UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended June 30, 2015
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from ___________ to ___________
Commission
file number 000-22166
ATRM
HOLDINGS, INC.
(Exact
Name of Registrant as Specified in Its Charter)
Minnesota |
|
41-1439182 |
(State
or Other Jurisdiction of |
|
(I.R.S.
Employer |
Incorporation
or Organization) |
|
Identification
No.) |
3050
Echo Lake Ave., Suite 300, Mahtomedi, Minnesota |
|
55115 |
(
Address of Principal Executive Offices) |
|
(Zip
Code) |
(651)
704-1800
(Registrant’s
Telephone Number, Including Area Code)
N/A
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer [ ] |
Accelerated
filer [ ] |
Non-accelerated
filer [ ] |
Smaller
reporting company [X] |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No
[X]
As
of August 12, 2015, 1,246,473 shares of Common Stock of the Registrant were outstanding.
ATRM
HOLDINGS, INC.
INDEX
PART
1. FINANCIAL INFORMATION
Item
1. Financial Statements
ATRM
HOLDINGS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except share data)
|
|
June 30, 2015 |
|
|
December 31, 2014 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,134 |
|
|
$ |
1,996 |
|
Accounts receivable, net |
|
|
3,994 |
|
|
|
2,804 |
|
Costs and estimated profit in excess of billings |
|
|
1,098 |
|
|
|
1,791 |
|
Inventories |
|
|
1,724 |
|
|
|
1,936 |
|
Fair value of contingent earn-outs, current |
|
|
610 |
|
|
|
1,200 |
|
Other current assets |
|
|
74 |
|
|
|
117 |
|
Total current assets |
|
|
8,634 |
|
|
|
9,844 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
4,600 |
|
|
|
4,740 |
|
|
|
|
|
|
|
|
|
|
Fair value of contingent earn-out, noncurrent |
|
|
778 |
|
|
|
1,100 |
|
Goodwill |
|
|
1,733 |
|
|
|
1,733 |
|
Intangible assets, net |
|
|
1,467 |
|
|
|
1,688 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
17,212 |
|
|
$ |
19,105 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Note payable |
|
$ |
- |
|
|
$ |
5,500 |
|
Current portion of long-term debt |
|
|
1,075 |
|
|
|
45 |
|
Trade accounts payable |
|
|
4,632 |
|
|
|
5,129 |
|
Billings in excess of costs and estimated profit |
|
|
674 |
|
|
|
288 |
|
Accrued compensation |
|
|
306 |
|
|
|
84 |
|
Other accrued liabilities |
|
|
1,846 |
|
|
|
2,492 |
|
Total current liabilities |
|
|
8,533 |
|
|
|
13,538 |
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion |
|
|
11,760 |
|
|
|
9,542 |
|
Deferred income taxes |
|
|
9 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ deficit: |
|
|
|
|
|
|
|
|
Common stock, $.001 par value; 3,000,000 shares authorized; 1,246,473 shares
issued and outstanding |
|
|
1 |
|
|
|
1 |
|
Additional paid-in capital |
|
|
66,355 |
|
|
|
66,335 |
|
Accumulated deficit |
|
|
(69,446 |
) |
|
|
(70,311 |
) |
Total shareholders’ deficit |
|
|
(3,090 |
) |
|
|
(3,975 |
) |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ deficit |
|
$ |
17,212 |
|
|
$ |
19,105 |
|
The
accompanying notes are an integral part of the condensed consolidated financial statements.
ATRM
HOLDINGS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in
thousands, except per share data)
| |
Three
months ended June 30, | | |
Six
months ended June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Net sales | |
$ | 6,800 | | |
$ | 12,389 | | |
$ | 13,601 | | |
$ | 12,389 | |
Costs and expenses: | |
| | | |
| | | |
| | | |
| | |
Cost of sales | |
| 6,620 | | |
| 11,586 | | |
| 13,502 | | |
| 11,586 | |
Selling, general and
administrative expenses | |
| 1,113 | | |
| 2,513 | | |
| 2,130 | | |
| 3,281 | |
Goodwill
impairment charge | |
| - | | |
| 3,705 | | |
| - | | |
| 3,705 | |
Total
costs and expenses | |
| 7,733 | | |
| 17,804 | | |
| 15,632 | | |
| 18,572 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations | |
| (933 | ) | |
| (5,415 | ) | |
| (2,031 | ) | |
| (6,183 | ) |
Other income (expense): | |
| | | |
| | | |
| | | |
| | |
Settlement gain | |
| 3,687 | | |
| - | | |
| 3,687 | | |
| - | |
Interest expense | |
| (402 | ) | |
| (215 | ) | |
| (789 | ) | |
| (216 | ) |
Change
in fair value of contingent earn-out | |
| - | | |
| 28 | | |
| - | | |
| 103 | |
Income (loss) from continuing operations
before income taxes | |
| 2,352 | | |
| (5,602 | ) | |
| 867 | | |
| (6,296 | ) |
Income
tax benefit (expense) | |
| (2 | ) | |
| 290 | | |
| (2 | ) | |
| 464 | |
Income (loss) from continuing operations | |
| 2,350 | | |
| (5,312 | ) | |
| 865 | | |
| (5,832 | ) |
Income from discontinued
operations, net of income taxes | |
| - | | |
| 537 | | |
| - | | |
| 861 | |
Net income (loss) | |
$ | 2,350 | | |
$ | (4,775 | ) | |
$ | 865 | | |
$ | (4,971 | ) |
| |
| | | |
| | | |
| | | |
| | |
Basic income (loss) per share: | |
| | | |
| | | |
| | | |
| | |
Continuing operations | |
$ | 1.98 | | |
$ | (4.92 | ) | |
$ | 0.73 | | |
$ | (5.41 | ) |
Discontinued
operations | |
| - | | |
| .50 | | |
| - | | |
| .80 | |
Net
income (loss) | |
$ | 1.98 | | |
$ | (4.43 | ) | |
$ | 0.73 | | |
$ | (4.61 | ) |
| |
| | | |
| | | |
| | | |
| | |
Diluted income (loss) per share: | |
| | | |
| | | |
| | | |
| | |
Continuing operations | |
$ | 1.95 | | |
$ | (4.92 | ) | |
$ | 0.72 | | |
$ | (5.41 | ) |
Discontinued
operations | |
| - | | |
| .50 | | |
| - | | |
| .80 | |
Net
income (loss) | |
$ | 1.95 | | |
$ | (4.43 | ) | |
$ | 0.72 | | |
$ | (4.61 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average common shares outstanding: | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 1,186 | | |
| 1,079 | | |
| 1,186 | | |
| 1,079 | |
Diluted | |
| 1,205 | | |
| 1,079 | | |
| 1,196 | | |
| 1,079 | |
The
accompanying notes are an integral part of the condensed consolidated financial statements.
