PART I
Unless the context otherwise requires, references in this Annual Report on Form 10-K (this “Form 10-K”) to (i) “ATRM,” the “Company,” “we,” “us” and “our,” refer to ATRM Holdings, Inc. and its consolidated subsidiaries, (ii) “KBS” refer to our modular housing business operated by our wholly-owned subsidiary KBS Builders, Inc. and (iii) “EBGL” refer to our Minnesota-based operations including Glenbrook Building Supply, Inc. (“Glenbrook”), a retail supplier of lumber and other building supplies, and EdgeBuilder, Inc.(“EdgeBuilder”), a manufacturer of structural wall panels, permanent wood foundation systems and other engineered wood products.
Forward-Looking Statements
This Form 10-K may contain “forward-looking statements,” as such term is used within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not based on historical fact and involve assessments of certain risks, developments, and uncertainties in our business looking to the future. Such forward-looking statements can be identified by the use of terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “intend,” “continue,” or “believe,” or the negatives or other variations of these terms or comparable terminology. Forward-looking statements may include projections, forecasts, or estimates of future performance and developments. These forward-looking statements are based upon assumptions and assessments that we believe to be reasonable as of the date of this report. Whether those assumptions and assessments will be realized will be determined by future factors, developments, and events, which are difficult to predict and may be beyond our control. Actual results, factors, developments, and events may differ materially from those we assumed and assessed. Risks, uncertainties, contingencies, and developments, including those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and those identified in “Risk Factors” in this report, 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.
ITEM 1. BUSINESS.
Overview
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 residential and commercial buildings in a production facility located in Prescott, Wisconsin. Our common stock, par value $0.001 per share, trades on the OTC Pink marketplace of the OTC Markets Group, Inc. under the symbol “ATRM.”
Products and Strategy
KBS
KBS is a Maine-based manufacturer that started business in 2001 as a manufacturer of modular homes. In 2008, KBS began manufacturing commercial modular multi-family housing units. In subsequent years, KBS expanded its product offerings to include a variety of commercial buildings including apartments, condominiums, townhouses, dormitories, hospitals, office buildings, and other structures. The structures are built inside our climate-controlled factories and transported to the site where they are set, assembled and secured on the foundation. Electrical, plumbing, and HVAC systems are inspected and tested in the factory, prior to transportation to the site, to ensure the modules meet all local building codes and quality requirements. Modular construction has gained increased acceptance and is a preferred method of building by many architects and general contractors. The advantages of modular construction include: modules are constructed in a climate-controlled environment; weather conditions usually do not interrupt or delay construction; the building is protected from weather, reducing the risk of mold due to materials absorbing moisture from rain or snow; reduced site work; improved safety and security; reduced vandalism and attrition, as the building is immediately secured; and a significant reduction in overall project time.
The KBS competitive strategy is to offer top quality products for both commercial and residential buildings with a focus on customization to suit the project requirements, provide value with our engineering and design expertise, and meet the timeframe needed by the customer. Our production strategy is to maintain and grow the resources necessary to build a variety of commercial and residential buildings. We attempt to utilize the most efficient methods of manufacturing and high-quality materials in all of our projects. Our sales team works to attract new architects and contractors in New England who need the flexibility that KBS offers.
EBGL
Glenbrook is a retail supplier of lumber, windows, doors, cabinets, drywall, roofing, decking and other building materials and conducts its operations in Oakdale, Minnesota. EdgeBuilder is a manufacturer of structural wall panels, permanent wood foundation systems and other engineered wood products and conducts its operations in Prescott, Wisconsin. Glenbrook and EdgeBuilder are managed by a single management team and operated as a single company. EdgeBuilder manufactures its wall panels and permanent wood foundation systems in a climate-controlled factory and transports them by flat-bed trucks to the customer building location where they are lifted by crane and assembled and erected on site. Panelized construction, especially in large-scale projects, is becoming increasingly popular because wall panels can be constructed ahead of time and stored until needed, they can reduce overall site construction time and the on-site assembly can be performed with smaller crews. Additionally, because the wall panels are constructed in a controlled indoor environment: weather conditions do not usually interrupt or delay construction; the building and materials are not exposed to the weather as they are during a traditional build; there is improved safety and security; and the wall panels are manufactured with higher quality and greater precision than a traditional on-site build.
The Glenbrook competitive strategy is to provide top-quality building materials and unmatched service and attention to detail to building professionals, as well as homeowners. In addition, Glenbrook provides highly personalized service, knowledgeable salespeople and attention to detail that the larger, big-box chain home stores do not provide. The EdgeBuilder competitive strategy is to offer a superior product unique to the project’s requirements, provide value with our engineering and design expertise, and meet the timeframe needed by the customer, while staying cost-competitive. EdgeBuilder’s production strategy is to utilize automation and the most efficient methods of manufacturing and high-quality materials in all of its projects.
Customers
Our customers include residential home builders, general contractors, owners/developers of commercial buildings, and individual retail customers. With regards to KBS, since 2014, we have pursued a strategy of moving away from very large, complex commercial projects to focus on single-family residential homes and smaller commercial projects, which has helped to further diversify our customer base and limit our exposure to any one customer or project. However, we continue to rely on a limited number of customers for a substantial percentage of our net sales. In 2017, no single customer accounted for more than 10% of our total net sales.
Competition
KBS is a regional manufacturer of modular housing units. KBS’s market is the New England states (Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont). Several modular manufacturers are located in these New England states and in nearby Pennsylvania. Some competitors have manufacturing locations in Canada and ship their products to the United States. KBS’s competitors include Maple Leaf Homes (Canada), Pennwest Homes, Champion Home Builders, Muncy Homes, Professional Building Systems, Ritz-Craft Homes, Commodore Corporation and Simplex Homes.
EBGL is a regional manufacturer of engineered structural wall panels and permanent wood foundation systems, and also has a local retail business. EBGL’s market is primarily the Upper Midwest States (Iowa, Minnesota, Missouri, North Dakota, Oklahoma, South Dakota, and Wisconsin). EBGL’s competitors include Precision Company, Component Manufacturing Company, Schweiter Building Supply and Construction Company, Arrow Building Center, and Marshall Truss. EBGL’s retail building supply business competes on a more local level against both small, local lumber yards, regional building supply companies and, to a certain degree, the “big box” stores such as Home Depot and Lowe’s.
Manufacturing and Supplies
KBS’s manufacturing operations are based in Maine. KBS leases two manufacturing plants: a 90,000 square foot facility in South Paris, Maine, and a 60,000 square foot facility in Waterford, Maine. Lumber and supplies for both facilities are purchased from our main location in South Paris. Residential homes and commercial buildings are manufactured in these climate controlled
facilities. We emphasize quality and conformance to all the local building codes where the home or building will be located. Independent building code inspectors are on site almost daily inspecting every stage of the manufacturing process.
EBGL’s manufacturing operations are located in Prescott, Wisconsin. EdgeBuilder leases a 34,000 square foot manufacturing plant where it manufactures wall panels and permanent wood foundation systems. EBGL’s retail operations are located in Oakdale, Minnesota. Glenbrook leases 30,000 square feet of commercial space where it operates its retail building supply business.
Both KBS’s and EBGL’s major material components are dimensional lumber and wood sheet products, which include plywood and oriented strand board. Lumber costs are subject to market fluctuations. Some of our required construction materials are only available through limited local sources in New England, Wisconsin and Minnesota. However, we can source such items from other parts of the country if a local supplier is unable to provide the material. We do not maintain long-term agreements with our suppliers and we purchase all of the materials used in our products through individual purchase orders. We keep a limited inventory of most commonly used materials on hand at our locations.
Sales and Marketing
In fiscal year
2017
, sales of residential homes and commercial structures represented approximately 68% and 32%, respectively, of total net sales. In
2017
, all sales were shipped within the United States.
KBS markets its modular homes products through direct sales people and through a network of independent dealers, builders, and contractors in New England. KBS’s direct sales organization is responsible for all commercial building projects, and works with developers, architects, owners, and general contractors to establish the scope of work, terms of payment, and general requirements for each project. KBS’s sales people also work with independent dealers, builders, and contractors to accurately configure and place orders for residential homes for their end customers. KBS’s network of independent dealers and contractors do not work with it exclusively, although many have KBS model homes on display at their retail centers. KBS does not assign exclusive territories to its independent dealers and contractors, but they tend to sell in areas of New England where they will not be competing against another KBS dealer or contractor.
EBGL markets its engineered structural wall panels and permanent wood foundation systems through direct sales people and a network of builders, contractors and developers in the Upper Midwest states. EBGL’s direct sales organization is responsible for both residential and commercial projects and it works with general contractors, developers and builders to provide bids and quotes for specific projects.
Our marketing efforts include participation in industry trade shows and production of product literature and sales support tools. These efforts are designed to generate sales leads for our independent builders and dealers, and direct salespeople.
Seasonality
Although modular and wall panel construction in our factories eliminates many of the weather-related challenges encountered with site-built construction, our operations can still be impacted by weather and other seasonal factors. Weather can cause delays in site preparation, including delays in building the foundation for a commercial project or residential home, access to building sites and customer delays in setting wall panels or modular homes due to weather conditions and temperature. Additionally, sales demand, especially for residential homes, generally weakens in the winter months, particularly in the northeast and upper midwest regions of the United States. As a result, both KBS and EBGL experience some seasonality. At KBS, the third quarter typically is the strongest demand period and the first quarter typically is the lowest demand period during the year. Although EBGL experiences some seasonality, it is less pronounced than KBS. EBGL’s fluctuations in business are impacted more by the timing of its large wall panel projects. At EBGL, the first quarter typically is the strongest demand period and the third quarter typically is the lowest demand period during the year.
Environmental
Our operations are subject to various federal, state, provincial and local laws, rules and regulations. We are subject to environmental laws, rules and regulations that limit discharges into the environment, establish standards for the handling, generation, emission, release, discharge, treatment, storage and disposal of hazardous materials, substances and wastes, and require cleanup of contaminated soil and groundwater. These laws, ordinances and regulations are complex, change frequently and have tended to become more stringent over time. Many of them provide for substantial fines and penalties, orders (including orders to cease operations) and criminal sanctions for violations. They may also impose liability for property damage and personal injury
stemming from the presence of, or exposure to, hazardous substances. In addition, certain of our operations require us to obtain, maintain compliance with, and periodically renew permits.
Employees
As of
December 31, 2017
, we had 188 employees. Of our 188 employees, 143 serve in manufacturing, 8 in sales, marketing, and customer service, and 37 in general administration and finance. None of our employees are represented by a labor union or are subject to any collective bargaining agreement and we believe that our employee relations are satisfactory.
Additional Information
We were incorporated in Minnesota in December 1982 as “Aetrium Incorporated.” Effective December 5, 2014, our name was changed to “ATRM Holdings, Inc.” Our corporate executive offices are located at 5215 Gershwin Avenue N., Oakdale, Minnesota 55128. Our telephone number is (651) 704-1800. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available, free of charge, on our website at
www.atrmholdings.com
, as soon as reasonably practicable after we electronically file this material with, or furnish it to, the U.S. Securities and Exchange Commission (the “SEC”). Reports and other information we file with the SEC may also be viewed at the SEC’s website at
www.sec.gov
or viewed or obtained at the SEC Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Our website is not intended to be a part of, nor are we incorporating it by reference into, this Form 10-K.
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information contained in this Form 10-K, including our consolidated financial statements and notes thereto, before deciding whether to invest in our common stock. Additional risks and uncertainties that we are unaware of may become important factors that affect us. If any of these risks actually occur, our business, financial condition or operating results may suffer, the trading price of our common stock could decline, and you may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
We have a history of operating losses and substantial indebtedness. Future cash flows from operations and financings may not be sufficient to enable us to meet our obligations under our indebtedness, which likely would have a material adverse effect on our business, financial condition, and results of operations.
We have incurred significant operating losses in recent years and, as of
December 31, 2017
, we had an accumulated deficit of approximately
$88.9 million
. There can be no assurance that we will generate sufficient revenue in the future to cover our expenses and achieve profitability on a consistent basis or at all.
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 December 31, 2017, we had outstanding debt totaling approximately
$10.1 million
. Our debt primarily included (i)
$3.8 million
principal outstanding on KBS’s
$4.0 million
revolving credit facility under a loan and security agreement (as amended, the “KBS Loan Agreement”) with Gerber Finance Inc. (“Gerber Finance”), and
$3.0 million
principal outstanding under a loan and security agreement with Gerber Finance used to finance the acquisition of EBGL (as amended, the “Acquisition Loan Agreement”), and (ii)
$2.2 million
principal outstanding on EBGL’s
$3.0 million
revolving credit facility under a revolving credit loan agreement with Premier Bank (the “Premier Loan Agreement”), which became effective on
June 30, 2017
and replaced the prior
$3.0 million
revolving credit facility under a loan and security agreement with Gerber Finance (the “EBGL Loan Agreement”). We also have obligations to make
$1.0 million
in deferred cash payments to the sellers of EBGL, payable in monthly installments of
$0.1 million
, inclusive of interest, through November 1, 2018.
Since December 31, 2017, we have paid off a certain amount of our debt and have incurred additional debt, as further described in Note
27
to the Notes to Consolidated Financial Statements set forth in Part IV, Item 15, “Financial Statements of Registrant” of this Form 10-K.
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. 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.
We may need additional financing and our ability to obtain such financing may be limited.
We may need additional financing in order to satisfy our debt payment obligations and effectively execute our business plan, which may include strategic acquisitions. There is no assurance that we will be able to obtain such additional financing, or that if available, it will be available to us on acceptable terms. Our existing loan agreements with Gerber Finance contain negative covenants limiting our ability to obtain additional debt financing without the consent of Gerber Finance. Due to our history of operating losses, existing debt payment obligations and the restrictions under the Gerber Finance loan agreements, our ability to obtain such additional financing may be limited.
The Gerber Finance loan agreements contain certain covenants that restrict our ability to engage in certain transactions and may impair our ability to respond to changing business and economic conditions.
Our loan agreements with Gerber Finance contain certain affirmative and negative covenants, including a financial covenant requiring us to not incur a net annual post-tax loss for the fiscal year ending December 31, 2019 and a minimum level of net income for each fiscal year thereafter. These covenants also include restrictions on our abilities to take certain actions without the consent of Gerber Finance, and may limit our ability to respond to changing business and economic conditions. These restrictions include, among other things, limitations on the ability of the borrowers to take the following actions: merge, consolidate, acquire or invest in another company; incur additional debt; enter into transactions with affiliates; engage in other businesses; sell, transfer or otherwise dispose of assets; and make certain payments, including dividends or distributions to ATRM.
Our inability to comply with the financial covenants under our loan agreements with Gerber Finance and Premier Bank could have a material adverse effect on our financial condition.
As of December 31, 2017, and 2018, KBS was not in compliance with the financial covenants under the KBS Loan Agreement requiring no net annual post-tax loss for KBS or the minimum leverage ratio covenant as of these test dates. Additionally, KBS was not in compliance with the requirement to deliver the Company's fiscal year-end financial statements reviewed by an independent certified accounting firm acceptable to Gerber Finance within 105 days from the fiscal year ended December 31, 2017. The occurrence of any event of default under the KBS Loan Agreement may result in KBS’s obligations under the KBS Loan Agreement becoming immediately due and payable. In April 2019, we obtained a waiver from Gerber Finance for these events. In addition, the Company and Gerber Finance agreed to eliminate the minimum leverage ratio covenant for years after 2018. The Company currently projects that it will be in compliance with the covenant requiring no net annual post-tax loss for KBS for 2019.
As of December 31, 2017, and 2018, EBGL was not in compliance with the following covenants under the Premier Loan Agreement: (i) requirement to maintain a Debt Service Coverage Ratio for the calendar year of at least
1.0
;
and (ii) a requirement to deliver the Company's fiscal year-end audited financial statements within
120 days
of the end of each calendar year. The occurrence of any event of default under the Premier Loan Agreement may result in EBGL’s obligations under the Premier Loan Agreement becoming immediately due and payable. In April 2019, we obtained a waiver from Premier Bank for these events through August 1, 2019 (the current maturity date of the Premier Loan Agreement).
If the Company fails to comply with any financial covenants under our loan agreements with Gerber Finance or Premier Bank going forward, the applicable lender(s) may demand the repayment of the credit facilities amount outstanding and any unpaid interest thereon.
We are dependent on our senior management team and other key employees.
