September 30, 2015 related to the settlement, which consisted of the following (in thousands):
| Reduction of principal (including adjustment for imputed interest at 9.5%) | | $ | 3,226 | |
| Forgiveness of interest accrued to the date of settlement | | | 461 | |
| Gain on settlement agreement | | $ | 3,687 | |
The principal balance of the Amended and Restated KBS Note was $2,011,651 ($2,200,000 less imputed interest of $188,349) at September 30, 2015 and is included in Long-Term Debt. See Note 14.
Long-term debt consists of the following (in thousands):
| | | September 30, 2015 | | | December 31, 2014 | |
| | | (Unaudited) | | | | |
| Promissory note payable to LSVI, unsecured, interest of 10% per annum payable semi-annually in July and January, with any unpaid principal and interest due on April 1, 2019 | | $ | 5,000 | | | $ | 5,000 | |
| | | | | | | | | |
| Promissory notes payable to LSV Co-Invest I, unsecured, interest of 10% per annum payable semi-annually in July and January, with any unpaid principal and interest due on April 1, 2019 | | | 4,500 | | | | 4,500 | |
| | | | | | | | | |
| Promissory note payable, unsecured, interest imputed at 9.5% (1) | | | 2,012 | | | | — | |
| | | | | | | | | |
| Installment payment agreement, 8.0% interest, payable in monthly installments of $1,199 through September 2020 (2) | | | 58 | | | | — | |
| | | | | | | | | |
| Notes payable, secured by equipment, interest rates from 6.6% to 9.5%, with varying maturity dates through September 2018 | | | 52 | | | | 87 | |
| | | | | | | | | |
| Total long-term debt | | | 11,622 | | | | 9,587 | |
| Current portion | | | (1,091 | ) | | | (45 | ) |
| Noncurrent portion | | $ | 10,531 | | | $ | 9,542 | |
| | (1) | Promissory note payable to the principal seller of KBS, payable in monthly installments of $100,000 through July 2017 (see Note 13). |
| | | |
| | (2) | Agreement to finance the purchase of software license rights and consulting services related to the implementation of enterprise management information system. |
On February 25, 2015, in order to provide additional working capital to ATRM, we entered into a Securities Purchase Agreement with LSVI pursuant to which it purchased for $1.0 million in cash, an unsecured promissory note made by ATRM in the principal amount of $1.0 million. This note was repaid on September 21, 2015.
As of September 30, 2015, LSVI owned 1,067,885 shares of our common stock, or approximately 47.1% of our outstanding shares. Jeffrey E. Eberwein, ATRM’s Chairman of the Board, is the manager of LSVGP, the general partner of LSVI and LSV Co-Invest I, and sole member of LSVM, the investment manager of LSVI.
ATRM’s entry into the securities purchase agreement with LSVI was approved by a Special Committee of our Board of Directors consisting solely of independent directors.
| 15. | COMMON STOCK RIGHTS OFFERING |
On September 18, 2015, pursuant to a rights offering to our existing shareholders, we sold 1,019,746 shares of our common stock at $3.00 per share, which included 900,000 shares sold to LSVI, our largest shareholder. Net proceeds from the offering amounted to $2,953,333, reflecting gross proceeds of $3,059,238 less $105,905 of offering-related expenses.
| 16. | 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 stock on the grant date. We recognize the compensation expense for stock options and restricted stock awards on a straight-line basis over the vesting period of the applicable awards.
2014 Incentive Plan
Our 2014 Incentive Plan (the “2014 Plan”) was approved by our board of directors on October 9, 2014 and became effective on December 4, 2014 upon approval by shareholders. The 2014 Plan is administered by the Compensation Committee of our board of directors. 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. 100,000 shares of the Company’s common stock are authorized to be issued pursuant to the 2014 Plan.
On June 5, 2015, ATRM granted restricted stock awards for a total of 60,000 shares of the Company’s common stock to our directors and our chief financial officer. The shares vest one year after the grant date. 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 $66,000 and $86,000 for the three and nine months ended September 30, 2015, respectively, and is included in the caption “Selling, general and administrative expenses” in our condensed consolidated statement of operations. The remaining compensation expense of approximately $182,000 will be recognized on a straight line basis through June 5, 2016, subject to forfeitures.