ATRM
HOLDINGS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in
thousands)
| |
Six months ended June 30, | |
| |
2015 | | |
2014 | |
Cash flows from operating activities: | |
| | | |
| | |
Net income (loss) | |
$ | 865 | | |
$ | (4,971 | ) |
Adjustments to reconcile net income (loss) to net cash used in operating
activities: | |
| | | |
| | |
Depreciation and amortization expense | |
| 380 | | |
| 721 | |
Share-based compensation expense | |
| 20 | | |
| 5 | |
Provision for bad debts | |
| 13 | | |
| - | |
Settlement gain | |
| (3,687 | ) | |
| - | |
Facility expense accrual credit | |
| (54 | ) | |
| - | |
Deferred income taxes | |
| 9 | | |
| - | |
Change in fair value of contingent earn-out | |
| - | | |
| (103 | ) |
Goodwill impairment charge | |
| - | | |
| 3,705 | |
Gain on sale of discontinued operations | |
| - | | |
| (1,128 | ) |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| (1,203 | ) | |
| (1,062 | ) |
Costs and estimated profit in excess of billings | |
| 693 | | |
| (1,233 | ) |
Inventories | |
| 212 | | |
| 744 | |
Other current assets | |
| 43 | | |
| (209 | ) |
Other assets | |
| - | | |
| 241 | |
Trade accounts payable | |
| (497 | ) | |
| 1,281 | |
Billings in excess of costs and estimated profit | |
| 386 | | |
| 372 | |
Accrued compensation | |
| 222 | | |
| (58 | ) |
Other accrued liabilities | |
| (131 | ) | |
| 694 | |
Net cash used in operating activities | |
| (2,729 | ) | |
| (1,001 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Proceeds from earn-out consideration | |
| 912 | | |
| 428 | |
Purchase of property and equipment | |
| (19 | ) | |
| (1 | ) |
Purchase of business, net of cash acquired | |
| - | | |
| (4,568 | ) |
Net cash generated by (used in) investing activities | |
| 893 | | |
| (4,141 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from issuance of long-term debt | |
| 1,000 | | |
| 6,500 | |
Principal payments on long-term debt | |
| (26 | ) | |
| (24 | ) |
Payment of debt assumed and paid at closing of business
purchase | |
| - | | |
| (1,401 | ) |
Net cash generated by financing activities | |
| 974 | | |
| 5,075 | |
| |
| | | |
| | |
Net decrease in cash and cash equivalents | |
| (862 | ) | |
| (67 | ) |
| |
| | | |
| | |
Cash and cash equivalents at beginning of period | |
| 1,996 | | |
| 1,260 | |
| |
| | | |
| | |
Cash and cash equivalents at end of period | |
$ | 1,134 | | |
$ | 1,193 | |
| |
| | | |
| | |
Supplemental cash flow information: | |
| | | |
| | |
Cash paid for interest expense | |
$ | 483 | | |
$ | 4 | |
Settlement agreement: | |
| | | |
| | |
– reduction of note payable to seller | |
$ | 3,226 | | |
$ | - | |
– forgiveness of accrued interest | |
$ | 461 | | |
$ | - | |
Note payable to seller issued as partial consideration for purchase of business | |
$ | - | | |
$ | 5,500 | |
Contingent earn-out receivable received as part of product line disposition | |
$ | - | | |
$ | 2,200 | |
The
accompanying notes are an integral part of the condensed consolidated financial statements.
ATRM
HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying unaudited condensed consolidated financial statements include the accounts of ATRM Holdings, Inc. and its wholly
owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. References in the notes
to the condensed consolidated financial statements to “ATRM,” “the Company”, “we,” “us”
or “our”, unless the context otherwise requires, refer to ATRM Holdings, Inc. and its subsidiaries and their respective
predecessors. Our modular housing business is operated by our wholly-owned subsidiaries KBS Builders, Inc. and Maine Modular Haulers,
Inc. (collectively referred to as “KBS”).