Our success depends, to a significant extent, on our senior management team and other key employees and the ability of other personnel or new hires to effectively replace key employees who may retire or resign. Failure to retain our leadership team and attract and retain new leadership and other important personnel could lead to ineffective management and operations, which could materially and adversely affect our business and operating results.
The cyclical and seasonal nature of the housing industry causes our revenues and operating results to fluctuate, and we expect this cyclicality and seasonality to continue in the future.
The housing industry is highly cyclical and seasonal. It is influenced by many national and regional factors, including the availability of financing for home buyers and developers, consumer confidence, interest rates, demographic and employment trends, income levels, housing demand, general economic conditions (including inflation and recessions), and the availability of suitable home sites. As a result of the foregoing factors, our revenues and operating results have been volatile, and we expect this
volatility to continue in the future. Unfavorable changes in any of the above factors or other issues that may arise could have an adverse effect on our revenue and earnings.
Although modular and wall panel construction in our factories eliminates many of the weather-related challenges encountered with site-built construction, our operations can still be impacted by weather and other seasonal factors. Weather can cause delays in site preparation, including delays in building the foundation for a commercial project or residential home, access to building sites and customer delays in setting modular homes or wall panels due to weather conditions and temperature. Additionally, sales demand, especially for residential homes, generally weakens in the winter months, particularly in the northeast and upper midwest regions of the United States. As a result, both KBS and EBGL experience some seasonality. At KBS, the third quarter typically is the strongest demand period and the first quarter typically is the lowest demand period during the year. Although EBGL experiences some seasonality, it is less pronounced than KBS. EBGL’s fluctuations in business are impacted more by the timing of its large wall panel projects. At EBGL, the first quarter typically is the strongest demand period and the third quarter typically is the lowest demand period during the year.
Our operating results could be adversely affected by changes in the cost and availability of raw materials.
Prices and availability of raw materials used to manufacture our products can change significantly due to fluctuations in supply and demand. Additionally, availability of the raw materials used to manufacture our products may be limited at times resulting in higher prices and/or the need to find alternative suppliers. Both KBS’s and EBGL’s major material components are dimensional lumber and wood sheet products, which include plywood and oriented strand board. Lumber costs are subject to market fluctuations. Furthermore, the cost of raw materials may also be influenced by transportation costs. It is not certain that any price increases can be passed on to our customers without affecting demand or that limited availability of materials will not impact our production capabilities. The state of the financial and housing markets may also impact our suppliers and affect the availability or pricing of materials. Our inability to raise the price of our products in response to increases in prices of raw materials or to maintain a proper supply of raw materials could have an adverse effect on our revenue and earnings.
We have material weaknesses in our internal control over financial reporting and concluded that our disclosure controls and procedures and internal control over financial reporting were not effective as of December 31, 2017.
As disclosed in Part II, Item 9A “Controls and Procedures” of this Form 10-K, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures and our internal control over financial reporting were not effective as of
December 31, 2017
due to material weaknesses in our internal control over financial reporting related to inadequate accounting processes and internal control procedures. Our failure to successfully remediate these material weaknesses could cause us to fail to meet our reporting obligations and to produce timely and reliable financial information. Additionally, such failure could cause investors to lose confidence in our public disclosures, which could have a negative impact on our stock price. For a discussion of these material weaknesses and our remediation efforts, please see Part II, Item 9A “Controls and Procedures” of this Form 10-K.
We have a few customers that account for a significant portion of our revenues, and the loss of these customers, or decrease in their demand for our products, could have a material adverse effect on our results.
We rely on a limited number of customers for a substantial percentage of our net sales and accounts receivable. Although we had no customers whose sales were greater than 10% of our total net sales in 2017, one customer, a residential home builder in the New England area, accounted for 11% of our total net sales in
2016
. A reduction, delay, or cancellation of orders from one or more of these significant customers, or the loss of one or more of these customers, would likely have an adverse impact on our operating results.
If KBS is unable to maintain or establish its relationships with independent dealers and contractors who sell its homes, KBS revenue could decline.
KBS sells residential homes through a network of independent dealers and contractors. As is common in the modular home industry, KBS’s independent dealers may also sell homes produced by competing manufacturers and can cancel their relationships with KBS on short notice. In addition, these dealers may not remain financially solvent, as they are subject to industry, economic, demographic and seasonal trends similar to those faced by KBS. If KBS is not able to maintain good relationships with its dealers and contractors or establish relationships with new solvent dealers or contractors, KBS’s revenue could decline.
Due to the nature of our business, many of our expenses are fixed costs and if there are decreases in demand for our products, it may adversely affect our operating results.
Many of our expenses, particularly those relating to properties, capital equipment, and certain manufacturing overhead items, are fixed in the short term. Reduced demand for our products causes our fixed production costs to be allocated across reduced production volumes, which adversely affects our gross margins and profitability.
Certain actions taken in connection with reducing operating costs may have a negative impact on our business.
In the event of a housing downturn and a decline in our revenues, we may implement cost reduction actions such as temporary factory shutdowns, workforce reductions, pay freezes and reductions, and reductions in other expenditures. In doing so, we will attempt to maintain the necessary infrastructures to allow us to take full advantage of subsequent improvements in market conditions. However, there can be no assurance that reductions we may make in personnel and expenditure levels and the loss of the capabilities of personnel we have terminated or may terminate will not inhibit us in the timely ramp up of production in response to improving market conditions.
Due to the nature of the work we perform, we may be subject to significant liability claims and disputes.
We engage in services that can result in substantial injury or damages that may expose us to legal proceedings, investigations and disputes. For example, in the ordinary course of our business, we may be involved in legal disputes regarding personal injury and wrongful death claims, employee or labor disputes, professional liability claims, and general commercial disputes, as well as other claims. An unfavorable legal ruling against us could result in substantial monetary damages. Although we have adopted a range of insurance, risk management, safety, and risk avoidance programs designed to reduce potential liabilities, there can be no assurance that such programs will protect us fully from all risks and liabilities. If we sustain liabilities that exceed our insurance coverage or for which we are not insured, it could have a material adverse impact on our results of operations and financial condition.
Our costs of doing business could increase as a result of changes in, expanded enforcement of, or adoption of new federal, state or local laws and regulations.
We are subject to various federal, state and local laws and regulations that govern numerous aspects of our business. In recent years, a number of new laws and regulations have been adopted, and there has been expanded enforcement of certain existing laws and regulations by federal, state and local agencies. These laws and regulations, and related interpretations and enforcement activity, may change as a result of a variety of factors, including political, economic or social events. Changes in, expanded enforcement of, or adoption of new federal, state or local laws and regulations governing minimum wage or living wage requirements; the classification of exempt and non-exempt employees; the distinction between employees and contractors; other wage, labor or workplace regulations; healthcare; data protection and cybersecurity; the sale and pricing of some of our products; transportation; logistics; supply chain transparency; taxes; unclaimed property; energy costs and consumption; or environmental matters could increase our costs of doing business or impact our operations.
In fiscal 2017, Congress enacted the Tax Cuts and Jobs Act (the "TCJA"), which significantly changes how the U.S. taxes corporations. During fiscal 2018, additional guidance related to the TCJA was issued by the U.S. Department of the Treasury and the IRS. The TCJA requires complex computations to be performed that were not previously required under U.S. tax law, significant judgments to be made in interpretation of the provisions of the TCJA, significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Department of the Treasury, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the TCJA will be applied or otherwise administered that is different from our interpretations. Further, uncertainties also exist in terms of how U.S. states and foreign countries within which we operate will react to these U.S. federal income tax changes, which could have additional impacts on our effective tax rate.
RISKS RELATED TO OUR SECURITIES
There is a limited market for our common stock.
Our common stock is currently quoted on the OTC Pink market of the OTC Markets Group, Inc. under the symbol “ATRM.” Trading of securities on this quotation service is generally limited and is effected on a less regular basis than on exchanges such as NASDAQ. The average daily trading volume in our common stock during the fiscal year
2017
was approximately 900 shares per day. We cannot provide assurances that a more active trading market will develop or be sustained. As a result of low
trading volume in our common stock, the purchase or sale of a relatively small number of securities could result in significant price fluctuations and it may be difficult for holders to sell their securities without depressing the market price for such securities.
Our ability to use net operating loss carryforwards to offset future taxable income for U.S. income tax purposes may be limited.
As of
December 31, 2017
, we had federal net operating loss carryforwards (“NOLs”) of approximately
$103.0 million
and state NOLs of approximately
$26.0 million
. Significant changes that impact the Company in the TCJA include a limitation on the utilization of NOLs arising after December 31, 2017 to 80% of taxable income with an indefinite carryforward. The TCJA also reduced the corporate income tax rate to 21%, from a prior rate of 35%, which may cause a reduction in the economic benefit of our NOLs and other deferred tax assets available to us. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. Further, our ability to use NOLs to offset future taxable income will depend on the amount of taxable income we generate in future periods and whether we become subject to annual limitations on the amount of taxable income that may be offset by our NOLs.
Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), imposes an annual limitation on the amount of taxable income that may be offset by a corporation’s NOLs if the corporation experiences an “ownership change” as defined in Section 382 of the Code. An ownership change occurs when the corporation’s “5-percent shareholders” (as defined in Section 382 of the Code) collectively increase their ownership in the corporation by more than 50 percentage points (by value) over a rolling three-year period. Additionally, various states have similar limitations on the use of state NOLs following an ownership change.
Our Amended and Restated Articles of Incorporation include provisions designed to protect the tax benefits of our NOLs by generally restricting any direct or indirect transfers of our common stock that increase the direct or indirect ownership of our common stock by any person from less than 4.99% to 4.99% or more, or increase the percentage of our common stock owned directly or indirectly by a person owning or deemed to own 4.99% or more of our common stock. Any direct or indirect transfer attempted in violation of these transfer restrictions will be void as of the date of the prohibited transfer as to the purported transferee. These restrictions were scheduled to expire on December 5, 2017, however, at the Company's 2017 Annual Meeting of Shareholders held on December 4, 2017, the shareholders approved an amendment to the Company's Amended and Restated Articles of Incorporation to extend this provision to December 5, 2020. On December 4, 2017, the Company filed Articles of Amendment with the Office of the Secretary of State of the State of Minnesota of effect this, as well as other, amendments.
Although this measure is intended to reduce the likelihood of an ownership change, we cannot assure you that it will prevent all transfers of our common stock that could result in such an ownership change. Further, this measure could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, ATRM or a large block of our common stock, which may adversely affect the marketability, and depress the market price, of our common stock. In addition, this measure could delay or frustrate the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving us, or impede an attempt to acquire a significant or controlling interest in us, even if such events might be beneficial to us and our shareholders.
The concentration of our stock ownership may limit individual stockholder ability to influence corporate matters.
As of April 26, 2019, Jeffrey E. Eberwein, the Chairman of the Company’s Board, owned approximately 17% of the outstanding common stock of ATRM. Mr. Eberwein also is the Chairman of the Board of Digirad Corporation ("Digirad") and beneficially owns 559,152 shares of Digirad's common stock, or approximately 2.8% of the shares outstanding. Mr. Eberwein is also the Chief Executive Officer of Lone Star Value Management, LLC ("LSVM"), which is the investment manager of Lone Star Value Investors, LP ("LSVI") and Lone Star Value Co-Invest I, LP ("LSV Co-Invest I"). LSVI owns 222,577 shares of the Company’s 1-% Series B Cumulative Preferred Stock ("Series B Stock") and another 374,562 shares of Series B Stock are owned directly by LSV Co-Invest I. Through these relationships and other relationships with affiliated entities, Mr. Eberwein may be deemed the beneficial owner of the securities owned by LSVI and LSV Co-Invest I. Mr. Eberwein disclaims beneficial ownership of Series B Stock, except to the extent of his pecuniary interest therein.
Our corporate executive offices are located at a leased facility (approximately 30,000 square feet) in Oakdale, Minnesota, a suburb of St. Paul, where EBGL also conducts its sales, marketing and administrative activities and Glenbrook conducts its retail operations. EdgeBuilder conducts its wall panel manufacturing activities at a leased facility (approximately 34,000 square feet) in Prescott, Wisconsin. KBS conducts its modular building manufacturing, sales, marketing and service activities at facilities we
previously owned and now lease as of April 3, 2019 in South Paris, Maine (90,000 square feet) and Waterford, Maine (60,000 square feet). We consider our present facilities to be sufficient for our current operations.
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ITEM 3.
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LEGAL PROCEEDINGS.
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The Company is and may become involved in various lawsuits as well as other certain legal proceedings that arise in the ordinary course of business. Information regarding certain material proceedings is provided below.
UTHE Technology Corporation v. Aetrium Incorporated
Since December 1993, an action brought by UTHE Technology Corporation (“UTHE”) against ATRM and its then sales manager for Southeast Asia (“Sales Manager”), asserting federal securities claims, a RICO claim, and certain state law claims, had been stayed in the United States District Court for the Northern District of California. UTHE’s claims were based on its allegations that four former employees of a Singapore company, which UTHE formerly owned, conspired to and did divert business from the subsidiary, and directed that business to themselves and a secret company they had formed, which forced UTHE to sell its subsidiary shares to the former employee defendants at a distressed price. The complaint alleged that ATRM and the Sales Manager participated in the conspiracy carried out by the former employee defendants. In December 1993, the case was dismissed as to the former employee defendants because of a contract requiring UTHE and them to arbitrate their claims in Singapore. The district court stayed the case against ATRM and the Sales Manager pending the resolution of arbitration in Singapore involving UTHE and three of the former employee defendants, but not involving ATRM or the Sales Manager. ATRM received notice in March 2012 that awards were made in the Singapore arbitration against one or more of the former employee defendants who were parties to the arbitration. In June 2012, UTHE filed a motion to reopen the case against ATRM and the Sales Manager and to lift the stay, which the court granted. On September 13, 2013, the court entered final judgment dismissing all remaining claims UTHE asserted against ATRM in the litigation. On September 23, 2013, UTHE appealed the district court judgment to the United States Court of Appeal for the Ninth Circuit only as to the dismissal of UTHE’s RICO claim. The appeal was argued in a court hearing on November 19, 2015. On December 11, 2015, the court of appeal issued an order reversing the district court’s grant of summary judgment of UTHE’s RICO claim and remanded the case back to the district court for further proceedings. On July 14, 2016, ATRM filed a motion for summary judgment in the district court seeking dismissal of the sole remaining RICO claim. On August 26, 2016, the district court granted ATRM’s motion for summary judgment and dismissed the case. On September 19, 2016, UTHE filed its appeal to the Ninth Circuit of the district court’s grant of summary judgment and dismissal. The parties completed the appellate briefing on February 13, 2017. Oral arguments were held by the appellate court on February 14, 2018. On July 2, 2018, the Ninth District Court of Appeals rendered its decision affirming the District Court’s opinion and upheld the dismissal of the case against ATRM. UTHE did not appeal that decision to the Supreme Court of the United States by the October 1, 2018 deadline. As such, this Ninth Circuit affirmance of the case dismissal stands, and the lawsuit has been successfully and completely defeated by the Company.
KBE Building Corporation v. KBS Builders, Inc., and ATRM Holdings, Inc., et. al.
At the time of the KBS acquisition in April 2014, KBS purchased receivables for a construction project known as the Nelton Court Housing Project (“Nelton Court”) in Hartford, CT, and also performed certain “punch-list” and warranty work. Modular units for Nelton Court were supplied by KBS Building Systems, Inc. (“KBS-BSI”) pursuant to a contract with KBE Building Corporation (“KBE”). KBE has asserted claims against KBS-BSI, KBS and ATRM arising out of alleged delays, and for the repair of certain alleged defects in the modular units supplied to the project. KBE’s claim seeks an unspecified amount of damages. The action has been transferred to the complex litigation docket of the Hartford Superior Court. On December 18, 2017, KBS was notified that a global settlement had been reached between all defendants and the plaintiff. Under the settlement, the Company’s insurance carriers have agreed to pay
$0.3 million
to the plaintiff in full settlement on KBS’s behalf. KBS paid a
$10.0 thousand
deductible to its insurance carriers for this claim. The Settlement became effective on January 5, 2018.
From time to time, in the ordinary course of ATRM’s business, it is party to various other disputes, claims and legal proceedings. In the opinion of management, based on information available at this time, such disputes, claims and proceedings will not have a material effect on ATRM’s consolidated financial statements.
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ITEM 4.
