Item
1.01 Entry into a Material Definitive Agreement.
EBGL
Asset Purchase
On
October 4, 2016, ATRM Holdings, Inc. (the “Company”) acquired certain assets of EdgeBuilder Wall Panels, Inc. and
Glenbrook Lumber & Supply, Inc. (collectively, the “Sellers”) through the Company’s newly-formed wholly-owned
subsidiaries EdgeBuilder, Inc. (“EdgeBuilder”) and Glenbrook Building Supply, Inc. (“Glenbrook”), respectively,
pursuant to the terms of an Asset Purchase Agreement, dated as of the same date (the “Purchase Agreement”), by and
among the Company, EdgeBuilder, Glenbrook, the Sellers and the individual owners of the Sellers (the “Acquisition”).
The Company operates the businesses of EdgeBuilder and Glenbrook on a combined basis, and such businesses are referred to on a
combined basis as “EBGL”.
Consideration
for the Acquisition included (i) approximately $4.0 million in cash, of which approximately $3.0 million was paid at closing and
$1.0 million is payable in four equal installments on the first day of each of the next four fiscal quarters, (ii) 100,000 shares
of the Company’s common stock (the “Shares”), (iii) a potential earn-out payment of up to $1.0 million based
upon the amount by which EBGL’s gross profit over the 12 months commencing October 1, 2016 exceeds a specified target and
(iv) the assumption of certain liabilities of the Sellers related to the purchased assets. The cash portion of the purchase price
is subject to a post-closing adjustment based on the amount of inventory and pre-paid expenses included in the purchased assets,
and the Shares are subject to transfer restrictions for 12 months following the closing.
Financing
from Gerber Finance Inc.
On
October 4, 2016, concurrently with the closing of the Acquisition, the Company entered into a Loan and Security Agreement, dated
as of the same date (the “Acquisition Loan Agreement”), with EBGL as the borrowers, the Company and its wholly-owned
subsidiaries KBS Builders, Inc. and Maine Modular Haulers, Inc. as guarantors, and Gerber Finance Inc. as the lender (“Gerber
Finance”), pursuant to which Gerber Finance provided EBGL with $3.0 million in financing for the Acquisition. On October
4, 2016, concurrently with the closing of the Acquisition, the same parties also entered into a Loan and Security Agreement, dated
as of the same date (the “LOC Loan Agreement”), pursuant to which Gerber Finance agreed to provide EBGL with a working
capital line of credit of up to $3.0 million. The Acquisition Loan Agreement and the LOC Loan Agreement are referred to collectively
as the “Loan Agreements”.
Borrowings
under the Acquisition Loan Agreement bear interest at the prime rate plus 3.00%, with interest payable monthly and the outstanding
principal balance payable upon expiration of the term of the Acquisition Loan Agreement. The initial term of the Acquisition Loan
Agreement expires on December 31, 2018, but extends automatically for additional one-year periods unless a party provides prior
written notice of termination. Availability under the LOC Loan Agreement is based on a formula tied to the borrowers’ eligible
accounts receivable, inventory and equipment, and borrowings bear interest at the prime rate plus 2.75%, with interest payable
monthly and the outstanding principal balance payable upon expiration of the term of the LOC Loan Agreement. Initially, availability
under the LOC Loan Agreement is limited to $1.0 million, which amount may be increased to up to $3.0 million in increments upon
request of the borrowers and in the discretion of Gerber Finance. The initial term of the LOC Loan Agreement expires on October
3, 2018, but extends automatically for additional one-year periods unless a party provides prior written notice of termination.
The
Loan Agreements provide for certain fees payable to Gerber Finance during their terms, including but not limited to a monthly
minimum loan amount fee and an annual facility fee. The borrowers’ obligations under the Loan Agreements are secured by
all of their property and assets and are guaranteed by the Company and its other subsidiaries. The Loan Agreements contain representations,
warranties, affirmative and negative covenants, events of default and other provisions customary for agreements of this type.
Financial covenants include maintenance of a minimum tangible net worth and a minimum debt service coverage ratio at fiscal year
end. The occurrence of any event of default under any Loan Agreement may result in the obligations thereunder becoming immediately
due and payable.
As
a condition to the extension of credit to the borrowers under the Loan Agreements, the Sellers entered into a subordination agreement,
and certain holders of unsecured promissory notes issued by the Company entered into amendments to their existing subordination
agreements, with Gerber Finance and the Company pursuant to which the obligations of the Company to such parties are subordinated
to the obligations to Gerber Finance under the Loan Agreements.
Financing
from Lone Star Value Co-Invest I, LP
On
October 4, 2016, the Company issued to Lone Star Value Co-Invest I, LP (“LSV Co-Invest I”) an unsecured promissory
note made by the Company in the principal amount of $2.0 million in exchange for $2.0 million in cash (the “LSV Co-Invest
Note”). The LSV Co-Invest Note was issued pursuant to a securities purchase agreement by and between the Company and LSV
Co-Invest I. The LSV Co-Invest Note bears interest at 10.0% per annum, with interest payable semiannually; provided, however,
for interest accruing during the 365 days after the issuance of the LSV Co-Invest Note, the Company may elect to make any interest
payment in-kind (“PIK Interest”) at an annual rate of 12.0%, so long as any such interest payment is made either (x)
entirely in PIK Interest or (y) 50% cash and 50% PIK Interest. LSV Co-Invest I may elect to receive PIK Interest in lieu of cash
starting 366 days after the issuance of the LSV Co-Invest Note. Any unpaid principal and interest under the LSV Co-Invest Note
is due on April 1, 2019. The Company may prepay the LSV Co-Invest Note at any time after a specified amount of advance notice
to LSV Co-Invest I (subject to restrictions under the Company’s loan agreements with Gerber Finance). The LSV Co-Invest
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 October 4, 2016, following the issuance of the LSV Co-Invest Note, LSV Co-Invest I holds unsecured promissory notes of the
Company in the aggregate outstanding principal amount of $6.8 million, and Lone Star Value Investors, LP (“LSVI”),
an affiliate of LSV Co-Invest I, holds 1,067,885 shares of the Company’s common stock, or approximately 45.1% of its outstanding
shares, and an unsecured promissory note of the Company in the outstanding principal amount of approximately $4.3 million. Additionally,
10,000 shares of the Company’s common stock are held in an account managed by Lone Star Value Management, LLC (“LSVM”),
an affiliate of LSVI and LSV Co-Invest I. Jeffrey E. Eberwein, Chairman of the Company’s Board of Directors, is the manager
of Lone Star Value Investors GP, LLC, the general partner of LSVI and LSV Co-Invest I, and sole member of LSVM, the investment
manager of LSVI. The Company’s sale of the LSV Co-Invest Note to LSV Co-Invest I was approved by a Special Committee of
the Company’s Board of Directors consisting solely of independent directors.