2003 Stock Incentive Plan
A stock incentive plan approved by our shareholders and adopted in May 2003 (the “2003 Plan”) terminated in February 2013. Stock options granted under the 2003 Plan continue to be exercisable according to their individual terms. The following table summarizes stock option activity under the 2003 Plan for the nine months ended September 30, 2015:
| | | | Number
of Shares | | | Weighted
Average
Exercise
Price | | | Weighted
Average
Remaining
Contract Term | | | Aggregate
Intrinsic Value
(in thousands) | |
| Outstanding, January 1, 2015 | | | | 38,500 | | | $ | 12.27 | | | | | | | | | |
| Expired | | | | (11,000 | ) | | | 25.75 | | | | | | | | | |
| Outstanding, September 30, 2015 | | | | 27,500 | | | $ | 6.88 | | | | 1.7 years | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | |
| Exercisable, September 30, 2015 | | | | 27,500 | | | $ | 6.88 | | | | 1.7 years | | | $ | 0 | |
All stock options outstanding at September 30, 2015 are nonqualified options which expire at varying dates through November 2017. The aggregate intrinsic values in the table above are zero because the option exercise prices for all outstanding options exceeded ATRM’s closing stock price on September 30, 2015. Share-based compensation expense related to stock options amounted to approximately $5,000 for the nine months ended September 30, 2014 and is included in the caption “Income from discontinued operations, net of income taxes” in our condensed consolidated statements of operations.
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 September 30, 2015, we have recorded a deferred tax liability of $11,000 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. We are presenting an income tax benefit in our statement of operations of $464,000 for the nine-month period ended September 30, 2014. The presented benefit is an offset to the tax provision effect we are presenting within discontinued operations for the same period.
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, 2014. 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
The following management’s discussion and analysis includes “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. Forward-looking statements contained in this Quarterly Report on Form 10-Q are based upon assumptions and assessments that we believe to be reasonable as of the date of this Quarterly Report on Form 10-Q. 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 this Management’s Discussion and Analysis of Financial Condition and Results of Operations and those identified in “Risk Factors” in Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, 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.
Results of Operations
Net Sales. Net sales represent sales since April 2, 2014 by our KBS operations, which we acquired on that date. We divested our test handler operations in April 2014 and its sales prior to the divestiture date are included in results from discontinued operations. Net sales from continuing operations were approximately $20.0 million for the nine months ended September 30, 2015 compared with approximately $22.7 million for the same period in 2014. The nine-month period in 2015 included nine months of KBS sales compared with approximately six months of KBS sales in 2014. For the nine months ended September 30, 2015, sales for commercial projects and single family homes represented 27% and 73% of total sales, respectively. Sales for the three months ended September 30, 2015 decreased to $6.4 million compared with $10.3 million for the same period in 2014 due to a decrease in commercial project sales. For the three months ended September 30, 2015, sales for commercial projects and single family homes represented 9% and 91% of total sales, respectively. The decrease in commercial project sales in the three and nine-month periods ended September 30, 2015 reflects the completion in 2014 of two large multi-tenant buildings that were in process at the time of the KBS acquisition in 2014. In addition, commercial sales in 2015 were adversely impacted by the delay of approximately $1.3 million for two multi-tenant buildings that were originally scheduled to be delivered in May 2015. Due to site preparation issues at a customer site and a lawsuit filed by an adjoining land owner, neither involving KBS, construction on the project was halted by the city that had issued the building permit, pending resolution of such issues. The completed modules remained in our possession at September 30, 2015. In October 2015, we were notified that the lawsuit had been dismissed. Although the dismissal can be appealed, our customer has resumed work on the project. We expect the modules will be delivered prior to December 31, 2015 and that we will ultimately collect the full amounts owed under the contract. Sales also decreased in 2015 as we have reduced the amount of site work (subcontracting of electrical, plumbing, heating, air conditioning, etc. at the building site) performed on commercial projects due to the low margins typically associated with such work and the difficulty in collecting retainage associated with site work performed by subcontractors. Our current strategy is to focus KBS’s efforts on our core competencies of manufacturing modular buildings and have the work required at the building site be performed by the customer’s general contractor whenever possible. Sales related to site work decreased approximately $2.0 million and $4.0 million for the three and nine months ended September 30, 2015, respectively, compared with the prior year periods.
Cost of Sales. Cost of sales includes costs since April 2, 2014 related to our KBS operations which we acquired on that date. Cost of sales for our test handler product line which we divested in 2014 is included in results from discontinued operations. Cost of sales amounted to approximately $20.4 million for the nine months ended September 30, 2015 compared with approximately $21.4 million for the same period in the 2014. The nine-month period in 2015 included costs for nine months of KBS sales compared with costs for approximately six months of KBS sales in 2014. Cost of sales amounted to approximately $6.9 million for the three months ended September 30, 2015 compared with approximately $9.8 million for the same period in the 2014. The decrease in 2015 was attributed primarily to lower commercial project sales, including lower sales for subcontracted site work as described above, partially offset by higher customer charge-backs and service costs. During 2015, we incurred significant costs related to closing out several commercial projects that were in process at the time of the KBS acquisition in April 2014, much of which was related to site work performed by subcontractors. In the quarter ended September 30, 2015, we recorded estimated contract losses for customer charge-backs and service costs totaling approximately $0.6 million related to three such “legacy” projects. The potential for additional contract losses became evident to us in the current period, primarily during negotiations for final payments, and were not previously known to us or estimable in prior periods. The $0.6 million of additional contract losses is included in cost of sales for the three and nine-month periods ended September 30, 2015. During 2015, we implemented new product quality programs and contract management processes in an effort to mitigate such issues in the future.