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MINE SAFETY DISCLOSURES.
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Not applicable.
Notes to Consolidated Financial Statements
NOTE 1: BUSINESS DESCRIPTION
Unless the context otherwise requires, references in the Notes to Consolidated Financial Statements to (i) “ATRM,” the “Company,” “we,” “us” and “our,” refer to ATRM Holdings, Inc. and its consolidated subsidiaries, (ii) “KBS” refers to our Maine-based modular housing manufacturing business operated by our wholly-owned subsidiary KBS Builders, Inc. and (iii) “EBGL” refers to our Minnesota-based operations including Glenbrook Building Supply, Inc. (“Glenbrook”), a retail supplier of lumber and other building supplies, and EdgeBuilder, Inc. (“EdgeBuilder”), a manufacturer of structural wall panels, permanent wood foundation systems and other engineered wood products.
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.
NOTE
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
2017
. We have incurred significant operating losses in recent years and, as of
December 31, 2017
, we had an accumulated deficit of approximately
$88.9 million
. Working capital has remained negative over the past several years. Cash used in operating activities, while improved over
2016
, remains negative, which has required us to generate funds from investing and financing activities. At
December 31, 2017
, we had outstanding debt of approximately
$10.1 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 December 31, 2017, we had outstanding debt totaling approximately
$10.1 million
. Our debt primarily included (i)
$3.8 million
principal outstanding on KBS’s
$4.0 million
revolving credit facility under a loan and security agreement (as amended, the “KBS Loan Agreement”) with Gerber Finance Inc. (“Gerber Finance”), and
$3.0 million
principal outstanding under a loan and security agreement with Gerber Finance used to finance the acquisition of EBGL (as amended, the “Acquisition Loan Agreement”), and (ii)
$2.2 million
principal outstanding on EBGL’s
$3.0 million
revolving credit facility under a revolving credit loan agreement with Premier Bank (the “Premier Loan Agreement”), which became effective on
June 30, 2017
and replaced the prior
$3.0 million
revolving credit facility under a loan and security agreement with Gerber Finance (the “EBGL Loan Agreement”). We also have obligations to make
$1.0 million
in deferred cash payments to the sellers of EBGL, payable in monthly installments of
$0.1 million
, inclusive of interest, through November 1, 2018.
At the applicable test dates, we were not in compliance with the following financial covenants under our loan agreements: (i) a requirement for KBS to maintain a minimum leverage ratio of
7:1
for the fiscal year ended December 31, 2017, as its actual leverage ratio for such period was negative; (ii) a requirement for KBS not to incur a net annual post-tax loss in any fiscal year of the loan agreements, as KBS’s net annual post-tax loss for the fiscal year ended December 31, 2017 was
$1.9 million
; and (iii) a requirement to deliver the Company’s fiscal year-end financial statements reviewed by an independent certified accounting firm acceptable to Gerber Finance within
105 days
from the fiscal year ended December 31, 2017. In August 2017, Gerber Finance provided us with a waiver for these events.
As of December 31, 2017, and 2018, KBS was not in compliance with the financial covenants under the KBS Loan Agreement requiring no net annual post-tax loss for KBS or the minimum leverage ratio covenant as of these test dates. Additionally, KBS was not in compliance with the requirement to deliver the Company's fiscal year-end financial statements reviewed by an independent certified accounting firm acceptable to Gerber Finance within 105 days from the fiscal year ended December 31, 2017. The occurrence of any event of default under the KBS Loan Agreement may result in KBS’s
obligations under the KBS Loan Agreement becoming immediately due and payable. In April 2019, we obtained a waiver from Gerber Finance for these events. In addition, the Company and Gerber Finance agreed to eliminate the minimum leverage ratio covenant for years after 2018. The Company currently projects that it will be in compliance with the covenant requiring no net annual post-tax loss for KBS for 2019.
As of December 31, 2017, and 2018, EBGL was not in compliance with the following covenants under the Premier Loan Agreement: (i) requirement to maintain a Debt Service Coverage Ratio for the calendar year of at least
1.0
;
and (ii) a requirement to deliver the Company's fiscal year-end audited financial statements within
120 days
of the end of each calendar year. The occurrence of any event of default under the Premier Loan Agreement may result in EBGL’s obligations under the Premier Loan Agreement becoming immediately due and payable. In April 2019, we obtained a waiver from Premier Bank for these events through August 1, 2019 (the current maturity date of the Premier Loan Agreement).
If the Company fails to comply with any financial covenants under our loan agreements with Gerber Finance or Premier Bank going forward, the applicable lender(s) may demand the repayment of the credit facilities amount outstanding and any unpaid interest thereon.
During 2016, 2017 and 2018, 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:
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KBS’s strategic shift away from large commercial projects with significant site work to focus on its core competency of manufacturing modular buildings;
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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;
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Reduction in KBS workforce including manufacturing, sales, engineering and front-office staff;
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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;
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KBS implemented a new dynamic pricing model for
2018
, which was designed to determine its bid price quoted to customers on the most current cost information to better ensure full recovery of its manufacturing costs and improve overall gross margins;
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In
July 2017
, KBS made the final payment due to the primary seller of KBS, freeing up
$0.1 million
per month of cash flows to be used for operations;
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In November 2018, EBGL made the final payment due to the sellers of EBGL, freeing up
$0.1 million
per month of cash flows to be used for operations;
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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;
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In
August 2016
, we amended certain of our debt agreements to allow the Company to pay PIK Interest on approximately
$11.0 million
of our debt, reducing strain on current cash flows;
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In
June 2017
, we refinanced EBGL’s revolving credit facility and amended the terms of our agreement with the EBGL Sellers providing for deferred payments to obtain more favorable lending and payment terms and reduce total fees paid under these agreements;
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As disclosed in Note
20
,
in
September 2017
, we converted
$13.3 million
of the Company’s outstanding debt, including accrued interest, to Series B Stock;
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As discussed in Note
27
, in
January 2018 and in June 2018
, the Company issued a unsecured promissory notes in the principal amounts of
$0.5 million
and
$0.9 million
, respectively, to LSV Co-Invest I to provide additional working capital for the Company;
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In
April 2019
, KBS and EBGL executed sale leasebacks of several of its real estate properties (see further discussion in Note
27
)
; and
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We continue to look for opportunities to refinance our remaining debt on more favorable terms.
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On September 10, 2018, ATRM entered into a non-binding
letter of intent (the "
LOI
")
relating to the acquisition
of ATRM (the "ATRM Acquisition")
by
Digirad Corporation ("
Digirad
")
. Under the terms contemplated in the LOI, ATRM stockholders will receive consideration consisting of
0.4
shares of Digirad common stock for each share of outstanding ATRM common stock acquired by the Company in the ATRM Acquisition (see Note
27
for additional information). We anticipate the ATRM Acquisition to close in the third quarter of 2019.
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, have already occurred or are probable of occurring, and have alleviated 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 consolidated financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned.
If we continue to experience operating losses, and we are not able to generate additional liquidity through the mechanisms described above or through some combination of other actions, while not expected, we may not be able to continue operations. Additionally, a failure to generate additional liquidity could negatively impact our access to materials or services that are important to the operation of our business. In addition, these losses could further trigger violations of covenants under our debt agreements, resulting in accelerated payment of these loans.
There can be no assurance that our existing cash reserves, together with funds generated by our operations and any future financings, will be sufficient to satisfy our debt payment obligations, to avoid liquidity issues and/or fund operations beyond this fiscal year. Our inability to generate funds from our operations and/or obtain financing sufficient to satisfy our payment obligations may result in our obligations being accelerated by our lenders, which would likely have a material adverse effect on our business, financial condition and results of operations. 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.
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. In
2014
,
2015
,
2016
,
2017
and
2018
, LSVM has provided financial support in the form financing through various debt agreements disclosed in Note
17
. Based on the previous commitments, management believes that additional financing may be provided by LSVM or its affiliates, if necessary, in the future. In addition, it should be noted that LSVM is a related party to Digirad, with whom ATRM has entered into a LOI, as mentioned above.
NOTE
3
: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy:
The 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.
Use of Estimates:
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America ("
GAAP
")
requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Significant estimates include those related to revenue recognition (including estimates of costs and profit under the percentage of completion method of accounting), customer rebates, allowance for doubtful accounts; asset lives used in computing depreciation and amortization; valuation of inventories, contingent consideration, goodwill, intangible assets and other long-lived assets, deferred income taxes, warranty obligations, health insurance expense accruals and accruals for contingencies, including legal matters. Such estimates require significant judgment. At the time they are made, such estimates are believed to be reasonable when considered in conjunction with our consolidated financial position and results of operations taken as a whole. However, actual results could differ from those estimates and such differences may be material to the consolidated financial statements.
Cash, Cash Equivalents and Restricted Cash:
At times, we may invest a portion of our cash reserves in cash equivalents, which are highly liquid investments with a maturity of three months or less when purchased.
We may maintain our cash and cash equivalents in accounts that, at times, may exceed the insurance limits of the Federal Deposit Insurance Corporation. Restricted cash represents amounts the Company has on deposit with Gerber Finance from time-to-time as additional collateral to support
borrowing under the KBS revolving line of credit facility, as well as funds kept on deposit with INTL FC Stone related to our lumber commodity hedging program.
Accounts Receivable and Allowance for Doubtful Accounts:
Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of losses that may result from uncollectable accounts receivable. We determine the allowance based on an analysis of individual accounts and an evaluation of the collectability of our accounts receivable in the aggregate based on factors such as the aging of receivable amounts, customer concentrations, historical experience, and current economic trends and conditions. Account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered. We do not have any off-balance sheet credit exposure related to our customers.
Inventories:
Inventories consist primarily of lumber and other commodity-type building materials and are valued at the lower of cost or market, with cost determined on a first-in, first-out basis. Materials purchased, and costs incurred for specific contracts are recorded in cost of sales when the related contract revenue is recognized. We adjust our inventories for excess and obsolete items by reducing their carrying values to estimated net realizable value based upon assumptions about future product demand.
Customer Rebate Program:
KBS has a rebate program for some builders based on sales volume. Rebates are recorded as a reduction of net sales in our consolidated statements of operations. The rebate liability is included in other accrued liabilities in our consolidated balance sheet.
Property, Plant and Equipment:
Property, plant and equipment are depreciated on a straight-line basis over their estimated useful lives. Estimated useful lives are as follows: buildings and improvements -
30
years; machinery and equipment -
3
to
7
years. When assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is recorded. Maintenance and repairs are expensed as incurred and major improvements are capitalize
d
.
Impairment of Goodwill and Indefinite-Lived Intangible Assets:
Goodwill and other intangible assets with indefinite lives, such as trademarks, are assessed annually in order to determine whether their carrying value exceeds their fair value. In addition, they are tested on an interim basis if an event occurs or circumstances change between annual tests that would more likely than not reduce their fair value below carrying value. If we determine the fair value of goodwill or other indefinite-lived intangible assets is less than their carrying value, an impairment loss is recognized. Impairment losses, if any, are reflected in operating income or loss in the period incurred. The Company performs its annual tests of goodwill and trademarks during the second quarter of each fiscal year.
See Notes
8
and
12
.
Impairment of Long-Lived Assets with Finite Lives:
Long-lived assets held and used by us which have finite lives, including fixed assets and purchased intangible assets, are assessed for impairment whenever an event or change in circumstances indicates that the carrying value of the asset may not be fully recoverable. Recoverability is determined based on an estimate of undiscounted future cash flows resulting from the use of an asset and its eventual disposition. An impairment loss is measured by comparing the fair value of the asset to its carrying value. If we determine the fair value of an asset is less than the carrying value, an impairment loss is incurred. Impairment losses, if any, are reflected in operating income or loss in the period incurred. We did not record any impairment charges related to long-lived assets with finite lives during
2017
or
2016
.
Revenue Recognition:
KBS manufactures both single-family residential homes as well as commercial structures. Commercial structures, which include multi-unit residential buildings such as apartment buildings, condominiums, townhouses, and dormitories as well as commercial structures such as hospitals and office buildings are manufactured to customer specifications and may take up to several months to complete. Commercial contracts provide that it manufactures, delivers and sets the modular units on the foundation with little or no final on-site work required (which includes on-site electrical, plumbing or heating and air conditioning services). Generally, KBS’s contracts for residential homes do not include site work, which is typically performed by independent builders, and the homes are generally delivered and set on the foundation within a few days after being manufactured.
EdgeBuilder manufactures structural wall panels and permanent wood foundations pursuant to commercial construction contracts. These wall panels and wood foundation systems are manufactured in EdgeBuilder’s factory and delivered to its customers’ construction sites in accordance with the contractual delivery schedule. Many of EdgeBuilder’s wall panel construction contracts span multiple months.
We recognize revenue for modular units and site work, as well as structural wall panels and wood foundations, using the percentage of completion method. Percentage of completion is determined using a units-of-production methodology based on modules delivered in accordance with the terms of the contract (KBS) and cost-to-cost method with cost determined based on costs incurred to date related to each wall panel (EBGL) contract. Sales tax billed to customers is excluded from revenue.
Transportation and freight billed to customers is recorded as revenue and the related costs are included in cost of sales. The current asset “Costs and estimated profit in excess of billings” represents revenues recognized in excess of amounts billed and the current liability “Billings in excess of costs and estimated profit” represents billings in excess of revenues recognized.
Application of the cost-to-cost percentage of completion method of accounting requires the use of estimates of costs to be incurred in completing our performance under a contract. The cost estimating process is based on the knowledge and experience of management and involves making significant judgments. Changes in contract performance, change orders, estimated profitability, final contract settlements and other factors may result in changes to estimated and actual costs and profit. The effects of such changes are recognized in the period in which the revisions are determined. In situations where the estimated cost to complete a contract indicates a loss will be incurred, the entire loss is recorded in the period in which it is estimated.
Glenbrook is a retail supplier of lumber and other building supplies. Retail sales at Glenbrook are recognized at the point of sale. Returns on retail sales are generally not material and are recognized at the point of return.
Warranty Costs:
KBS provides a limited warranty on its residential homes that covers substantial defects in materials or workmanship for a period of
12 months
after delivery to the owner. EBGL provides a limited warranty on the sale of its wood foundation products that covers leaks resulting from defects in workmanship for a period of twenty-five years. Estimated warranty costs are accrued in the period that the related revenue is recognized. Accrued warranty costs are included in the caption “Other accrued liabilities” in our consolidated balance sheet. See Note
15
.
Self-Insurance Costs:
We maintain a self-insurance program for a portion of our employee health care costs. Self-insurance costs are accrued based on actual reported claims plus an estimate of claims incurred but not yet reported. The portion of the accrual related to unreported claims is estimated based on an analysis of historical claims experience and other assumptions. Accruals for such costs could be significantly impacted if future events and claims differ from these assumptions. Accrued health insurance costs are included in the caption “Other accrued liabilities” in our consolidated balance sheet. See Note
15
.
Income Taxes:
We record income tax expense or benefit based on our estimate of the effective tax rates for the jurisdictions in which we do business. Deferred tax assets are recognized for deductible temporary differences and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We assess our income tax positions for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting dates. For those tax positions where it is more likely than not that a tax benefit will be sustained, we record the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit is recorded. Interest expense associated with income taxes, if any, is classified as income tax expense. See Note
24
for additional information regarding income taxes.
Income (Loss) Per Common Share:
Basic income (loss) per common share is computed by dividing income (loss) by the weighted-average number of common shares outstanding during each period. Diluted income per share is computed by dividing income by the weighted-average number of common shares and common equivalent shares using the treasury stock method. Common equivalent shares include shares issuable upon the assumed exercise of stock options, vesting of restricted shares, and the conversion of convertible securities. For periods that include a loss, the computation of diluted loss per share excludes the impact of common equivalent shares because they would be antidilutive and diluted loss per share is therefore the same as basic loss per share.
Business Combinations:
We account for business combinations under the acquisition method of accounting. The purchase price of an acquired business is allocated to the acquired tangible and intangible assets and the assumed liabilities on the basis of their respective fair values on the date of acquisition. Any excess of the purchase price over the fair value of the separately identifiable acquired assets and assumed liabilities is allocated to goodwill. The valuation of acquired assets and assumed liabilities requires significant judgments and is subject to revision as additional information about the fair value of assets and liabilities becomes available. Additional information, which existed as of the acquisition date but at that time was unknown to us, may become known during the remainder of the measurement period, a period not to exceed
12 months
from the acquisition date. Adjustments in the purchase price allocation may result in a change in the amount allocated to goodwill. All acquisition-related costs are expensed as incurred.