The
condensed consolidated balance sheet at December 31, 2014 has been derived from our audited financial statements. In the opinion
of management, the unaudited interim condensed consolidated financial statements include all adjustments (consisting only of normal,
recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the interim
periods presented. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of
the operating results to be expected for the full year or any future period.
The
accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, normally included
in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States
of America, have been condensed or omitted, pursuant to such rules and regulations. Therefore, these condensed consolidated financial
statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in our
Annual Report on Form 10-K for the year ended December 31, 2014.
Beginning
in fiscal year 2013, ATRM implemented a series of strategic initiatives intended to stabilize the Company and return it to profitability.
In July 2013, we sold the assets related to our Reliability Test Products (“RTP”) line of products to Cascade Microtech,
Inc. (“Cascade”). On April 2, 2014, we acquired KBS, a business that manufactures modular housing units for commercial
and residential applications. On April 22, 2014, we entered into an agreement to transfer the assets related to our test handler
product line to BSA (as defined below) in return for a future stream of earn-out payments based on the product line’s revenues.
We
have incurred significant operating losses and, as of June 30, 2015, we had an accumulated deficit of approximately $69 million.
There can be no assurance that the strategic initiatives described above will lead to sufficient revenue in the future to cover
our expenses and achieve profitability for ATRM on a consistent basis or at all. In addition, we incurred substantial debt in
connection with the acquisition of KBS. To finance the acquisition, we issued $6.5 million in promissory notes to Lone Star Value
Investors, LP (“LSVI”) and a $5.5 million promissory note (the “KBS Note”) to the sellers with an original
maturity date of October 1, 2014. We reached an agreement with the holder of the KBS Note to extend its maturity date to December
1, 2014 but we were unable to repay the note on that date. On June 26, 2015, as discussed in Note 13, we reached an agreement
with the holder of the KBS Note to reduce its principal balance to $2.5 million which amount is to be paid in monthly installments
of $100,000 over 25 months, inclusive of interest. During the second half of fiscal year 2014 and early 2015 we received cash
to fund our working capital needs from LSVI and its affiliate Lone Star Value Co-Invest I, LP (“LSV Co-Invest I”)
in exchange for unsecured promissory notes issued to these entities.
As
of the June 30, 2015, the Company’s total debt owed under promissory notes, including the Amended and Restated KBS Note
(as defined below), was approximately $12.8 million. We have implemented significant changes to improve the performance
of our KBS operations, including organizational changes and the implementation of improved contracts, processes and controls.
We intend to pursue new financing to refinance all or a portion of our debt and to provide for our general working capital needs
going forward. We anticipate commencing a rights offering on or about August 17, 2015 for the sale of up to 1,246,473 shares of
our common stock at an offering price of $3.00 per share. The offering is expected to close in September 2015. We expect to retain
a portion of the net proceeds for our working capital needs, and to use the remainder to reduce our long-term debt.
Jeffrey
E. Eberwein, the Company’s Chairman of the Board, is the manager of Lone Star Value Investors GP, LLC (“LSVGP”),
the general partner of LSVI and LSV Co-Invest I, and sole member of Lone Star Value Management, LLC (“LSVM”), the
investment manager of LSVI. ATRM may be dependent on LSVI and LSV Co-Invest I, or other third parties, for working capital financing
to fund the Company’s operations until such time as it obtains new financing to refinance all or a portion of its debt.
Although not a binding commitment, LSVM has advised ATRM of its present intention to continue to financially support the Company
as it pursues alternative financing. There can be no assurance we will be successful in obtaining any such new financing with
terms favorable to us or at all. There can be no assurance that our existing cash reserves, together with funds generated by our
operations and any future financings, will be sufficient to satisfy our debt payment obligations.
Our
inability to generate funds or obtain financing sufficient to satisfy our debt payment obligations may result in such obligations
being accelerated by our lenders, which would likely have a material adverse effect on our business, financial condition and results
of operations. Given these uncertainties, there can be no assurance that our existing cash reserves will be sufficient to avoid
liquidity issues and/or fund operations beyond one year from June 30, 2015.
3. |
RECENT ACCOUNTING
PRONOUNCEMENT |
In
January 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-01, Income Statement - Extraordinary
and Unusual Items (“ASU 2015-01”), as part of its initiative to reduce complexity in accounting standards. ASU
2015-01 eliminates the concept of extraordinary items from generally accepted accounting principles. The amendments in the update
are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early
adoption is permitted if the guidance is applied from the beginning of the fiscal year of adoption. As permitted, the Company
adopted the provisions of ASU 2015-01 effective January 1, 2015.
On
April 2, 2014, the Company entered into an agreement with KBS Building Systems, Inc. and certain of its affiliates and their owner,
pursuant to which we purchased substantially all of KBS Building Systems’ assets related to its business of manufacturing,
selling, and distributing modular housing units for residential and commercial use. Consideration for the acquisition included
$5.0 million in cash paid at closing, the KBS Note in the principal amount of $5.5 million and the assumption of certain other
liabilities. In addition, we assumed certain debt of approximately $1.4 million which we paid at closing. The acquired assets
included approximately $0.4 million in cash, resulting in a net purchase price of approximately $10.1 million.