Selling, General and Administrative. Selling, general and administrative (“SG&A”) expenses for the nine months ended September 30, 2015 were approximately $3.7 million compared with approximately $4.4 million for the comparable period in 2014, a decrease of approximately $0.7 million. The decrease included reductions of approximately $1.1 million in legal and professional expenses and $0.6 million of amortization expense. Higher legal and professional fees in 2014 were primarily associated with the KBS acquisition and divestiture of our test handler product line. Higher amortization expense in 2014 included amortization related to the backlog of orders received in the KBS acquisition. These expense reductions were partially offset by approximately $0.6 million of higher expenses due to the inclusion of nine months of KBS operations in 2015 compared with approximately six months in 2014 and approximately $0.4 million in severance charges related to a restructuring of KBS operations in the quarter ended September 30, 2015. SG&A expenses were approximately $1.5 million for the three months ended September 30, 2015 compared with approximately $1.1 million for the same period in 2014, an increase of approximately $0.4 million. The increase included approximately $0.4 million in severance charges described above and approximately $0.2 million for the reimbursement of certain fees and expenses of a related party, partially offset by decreases of approximately $0.1 million in legal and professional expenses and $0.1 million in amortization expense.
Goodwill Impairment Charge.We completed a goodwill impairment assessment as of June 30, 2014 and determined that the carrying value of goodwill exceeded its fair value by $3.7 million at that date. Accordingly, we recorded a goodwill impairment charge in the amount of approximately $3.7 million in the nine months ended September 30, 2014.
Interest Expense. Interest expense was approximately $1.1 million for the nine months ended September 30, 2015 compared with $0.5 million for the same period in 2014. The increase resulted from higher average debt balances in 2015 to fund working capital needs. Interest expense was approximately $0.3 million for each of the three month periods ended September 30, 2015 and 2014. Interest expense is primarily related to the debt we incurred to finance the KBS acquisition in April 2014 and additional borrowings described in Note 14 to our unaudited condensed consolidated financial statements.
Change in Fair Value of Contingent Earn-Out.We assess the fair value of contingent earn-outs at the end of each quarter. The contingent earn-out included in our condensed consolidated balance sheets at September 30, 2015 and December 31, 2014 is related to the transfer of our test handler product line to BSA in April 2014. Change in fair value of contingent earn-out for the three and nine months ended September 30, 2015 represented a decrease of approximately $62,000 in the fair value of this earn-out as a result of our quarterly assessment at that date. For the nine months ended September 30, 2014, change in fair value of contingent earn-out amounted to approximately $103,000 and represented increases in the fair value of the contingent earn-out related to the sale of our RTP line of products.
Settlement Gain.In April 2015, we asserted certain indemnification and other claims against the sellers of KBS pursuant to an asset purchase agreement executed in April 2014. On June 26, 2015 we entered into a settlement agreement with the sellers related to such claims. The settlement agreement provided for, among other things, a reduction in the principal amount of the KBS Note from $5.5 million to $2.5 million and the forgiveness of all then-accrued interest related to the note. We recorded a gain of approximately $3.7 million in the nine-month period ended September 30, 2015 related to the settlement.
Income Taxes. Since 2009, we have maintained a valuation allowance to fully reserve our deferred tax assets. We expect to continue to maintain a full valuation allowance until we determine that we can sustain a level of profitability that demonstrates our ability to realize these assets. To the extent we determine that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders’ equity. We recorded income tax expense of $2,000 and $4,000 for the three and nine-month periods ended September 30, 2015, respectively, which represented 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. We recorded no income tax expense or benefit for the three and nine-month periods ended September 30, 2014. The income tax expense attributed to discontinued operations for the nine-month period ended September 30, 2014, calculated using a 35% marginal tax rate, is offset by a corresponding income tax benefit for continuing operations.
Discontinued Operations. Results related to our divested test handler operations have been reclassified and presented as discontinued operations for the nine months ended September 30, 2014. Condensed results of discontinued operations are summarized in Note 5 to our unaudited condensed consolidated financial statements.