Share-Based Compensation:
We measure and recognize share-based compensation using the fair value method. See Note
21
for additional information regarding share-based compensation and our stock-based compensation plans.
Fair Value Measurements:
We measure fair value for financial reporting purposes based on a framework that prioritizes the inputs used to measure fair value for three broad categories of financial assets and liabilities as follows:
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Level 1 – Quoted prices in active markets for identical assets or liabilities.
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Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
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Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
|
The carrying amounts of our cash equivalents, restricted cash, accounts receivable, costs in excess of billings and estimated profit, other current assets, trade accounts payable, billings in excess of costs and estimated profit and accrued expenses at
December 31, 2017
and
2016
approximate fair value due to the short-term maturities of these instruments.
Derivative Instruments:
The Company uses derivative financial instruments (exchange-traded futures contracts, put options and call options) to manage a portion of the risk associated with changes in commodity prices specifically related to lumber. The Company monitors and manages this exposure as part of its overall risk management policy. As such, the Company seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results by taking hedging positions in these commodities. While the Company attempts to link its hedging activities to purchase and sale activities, there are situations in which these hedging activities can themselves result in losses. The Company does not hold or issue derivative financial instruments for trading or speculative purposes.
The Company accounts for its derivative activities under the provisions of ASC 815, Derivatives and Hedging (ASC 815). ASC 815 establishes accounting and reporting requirements requiring every derivative instrument be recorded on the balance sheet as either an asset or liability measured at fair value. Derivative instruments with settlement dates within one year are included in current assets or liabilities, whereas derivative instruments with settlement dates exceeding one year are included in non-current assets or liabilities. The Company calculates a net asset or liability for current and non-current derivative instruments for each counterparty based on the settlement dates within the respective contracts. The changes in fair value of these derivative financial instruments are recognized in current period earnings as the Company does not use hedge accounting. See Note
9
for additional information regarding derivatives.
Contingent Earn-outs:
We record contingent earn-outs received in business divestitures and contingent earn-outs given in acquisitions at their estimated fair values. Adjustments to fair value are recorded in current period earnings. We determine the fair value of contingent earn-out consideration (both receivable and payable) using discounted cash flow techniques based on all information available to us at the time, including estimates, assumptions and judgments we believe to be reasonable under the circumstances. Actual amounts realized or paid may differ from those estimated.
NOTE 4: RECENTLY ISSUED AND ADOPTED ACCOUNTING PROUNOUNCEMENTS
Recently Adopted
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
, which clarifies when changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the new guidance, modification accounting is only required if the fair value, vesting conditions or classification (equity or liability) of the new award are different from the original award immediately before the original award is modified. This update is effective for annual and interim financial statement periods beginning after December 15, 2017, with early adoption permitted. The new guidance must be applied prospectively to awards modified on or after the adoption date; consequently the impact will be dependent on whether the Company modifies any of its share-based payment awards and the nature of such modifications. There were no material impacts on the Company’s results based on the adoption of this update.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. The amendments in this ASU simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test and eliminating the requirement for a reporting unit with a zero or negative carrying amount to perform a qualitative assessment. Instead, under this pronouncement, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and would recognize an impairment change for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized is not
to exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects will be considered, if applicable. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted and should be adopted on a prospective basis. The Company has adopted this ASU on a prospective basis in the second quarter of 2017.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. The new guidance will require amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company has complied with this standard as of January 1, 2016.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(ASU 2016-09). Under ASU 2016-09, the tax effects of stock compensation will be recognized as income tax expense or benefit to the Company’s income statement and the tax effects of exercised or vested awards will be treated as discrete items in the reporting period in which they occur. Along with other income tax cash flows, excess tax benefits will be classified as operating activities, and cash paid by the Company when directly withholding shares for tax withholding purposes will be classified as financing activities. The Company has elected to account for forfeitures when they occur. This guidance was adopted on January 1, 2017, with no material impact to the Company’s consolidated financial statements.
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 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 this update effective January 1, 2017. There were no material impacts on the Company’s results based on the adoption of this update.
In July 2015, the FASB issued ASU No. 2015-11,
Simplifying the Measurement of Inventory
, which requires all inventory to be measured at the lower of cost and net realizable value, except for inventory that is accounted for using the LIFO or the retail inventory method, which will be measured under existing accounting standards. The new guidance must be applied on a prospective basis and was adopted on January 1, 2017 with no material impact on our consolidated financial statements.
Recently Issued
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
(“ASU 2016-02”). ASU 2016-02 requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in its balance sheet a liability to make lease payments and an asset representing its right to use the underlying asset for the lease term. The new standard is effective for the company on January 1, 2019. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company
will adopt the standard effective January 1, 2019 and has chosen to use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods prior to January 1, 2019. The new standard provides a number of optional practical expedients in transition. The Company has elected to apply the ‘package of practical expedients’ which allow us to not reassess i) whether existing or expired arrangements contain a lease, ii) the lease classification of existing or expired leases, or iii) whether previous initial direct costs would qualify for capitalization under the new lease standard. The Company has also elected to apply i) the practical expedient which allows us to not separate lease and non-lease components, and (2) the short-term lease exemption for all leases with an original term of less than 12 months, for purposes of applying the recognition and measurements requirements in the new standard. The Company expects that adoption of this standard will add an additional right to use asset of
$1.0 million
and an additional lease liability of
$1.0 million
The Company does not expect a material impact to the consolidated statement of operations or cash flows.
Subsequent to the issuance of ASU 2016-02, the FASB issued ASUs 2018-01, Land Easement Practical Expedient for Transition to Topic 842. This ASU does not change the core principle of the guidance in ASU 2016-02, instead this amendment is intended to clarify and improve operability of certain topics included within the credit losses standard. This ASU will have the same effective date and transition requirements as ASU 2016-02.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. This standard will supersede the revenue recognition requirements in ASC 605,
Revenue Recognition
, and most industry-specific guidance. The standard requires an entity to recognize revenue in an amount that reflects the consideration to which the entity expects to receive in exchange for goods or services. In addition, during 2016, the FASB has issued ASU No. 2016-08,
Principal versus Agent Considerations
,” ASU No. 2016-10, “
Identifying Performance Obligations and Licensing
,” ASU No. 2016-12, “
Narrow Scope Improvements and Practical Expedients
,” and ASU No. 2016-20, “
Technical Corrections and Improvements to Topic 606, Revenue
from Contracts with Customers
,” all of which clarify certain implementation guidance in ASU No. 2014-09. This standard along with the subsequent clarifications issued are effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years, making it effective for our fiscal year beginning January 1, 2018. Early adoption is permitted to the original effective date for annual reporting periods beginning after December 15, 2016. The Company has determined there will be no material changes to the consolidated financial statements with the exception of expanded disclosures on revenue to comply with the new ASU. The Company plans to use the modified retrospective method of adoption.
5.
RESTRICTED CASH
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statement of cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
2016
|
|
Cash and cash equivalents
|
$
|
48
|
|
$
|
1,247
|
|
|
Restricted cash
|
482
|
|
150
|
|
|
Total cash, cash equivalents, and restricted cash shown in the consolidated statement of cash flows
|
$
|
530
|
|
$
|
1,397
|
|
Amounts included in restricted cash represent
$0.43 million
on deposit with Gerber Finance from time-to-time as additional collateral to support borrowing under the KBS loan agreement and an additional
$50.0 thousand
on deposit with INTL FC Stone related to our lumber commodity hedging program.
NOTE
6
: BUSINESS COMBINATION
On October 4, 2016, the Company acquired certain assets of EdgeBuilder Wall Panels, Inc. and Glenbrook Lumber & Supply, Inc. (collectively, 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 (the “Purchase Agreement”), 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 business activities include selling lumber and building supplies and manufacturing and selling prefabricated wall panels for commercial and residential construction applications and permanent wood foundation systems for residential buildings. We acquired EBGL because we believe that there is significant growth opportunity in the structural wall panel, permanent wood foundation systems and local building supply businesses. We believe that the acquisition of EBGL, along with the acquisition of KBS in 2014, provide ATRM with the potential to return to profitability.
Consideration for the EBGL Acquisition totaled approximately
$5.2 million
and included (i)
$3.0 million
in cash paid at closing and
$1.0 million
of deferred payments payable to the EBGL Sellers in four equal installments on the first day of each of the next four fiscal quarters beginning January 1, 2017, (ii)
100,000
shares of the Company’s common stock, (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 EBGL Sellers related to the purchased assets. The cash portion of the purchase price was subject to a post-closing adjustment based on the amount of inventory and pre-paid expenses included in the purchased assets. Such price adjustment resulted in a
$0.2 million
increase in the purchase price, which amount was paid by the Company to the EBGL Sellers in January 2017. The shares issued as part of the purchase price are subject to transfer restrictions for
12 months
following the closing. The Purchase Agreement provided that the potential earn-out payment tied to EBGL’s future gross profit would be calculated based on the EBGL Sellers’ historical accounting practices. The EBGL Sellers’ historical accounting practices were not fully compliant with GAAP including not following contract accounting rules for their large long-term wall panel contracts, differences in classification of certain costs which under GAAP would be considered costs-of-goods-sold (which were included below gross profit) and certain costs which were accounted for on a cash versus accrual basis of accounting.
The purchase price and the allocation of the purchase price were as follows (in thousands):
|
|
|
|
|
|
|
|
Purchase price:
|
|
|
Cash paid at closing
|
$
|
2,960
|
|
|
Fair value of deferred payments owing to EBGL Sellers
|
941
|
|
|
Fair value of contingent earn-out liability
|
943
|
|
|
ATRM common stock (100,000 shares at $1.49 per share)
|
149
|
|
|
Purchase price adjustment – paid in January 2017
|
218
|
|
|
Total purchase price
|
$
|
5,211
|
|
|
|
|
|
|
|
|
|
Allocation of purchase price:
|
|
|
Assets acquired:
|
|
|
Inventories
|
$
|
898
|
|
|
Costs and estimated profit in excess of billings
|
93
|
|
|
Prepaid expenses
|
3
|
|
|
Equipment
(1)
|
289
|
|
|
Goodwill
(2)
|
3,020
|
|
|
Customer relationships
(2)(3)
|
677
|
|
|
Tradenames
(2)
|
104
|
|
|
Purchased backlog
(2)(3)
|
300
|
|
|
Total assets acquired
|
5,384
|
|
|
|
|
|
Liabilities assumed:
|
|
|
Billings in excess of costs and estimated profits
|
(31
|
)
|
|
Accrued compensation
|
(40
|
)
|
|
Accrued other liabilities
|
(102
|
)
|
|
Total liabilities assumed
|
(173
|
)
|
|
|
|
|
Net assets acquired
|
$
|
5,211
|
|
|
|
|
|
(1)
|
The fair value of equipment was determined based primarily on an independent appraisal.
|
|
|
|
|
(2)
|
Goodwill and tradenames are considered indefinite-lived assets and are not subject to future amortization, but will be tested for impairment at least annually.
Goodwill is comprised primarily of manufacturing processes and knowhow, assembled workforce and other intangible assets that do not qualify for separate recognition. The full amount of goodwill is expected to be deductible for tax purposes.
|
|
|
|
|
(3)
|
The amortization period for customer relationships is
six years
. Purchased backlog will be amortized over the period that the related contracts are completed, which is expected to be less than
one year
.
|
On June 30, 2017, as described in Note
17
, we entered into an agreement to amend the Purchase Agreement in which the parties agreed to replace the
three
remaining installments of the deferred payments to the EBGL Sellers (
$0.75 million
) and the contingent earn-out payment (
$0.9 million
) with set monthly payments totaling
$1.8 million
, payable in an initial
$0.2 million
payment made on or about July 3, 2017 and
16
monthly installments beginning August 1, 2017 and ending on November 1, 2018.
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 EBGL for the year ended
December 31, 2016
as if the EBGL Acquisition had occurred on January 1, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
Pro forma net sales
|
|
$
|
40,589
|
|
|
Pro forma net loss
|
|
(5,880
|
)
|
|
Pro forma loss per share – basic and diluted
|
|
(2.51
|
)
|
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 EBGL acquisition of approximately
$0.2 million
in fiscal year
2016
. These costs are included in the caption “Selling, general and administrative expenses” in our consolidated statement of operations.
NOTE
7
: CONTINGENT EARN-OUT RECEIVABLE
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. Royalties earned are subject to certain qualifications and adjustments. The royalty percentage was
12%
as of the quarter ended December 31, 2015 and decreases
0.75%
each quarter thereafter. Royalty payments are due
60
days after the end of each calendar quarter. We received payments totaling approximately
$0.5 million
and
$0.3 million
at
December 31, 2017
and
2016
, respectively. The contingent earn-out receivable totaled approximately
$0.4 million
and
$0.6 million
at
December 31, 2017
and
2016
, respectively.
NOTE
8
: FAIR VALUE MEASUREMENTS
Financial assets and liabilities reported at fair value on a recurring basis include the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
|
Lumber derivative contracts (Level 1)
|
|
$
|
9
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Contingent earn-out receivable (based on Level 3 inputs):
|
|
|
|
|
|
Current portion
|
|
$
|
373
|
|
|
$
|
359
|
|
|
Noncurrent portion
|
|
61
|
|
|
202
|
|
|
Total
|
|
$
|
434
|
|
|
$
|
561
|
|
|
Contingent earn-out payable (based on Level 3 inputs):
|
|
$
|
—
|
|
|
$
|
(967
|
)
|
Our Level 1 assets (lumber derivative contracts) fair value is based upon quoted market prices.
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, 2015
|
|
$
|
877
|
|
|
$
|
—
|
|
|
Add – fair value of earn-out liability at closing of EBGL Acquisition
|
|
—
|
|
|
(943
|
)
|
|
Subtract – net decrease based on re-assessments (included in earnings)
|
|
(4
|
)
|
|
—
|
|
|
Add – net increase based on re-assessments (included in earnings)
|
|
—
|
|
|
(24
|
)
|
|
Settlements
|
|
(312
|
)
|
|
—
|
|
|
Balance at December 31, 2016
|
|
561
|
|
|
(967
|
)
|
|
Add – adjustment based on re-assessments
|
|
361
|
|
|
—
|
|
|
Add – net decrease based on re-assessments
|
|
—
|
|
|
76
|
|
|
Subtract - settlements
|
|
(488
|
)
|
|
—
|
|
|
Subtract - amendment (see Note 17)
|
|
—
|
|
|
891
|
|
|
Balance at December 31, 2017
|
|
$
|
434
|
|
|
$
|
—
|
|
|
|
|
|
(1)
|
Earn-out receivable related to the transfer of our test handler product line in 2014 (see Note
7
).
|
|
|
|
|
(2)
|
Earn-out payable related to the EBGL Acquisition in 2016 (see Note
6
).
|
Quantitative information about Level 3 fair value assets and liabilities measured on a recurring basis at
December 31, 2017
is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
Fair Value Asset/Liability
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Amount
|
|
Contingent earn-out receivable related to transfer of test handler product line
|
|
Discounted cash flow
|
|
Total actual revenue for the remaining royalty period Performance weighted average Discount rate
|
|
$6.9 million
100%
2.41% to 2.64%
|
Quantitative information about Level 3 fair value assets measured on a recurring basis at
December 31, 2016
is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
Fair Value Asset/Liability
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Amount
|
|
Contingent earn-out receivable related to transfer of test handler product line
|
|
Discounted cash flow
|
|
Estimated revenue for remaining royalty period
Performance weighted average
Discount rate
|
|
$11 million
60% to 125%
10%
|
|
|
|
|
|
|
|
|
|
Contingent earn-out payable related to purchase of EBGL
|
|
Discounted cash flow
|
|
Estimated gross profit for earn-out period
Discount rate
|
|
$3.4 million
10%
|
Quantitative information about Level 3 fair value assets and liabilities measured on a nonrecurring basis at
December 31, 2017
is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
Fair Value Asset/Liability
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Amount
|
|
Goodwill
|
|
Discounted cash flow
|
|
Projected annual revenue
Annual revenue growth rate
Discount rate
|
|
$17.5 million
3.0% to 7.1%
13.6%
|
Quantitative information about Level 3 fair value assets and liabilities measured on a nonrecurring basis at
December 31, 2016
is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
Fair Value Asset/Liability
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Amount
|
|
Goodwill
|
|
Discounted cash flow
|
|
Projected annual revenue
Annual revenue growth rate
Discount rate
|
|
$32 million
0.0%
13.6%
|
Financial assets reported at fair value on a nonrecurring basis include the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2017
|
|
2016
|
|
|
|
Fair Value
(Level 3)
|
|
Total Gains
and (Losses)
(1)
|
|
Fair Value
(Level 3)
|
|
Total Gains
and (Losses)
(2)
|
|
Goodwill
|
|
$
|
—
|
|
|
$
|
(3,020
|
)
|
|
$
|
—
|
|
|
$
|
(1,733
|
)
|
(1)
We recorded a goodwill impairment charge of approximately
$3.0 million
in year 2017 in connection with the write-off of EBGL goodwill to it's fair value of
$0
(see Note
12
).