KBS
results are included in our condensed consolidated statement of operations since April 2, 2014, the date of acquisition. The following
unaudited pro forma financial information presents the combined results of ATRM and KBS Buildings Systems for the three and six
months ended June 30, 2014 as if the acquisition had occurred on January 1, 2014 (in thousands):
| |
Three months ended June 30, 2014 | | |
Six months ended June 30, 2014 | |
| |
| | |
| |
Pro forma net sales | |
$ | 12,389 | | |
$ | 22,233 | |
Pro forma loss from continuing operations | |
| (4,781 | ) | |
| (6,789 | ) |
Pro forma net loss | |
| (4,244 | ) | |
| (5,928 | ) |
Pro forma loss per share – basic and diluted | |
$ | (3.93 | ) | |
$ | (5.49 | ) |
The
above unaudited pro forma financial information is not necessarily indicative of what our consolidated results of operations actually
would have been or what results may be expected in the future.
We
incurred expenses for professional fees associated with the KBS acquisition of approximately $0.6 million and $0.7 million in
the three and six months ended June 30, 2014, respectively. These costs are included in the caption “Selling, general and
administrative expenses” in our condensed consolidated statement of operations.
5. |
SALE OF PRODUCT
LINE - DISCONTINUED OPERATIONS |
On
April 22, 2014, we entered into an Agreement (the “BSA Agreement”) with Boston Semi Equipment LLC (“BSE”)
and Boston Semi Automation LLC (“BSA”), a wholly owned subsidiary of BSE, pursuant to which we transferred our assets
and certain liabilities related to our business of designing, manufacturing, marketing and servicing equipment used in the handling
of integrated circuits (“test handler product line”) to BSA.
The
BSA Agreement provides that BSA will pay to ATRM a royalty on all revenue related to the test handler product line through December
31, 2018. The royalty percentage was 13.50% for the three month period ended June 30, 2015 and decreases 0.75% each quarter thereafter.
Royalties earned are subject to certain qualifications and adjustments. The first royalty payment covering the period April 22,
2014 through December 31, 2014 amounted to approximately $770,000 and was received in January 2015. The payment for royalties
earned in the quarter ended March 31, 2015 amounted to approximately $142,000 and was received in May 2015. Future royalty payments
are due 60 days after the end of each calendar quarter.
Following
the sale of our RTP product line to Cascade in 2013 and the transfer of our test handler product line to BSA in April 2014, ATRM
has no manufacturing operations remaining in North St. Paul, Minnesota. The original lease term for our North St. Paul facility,
which consisted of approximately 45,000 square feet, was scheduled to expire on August 31, 2015. Approximately one-half of the
space in this facility had been subleased to Cascade and BSA through the end of the lease term. We also entered into administrative
services agreements with Cascade and BSA that provided for copier and computer network services through the end of the lease term.
The remaining half of the facility was unutilized. As a result of the divestitures of our businesses in Minnesota, we determined
that ATRM would not receive economic benefit from its facility, copier and IT equipment leases at its North St. Paul location
over their remaining terms, and liabilities related to these contracts should be recorded at net settlement value at April 22,
2014 (the “cease-use date”). We recorded a charge of $264,000 related to these contracts in the quarter ended June
30, 2014. The accrued facility expense is included in “Other accrued liabilities” in our condensed consolidated balance
sheet. See Note 12.
On
May 1, 2015, we entered into an agreement with the owner of the leased facility in North St. Paul to accelerate the expiration
of the lease from August 31, 2015 to May 1, 2015. We also entered into agreements with Cascade and BSA to terminate their subleases
effective May 1, 2015. The early terminations of these agreements were executed at the request of the owner of the facility at
no cost to ATRM. Effective May 1, 2015, we relocated our corporate office from the North St. Paul facility to a nearby suburb
of St. Paul, MN where we lease office space on a month to month basis. As a result of the early termination of the North St. Paul
facility lease and subleases, we recorded a gain of approximately $54,000 resulting from a reduction in the facility exit accrual.
This gain is included in general and administrative expenses for the three and six month periods ended June 30, 2015.
Condensed
operating results for the test handler product line are presented as discontinued operations in our consolidated statements of
operations for the three and six month periods ended June 30, 2014 and are summarized below (in thousands):
| |
Three months
ended June 30, 2014 | | |
Six months
ended June 30, 2014 | |
| |
| | |
| |
Net sales | |
$ | 218 | | |
$ | 2,376 | |
Costs and expenses: | |
| | | |
| | |
Cost of sales | |
| 150 | | |
| 1,400 | |
Operating expenses | |
| 369 | | |
| 779 | |
Total costs and expenses | |
| 519 | | |
| 2,179 | |
Income (loss) from discontinued operations | |
| (301 | ) | |
| 197 | |
Gain on sale of discontinued operations | |
| 1,128 | | |
| 1,128 | |
Income before income taxes | |
| 827 | | |
| 1,325 | |
Income tax expense | |
| (290 | ) | |
| (464 | ) |
Income from discontinued operations | |
$ | 537 | | |
$ | 861 | |
The
Company had no discontinued operations for the three and six months ended June 30, 2015.
