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. Unless the context otherwise
requires, references in the Notes to Condensed Consolidated Financial Statements to (i) “ATRM,” the “Company,”
“we,” “us” and “our,” refer to ATRM Holdings, Inc. and its consolidated subsidiaries, (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 EdgeBuilder, Inc. (“EdgeBuilder”),
a manufacturer of structural wall panels, permanent wood foundation systems and other engineered wood products, and Glenbrook
Building Supply, Inc. (“Glenbrook”), a retail supplier of lumber and other building supplies.
Through
our wholly-owned subsidiaries, KBS, Glenbrook and EdgeBuilder, we manufacture modular buildings for commercial and residential
applications in production facilities located in South Paris and Waterford, Maine, operate a retail lumber yard located in Oakdale,
Minnesota, and manufacture structural wall panels, permanent wood foundation systems and other engineered wood products for use
in construction of commercial and residential buildings in a production facility located in Prescott, Wisconsin.
Our
previous wholly-owned subsidiary, Maine Modular Haulers, Inc. (“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, 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 months ended March 31, 2017 are not necessarily indicative of the operating
results to be expected for the full year or any future period.
The
accompanying unaudited Condensed Consolidated Financial 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, 2016.
2.
|
FINANCIAL
POSITION, LIQUIDITY AND CAPITAL RESOURCES
|
We
acknowledge that the Company continues to face a challenging operating environment, and while we continue to focus on improving
our overall profitability, we reported an operating loss for the quarter ended March 31, 2017. We have incurred significant operating
losses in recent years and, as of March 31, 2017, we had an accumulated deficit of approximately $81 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, we had outstanding debt of approximately $20.5 million.
We have issued various promissory
notes to finance our acquisitions of KBS and EBGL and to provide for our general working capital needs. As of March 31, 2017,
we had outstanding debt totaling approximately $20.5 million. Our debt included: (i) $2.3 million principal outstanding on KBS’s
$4.0 million revolving credit facility under a loan and security agreement with Gerber Finance Inc. (“Gerber Finance”)
(the “KBS Loan Agreement”), $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 “Acquisition Loan Agreement”);
(ii) $4.5 million principal amount of unsecured promissory notes issued to Lone Star Value Investors, LP (“LSVI”)
and $7.6 million principal amount of unsecured promissory notes issued to Lone Star Value Co-Invest I, LP (“LSV Co-Invest
I”), with interest payable semiannually and any unpaid principal and interest due on April 1, 2019 (as noted in Note 19,
the promissory notes issued to LSVI and LSV Co-Invest I were exchanged for preferred stock on September 29, 2017); and
(iii) $0.4 million principal amount outstanding under an unsecured promissory note issued to the primary 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. We also had obligations to make $0.75 million in deferred cash payments to the sellers
of EBGL, payable in quarterly installments of $250,000, inclusive of interest, through October 1, 2017. As noted in Note 19, the
deferred payments 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”), the general partner of LSVI and LSV Co-Invest I, and the sole member of Lone Star Value Management,
LLC (“LSVM”), the investment manager of LSVI.
At
the applicable test dates, we were not in compliance with the following financial covenants under our loan agreements with
Gerber Finance: (i) a requirement for KBS to maintain a minimum leverage ratio of 7:1 for the fiscal year ended December
31, 2016, 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, 2016 was $3.2 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. In August 2017, Gerber Finance provided us with a waiver for these events. As of December 31,
2017, KBS was not in compliance with the financial covenant requiring no net annual post-tax loss for KBS or the minimum
leverage ratio covenant as of the next test date, December 31, 2017. We have begun discussions with Gerber Finance as to
obtaining a waiver for these events. If we fail to obtain a waiver from Gerber Finance, Gerber Finance may demand the
repayment of the credit facilities amount outstanding and any unpaid interest thereon.
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 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.
In addition to the above actions,
although not a binding commitment, LSVM has advised us of its present intention to continue to financially support the Company
in the event that additional financing is required. From 2014 through 2017, and again in 2018, LSVM has provided financial support
in the form of financing through various debt agreements disclosed in Note 14 and Note 19. Based on LSVM’s historical
support of the Company, management believes that additional financing may be provided by LSVM or its affiliates, if necessary,
in the future.
Our
historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern.
We believe that the actions discussed above have either already occurred or are probable of occurring, and mitigate
the substantial doubt raised by our historical operating results, as well as satisfy our estimated liquidity needs for the twelve
months from the issuance of the Condensed Consolidated Financial Statements.
On October 4, 2016, the Company
acquired certain assets of the EBGL Sellers through the Company’s wholly-owned subsidiaries EdgeBuilder and Glenbrook,
respectively, pursuant to the terms of an Asset Purchase Agreement, dated as of the same date, by and among the Company, EdgeBuilder,
Glenbrook, the EBGL Sellers and the individual owners of the EBGL Sellers (the “EBGL Acquisition”). The Company operates
the businesses of EdgeBuilder and Glenbrook on a combined basis, and such businesses are referred to on a combined basis as EBGL.