(2)
We recorded a goodwill impairment charge of approximately
$1.7 million
in year 2016 in connection with the write-off of the remaining goodwill related to the KBS acquisition to it's fair value of
$0
(see Note
12
).
The following table summarizes the activity for our Level 3 assets measured on a nonrecurring basis (in thousands):
|
|
|
|
|
|
|
|
|
Goodwill
(1)
|
|
Balance at December 31, 2015
|
$
|
1,733
|
|
|
Subtract – KBS goodwill impairment recorded at June 30, 2016 (included in earnings)
|
(1,733
|
)
|
|
Add - acquisition of EBGL
|
3,020
|
|
|
Balance at December 31, 2016
|
3,020
|
|
|
Subtract - EBGL goodwill impairment recorded at June 30, 2017 (included in earnings)
|
(3,020
|
)
|
|
Balance at December 31, 2017
|
$
|
—
|
|
|
|
|
|
(1)
|
For more information regarding Goodwill, see Note
12
.
|
NOTE
9
: DERIVATIVES
The Company occasionally enters into lumber derivative contracts in order to protect its gross profit margins from fluctuations caused by volatility in lumber prices. At
December 31, 2017
, the Company had a net long (buying) position of
330,000
board feet under
three
lumber derivatives contracts with a fair value of
$5.2 thousand
which is included in other current assets. In addition, at
December 31, 2017
, the Company has a long position of
1,100,000
board feet under
ten
different lumber derivative call contracts and has a short position of
1,100,000
board feet under
ten
different lumber derivative put contracts, with a net fair value of
$3.9 thousand
which is also included in other current assets. At December 31, 2016, the Company had no lumber derivative contracts outstanding. The Company had restricted cash on deposit with the broker totaling
$52.3 thousand
at
December 31, 2017
.
Gains (losses) from derivative instruments, none of which are designated as hedging instruments, are recorded in cost of goods sold in the Company’s statements of operations and included the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Realized gains, net
|
|
$
|
37
|
|
|
Unrealized gains, net
|
|
6
|
|
|
Total
|
|
$
|
43
|
|
NOTE 10: ACCOUNTS RECEIVABLE, NET
Accounts receivable are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
|
Contract billings
|
|
$
|
3,751
|
|
|
$
|
2,330
|
|
|
Retainage
|
|
274
|
|
|
370
|
|
|
Subtotal
|
|
4,025
|
|
|
2,700
|
|
|
Less - allowance for doubtful accounts
|
|
(185
|
)
|
|
(96
|
)
|
|
Accounts receivable, net
|
|
$
|
3,840
|
|
|
$
|
2,604
|
|
Retainage balances are expected to be collected within the next twelve months.
NOTE 11: INVENTORIES
At
December 31, 2017
and
2016
, inventories totaled approximately
$1.3 million
and
$1.4 million
, respectively, and consisted of raw materials inventory. There are no finished goods or work-in-process inventory included in the inventory balances as of
December 31, 2017
or
2016
.
NOTE
12
: GOODWILL AND INTANGIBLE ASSETS
Intangible assets are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
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
|
|
|
Trademarks
|
|
394
|
|
|
—
|
|
|
394
|
|
|
394
|
|
|
—
|
|
|
394
|
|
|
Total
|
|
394
|
|
|
—
|
|
|
394
|
|
|
3,414
|
|
|
—
|
|
|
3,414
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
2,097
|
|
|
$
|
(902
|
)
|
|
1,195
|
|
|
2,097
|
|
|
$
|
(586
|
)
|
|
1,511
|
|
|
Purchased backlog
|
|
1,290
|
|
|
(1,290
|
)
|
|
—
|
|
|
1,290
|
|
|
(1,078
|
)
|
|
212
|
|
|
Total
|
|
3,387
|
|
|
(2,192
|
)
|
|
1,195
|
|
|
3,387
|
|
|
(1,664
|
)
|
|
1,723
|
|
|
Total intangible assets
|
|
$
|
3,781
|
|
|
$
|
(2,192
|
)
|
|
$
|
1,589
|
|
|
$
|
6,801
|
|
|
$
|
(1,664
|
)
|
|
$
|
5,137
|
|
The following table summarizes the activity for Goodwill (in thousands):
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Balance at December 31, 2015
|
$
|
1,733
|
|
|
Subtract – KBS goodwill impairment recorded at June 30, 2016 (included in earnings)
|
(1,733
|
)
|
|
Add - acquisition of EBGL
|
3,020
|
|
|
Balance at December 31, 2016
|
3,020
|
|
|
Subtract - EBGL goodwill impairment recorded at June 30, 2017 (included in earnings)
|
(3,020
|
)
|
|
Balance at December 31, 2017
|
$
|
—
|
|
The Company performs an annual assessment of goodwill during the second quarter. Since the acquisition of EBGL in 2016, EBGL’s operating results have lagged behind management’s expectations. Rising lumber costs and other factors have resulted in lower-than-expected gross profit margins and net losses. We completed our annual goodwill impairment assessment as of June 30, 2017 and determined that the carrying value of the EBGL goodwill exceeded the estimated fair value by
$3.0 million
at that date. Accordingly, a goodwill impairment charge of approximately
$3.0 million
was recorded in the quarter ended June 30, 2017.
We completed a goodwill impairment assessment as of September 30, 2016 and determined that the carrying value of the KBS goodwill exceeded the fair value by
$1.7 million
at that date. Since the acquisition of KBS in 2014, KBS’s operating results had lagged behind management’s expectations. Despite the implementation of its strategic plans for change at KBS, which had begun to materialize in KBS’s overall operating results, KBS continued to underperform our projected levels of net revenue and net income. Accordingly, we recorded a goodwill impairment charge of approximately
$1.7 million
in 2016.
Amortization expense amounted to approximately
$0.5 million
and
$0.3 million
in
2017
and
2016
, respectively. Estimated amortization of purchased intangible assets is as follows over the next five years (in thousands):
|
|
|
|
|
|
|
|
2018
|
$
|
316
|
|
|
2019
|
315
|
|
|
2020
|
315
|
|
|
2021
|
164
|
|
|
2022
|
85
|
|
|
Thereafter
|
—
|
|
|
Total
|
$
|
1,195
|
|
NOTE 13: UNCOMPLETED CONSTRUCTION CONTRACTS
The status of uncompleted construction contracts is summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
|
Costs incurred on uncompleted contracts
|
|
$
|
5,528
|
|
|
$
|
6,575
|
|
|
Inventory purchased for specific contracts
|
|
403
|
|
|
837
|
|
|
Estimated profit
|
|
612
|
|
|
1,150
|
|
|
Subtotal
|
|
6,543
|
|
|
8,562
|
|
|
Less billings to date
|
|
(6,961
|
)
|
|
(8,169
|
)
|
|
Total
|
|
$
|
(418
|
)
|
|
$
|
393
|
|
|
Included in the following balance sheet captions:
|
|
|
|
|
|
|
|
Costs and estimated profit in excess of billings
|
|
$
|
565
|
|
|
$
|
1,045
|
|
|
Billings in excess of costs and estimated profit
|
|
(983
|
)
|
|
(652
|
)
|
|
Total
|
|
$
|
(418
|
)
|
|
$
|
393
|
|
The Company has approximately
$8.2 million
of work under contract remaining to be recognized at
December 31, 2017
.
NOTE 14: ACCOUNTS PAYABLE RETAINAGE
Accounts payable of approximately
$4.9 million
at
December 31, 2017
included retainage amounts due to subcontractors totaling approximately
$0.1 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
December 31, 2017
are expected to be settled within the next twelve months.
NOTE
15
: OTHER ACCRUED LIABILITIES
Other accrued liabilities are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
|
Accrued taxes
|
|
$
|
1,562
|
|
|
$
|
739
|
|
|
Accrued sales rebates
|
|
420
|
|
|
327
|
|
|
Accrued health insurance costs
|
|
285
|
|
|
96
|
|
|
Accrued warranty
|
|
50
|
|
|
49
|
|
|
Other
|
|
33
|
|
|
416
|
|
|
Accrued interest expense
|
|
20
|
|
|
637
|
|
|
Total other accrued liabilities
|
|
$
|
2,370
|
|
|
$
|
2,264
|
|
The following table summarizes product warranty expense accruals and settlements for the two years ended
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual
balance at
beginning of
year
|
|
Accruals for
warranties
|
|
Settlements
made
|
|
Accrual
balance at
end of
year
|
|
2017
|
|
$
|
49
|
|
|
$
|
91
|
|
|
$
|
(90
|
)
|
|
$
|
50
|
|
|
2016
|
|
39
|
|
|
116
|
|
|
(106
|
)
|
|
49
|
|
NOTE
16
: NOTES PAYABLE
As of
December 31, 2017
, we had outstanding revolving lines of credit of approximately
$6.0 million
. Our notes payable primarily included (i)
$3.8 million
principal outstanding on KBS’s
$4.0 million
revolving credit facility under the KBS Loan Agreement and (ii)
$2.2 million
principal outstanding on EBGL’s
$3.0 million
revolving credit facility under the Premier Loan Agreement, net of an immaterial amount of unamortized financing fees.
KBS Loan Agreement
The KBS Loan Agreement provides KBS with a revolving line of credit with borrowing availability of up to
$4.0 million
. Availability under the line of credit is based on a formula tied to KBS’s eligible accounts receivable, inventory, real estate and other collateral. The KBS Loan Agreement was scheduled to expire on February 22, 2018, but, under the terms of the agreement, was extended automatically for an additional
one
-year period ending on February 22, 2019. Under the terms of the agreement, the KBS Loan Agreement was extended automatically for an additional
one
-year period ending on February 22, 2020. The KBS Loan Agreement will extend again automatically for an additional
one
-year period unless a party provides prior written notice of termination. Upon the final expiration of the term of the KBS Loan Agreement, the outstanding principal balance is payable in full. Borrowings bear interest at the prime rate plus
2.75%
, with interest payable monthly. The KBS Loan Agreement also provides for certain fees payable to Gerber Finance during its term, including a
1.5%
annual facilities fee and a
0.10
% monthly collateral monitoring fee. KBS’s obligations under the KBS Loan Agreement are secured by all of its property and assets and are guaranteed by ATRM. Unsecured promissory notes issued by KBS and ATRM are subordinate to KBS’s obligations under the KBS Loan Agreement. The KBS Loan Agreement contains representations, warranties, affirmative and negative covenants, events of default and other provisions customary for financings of this type. Financial covenants require that KBS maintain a maximum leverage ratio (as defined in the KBS Loan Agreement) and KBS not incur a net annual post-tax loss in any fiscal year during the term of the KBS Loan Agreement. At December 31, 2017, approximately
$3.8 million
was outstanding under the KBS Loan Agreement, which after offset of an immaterial amount of unamortized deferred financing costs, is presented at a net amount of approximately
$3.8 million
on the Consolidated Balance Sheet.
On June 30, 2017, the parties to the Acquisition Loan Agreement entered into a Second Agreement of Amendment to Loan and Security Agreement to amend the Acquisition Loan Agreement to waive certain covenants and to make certain amendments in connection with the termination of the EBGL Loan Agreement and refinancing under the Premier Loan Agreement.
On June 30, 2017, the parties to the KBS Loan Agreement entered into a Third Agreement of Amendment to Loan and Security Agreement providing for increased availability under the KBS Loan Agreement to KBS under certain circumstances, and certain other changes, as well as a waiver of certain covenants.
On July 20, 2017, the parties to the KBS Loan Agreement entered into a Fourth Agreement of Amendment to Loan and Security Agreement providing for increased availability under the KBS Loan Agreement to KBS for new equipment additions, as well as a waiver for certain covenants.
On September 29, 2017, the parties to the KBS Loan Agreement entered into a Fifth Agreement of Amendment to Loan and Security Agreement and the parties to the Acquisition Loan Agreement entered into a Third Agreement of Amendment to Loan and Security Agreement in conjunction with the Exchange with Lone Star Value Investors, LP ("LSVI") and LSV Co-Invest (see discussion below).
On December 22, 2017, the parties to the KBS Loan Agreement entered into a Sixth Agreement of Amendment to Loan and Security Agreement providing for increased availability under the KBS Loan Agreement to KBS under certain circumstances, and certain other changes. In connection with this amendment to the KBS Loan Agreement, Jeffrey E. Eberwein, Chairman of the Company's Board of Directors (the "Board"), executed a guaranty dated November 20, 2017 in favor of Gerber Finance unconditionally guaranteeing up to
$0.5 million
of KBS’s obligations under the KBS Loan Agreement arising from certain permitted overadvances. On December 22, 2017, the Company also entered into a Fourth Agreement of Amendment to Loan and Security Agreement to amend the terms of the Acquisition Loan Agreement to reflect certain changes made to the KBS Loan Agreement.
As of December 31, 2017 and 2018, KBS was not in compliance with the financial covenants requiring no net annual post-tax loss for KBS or the minimum leverage ratio covenant as of these test dates. Additionally, KBS was not in compliance with the requirement to deliver the Company's fiscal year-end financial statements reviewed by an independent certified accounting firm acceptable to Gerber Finance within
105 days
from the fiscal year ended December 31, 2017. The occurrence of any event of default under the KBS Loan Agreement may result in KBS’s obligations under the KBS Loan Agreement becoming immediately due and payable. In April 2019, we obtained a waiver from Gerber Finance for these events. In addition obtaining a waiver for these covenants, the Company and Gerber Finance agreed to eliminate the minimum leverage ratio covenant for fiscal years after 2018 (see further discussion in Note 27). The Company currently projects that it will be in compliance with the covenant requiring no net annual post-tax loss for KBS. If the Company fails to comply with any financial covenants under our loan agreements with Gerber Finance going forward, Gerber Finance may demand the repayment of the credit facilities amount outstanding and any unpaid interest thereon.
EBGL Line of Credit
On October 4, 2016, concurrently with the EBGL Acquisition, the Company entered the EBGL Loan Agreement with Gerber Finance providing EBGL with a revolving working capital line of credit of up to
$3.0 million
. Availability under the EBGL Loan Agreement was based on a formula tied to the borrowers’ eligible accounts receivable, inventory and equipment. The initial term of the EBGL Loan Agreement was set to expire on October 3, 2018, but extended automatically for additional
one
-year periods unless a party provided prior written notice of termination. Borrowings bear interest at the prime rate plus
2.75%
, with interest payable monthly and the outstanding principal balance was 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
$0.5 million
upon the request of the borrowers and in the discretion of Gerber Finance. 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 contained representations, warranties, affirmative and negative covenants, events of default and other provisions customary for financings of this type. Financial covenants required that EBGL maintained a minimum tangible net worth and a minimum debt service coverage ratio. 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.
On June 30, 2017, EBGL entered into a Revolving Credit Loan Agreement (the “Premier Loan Agreement”) with Premier Bank (“Premier”) providing EBGL with a working capital line of credit of up to
$3.0 million
. The Premier Loan Agreement replaced the EBGL Loan Agreement with Gerber Finance, which was terminated on the same date. Availability under the Premier Loan Agreement is based on a formula tied to EBGL’s eligible accounts receivable, inventory and equipment, and borrowings bear interest at the prime rate plus
1.50%
, with interest payable monthly and the outstanding principal balance payable upon expiration of the term of the Premier Loan Agreement. The Premier Loan Agreement also provides for certain fees payable to Premier during its term. The initial term of the Premier Loan Agreement was scheduled to expire on June 30, 2018, but was extended by Premier until February 1, 2019. In February 2019, the Premier Loan Agreement was extended further by Premier until August 1, 2019. The Premier Loan Agreement may be further extended from time to time at our request, subject to approval
by Premier. EBGL’s obligations under the Premier Loan Agreement are secured by all of their inventory, equipment, accounts and other intangibles, fixtures and all proceeds of the foregoing.