6. |
FAIR VALUE
MEASUREMENTS |
Financial
assets reported at fair value on a recurring basis included the following at June 30, 2015 (in thousands):
| |
Level 1 | | |
Level 2 | | |
Level 3 | |
Contingent earn-out receivable related to the transfer of test handler product line: | |
| | | |
| | | |
| | |
Current portion | |
$ | — | | |
$ | — | | |
$ | 610 | |
Noncurrent portion | |
| — | | |
| — | | |
| 778 | |
Total | |
$ | — | | |
$ | — | | |
$ | 1,388 | |
The
following table summarizes the Level 3 activity for our earn-out receivable related to the transfer of our test handler product
line (in thousands):
| |
Level 3 | |
| |
| | |
Balance at December 31, 2014 | |
$ | 2,300 | |
Subtract - settlements | |
| (912 | ) |
Balance at June 30, 2015 | |
$ | 1,388 | |
Quantitative
information about Level 3 fair value measurements on a recurring basis at June 30, 2015 is summarized in the table below:
Fair Value Asset | |
Valuation Technique | |
Unobservable Input | |
Amount |
Earn-out receivable related to transfer of test
handler product line | |
Discounted cash flow | |
Total projected revenue Revenue growth rate
Performance weighted average Discount rate | |
$21 million 0 % 60% to 125% 10 % |
7. |
ACCOUNTS RECEIVABLE,
NET |
Accounts
receivable consists of the following (in thousands):
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
(Unaudited) | | |
| |
| |
| | | |
| | |
Contract billings | |
$ | 3,434 | | |
$ | 2,235 | |
Retainage | |
| 1,340 | | |
| 1,369 | |
Subtotal | |
| 4,774 | | |
| 3,604 | |
Less - allowance for doubtful accounts | |
| (780 | ) | |
| (800 | ) |
Accounts receivable, net | |
$ | 3,994 | | |
$ | 2,804 | |
Retainage
balances are expected to be collected within the next twelve months.
Inventories
are comprised of the following (in thousands):
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
(Unaudited) | | |
| |
| |
| | | |
| | |
Raw materials | |
$ | 1,517 | | |
$ | 1,729 | |
Finished goods | |
| 207 | | |
| 207 | |
Total inventories | |
$ | 1,724 | | |
$ | 1,936 | |
9. |
GOODWILL
AND INTANGIBLE ASSETS, NET |
Intangible
assets are comprised of the following at June 30, 2015 (in thousands):
| |
Gross Carrying Amount | | |
Accumulated Amortization | | |
Net Carrying Value | |
Indefinite-lived intangible assets: | |
| | | |
| | | |
| | |
Goodwill | |
$ | 1,733 | | |
$ | — | | |
$ | 1,733 | |
Trademarks | |
| 290 | | |
| — | | |
| 290 | |
Total | |
| 2,023 | | |
| — | | |
| 2,023 | |
| |
| | | |
| | | |
| | |
Finite-lived intangible assets: | |
| | | |
| | | |
| | |
Customer relationships | |
| 1,420 | | |
| (254 | ) | |
| 1,166 | |
Purchased backlog | |
| 990 | | |
| (979 | ) | |
| 11 | |
Total | |
| 2,410 | | |
| (1,233 | ) | |
| 1,177 | |
| |
| | | |
| | | |
| | |
Total intangible assets | |
$ | 4,433 | | |
$ | (1,233 | ) | |
$ | 3,200 | |
Amortization
expense amounted to approximately $61,000 and $221,000 for the three and six months ended June 30, 2015, respectively, and $641,000
for the three and six months ended June 30, 2014. Estimated amortization of purchased intangible assets over the next five years
is as follows (in thousands):
2015 (six months) | |
$ | 112 | |
2016 | |
| 203 | |
2017 | |
| 203 | |
2018 | |
| 203 | |
2019 | |
| 203 | |
Thereafter | |
| 253 | |
Total | |
$ | 1,177 | |
10. |
UNCOMPLETED
CONSTRUCTION CONTRACTS |
The
status of uncompleted construction contracts is as follows (in thousands):
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
(Unaudited) | | |
| |
| |
| | | |
| | |
Costs incurred on uncompleted contracts | |
$ | 23,697 | | |
$ | 21,282 | |
Inventory purchased for specific contracts | |
| 1,989 | | |
| 445 | |
Estimated profit | |
| 1,741 | | |
| 2,717 | |
Subtotal | |
| 27,427 | | |
| 24,444 | |
Less billings to date | |
| (27,003 | ) | |
| (22,941 | ) |
Total | |
$ | 424 | | |
$ | 1,503 | |
| |
| | | |
| | |
Included in the following balance sheet captions: | |
| | | |
| | |
Costs and estimated profit in excess of billings | |
$ | 1,098 | | |
$ | 1,791 | |
Billings in excess of costs and estimated profit | |
| (674 | ) | |
| (288 | ) |
Total | |
$ | 424 | | |
$ | 1,503 | |
The
Company had approximately $5.5 million of work under contract remaining to be recognized at June 30, 2015.
11. |
ACCOUNTS
PAYABLE RETAINAGE |
Accounts
payable includes retainage amounts due to subcontractors of $0.6 million and $0.5 million at June 30, 2015 and December 31, 2014,
respectively. Retainage balances are expected to be settled within the next twelve months.