EBGL’s
results are included in our consolidated statement of operations since October 4, 2016, the date of the EBGL Acquisition. The
following unaudited pro forma financial information presents the combined results of ATRM and the EBGL Sellers for the three-month
period ended March 31, 2016 as if the EBGL Acquisition had occurred on January 1, 2016 (in thousands, except per share amount):
|
|
2016
|
|
Pro forma net sales
|
|
$
|
10,080
|
|
Pro forma net loss
|
|
|
(1,111
|
)
|
Pro forma loss per share – basic and diluted
|
|
|
(0.48
|
)
|
The
above unaudited pro forma financial information is not necessarily indicative of what our consolidated results of operations actually
would have been or what results may be expected in the future.
4.
|
RECENTLY
ADOPTED ACCOUNTING PRONOUNCEMENT
|
In
November 2015, the Financial Accounting Standards Board issued ASU No. 2015-17,
Income Taxes (Topic 740
)
: Balance Sheet
Classification of Deferred Taxes
(“ASU 2015-17”). ASU 2015-17 was issued to simplify the presentation of deferred
income taxes. 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 periods beginning
after December 15, 2016, and interim periods within those annual periods. As required, ATRM adopted these updates effective January
1, 2017.
The
following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated
balance sheet that sum to the total of the same such amounts shown in the condensed consolidated statement of cash flows.
|
|
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
|
|
Amounts
included in restricted cash represent those on deposit with Gerber Finance from time-to-time as additional collateral to support
borrowing under the KBS revolving line of credit facility.
6.
|
FAIR
VALUE MEASUREMENTS
|
Financial
assets reported at fair value on a recurring basis included the following at March 31, 2017 (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
|
)
|
The
following table summarizes the activity for our Level 3 assets and liabilities measured on a recurring basis (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
|
)
|
|
(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, is summarized in the table below:
Fair
Value Asset
|
|
Valuation
Technique
|
|
Unobservable
Input
|
|
Amount
|
Earn-out
receivable related to transfer of test handler product line
|
|
Discounted
cash flow
|
|
Total
projected revenue Performance weighted average Discount rate
|
|
$11.3
million
60%
to 125%
10
%
|
|
|
|
|
|
|
|
Contingent
earn-out payable
|
|
Discounted
cash flow
|
|
Estimated
gross profit for earn-out period Discount rate
|
|
$3.4
million
10
%
|
7.
|
ACCOUNTS
RECEIVABLE, NET
|
Accounts
receivable consists of the following (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
|
|
Retainage
balances are expected to be collected within the next twelve months.
At
March 31, 2017 and December 31, 2016, inventories totaling approximately $1.3 million and $1.4 million, respectively, consisted
of raw materials inventory. There are 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
|
Intangible
assets are comprised of the following (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
|
|
Amortization
expense amounted to approximately $192,000 for the three months ended March 31, 2017, and approximately $51,000 for the three
months ended March 31, 2016. Estimated amortization of purchased intangible assets over the next five years is as follows (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
|
Other
accrued liabilities are comprised of the following (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
|
|
Changes
in accrued warranty are summarized below (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
|
|
As
of March 31, 2017, we had outstanding notes payable of approximately $4.1 million. Our notes payable included (i) $2.3 million
principal outstanding on KBS’s $4.0 million revolving credit facility under the KBS Loan Agreement and (ii) $1.8 million
principal outstanding on EBGL’s $3.0 million revolving credit facility under the EBGL Loan Agreement.
The
KBS Loan Agreement provides KBS with a revolving line of credit with borrowing availability of up to $4.0 million. 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. 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, approximately $2.4
million was outstanding under the KBS Loan Agreement, which, after offset of approximately $0.1 million of unamortized deferred
financing costs, is presented at a net amount of approximately $2.3 million on the Condensed Consolidated Balance Sheet.
As
of December 31, 2017, KBS was not in compliance with the financial covenant requiring no net annual post-tax loss for KBS or
the minimum leverage ratio covenant as of the next test date, December 31, 2017. We have begun discussions with Gerber
Finance as to obtaining a waiver for these events. Should the Company be unable to obtain a waiver from Gerber Finance, it
would become an event of default. The occurrence of any event of default under the KBS Loan Agreement may result in
KBS’s obligations under the KBS Loan Agreement becoming immediately due and payable.
The
EBGL Loan Agreement provides EBGL with a revolving working capital line of credit of up to $3.0 million. Availability under the
EBGL Loan Agreement is based on a formula tied to the borrowers’ eligible accounts receivable, inventory and equipment.