As of December 31, 2017, and 2018, EBGL was not in compliance with the following covenants under the Premier Loan Agreement: (i) requirement to maintain a Debt Service Coverage Ratio for the calendar year of at least
1.0
;
and (ii) a requirement to deliver the Company's fiscal year-end audited financial statements within
120 days
of the end of each calendar year. The occurrence of any event of default under the Premier Loan Agreement may result in EBGL’s obligations under the Premier Loan Agreement becoming immediately due and payable. In April 2019, we obtained a waiver from Premier Bank for these events through August 1, 2019 (the current maturity date of the Premier Loan Agreement).
If the Company fails to comply with any financial covenants under our loan agreements with Gerber Finance or Premier Bank going forward, the applicable lender(s) may demand the repayment of the credit facilities amount outstanding and any unpaid interest thereon.
The Premier Loan Agreement contains representations, warranties, affirmative and negative covenants, events of default and other provisions customary for financings of this type. The occurrence of any event of default under the Premier Loan Agreement may result in the obligations of EBGL becoming immediately due and payable.
As a condition to closing the Premier Loan Agreement, each of the Company and Jeffrey E. Eberwein, Chairman of the Company's Board, executed a guaranty, dated as of the same date, in favor of Premier, absolutely and unconditionally guaranteeing all of EBGL’s obligations under the Premier Loan Agreement.
In connection with EBGL’s entry into the Premier Loan Agreement, and on the same date, EBGL repaid in full all of their obligations under and terminated the EBGL Loan Agreement. Pursuant to the termination of the EBGL Loan Agreement, all obligations of the Company in favor of Gerber Finance in connection with the EBGL Loan Agreement were extinguished.
NOTE
17
: LONG-TERM DEBT
Long-term debt is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
|
Promissory note payable to Gerber Finance, secured, interest at the current prime rate plus 3.0% payable monthly with any unpaid principal and interest due on December 31, 2018 (automatically extended to December 31, 2019 as neither party elected to terminate), supported by pledge agreement between LSVI and Gerber Finance of up to $3 million plus additional fees
|
|
$
|
3,000
|
|
|
$
|
3,000
|
|
|
Amended deferred payments to EBGL Sellers, inclusive of interest (imputed at 15.14%), monthly payments of $100,000 beginning on August 1, 2017 through November 1, 2018; amount paid in full in November 2018
|
|
1,034
|
|
|
—
|
|
|
EBGL computer equipment and software financing, secured by underlying assets, interest at 9.0% per annum, payable in monthly installments of $1,105 per month, through May 2022
|
|
48
|
|
|
—
|
|
|
KBS software installment payment agreement, unsecured, interest at 8.0% per annum, payable in monthly installments of $1,199 through September 2020
|
|
35
|
|
|
46
|
|
|
Revolving equipment credit line, unsecured
|
|
12
|
|
|
—
|
|
|
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 (these notes, plus accrued interest, were exchanged for Series B Stock, as defined below, on September 29, 2017)
|
|
—
|
|
|
6,773
|
|
|
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 (these notes, plus accrued interest, were exchanged for Series B Stock, as defined below, on September 29, 2017)
|
|
—
|
|
|
4,261
|
|
|
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; paid in full on July 6, 2017
|
|
—
|
|
|
678
|
|
|
Notes payable, secured by equipment, interest rate at 5.0% per annum, payable in monthly installments of $2,253 through October 2017; paid in full in October 2017
|
|
—
|
|
|
22
|
|
|
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; the Company amended the terms of the deferred payments to EBGL Sellers on June 30, 2017
|
|
—
|
|
|
964
|
|
|
Total long-term debt
|
|
4,129
|
|
|
15,744
|
|
|
Current portion
|
|
(1,068
|
)
|
|
(1,675
|
)
|
|
Noncurrent portion
|
|
$
|
3,061
|
|
|
$
|
14,069
|
|
Under the terms of the amended LSVI and LSV Co-Invest I promissory notes, the Company, at its sole option, may to 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 to make 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. An additional
$0.6 million
of PIK Interest was added to the principal balance of the LSVI and LSV Co-Invest I promissory notes as of June 30, 2017.
On March 31, 2017, ATRM entered into a 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. ATRM’s entry into the securities purchase agreement with LSV Co-Invest I was approved by a Special Committee of our Board consisting solely of independent directors.
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
.
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.
On June 30, 2017, the Company entered into a Second Agreement of Amendment to Loan and Security Agreement to amend the Acquisition Loan Agreement to waive certain covenants and to make certain amendments in connection with the termination of the EBGL Loan Agreement and refinancing under the Premier Loan Agreement.
Amended Asset Purchase Agreement
On June 30, 2017, the Company and the EBGL Sellers agreed to amend the Asset Purchase Agreement, dated as of October 4, 2016 (as amended, the “EBGL Asset Purchase Agreement”). Under the terms of this amendment, EBGL’s obligations to pay certain deferred payments to the EBGL Sellers (
$0.75 million
) and the contingent earn-out payment (carrying value of
$0.89 million
) were replaced with set monthly payments totaling
$1.8 million
, payable with an initial
$0.2 million
payment on or about July 3, 2017 and 2016 monthly installments of
$0.1 million
beginning August 1, 2017 and ending on November 1, 2018. The initial
$0.2 million
payment was made on June 30, 2017. The restructured obligation was accounted for as a modification of the original obligations. Accordingly, the carrying value at June 30, 2017 of the remaining obligations under the amended agreement (totaling
$1.6 million
, comprised of the remaining
16
monthly installments of
$0.1 million
per month, after the initial payment of
$0.2 million
was made on June 30, 2017) is equivalent to the total carrying value of the original obligations totaling
$1.44 million
at June 30, 2017, immediately prior to the amendment. This represents the estimated fair value of the amended obligation to the EBGL sellers (future cash flows discounted using a rate of
15.14%
). The Company has subsequently made all remaining payments with the final payment made in November 2018 in full satisfaction of the obligations to the EBGL Sellers.
Preferred Stock Exchange
On September 29, 2017, the Company, LSVI, and LSV Co-Invest I entered into an exchange agreement dated as of the same date (the "Exchange Agreement"), pursuant to which the Company issued to LSVI and LSV Co-Invest I, a total of
132,548
shares of a new class of
10.0%
Series B Cumulative Preferred Stock ("Series B Stock"), par value
$0.001
per share, of the Company in exchange for the return and cancellation of all of the unsecured promissory notes of the Company (the "Notes") held by LSVI and LSV Co-Invest I, along with accrued interest (the "Exchange"). The Notes had an aggregate of
$13.3 million
unpaid principal and accrued and unpaid interest outstanding at the time of their cancellation (see Note 20 for additional information).
On September 29, 2017, in connection with the Exchange, the Company entered into a Registration Rights Agreement dated as of the same date (the "Registration Rights Agreement"), with LSVI and LSV Co-Invest. The Registration Rights Agreement provides that at any time after October 15, 2018, upon the written request of the holders of at least 66 2/3% of the shares of Series B Stock issued in the Exchange that qualify as registrable securities as defined therein, the Company will prepare and file with the Securities and Exchange Commission ("SEC") a registration statement covering the resale of those shares by their holders. No request has been made to date.
At the time of the Exchange, LSVI also owned
1,067,855
shares of the Company's common stock, or approximately
45%
of the shares outstanding. Additionally,
10,000
shares of the Company's common stock were held in an account managed by LSVM, an affiliate of LSVI and LSV Co-Invest I. Jeffrey E. Eberwein, Chairman of the Company's Board, is manager of LSVGP, the general partner of LSVI and LSV Co-Invest I, and the sole member of LSVM, the investment manager of LSVI and therefore, may be deemed to beneficially own the securities owned by LSVI and the securities held in the account managed by LSVI. The terms of the Exchange and the Series B Stock were negotiated and approved by a Special Committee of the Board consisting solely of disinterested and independent directors.
On September 29, 2017, in connection with the Exchange, the Company entered into amendments to its two Loan and Security Agreements (as amended, the "Loan Agreements") with Gerber Finance to permit the Exchange and the Company's payment of in-kind dividends on the Series B Stock, by the issuance of additional shares of Series B Stock, in accordance with the terms of the Series B Stock (as described above). Under the Loan Agreements, the Company is not permitted to pay cash
dividends on the Series B Stock without the consent of Gerber Finance. Additionally, in connection with the Exchange, the subordination agreements by and among the Company, LSVI, LSV Co-Invest I and Gerber Finance, providing for the subordination of the Company's obligations under the Notes to its obligations to Gerber Finance, were terminated.
Subsequently, in 2018, the Company issued new promissory notes to LSV Co-Invest I in the total principal amount of
$1.4 million
. See further discussion in Note
27
.
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.
Future maturities of long-term debt are summarized below:
|
|
|
|
|
|
|
|
2018
|
$
|
1,068
|
|
|
2019
|
3,023
|
|
|
2020
|
21
|
|
|
2021
|
12
|
|
|
2022
|
5
|
|
|
Total long-term debt
|
$
|
4,129
|
|
NOTE 18: LEGAL PROCEEDINGS
The Company is and may become involved in various lawsuits as well as other certain legal proceedings that arise in the ordinary course of business. Information regarding certain material proceedings is provided below.
UTHE Technology Corporation v. Aetrium Incorporated
Since December 1993, an action brought by UTHE Technology Corporation (“UTHE”) against ATRM and its then sales manager for Southeast Asia (“Sales Manager”), asserting federal securities claims, a RICO claim, and certain state law claims, had been stayed in the United States District Court for the Northern District of California. UTHE’s claims were based on its allegations that four former employees of a Singapore company, which UTHE formerly owned, conspired to and did divert business from the subsidiary, and directed that business to themselves and a secret company they had formed, which forced UTHE to sell its subsidiary shares to the former employee defendants at a distressed price. The complaint alleged that ATRM and the Sales Manager participated in the conspiracy carried out by the former employee defendants. In December 1993, the case was dismissed as to the former employee defendants because of a contract requiring UTHE and them to arbitrate their claims in Singapore. The district court stayed the case against ATRM and the Sales Manager pending the resolution of arbitration in Singapore involving UTHE and three of the former employee defendants, but not involving ATRM or the Sales Manager. ATRM received notice in March 2012 that awards were made in the Singapore arbitration against one or more of the former employee defendants who were parties to the arbitration. In June 2012, UTHE filed a motion to reopen the case against ATRM and the Sales Manager and to lift the stay, which the court granted. On September 13, 2013, the court entered final judgment dismissing all remaining claims UTHE asserted against ATRM in the litigation. On September 23, 2013, UTHE appealed the district court judgment to the United States Court of Appeal for the Ninth Circuit only as to the dismissal of UTHE’s RICO claim. The appeal was argued in a court hearing on November 19, 2015. On December 11, 2015, the court of appeal issued an order reversing the district court’s grant of summary judgment of UTHE’s RICO claim and remanded the case back to the district court for further proceedings. On July 14, 2016, ATRM filed a motion for summary judgment in the district court seeking dismissal of the sole remaining RICO claim. On August 26, 2016, the district court granted ATRM’s motion for summary judgment and dismissed the case. On September 19, 2016, UTHE filed its appeal to the Ninth Circuit of the district court’s grant of summary judgment and dismissal. The parties completed the appellate briefing on February 13, 2017. Oral arguments were held by the appellate court on February 14, 2018. On July 2, 2018, the Ninth District Court of Appeals rendered its decision affirming the District Court’s opinion and upheld the dismissal of the case against ATRM. UTHE did not appeal that decision to the Supreme Court of the United States by the October 1, 2018 deadline. As such, this Ninth Circuit affirmance of the case dismissal stands, and the lawsuit has been successfully and completely defeated by the Company.
KBE Building Corporation v. KBS Builders, Inc., and ATRM Holdings, Inc., et. al.
At the time of the KBS acquisition in April 2014, KBS purchased receivables for a construction project known as the Nelton Court Housing Project (“Nelton Court”) in Hartford, CT, and also performed certain “punch-list” and warranty work.
Modular units for Nelton Court were supplied by KBS Building Systems, Inc. (“KBS-BSI”) pursuant to a contract with KBE Building Corporation (“KBE”). KBE has asserted claims against KBS-BSI, KBS and ATRM arising out of alleged delays, and for the repair of certain alleged defects in the modular units supplied to the project. KBE’s claim seeks an unspecified amount of damages. The action has been transferred to the complex litigation docket of the Hartford Superior Court. On December 18, 2017, KBS was notified that a global settlement had been reached between all defendants and the plaintiff. Under the settlement, the Company’s insurance carriers have agreed to pay
$0.3 million
to the plaintiff in full settlement on KBS’s behalf. KBS paid a
$10.0 thousand
deductible to its insurance carriers for this claim. The Settlement became effective on January 5, 2018.
From time to time, in the ordinary course of ATRM’s business, it is party to various other disputes, claims and legal proceedings. In the opinion of management, based on information available at this time, such disputes, claims and proceedings will not have a material effect on ATRM’s consolidated financial statements.
NOTE 19: LEASES AND RENT EXPENSE
EBGL leases its facilities in Oakdale, Minnesota and Prescott, Wisconsin. These facilities are being leased from limited liability companies controlled by
two
owners of the EBGL Sellers who are shareholders of ATRM. Neither shareholder is a director nor an officer of ATRM, and, to our knowledge, does not own more than
5%
of our common stock. These lease agreements provide for monthly base rents totaling
$22,135
as of
December 31, 2017
and expire on
September 30, 2021
, with an option to renew for an additional
five
-year period. As of
December 31, 2017
, future minimum lease payments under operating leases were as follows (in thousands):
|
|
|
|
|
|
|
|
2018
|
$
|
266
|
|
|
2019
|
267
|
|
|
2020
|
272
|
|
|
2021
|
207
|
|
|
2022
|
—
|
|
|
Total minimum lease payments
|
$
|
1,012
|
|
Rent expense, including facility and various short-term equipment operating leases, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2017
|
|
2016
|
|
Paid to companies controlled by shareholder
|
|
$
|
278
|
|
|
$
|
85
|
|
|
Paid to others
|
|
53
|
|
|
15
|
|
|
Total rent expense
|
|
$
|
331
|
|
|
$
|
100
|
|
NOTE
20
: EQUITY
Preferred Stock
On September 29, 2017, the Company filed with the Secretary of State of the State of Minnesota a Statement of Designation of the Series B Stock (the “Statement of Designation”) creating the Series B Stock. The Statement of Designation authorizes the issuance of
160,000
shares of Series B Stock, having a par value of
$0.001
per share and a stated value of
$100.00
per share (subject to adjustment). Holders of Series B Stock are entitled to receive, when, as and if declared by the Board, cumulative preferential dividends, payable quarterly in cash at a rate per annum equal to
10.0%
multiplied by the stated value; provided that the Company may pay dividends in-kind through the issuance of additional shares of Series B Stock at a rate per annum equal to
12.0%
multiplied by the stated value, at the sole option of the Company, for up to four quarterly dividend periods in any consecutive
36
-month period (determined on a rolling basis).
In the event of any liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, before any payment or distribution to holders of junior shares, holders of Series B Stock will be entitled to receive an amount of cash per share of Series B Stock equal to the stated value plus all accumulated accrued and unpaid dividends thereon (whether or not earned or declared).
Upon the occurrence of four accumulated, accrued and unpaid defaults by the Company of its obligation to pay dividends (either in cash or in-kind) on the Series B Stock in full for each quarterly dividend period, whether consecutive or non-consecutive,
until the Company has paid all accumulated accrued and unpaid dividends in full and has paid accrued dividends for the two most recently completed quarterly dividend periods in full in a timely manner, (i) the dividend rate will increase to
12.0%
per annum and (ii) the size of the Board will be increased by two directors and the holders of Series B Stock (together with the holders of any class of shares with similar rights) will have the right to elect two directors to the Board. The terms of such directors will terminate, and the size of the Board will decrease accordingly, once the voting rights terminate.