Financial Condition, Liquidity and Capital Resources
Cash and cash equivalents decreased by approximately $0.3 million in the nine months ended September 30, 2015.
Cash flows used in operating activities. In the nine months ended September 30, 2015, cash flows used in operating activities was approximately $4.0 million, consisting primarily of our net loss of approximately $5.2 million (excluding a $3.7 million non-cash settlement gain), partially offset by approximately $0.6 million in non-cash depreciation, amortization and share-based compensation expense and approximately $0.5 million in working capital changes. Working capital changes generating cash included decreases of approximately $0.8 million in costs and estimated profit in excess of billings and increases of $0.4 million in billings in excess of costs and estimated profit, $0.2 million in accrued compensation and $0.4 million in other accrued liabilities, partially offset by a $1.0 million increase in accounts receivable and a decrease of approximately $0.4 million in accounts payable. The increases in accounts receivable and billings in excess of costs and estimated profit and the decreases in costs and estimated profit in excess of billings primarily reflected a relatively higher average percentage of completion of KBS commercial projects in progress at September 30, 2015 compared with that at December 31, 2014. The decrease in accounts payable resulted primarily from the timing of payments. The increase in other accrued liabilities included a $0.4 million accrual for severance costs related to the restructuring of our KBS operations described above and a $0.2 million accrual for reimbursement of certain fees and expenses of a related party, partially offset by decreases of $0.1 million in each of accrued health insurance costs and accrued facility costs. In the nine months ended September 30, 2014, cash flows used in operating activities were approximately $4.6 million, consisting primarily of our net loss of $7.0 million (excluding a $1.1 million pre-tax gain on the sale of our test handler product line) and approximately $2.1 million in working capital changes, partially offset by a $3.7 million non-cash goodwill impairment charge and $1.0 million in non-cash depreciation and amortization expense. Working capital changes using cash included increases of $0.6 million in accounts receivable and $2.0 million in costs and estimated profit in excess of billings and a decrease of $1.3 million in accounts payable, partially offset by decreases of $0.5 million in inventories and $0.3 million in other current assets and a $1.0 million increase in other accrued liabilities. The increase in accounts receivable and costs and estimated profit in excess of billings were primarily attributed to three new commercial projects started in the quarter ended September 30, 2014. The decrease in accounts payable reflected increased payments to suppliers after we received additional debt financing in July and September of 2014. The decrease in inventories was primarily attributed to the sale of seven VMAX test handlers prior to the transfer of our test handler product line to BSA in April 2014. The increase in other accrued liabilities included increases of $0.2 million in accrued facility expenses, $0.3 million in accrued sales taxes and $0.3 million in accrued interest expense.
Cash flows generated by (used in) investing activities. In the nine months ended September 30, 2015, cash flows generated by investing activities was approximately $1.1 million, consisting primarily of royalty payments received from BSA related to the transfer of our test handler product line to BSA in fiscal year 2014. In the nine months ended September 30, 2014, cash flows used in investing activities were approximately $4.3 million, which consisted of the $4.6 million net cash portion of the purchase price paid in connection with our acquisition of KBS ($5.0 million paid at closing less $0.4 million of cash acquired) and approximately $0.2 million of equipment purchases, partially offset by approximately $0.4 million received in final settlement of the contingent earn-out in connection with our sale of our RTP product line to Cascade.
Cash flows generated by financing activities. In the nine months ended September 30, 2015, cash flows generated by financing activities was approximately $2.7 million, which included approximately $3.0 million of net proceeds from a common stock rights offering completed in September 2015 and approximately $1.0 million received from the sale of a promissory note to LSVI as described in Note 14 to our unaudited condensed consolidated financial statements, partially offset by approximately $1.3 million of debt payments. In the nine months ended September 30, 2014, cash flows provided by financing activities were approximately $9.6 million, which consisted primarily of $6.5 million received from the sale of promissory notes to LSVI to finance the KBS acquisition and $4.5 million from the sale of promissory notes to LSVI Co-Invest I, less $1.4 million of debt that was assumed and paid at the closing of the KBS acquisition.
Historically, we have supported our capital expenditure and working capital needs with cash generated from operations, debt financings and our existing cash and cash equivalents. We have incurred significant losses in recent years. Since July of 2013, we implemented several strategic initiatives intended to stabilize the Company and return us to profitability, including the sales of our RTP product line in July 2013 and our test handler product line in April 2014. Also in April 2014, we acquired KBS, a business that manufactures modular housing units for commercial and residential applications, because we believe there is significant growth opportunity within the industry and it provides ATRM with the potential to return to profitability. We are working to implement strategies to improve profitability at KBS, including management changes and the implementation of improved processes, operating and financial reporting and controls. However, there can be no assurance that the acquisition of KBS will lead to sufficient revenue in the future to cover our expenses and allow us to achieve profitability, on a consistent basis or at all.