12. |
OTHER
ACCRUED LIABILITIES |
Other
accrued liabilities are comprised of the following (in thousands):
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
(Unaudited) | | |
| |
| |
| | | |
| | |
Accrued interest expense | |
$ | 516 | | |
$ | 671 | |
Accrued sales taxes | |
| 936 | | |
| 873 | |
Accrued health insurance costs | |
| 118 | | |
| 305 | |
Accrued sales rebates | |
| 145 | | |
| 363 | |
Accrued warranty | |
| 58 | | |
| 78 | |
Accrued facility expenses (see Note 5) | |
| 12 | | |
| 138 | |
Other | |
| 61 | | |
| 64 | |
Total other current accrued liabilities | |
$ | 1,846 | | |
$ | 2,492 | |
Changes
in accrued warranty are summarized below (in thousands):
| |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | |
| |
| | | |
| | |
Accrual balance, beginning of period | |
$ | 78 | | |
$ | — | |
Accruals for warranties | |
| 13 | | |
| 38 | |
Settlements made | |
| (33 | ) | |
| (33 | ) |
Accrual assumed in KBS acquisition | |
| — | | |
| 47 | |
Accrual balance, end of period | |
$ | 58 | | |
$ | 52 | |
As
described in Notes 2 and 4, as partial consideration for the KBS acquisition, we issued the KBS Note in the principal amount of
$5.5 million. We were unable to repay the note on its maturity date, December 1, 2014. Under the terms of the note, the holder
had a right to charge interest at 10.0% per annum for any period during which we are in default. In April 2015, we asserted certain
indemnification and other claims against the sellers of KBS and on June 26, 2015 we entered into a settlement agreement with the
sellers related to such claims. The settlement agreement provides for, among other things, the amendment and restatement of the
KBS Note (the “Amended and Restated KBS Note”) to reduce the principal amount from $5.5 million to $2.5 million and
the forgiveness of all then-accrued interest related to the KBS Note as disclosed below. The new principal amount is to be paid
in 25 installments of $100,000 on the first business day of each month, which began on July 1, 2015. The Amended and Restated
KBS Note does not accrue interest unless it is in default, in which case the annual interest rate would be 10%. Since this acquisition
purchase price adjustment was outside the twelve month measurement period from the acquisition date, the change was credited to
earnings. The Company recorded a gain of $3.7 million in the three and six month periods ended June 30, 2015 related to the settlement,
which consisted of the following (in thousands):
Reduction of principal (including adjustment for imputed interest at 9.5%) | |
$ | 3,226 | |
Forgiveness of interest accrued to the date of settlement | |
| 461 | |
Gain on settlement agreement | |
$ | 3,687 | |
The principal balance of the Amended
and Restated KBS Note was $2,274,217 ($2,500,000 less imputed interest of $225,783) at June 30, 2015 and is included in Long-Term
Debt. See Note 14.
Long-term
debt consists of the following (in thousands):
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
(Unaudited) | | |
| |
| |
| | | |
| | |
Promissory note payable to LSVI, unsecured, interest of 10% per annum payable semi-annually
in July and January, with any unpaid principal and interest due on April 1, 2019 | |
$ | 5,000 | | |
$ | 5,000 | |
| |
| | | |
| | |
Promissory notes payable to LSV Co-Invest I, unsecured, interest of 10% per annum payable semi-annually
in July and January, with any unpaid principal and interest due on April 1, 2019 | |
| 4,500 | | |
| 4,500 | |
| |
| | | |
| | |
Promissory note payable to LSVI, unsecured, interest of 10% per annum
payable semi-annually in July and January, with any unpaid principal and interest due on April 1, 2019 (1) | |
| 1,000 | | |
| — | |
| |
| | | |
| | |
Promissory note payable, unsecured, interest imputed at 9.5% (2) | |
| 2,274 | | |
| — | |
| |
| | | |
| | |
Notes payable, secured by equipment, interest rates from 5.0% to 9.5%,
with varying maturity dates through September 2018 | |
| 61 | | |
| 87 | |
| |
| | | |
| | |
Total long-term debt | |
| 12,835 | | |
| 9,587 | |
Current portion | |
| (1,075 | ) | |
| (45 | ) |
Noncurrent portion | |
$ | 11,760 | | |
$ | 9,542 | |
| (1) | On
February 25, 2015, in order to provide additional working capital to ATRM, we entered
into a Securities Purchase Agreement with LSVI pursuant to which it purchased for $1.0
million in cash, an unsecured promissory note made by ATRM in the principal amount of
$1.0 million. |
| | |
| (2) | Promissory
note payable to the principal seller of KBS, payable in monthly installments of $100,000
through July 2017 (see Note 13). |
As
of June 30, 2015, LSVI owned 167,885 shares of our common stock, or approximately 14.1% of our outstanding shares. Jeffrey E.
Eberwein, ATRM’s Chairman of the Board, is the manager of LSVGP, the general partner of LSVI and LSV Co-Invest I, and sole
member of LSVM, the investment manager of LSVI.
ATRM’s
entry into the securities purchase agreement with LSVI was approved by a Special Committee of our Board of Directors consisting
solely of independent directors.