Additionally, the Company is not permitted to take certain corporate actions without the approval of holders of at least 2/3 of the shares of Series B Stock (together with the holders of any class of shares with similar rights), including: (i) any amendment, alteration or repeal of any of the provisions of the Company’s Articles of Incorporation or the Statement of Designation that materially and adversely affects the rights, preferences or voting power of the Series B Stock; (ii) a statutory share exchange that affects the Series B Stock, or a merger or consolidation, unless each share of Series B Stock remains outstanding without material and adverse change to its terms, voting powers, preferences and rights, or is converted or exchanged into preferred shares with identical rights; (iii) authorize, reclassify, or create, or increase the authorized amount of, any shares senior to or on a parity with the Series B Stock, or any security convertible into or exchangeable for shares senior to or on a parity with the Series B Stock; and (iv) an increase to the size of the Board above five directors other than under the terms of the Statement of Designation. The Series B Stock does not vote together with the Company’s common stock or have any other voting rights except as set forth in the Statement of Designation.
On December 4, 2017, the board of directors of the Company declared a
4
-for-1 stock split (“Stock Split”) of the Company’s Series B Stock. Unless otherwise noted, all share and per-share data included in these consolidated financial statements with respect to the Series B Stock have been adjusted to give effect to the Stock Split. In addition, the number of shares subject to, and the exercise price of, the Company’s outstanding options were adjusted to reflect the Stock Split.
Charter Amendments
At the Company’s 2017 Annual Meeting of Shareholders held on
December 4, 2017
, shareholders approved amendments to its Amended and Restated Articles of Incorporation (the “Existing Charter”) to:
(i)
increase the number of authorized shares of the Company’s capital stock from
3,200,000
to
10,000,000
, and make corresponding changes to the number of authorized shares of the Company’s common stock and preferred stock;
(ii)
effect a
4
-for-1 forward stock split of the Series B Stock; and
(iii)
effect an extension to
December 5, 2020
of the provisions of the Existing Charter designed to protect the tax benefits of the Company’s net operating loss carryforwards by generally restricting any direct or indirect transfers of the Company’s common stock that increase the direct or indirect ownership of the Company’s common stock by any Person (as defined in the Existing Charter) from less than
4.99%
to
4.99%
or more of the Company’s common stock, or increase the percentage of the Company’s common stock owned directly or indirectly by a Person owning or deemed to own
4.99%
or more of the Company’s common stock (the “Extended Protective Amendment”).
On
December 4, 2017
, the Company filed Articles of Amendment with the Office of the Secretary of State of the State of Minnesota to effect these amendments.
As of December 31, 2017, there were approximately
7,500,000
authorized and
2,396,219
shares of common stock issued and outstanding, respectively, and
2,000,000
authorized and
546,466
shares of Series B Stock issued and outstanding, respectively.
NOTE
21
: STOCK INCENTIVE PLANS 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
$115.0 thousand
for the
twelve months ended
December 31, 2016
and is included in the caption “Selling, general and administrative expenses” in our 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
$13.7 thousand
and
$53.8 thousand
for the
twelve months ended
December 31, 2016
and
2017
, respectively, and is included in the caption “Selling, general and administrative expenses” in our Consolidated Statement of Operations.
On December 18, 2017, ATRM granted
70,000
shares of the Company's common stock to its directors and its 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
$1.18
per share, the closing price of our common stock on the grant date. Compensation expense related to these grants amounted to approximately
$3.1 thousand
for the twelve months ended December 31, 2017, and is included in the caption "Selling, general and administrative expenses" in our Consolidated Statement of Operations. The remaining compensation expense of approximately
$79.4 thousand
will be recognized on a straight-line basis through December 18, 2018, 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
twelve months ended
December 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
|
|
|
|
|
|
|
|
Expired
|
|
(27,500
|
)
|
|
$
|
6.88
|
|
|
|
|
|
|
|
Outstanding December 31, 2017
|
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
Exercisable December 31, 2017
|
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
All stock options outstanding as of January 1, 2017 had expired unexercised as of
December 31, 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
December 31, 2017
.
NOTE 22: TAX BENEFIT PRESERVATION PLAN / PREFERRED STOCK RIGHTS
As of
December 31, 2017
, ATRM had federal net operating loss carryforwards (“NOLs”) of approximately
$103.0 million
and state NOLs of approximately
$26.0 million
. Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), imposes an annual limitation on the amount of taxable income that may be offset by a corporation’s NOLs if the corporation experiences an “ownership change” as defined in Section 382 of the Code. An ownership change occurs when the corporation’s “5-percent shareholders” (as defined in Section 382 of the Code) collectively increase their ownership in the corporation by more than
50 percent
age points (by value) over a rolling three-year period. Additionally, various states have similar limitations on the use of state NOLs following an ownership change.
On February 13, 2014, to protect the tax benefits of ATRM’s NOLs, the Board adopted a Tax Benefit Preservation Plan (the “Rights Plan”) that generally was designed to deter any person from acquiring shares of ATRM’s common stock if the acquisition would result in such person beneficially owning
4.99%
or more of the common stock without the approval of the Board.
In connection with the adoption of the Rights Plan, on February 13, 2014, the Board authorized and declared a dividend distribution of
one
right for each outstanding share of ATRM’s common stock to stockholders of record as of the close of business on February 24, 2014. Each right entitled the registered holder to purchase from the Company one one-thousandth of a share of Series B Stock, par value
$0.001
per share, of the Company at an exercise price of
$30.00
per one one-thousandth of a Preferred Share, subject to adjustment.
Subject to certain exceptions specified in the Rights Plan, the rights were to separate from ATRM’s common stock and become exercisable following (i) the 10t
h
business day (or such later date as may be determined by the Board) after the public announcement that an acquiring person had acquired beneficial ownership of
4.99%
or more of ATRM’s common stock or (ii) the 10t
h
business day (or such later date as may be determined by the Board) after a person or group announced a tender or exchange offer that would have resulted in ownership by a person or group of
4.99%
or more of ATRM’s common stock.
Additionally, at any time after the date on which an acquiring person beneficially owned
4.99%
or more, but less than
50%
, of ATRM’s common stock, the Board was permitted to exchange the rights (except for rights that were voided due to their beneficial ownership by an acquiring person or group), in whole or in part, for shares of ATRM’s common stock at an exchange ratio of
one
share per right (subject to adjustment), or in certain circumstances, cash or other securities of the Company having a value approximately equal to one share.
The operation of the Rights Plan could have caused substantial dilution to a person or group that acquired
4.99%
or more of the Company’s common stock on terms not approved by the Board.
The adoption of the Rights Plan had no impact on the Company’s consolidated financial statements for fiscal years
2017
or
2016
.
No
rights were exercisable at
December 31, 2017
. The Rights Plan expired on February 13, 2017.
NOTE 23: EMPLOYEE SAVINGS 401(k) PLAN
ATRM has a 401(k) employee savings plan, which covers full-time ATRM employees who are at least
21
years of age. Contributions to the savings plan are at the discretion of management. No contributions were made to the plan in fiscal years
2017
or
2016
.
NOTE
24
: INCOME TAXES
A reconciliation of income tax expense (benefit) computed using the federal statutory rate to the income tax expense (benefit) in our consolidated statements of operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2017
|
|
2016
|
|
Tax benefit computed at federal statutory rate
|
|
$
|
(3,084
|
)
|
|
$
|
(2,216
|
)
|
|
State taxes, net of federal benefit
|
|
557
|
|
|
(156
|
)
|
|
(Decrease) increase in valuation allowance
|
|
(10,645
|
)
|
|
2,048
|
|
|
State NOL expiration/write-off
|
|
—
|
|
|
321
|
|
|
Adjustment to income tax accruals
|
|
(870
|
)
|
|
5
|
|
|
State research credit expiration
|
|
—
|
|
|
3
|
|
|
Non-deductible expenses
|
|
317
|
|
|
3
|
|
|
Impact of Tax Reform
|
|
13,736
|
|
|
—
|
|
|
Total income tax expense
|
|
$
|
11
|
|
|
$
|
8
|
|
Deferred tax assets (liabilities) are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
|
Accounts receivable
|
|
$
|
48
|
|
|
$
|
36
|
|
|
Employee compensation and benefits
|
|
61
|
|
|
100
|
|
|
Contingent consideration
|
|
(106
|
)
|
|
(169
|
)
|
|
Amortization
|
|
1,445
|
|
|
1,305
|
|
|
Deferred acquisition costs
|
|
212
|
|
|
245
|
|
|
NOL and tax credit carryforwards
|
|
24,064
|
|
|
34,807
|
|
|
Warranty accrual
|
|
—
|
|
|
18
|
|
|
Other, net
|
|
27
|
|
|
60
|
|
|
Deferred tax assets (liabilities), net
|
|
$
|
25,751
|
|
|
$
|
36,402
|
|
|
Less valuation allowance
|
|
(25,779
|
)
|
|
(36,421
|
)
|
|
Net deferred tax assets (liabilities)
|
|
$
|
(28
|
)
|
|
$
|
(19
|
)
|
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.
ATRM has federal NOLs of approximately
$103.0 million
that will begin to
expire in 2020
if not utilized. We also have state NOLs of approximately
$26.0 million
that will
expire at various times, beginning in 2017
, if not utilized. We also have federal and state research tax credit carryforwards of approximately
$9.0 million
that will
expire at various times, beginning in 2017
, if not utilized. The utilization of NOLs and research tax credit carryforwards may be subject to changes in tax regulations and/or to annual limitations as a result of changes in ownership that may already have occurred or future changes in ownership pursuant to the requirements of Section 382 of the Code. Such limitations could result in the expiration of NOL and tax credit carryforwards before utilization.
We assessed our income tax positions at
December 31, 2017
and
2016
for all years subject to examination and determined that our unrecognized tax positions were immaterial at those dates.
ATRM is subject to income tax examinations in the U.S. federal and certain state jurisdictions. Our 2013 and 2012 federal income tax returns were reviewed by the Internal Revenue Service during fiscal years 2015 and 2014, respectively, and resulted in no adjustments. Federal tax returns are subject to review for fiscal years 2014 through 2016 and state income tax returns are subject to review for fiscal years 2012 through 2016.
2017 U.S. Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was signed into United States law. The TCJA includes a number of changes to existing tax law, including, among other things, a permanent reduction in the federal corporate income tax rate from a top marginal tax rate of 35% to a flat rate of 21%, effective as of January 1, 2018, as well as limitation of the deduction for net operating losses to 80% of annual taxable income and elimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such net operating losses may be carried forward indefinitely). The federal tax rate change resulted in a reduction in the gross amount of the Company’s deferred tax assets recorded as of December 31, 2017 and a corresponding reduction in the Company’s valuation allowance. As a result, no income tax expense or benefit was recognized as of the enactment date of the TCJA.
The staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. The Company is still
in the process of analyzing the impact to the Company of the TCJA and its analysis is not yet complete. Where the Company has been able to make reasonable estimates of the effects related to the TCJA, the Company has recorded provisional amounts.
In connection with the initial analysis of the impact of the TCJA, the Company remeasured its deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21% for federal tax purposes. The remeasurement of the Company’s deferred tax assets was offset by a change in the valuation allowance. All of the Company's recorded income tax benefits and provisions related to the TCJA are provisional. The provisional amounts recorded by the Company are based on guidance, interpretations and other information available as of December 31, 2017. The impact of the changes in U.S. tax law may be refined as further guidance, interpretations or information becomes available or upon completion by the Company of its evaluation of the impact of the changes in U.S. tax law. The ultimate impact to the Company’s financial statements of the TCJA may differ from the provisional amounts.
NOTE 25: PRODUCT LINE, GEOGRAPHIC, SIGNIFICANT CUSTOMER AND CONCENTRATION OF CREDIT RISK DATA
The following table sets forth the various components of net sales by product line as a percentage of total net sales:
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2017
|
|
2016
|
|
Residential homes
|
|
68
|
%
|
|
79
|
%
|
|
Commercial structures
|
|
32
|
%
|
|
21
|
%
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
All of our long-lived assets are located in the United States. All of our sales based on product shipment destination were within the United States.
Sales to customers comprising more than 10% of our total net sales and corresponding accounts receivable concentration information for such customers is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total sales for
years ended December 31,
|
|
Percent of total accounts
receivable as of December 31,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Residential Customers
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
*
|
|
10.7%
|
|
14.1%
|
|
*
|
|
Customer B
|
|
*
|
|
*
|
|
*
|
|
11.8%
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Customers
|
|
|
|
|
|
|
|
|
|
Customer C
|
|
*
|
|
*
|
|
16.8%
|
|
*
|
|
Customer D
|
|
*
|
|
*
|
|
15.7%
|
|
*
|
|
Customer E
|
|
*
|
|
*
|
|
*
|
|
27.0%
|
* Percent was less than 10% of the total.
NOTE 26: OPERATING SEGMENTS
Prior to the EBGL Acquisition in October 2016, the Company’s operating results reflected the operating results of KBS, along with certain corporate overhead and corporate borrowing activity. Since the October 2016 EBGL Acquisition, the Company manages and organizes its business in
two
distinct reportable segments: (i) modular building manufacturing and (ii) structural wall panel and wood foundation manufacturing, including building supply retail operations. The modular building manufacturing segment, through KBS, manufactures modular buildings for both single-family residential homes and larger, commercial building projects. The structural wall panel and wood foundation manufacturing segment (which also includes the building supply retail operations), manufactures structural wall panels for both residential and commercial projects as well as permanent wood foundation systems for residential homes, through the EdgeBuilder subsidiary, in addition to operating a local building supply retail operation through the Glenbrook subsidiary. The Company also has corporate level activities and expenditures which are not considered a reportable segment.
Each segments’ accounting policies are the same as those described in the summary of significant accounting policies (Note
3
). There are no intersegment sales.
The Company’s reportable business segments are strategic business units that offer different products and services. Each segment is managed separately because they have different manufacturing processes and market to different customer bases, in geographically different markets.
The following table presents certain financial information regarding each reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modular Home
Manufacturing
|
|
Structural Wall
Panel
Manufacturing
|
|
Total
|
|
December 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Segment net sales
|
|
$
|
24,229
|
|
|
$
|
24,654
|
|
|
$
|
16,324
|
|
|
$
|
3,502
|
|
|
$
|
40,553
|
|
|
$
|
28,156
|
|
|
Depreciation and amortization expense
|
|
504
|
|
|
502
|
|
|
399
|
|
|
131
|
|
|
903
|
|
|
633
|
|
|
Segment goodwill impairment expense
|
|
—
|
|
|
1,733
|
|
|
3,020
|
|
|
—
|
|
|
3,020
|
|
|
1,733
|
|
|
Interest expense, net
|
|
378
|
|
|
409
|
|
|
792
|
|
|
120
|
|
|
1,170
|
|
|
529
|
|
|
Segment net loss
|
|
(1,948
|
)
|
|
(3,503
|
)
|
|
(4,166
|
)
|
|
(155
|
)
|
|
(6,114
|
)
|
|
(3,658
|
)
|
|
Total segment assets
|
|
7,468
|
|
|
8,007
|
|
|
4,541
|
|
|
7,126
|
|
|
12,009
|
|
|
15,133
|
|
|
Expenditures for segment assets
|
|
405
|
|
|
51
|
|
|
38
|
|
|
22
|
|
|
443
|
|
|
73
|
|
Reconciliation of Segment Information
The following table presents the reconciliation of revenues (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
2017
|
|
2016
|
|
Total net sales for reportable segments
|
$
|
40,553
|
|
|
$
|
28,156
|
|
|
Consolidated net sales
|
$
|
40,553
|
|
|
$
|
28,156
|
|
The following table presents the reconciliation of net loss (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
2017
|
|
2016
|
|
Total net loss for reportable segments
|
$
|
(6,114
|
)
|
|
$
|
(3,658
|
)
|
|
Unallocated amounts:
|
|
|
|
|
|
Other corporate expenses
|
(1,805
|
)
|
|
(1,708
|
)
|
|
Interest expense
|
(1,108
|
)
|
|
(1,147
|
)
|
|
Change in fair value of contingent earn-out
|
361
|
|
|
(3
|
)
|
|
Provision for income taxes
|
(11
|
)
|
|
(8
|
)
|
|
Consolidated net loss
|
$
|
(8,677
|
)
|
|
$
|
(6,524
|
)
|
The following table presents the reconciliation of assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
2017
|
|
2016
|
|
Total assets for reportable segments
|
$
|
12,009
|
|
|
$
|
15,133
|
|
|
Other assets
|
906
|
|
|
1,645
|
|
|
Consolidated assets
|
$
|
12,915
|
|
|
$
|
16,778
|
|
The following table presents the reconciliation other significant adjustments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Totals
|
|
Adjustments
|
|
Consolidated
Totals
|
|
December 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Depreciation and amortization expense
|
|
$
|
903
|
|
|
$
|
633
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
903
|
|
|
$
|
633
|
|
|
Segment goodwill impairment expense
|
|
3,020
|
|
|
1,733
|
|
|
—
|
|
|
—
|
|
|
3,020
|
|
|
1,733
|
|
|
Interest expense
|
|
1,170
|
|
|
529
|
|
|
1,108
|
|
|
1,147
|
|
|
2,278
|
|
|
1,676
|
|
The adjustment to interest expense is the amount of interest incurred by the Company at the parent level, but not allocated to the operating segments. The other adjustments reflect amounts incurred at the parent not allocated to the operating segments. None of the other adjustments are considered significant.