In September 2015, we completed a stock offering in which we sold 1,019,746 shares of our common stock and received approximately $3.0 million, net of offering expenses. From the proceeds of the stock offering, we repaid $1.0 million of debt owed to LSVI and retained the remainder for working capital.
As of September 30, 2015, our cash and cash equivalents amounted to approximately $1.7 million. As of September 30, 2015, our debt totaled approximately $11.6 million, including the Amended and Restated KBS Note of $2.0 million, $5.0 million owed to LSVI and $4.5 million owed to LSV Co-Invest I. We intend to pursue new financing to replace all or a portion of the debt owing to LSVI and LSV Co-Invest I and to provide for our general working capital needs. There can be no assurance we will be successful in obtaining any such new financing with terms favorable to us or at all. Until such time as we obtain such new financing, we may be dependent on LSVI and LSV Co-Invest I, or other third parties, to provide for our general working capital needs. Although not a binding commitment, LSVM has advised us of its present intention to continue to financially support the Company as it pursues new financing.
There can be no assurance that our cash and cash equivalents, together with funds generated by our operations and any future financings, will be sufficient to satisfy our debt payment obligations. In addition, in order to execute our long-term growth strategy, which may include additional acquisitions, we may need to raise additional funds through public or private equity offerings, debt financings, or other means.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our chief executive officer and our chief financial officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on their evaluation of our disclosure controls and procedures, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2015, to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow for timely decisions regarding required disclosure.
Description of Material Weakness
As discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations above and Notes 4 and 5 to our accompanying condensed consolidated financial statements, in April 2014 we acquired the assets and assumed certain liabilities related to the operations of KBS and transferred our test handler product line to BSA. As a result, the KBS business currently represents our primary business activity. Prior to the acquisition, the KBS operations were a privately-owned business with very limited administrative and accounting resources, outdated accounting software and generally weak accounting processes and internal control procedures. Due to the lack of adequate processes, procedures and controls at KBS, management concluded that we have material weaknesses in our internal control over financial reporting, and that our disclosure controls and procedures and internal control over financial reporting were not effective as of September 30, 2015. Specifically, material weaknesses were found in our financial reporting process with respect to (1) poor control over accounts payable cut-offs and (2) inadequate segregation of duties in certain accounting processes, including the cash receipts and disbursements processes and management of user access rights in our accounting system, partly as a result of our limited size and accounting staff.
Remediation of Material Weakness
We are working to remediate these material weaknesses. Since the April 2014 acquisition of KBS, we hired an additional accounting professional in July 2014 with relevant experience to assist in the effort to implement improvements at KBS. We have implemented improvements in processes, procedures and controls, including in the areas of contract accounting, proper transaction cutoffs, inventory controls, financial reporting and management oversight. In August 2015, we acquired a new accounting and management information software package and hired a consultant to assist with implementation. System design and training is in process and we expect to implement the new system in stages beginning in the first quarter of 2016. We will to work to improve such processes, procedures and controls, and will disclose in future periods the progress we have made in our efforts to remediate these material weaknesses.
Changes in Internal Control Over Financial Reporting
As a result of the control deficiencies at KBS discussed above, we determined that we have material weaknesses in our internal control over financial reporting. We are working to remediate these material weaknesses as discussed above.
PART II. OTHER INFORMATION
Item1. Legal Proceedings
As reported in our Annual Report on Form 10-K for the year ended December 31, 2014, we are subject to litigation captioned UTHE Technology Corporation vs. Aetrium Incorporated et al. in the United States District Court for the Northern District of California. On September 13, 2013 the court entered final judgment dismissing all remaining claims UTHE Technology Corporation (“UTHE”) asserted against us in the litigation. On September 23, 2013, UTHE appealed the district court judgment to the United States Court of Appeal for the Ninth Circuit. The initial court hearing for the appeal is scheduled for November 19, 2015.
Item1A. 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
| | 31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| | 31.2 | Certification of 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: November 16, 2015 | By: | /s/ Daniel M. Koch |
| | | Daniel M. Koch |
| | | President and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
| Date: November 16, 2015 | By: | /s/ Paul H. Askegaard |
| | | Paul H. Askegaard |
| | | Chief Financial Officer |
| | | (Principal Financial and Accounting Officer) |
EXHIBIT INDEX
| | 31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| | 31.2 | Certification of 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 |