15. |
STOCK
INCENTIVE PLAN AND SHARE-BASED COMPENSATION |
ATRM
uses the fair value method to measure and recognize share-based compensation. We determine the fair value of stock options on
the grant date using the Black-Scholes option valuation model. We determine the fair value of restricted stock awards based on
the quoted market price of our stock on the grant date. We recognize the compensation expense for stock options and restricted
stock awards on a straight-line basis over the vesting period of the applicable awards.
2014
Incentive Plan
Our
2014 Incentive Plan (the “2014 Plan”) was approved by our board of directors on October 9, 2014 and became effective
on December 4, 2014 upon approval by shareholders. The 2014 Plan is administered by the Compensation Committee of our board of
directors. The purpose of the 2014 Plan is to provide employees, consultants and board members the opportunity to acquire an equity
interest in the Company through the issuance of various stock-based awards such as stock options and restricted stock. 100,000
shares of the Company’s common stock are authorized to be issued pursuant to the 2014 Plan.
On June 5, 2015,
ATRM granted restricted stock awards for a total of 60,000 shares of the Company’s common stock to our directors. The shares
vest one year after the grant date. The fair value of the awards was determined to be $4.48 per share, the closing price of our
common stock on the grant date. Compensation expense related to these grants amounted to approximately $20,000 for the three and
six months ended June 30, 2015 and is included in general and administrative expenses in our condensed consolidated statement
of operations. The remaining compensation expense of approximately $249,000 will be recognized on a straight line basis through
June 5, 2016, subject to forfeitures.
2003
Stock Incentive Plan
A
stock incentive plan approved by our shareholders and adopted in May 2003 (the “2003 Plan”) terminated in February
2013. Stock options granted under the 2003 Plan continue to be exercisable according to their individual terms. The following
table summarizes stock option activity under the 2003 Plan for the six months ended June 30, 2015:
| |
Number of Shares | | |
Weighted
Average
Exercise Price | | |
Weighted
Average
Remaining
Contract Term | | |
Aggregate
Intrinsic Value
(in thousands) | |
Outstanding, January 1, 2015 | |
| 38,500 | | |
$ | 12.27 | | |
| | | |
| | |
No
activity during the six months ended June 30, 2015 | |
| - | | |
| - | | |
| | | |
| | |
Outstanding, June
30, 2015 | |
| 38,500 | | |
$ | 12.27 | | |
| 1.5
years | | |
$ | 0 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable, June
30, 2015 | |
| 38,500 | | |
$ | 12.27 | | |
| 1.5
years | | |
$ | 0 | |
All
stock options outstanding at June 30, 2015 are nonqualified options which expire
at varying dates through November 2017. The aggregate intrinsic values in the table above are zero because the option exercise
prices for all outstanding options exceeded ATRM’s closing stock price on June 30,
2015. Share-based compensation expense related to stock options amounted to approximately $5,000 for the six months ended June
30, 2014 and is included in the caption “Income from discontinued operations, net of income taxes” in our condensed
consolidated statements of operations.
We
record the benefit we will derive in future accounting periods from tax losses and credits and deductible temporary differences
as “deferred tax assets”. We record a valuation allowance to reduce the carrying value of our net deferred tax assets
if, based on all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Since 2009, we have maintained a valuation allowance to fully reserve our deferred tax assets. We recorded a full valuation allowance
in 2009 because we determined there was not sufficient positive evidence regarding our potential for future profits to outweigh
the negative evidence of our three year cumulative loss position at that time. We expect to continue to maintain a full valuation
allowance until we determine that we can sustain a level of profitability that demonstrates our ability to realize these assets.
To the extent we determine that the realization of some or all of these benefits is more likely than not based upon expected future
taxable income, a portion or all of the valuation allowance will be reversed. Such a reversal would be recorded as an income tax
benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders’ equity.
At
June 30, 2015, we have recorded a deferred tax liability of $9,000 for the taxable differences related to our indefinite lived
intangible assets when calculating our valuation allowance due to the unpredictability of the reversal of these differences. We
are presenting an income tax benefit in our statement of operations of $290,000 and $464,000 for the three and six-month periods
ended June 30, 2014, respectively. The presented benefit is an offset to the tax provision effect we are presenting within discontinued
operations for the same time periods.
ATRM
HOLDINGS, INC.
Item
2. |
Management’s
Discussion and Analysis of Financial Condition and Results of Operations |
The
following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements,
and the notes thereto, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the audited
consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2014. All figures in the following discussion are presented on a consolidated basis. All dollar amounts and percentages presented
herein have been rounded to approximate values.
Forward-Looking
Statements
The
following management’s discussion and analysis includes “forward-looking statements”, as such term is used within
the meaning of the Private Securities Litigation Reform Act of 1995. These “forward-looking statements” are not based
on historical fact and involve assessments of certain risks, developments, and uncertainties in our business looking to the future.
Such forward-looking statements can be identified by the use of terminology such as “may”, “will”, “should”,
“expect”, “anticipate”, “estimate”, “intend”, “continue”, or “believe”,
or the negatives or other variations of these terms or comparable terminology. Forward-looking statements may include projections,
forecasts, or estimates of future performance and developments. Forward-looking statements contained in this Quarterly Report
on Form 10-Q are based upon assumptions and assessments that we believe to be reasonable as of the date of this Quarterly Report
on Form 10-Q. Whether those assumptions and assessments will be realized will be determined by future factors, developments, and
events, which are difficult to predict and may be beyond our control. Actual results, factors, developments, and events may differ
materially from those we assumed and assessed. Risks, uncertainties, contingencies, and developments, including those discussed
in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and those identified in “Risk
Factors” in Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, could cause our future
operating results to differ materially from those set forth in any forward-looking statement. There can be no assurance that any
such forward-looking statement, projection, forecast or estimate contained can be realized or that actual returns, results, or
business prospects will not differ materially from those set forth in any forward-looking statement.