NOTE
27
: SUBSEQUENT EVENTS
Amendments to Gerber Finance Loan Agreements
Through a series of correspondence between KBS and Gerber Finance, on or about January 15, 2018, which the parties to the KBS Loan Agreement deemed to be the Seventh Agreement of Amendment to the Loan and Security Agreement, the parties clarified certain definitions in the KBS Loan Agreement.
On October 1, 2018, the parties to the KBS Loan Agreement entered into an Eighth Agreement of Amendment to the Loan and Security Agreement to extend the availability of up to
$0.6 million
of overadvances to KBS above the borrowing base in order to provide KBS with additional working capital. The overadvance was scheduled to be paid down by
$75.0 thousand
per week beginning January 4, 2019 in order to be fully repaid on or before February 23, 2019 to coincide with the expiration date of the line of credit. As the line was automatically renewed through February 23, 2020, Gerber Finance has subsequently agreed to begin the scheduled pay down of
$75.0 thousand
per week to begin on February 15, 2019 for eight weeks with final repayment scheduled for April 8, 2019. The
$0.6 million
overadvance was paid in full on April 3, 2019.
On February 22, 2019, the Company entered into a Ninth Agreement of Amendment to Loan and Security Agreement (the “Ninth KBS Loan Amendment”) to amend the terms of the KBS Loan Agreement to extend the availability of up to
$0.6 million
of overadvances through no later than February 23, 2020 in order to provide KBS with additional working capital. The overadvance was paid in full in April 2019.
On April 1, 2019, the Company entered into a Tenth Agreement of Amendment to Loan and Security Agreement (the “Tenth KBS Loan Amendment”) to amend the terms of the KBS Loan Agreement, and a Fifth Agreement of Amendment to Loan and Security Agreement (the “Fifth EBGL Loan Amendment”) to amend the terms of the Acquisition Loan Agreement. The Tenth KBS Loan Amendment and the Fifth EBGL Loan Amendment amended the terms of the KBS Loan Agreement and the Acquisition Loan Agreement, respectively, to permit the Company’s acquisition of LSVM and to clarify the parties’ rights and duties in connection therewith, among other things.
In connection with each of the Ninth KBS Loan Amendment and the Tenth KBS Loan Amendment, Mr. Eberwein executed a reaffirmation of guaranty in favor of Gerber Finance relating to his unconditional guaranty of
$0.6 million
of KBS’s obligations under the KBS Loan Agreement arising from the
$0.6 million
of overadvances permitted under the Ninth KBS Loan Amendment.
On April 15, 2019, the Company entered into an Eleventh Agreement of Amendment to Loan and Security Agreement (the “Eleventh KBS Loan Amendment”) to amend the terms of the KBS Loan Agreement to (i) provide for increased borrowing capability; (ii) to eliminate the Leverage Ratio financial covenant required by Schedule III (Financial Covenants); and (iii) to amend the Net Loss covenant required by Schedule III (Financial Covenants). In addition, the Eleventh KBS Loan Amendment provided a waiver for certain covenants for the 2017 and 2018 fiscal years. In connection with the Eleventh KBS Loan Amendment, Mr. Eberwein executed a reaffirmation of agreements in favor of Gerber Finance relating to his unconditional guaranty as described above and any other documents related to KBS.
Promissory Notes Sales to LSV Co-Invest I
On January 12, 2018, the Company issued to LSV Co-Invest I an unsecured promissory note in the principal amount of
$0.5 million
in exchange for the same amount in cash (the “LSV Co-Invest I January Note”). The LSV Co-Invest I January Note was issued pursuant to a securities purchase agreement by and between the Company and LSV Co-Invest I dated as of the same date. The LSV Co-Invest I January Note bears interest at
10.0%
per annum, with interest payable semiannually; provided, however, LSV Co-Invest I may elect to receive any interest as PIK Interest at an annual rate of
12.0%
, so long as any such interest payment is made either (x) entirely in PIK Interest or (y)
50%
cash and
50%
PIK Interest. Any unpaid principal and interest under the LSV Co-Invest I January Note is due on January 12, 2020. The Company may prepay the LSV Co-Invest I January Note at any time after a specified amount of advance notice to LSV Co-Invest I (subject to certain restrictions under the Company’s existing loan agreements). The LSV Co-Invest I January Note provides for customary events of default, the occurrence of any of which may result in the principal and unpaid interest then outstanding becoming immediately due and payable.
As of January 12, 2018, LSVI owned
1,067,885
shares of our common stock, or approximately
45.1%
of our outstanding shares, including
900,000
shares purchased in a common stock rights offering we completed in September 2015. Jeffrey E. Eberwein, ATRM’s Chairman of the Board, is the manager of LSVGP, the general partner of LSVI and LSV Co-Invest I, and the sole member of LSVM, the investment manager of LSVI. ATRM’s entry into the securities purchase agreement with LSV Co-Invest I was approved by a Special Committee of our Board consisting solely of independent directors.
On June 1, 2018, the Company issued to LSV Co-Invest I an additional unsecured promissory note in the principal amount of
$0.9 million
in exchange for the same amount in cash (the “LSV Co-Invest I June Note”). The LSV Co-Invest I June Note was issued pursuant to a securities purchase agreement by and between the Company and LSV Co-Invest I dated as of the same date. The LSV Co-Invest I June Note bears interest at
10.0%
per annum, with interest payable semiannually; provided, however, LSV Co-Invest I may elect to receive any interest payment entirely in-kind at an annual rate of
12.0%
. Any unpaid principal and interest under the LSV Co-Invest I June Note is due on June 1, 2020. The Company may prepay the LSV Co-Invest I June Note at any time after a specified amount of advance notice to LSV Co-Invest I (subject to certain restrictions under the Company’s existing loan agreements). The LSV Co-Invest I June Note provides for customary events of default, the occurrence of any of which may result in the principal and unpaid interest then outstanding becoming immediately due and payable.
As of June 1, 2018, LSV Co-Invest I held
353,060
shares of the Company’s
10.00%
Series B Stock and the LSV Co-Invest I January Note in the principal amount of
$0.5 million
. Also, as of June 1, 2018, LSVI, an affiliate of LSV Co-Invest I, held
209,800
shares of Series B Stock, and LSVGP held
3,005
shares of the Company’s common stock. Additionally, as of June 1, 2018,
415,012
shares of the Company’s common stock, or approximately
17%
of its outstanding shares, were owned directly by Jeffrey E. Eberwein, Chairman of the Company’s Board. Mr. Eberwein is the manager of LSVGP, the general partner of LSVI and LSV Co-Invest I, and sole member of Lone Star Value Management, LLC, the investment manager of LSVI. The Company’s sale of the LSV Co-Invest I June Note to LSV Co-Invest I was approved by the independent members of the Company’s Board of Directors.
Merger with Digirad Corporation
On September 10, 2018, Digirad announced that its board of directors had approved the conversion of Digirad into a diversified holding company and in conjunction with that new structure, that it would be acquiring the Company. In the transaction, shareholders of the Company will receive consideration consisting of 0.4 shares of Digirad common stock for each share of ATRM common stock, which is the approximate price ratio between the two stocks over the prior year.
The issuance of Digirad common stock in connection with the ATRM Acquisition is expected to increase the number of shares of outstanding Digirad common stock by just under
5%
. The ATRM Acquisition will be subject to, among other things, ATRM becoming current with its SEC filings and the negotiation and execution of definitive documentation. The final terms of the ATRM Acquisition are subject to change depending on the outcome of the Company’s due diligence investigation and may differ from those reflected in the LOI. The ATRM Acquisition was approved by a special committee of independent directors of the Company.
As of September 10, 2018, Jeffrey E. Eberwein, the Chairman of the Company’s Board, owns approximately
17.4%
of the outstanding common stock of ATRM. Mr. Eberwein also is the Chairman of the Board of Digirad and beneficially owns
544,152
shares of Digirad's common stock, or approximately
2.7%
of the shares outstanding. Mr. Eberwein is also the Chief Executive Officer of Lone Star Value Management, LLC, which is the investment manager of LSVI. LSVI owns
216,094
shares of the Company’s Series B Stock and another
363,651
shares of Series B Stock are owned directly by LSV Co-Invest I. Through these relationships and other relationships with affiliated entities, Mr. Eberwein may be deemed the beneficial owner of the securities
owned by LSVI and LSV Co-Invest I. Mr. Eberwein disclaims beneficial ownership of Series B Stock, except to the extent of his pecuniary interest therein.
Promissory Note Sale to Digirad
On December 14, 2018, the Company issued to Digirad an unsecured promissory note in the principal amount of
$0.3 million
in exchange for the same amount in cash (the “Digirad Note”). The Digirad Note bears interest at
10.0%
per annum for the first 12 months of its term, and at
12.0%
per annum for the remaining 12 months. All unpaid principal and interest under the Digirad Note is due on December 14, 2020. The Company may prepay the Digirad Note at any time after a specified amount of advance notice to Digirad (subject to certain restrictions under the Company’s existing loan agreements). The Digirad Note provides for customary events of default, the occurrence of any of which may result in the principal and unpaid interest then outstanding becoming immediately due and payable.
Promissory Note Sale to Lone Star Value Management, LLC
On December 17, 2018, the Company issued to LSVM an unsecured promissory note in the principal amount of
$0.3 million
in exchange for the same amount in cash (the “LSVM Note”). The LSVM Note was issued pursuant to a securities purchase agreement by and between the Company and LSVM dated as of the same date. The LSVM Note bears interest at
10.0%
per annum, with interest payable annually; provided, however, LSVM may elect to receive any interest payment entirely in-kind at a rate of
12.0%
per annum. Any unpaid principal and interest under the LSVM Note is due on November 30, 2020. The Company may prepay the LSVM Note at any time after a specified amount of advance notice to LSVM (subject to certain restrictions under the Company’s existing loan agreements). The LSVM Note provides for customary events of default, the occurrence of any of which may result in the principal and unpaid interest then outstanding becoming immediately due and payable.
Jeffrey E. Eberwein, the Chairman of the Company’s Board, owns approximately
17.4%
of the outstanding common stock of ATRM. Mr. Eberwein is also the Chief Executive Officer and the sole member of Lone Star Value Management, LLC, which is the investment manager of LSVI. Mr. Eberwein is also the manager of LSVGP, the general partner of LSVI and LSV Co-Invest I. As of December 17, 2018, LSVI owns
216,094
shares of the Company’s
10.00%
Series B Stock, LSVGP held
3,005
shares of the Company’s common stock, and another
363,651
shares of Series B Stock are owned directly by Lone Star Value Co-Invest I, LP (“LSV Co-Invest I”). LSV Co-Invest I also holds unsecured promissory notes of the Company in the principal amount totaling
$1.4 million
. Through these relationships and other relationships with affiliated entities, Mr. Eberwein may be deemed the beneficial owner of the securities owned by LSVI and LSV Co-Invest I. Mr. Eberwein disclaims beneficial ownership of Series B Stock, except to the extent of his pecuniary interest therein.
Digirad Joint Venture and Services Agreement
On December 14, 2018, the Company entered into a Joint Venture Agreement with Digirad (the "Joint Venture Agreement"), forming Star Procurement, LLC ("Star Procurement"), with each ATRM and Digirad holding a
50%
interest. The purpose of the joint venture is for Star Procurement to purchase from third parties and sell building materials and related goods to KBS Builders, Inc., the Company's wholly owned subsidiary. Star Procurement entered into a Services Agreement (the "Services Agreement") on January 2, 2019 with KBS in connection with the joint venture. Digirad's initial capital contribution to the joint venture was
$1.0 million
. ATRM did not make an initial capital contribution.
Acquisition of Lone Star Value Management
On April 1, 2019, the Company entered into a Membership Interest Purchase Agreement (the “LSVM Purchase Agreement”) with LSVM and Mr. Eberwein. Pursuant to the terms of the LSVM Purchase Agreement, Mr. Eberwein sold all of the issued and outstanding membership interests of LSVM to the Company (the “LSVM Acquisition”) for a purchase price of
$100.00
, subject to a working capital adjustment provision. The LSVM Acquisition closed simultaneously with the execution and delivery of the LSVM Purchase Agreement, and was deemed effective as of January 1, 2019 for accounting purposes, as a result of which LSVM became a wholly-owned subsidiary of ATRM. Pursuant to the LSVM Purchase Agreement, the current assets (as well as the
$0.3 million
LSVM December 2018 Note issued by the Company) and current liabilities existing prior to January 1, 2019 remain with Mr. Eberwein. The LSVM Purchase Agreement contains representations, warranties, covenants and indemnification provisions customary for transactions of this type. The Company's entry into the LSVM Purchase Agreement and the LSVM Acquisition were unanimously approved by a special committee of the Board comprised solely of independent directors. As of the date of these consolidated financial statements, the initial accounting for the LSVM Acquisition was incomplete, as the Company continues to determine the fair value of the acquired assets and liabilities. As of the date of these consolidated
financial statements, the initial accounting for this acquisition was incomplete as the Company is currently working to determine the fair value of the acquired assets and liabilities.
Sale of Maine Facilities
On April 3, 2019, 947 Waterford Road, LLC (“947 Waterford”) entered into a Purchase and Sale Agreement (the “Waterford Purchase Agreement”) with KBS, pursuant to which 947 Waterford purchased certain real property and related improvements (including buildings) located in Waterford, Maine (the “Waterford Facility”) from KBS (the “Waterford Transaction”), and acquired the Waterford Facility. The Waterford Purchase Agreement contains representations, warranties and covenants of KBS and 947 Waterford that are customary for a transaction of this nature. The purchase price of the Waterford Facility is
$1.0 million
, subject to adjustment for taxes and other charges and assessments.
947 Waterford is a wholly-owned indirect subsidiary of Digirad, formed for the purpose of acquiring and holding the Waterford Facility.
On April 3, 2019, 300 Park Street, LLC (“300 Park”) entered into a Purchase and Sale Agreement (the “Park Purchase Agreement”) with KBS, pursuant to which 300 Park purchased certain real property and related improvements and personal property (including buildings, machinery and equipment) located in Paris, Maine (the “Park Facility”) from KBS (the “Park Transaction”), and acquired the Park Facility. The Park Purchase Agreement contains representations, warranties and covenants of KBS and 300 Park that are customary for a transaction of this nature. The purchase price of the Park Facility is
$2.9 million
, subject to adjustment for taxes and other charges and assessments.
On April 3, 2019, KBS entered into a separate lease agreement with each of 947 Waterford (the “Waterford Lease”) and 300 Park (the “Park Lease”). The Waterford Lease has an initial term of
120 months
, which is subject to extension. The base rental payments associated with the initial term under the Waterford Lease are estimated to be between
$1.2 million
and
$1.3 million
in the aggregate. The Park Lease has an initial term of
120 months
, which is subject to extension. The base rental payments associated with the initial term under the Park Lease are estimated to be between
$3.3 million
and
$3.6 million
in the aggregate.
The Oxford Lease will be effective upon the closing of the sale (the “Oxford Transaction”) of the certain real property and related improvements and personal property owned by RJF - Keiser Real Estate, LLC (“RJF”) (including buildings, fixtures, and other improvements on the land, and all machinery and equipment and other personal property, if any, owned by RJF and located on the property) located in Oxford, Maine. The Oxford Transaction is pursuant to that certain Purchase and Sale Agreement between 56 Mechanic and RJF. The Oxford Lease has an initial term of
120 months
, which is subject to extension. The base rental payments associated with the initial term under the Oxford Lease are estimated to be between
$1.4 million
and
$1.6 million
in the aggregate. ATRM has unconditionally guaranteed the performance of all obligations under each of the Leases to be performed by KBS, including, without limitation, the payment of all required rent.