The initial term of the EBGL Loan Agreement is set to expire on October 3, 2018, but extends automatically for additional one-year
periods unless a party provided prior written notice of termination. Borrowings bear interest at the prime rate plus 2.75%, with
interest payable monthly and the outstanding principal balance is 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 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
representations, warranties, affirmative and negative covenants, events of default and other provisions customary for financings
of this type. Financial covenants require that EBGL maintains a minimum tangible net worth and a minimum debt service coverage
ratio. As of March 31, 2017, the Company expected that it would be in compliance with these financial covenants at the next test
date, December 31, 2017; however, as discussed in Note 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, the 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.
Long-term
debt is comprised of the following (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 LSV Co-Invest I promissory notes, the Company, at its sole option, may elect to make any interest
payment in PIK Interest at an effective rate of 12% per annum (versus the 10% interest rate applied to cash payments) for that
period. The Company elected the PIK Interest option for its interest payments in 2016 and recorded approximately $1.1 million
of PIK Interest as part of the principal balance of the LSVI and LSV Co-Invest I promissory notes at December 31, 2016 and March
31, 2017. Subsequently, the Company has elected the PIK Interest option for its interest payments in 2017.
On
March 31, 2017, ATRM entered into an additional Securities Purchase Agreement with LSV Co-Invest I. Pursuant to this agreement,
LSV Co-Invest I purchased for $0.5 million in cash, an unsecured promissory note dated March 31, 2017, made by ATRM in the principal
amount of $0.5 million. The note bears interest at 10.0% per annum, with interest payable semiannually in January and July; provided,
however, LSV Co-Invest I may elect to receive any PIK Interest at an annual rate of 12.0%, so long as any such interest payment
is made either (x) entirely in PIK Interest or (y) 50% cash and 50% PIK Interest. Except for the principal amount and the PIK
Interest feature, the terms of this promissory note are identical to the terms of the previous LSVI and LSV Co-Invest I promissory
notes.
As
disclosed in Note 19, subsequent to March 31, 2017, the Company, LSVI, and LSV Co-Invest I entered into an exchange agreement
whereby the outstanding LSVI and LSV Co-Invest I promissory notes, along with accrued interest, were exchanged for 132,548 shares
of the Company’s 10.0% Series B Cumulative Preferred Stock.
The
Company is party to a Registration Rights Agreement with LSVI, providing LSVI with certain demand and piggyback registration rights,
effective at any time after July 30, 2014, with respect to the 107,297 shares of our common stock issued upon the conversion of
a convertible promissory note held by LSVI in 2014.
As
of March 31, 2017, LSVI owned 1,067,885 shares of our common stock, or approximately 45.1% of our outstanding shares, including
900,000 shares purchased in a common stock rights offering we completed in September 2015. Jeffrey E. Eberwein, ATRM’s Chairman
of the Board, is the manager of LSVGP, the general partner of LSVI and LSV Co-Invest I, and the sole member of LSVM, the investment
manager of LSVI.
ATRM’s
entry into the securities purchase agreements with LSVI and LSV Co-Invest I was approved by a Special Committee of our Board consisting
solely of independent directors.
15.
|
STOCK
INCENTIVE PLAN AND SHARE-BASED COMPENSATION
|
ATRM
uses the fair value method to measure and recognize share-based compensation. We determine the fair value of stock options on
the grant date using the Black-Scholes option valuation model. We determine the fair value of restricted stock awards based on
the quoted market price of our common stock on the grant date. We recognize the compensation expense for stock options and restricted
stock awards on a straight-line basis over the vesting period of the applicable awards.
2014
Incentive Plan
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 amounted to approximately $17,000 for the three months ended March 31, 2017, and is included in
the caption “Selling, general and administrative expenses” in our Condensed Consolidated Statement of Operations.
The remaining compensation expense of approximately $37,000 has been recognized on a straight-line basis through October 19, 2017.
2003
Stock Incentive Plan
A
stock incentive plan approved by our shareholders and adopted in May 2003 (the “2003 Plan”) terminated in February
2013. Stock options granted under the 2003 Plan continue to be exercisable according to their individual terms. The following
table summarizes stock option activity under the 2003 Plan for the three 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 outstanding
at March 31, 2017,
are nonqualified options, all of which
expired unexercised at varying dates through November 2017. The aggregate intrinsic values in the table above are zero because
the option exercise prices for all outstanding options exceeded ATRM’s closing stock price on
March
31
, 2017.
We
record the benefit we will derive in future accounting periods from tax losses and credits and deductible temporary differences
as “deferred tax assets.” 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, we have recorded a deferred tax liability of $20,700 for the taxable differences related to our indefinite-lived
intangible assets when calculating our valuation allowance due to the unpredictability of the reversal of these differences.