Given
these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation
to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained
herein to reflect future results, events or developments.
Results
of Operations
Net
Sales. Net sales represent sales since April 2, 2014 by our KBS operations which we acquired on that date. We divested our
test handler operations last year and its sales in 2014 prior to the divestiture date are included in results from discontinued
operations. Net sales from continuing operations were approximately $13.6 million for the six months ended June 30, 2015 compared
with approximately $12.4 million for the same period in 2014. The six-month period in 2015 included six months of KBS sales compared
with approximately three months of KBS sales in 2014. For the six months ended June 30, 2015, sales for commercial projects and
single family homes represented 36% and 64% of total sales, respectively. Sales for the three months ended June 30, 2015 decreased
to $6.8 million compared with $12.4 million for the same period in 2014 due to a decrease in commercial project sales. For the
three months ended June 30, 2015, sales for commercial projects and single family homes represented 7% and 93% of total sales,
respectively. The decrease in commercial project sales in the three and six-month periods ended June 30, 2015 reflects the completion
in 2014 of two very large multi-tenant buildings that were in process at the time of the KBS acquisition a year ago. In addition,
commercial sales in 2015 were adversely impacted by the delay of approximately $1.3 million for two multi-tenant buildings that
were scheduled to be delivered in May 2015. Due to site preparation issues at a customer site not involving KBS, construction
on the project was halted by the city that had issued the building permit pending resolution of such issues. The completed modules
remained in our possession at June 30, 2015. We expect that this dispute will be resolved and we will collect the full amounts
owed under the contract. In addition, sales related to site work (subcontracting of electrical, plumbing, heating, air conditioning,
etc., at the building site) decreased approximately $3.0 million and $1.9 million for the three and six months ended June 30,
2015, respectively, compared with the prior year periods. We have reduced the amount of site work performed on commercial projects
due to the low margins typically associated with such work and the difficulty in collecting retainage associated with site work
performed by subcontractors. Our current strategy is to focus KBS’s efforts on our core competencies of manufacturing modular
buildings and have the work required at the building site be performed by the customer’s general contractor whenever possible.
We expect that commercial project sales will increase sequentially in the third quarter of 2015.
Cost
of Sales. Cost of sales includes costs since April 2, 2014 related to our KBS operations which we acquired on that date. Cost
of sales for our test handler product line which we divested in 2014 is included in results from discontinued operations. Cost
of sales amounted to approximately $13.5 million for the six months ended June 30, 2015 compared with approximately $11.6 million
for the same period in the 2014. The six-month period in 2015 included costs for six months of KBS sales compared with costs for
approximately three months of KBS sales in 2014. Cost of sales amounted to approximately $6.6 million for the three months ended
June 30, 2015 compared with approximately $11.6 million for the same period in the 2014. The decrease in 2015 was attributed to
lower commercial project sales, including lower sales for subcontracted site work as described above.
Selling,
General and Administrative. Selling, general and administrative (“SG&A”) expenses for the six months ended
June 30, 2015 were approximately $2.1 million compared with approximately $3.3 million for the comparable period in 2014, a decrease
of approximately $1.2 million. Expenses attributed to the KBS operations that we acquired in April 2014 amounted to approximately
$1.5 million for the six months ended June 30, 2015 compared with $1.3 million for the same period in 2014. Excluding the KBS-related
expenses, SG&A expenses decreased approximately $1.4 million from the prior year, which reflected decreases of approximately
$1.0 million in legal and professional expenses associated with the KBS acquisition and divestiture of our test handler product
line, $0.1 million in compensation and $0.1 million in severance costs. SG&A expenses were approximately $1.1 million for
the three months ended June 30, 2015 compared with approximately $2.5 million for the same period in 2014, a decrease of approximately
$1.4 million, which included decreases of approximately $0.7 million in legal and professional expenses associated with the KBS
acquisition and divestiture of our test handler product line and a $0.4 million decrease in amortization expenses related to intangible
assets received in the KBS acquisition.
Goodwill
Impairment Charge. We completed a goodwill impairment assessment as of June 30, 2014 and determined that the carrying value
of goodwill exceeded its fair value by $3.7 million at that date. Accordingly, we recorded a goodwill impairment charge in the
amount of approximately $3.7 million in the three and six months ended June 30, 2014.
Interest
Expense. Interest expense amounted to approximately $0.8 million for the six months ended June 30, 2015 compared with $0.2
million for the same period in 2014. Interest expense amounted to approximately $0.4 million for the three months ended June 30,
2015 compared with $0.2 million for the same period in 2014. Interest expense is primarily related to the debt we incurred to
finance the KBS acquisition in April 2014 and additional borrowings described in Note 14 to our unaudited condensed consolidated
financial statements.
Settlement
Gain. In April 2015, we asserted certain indemnification and other claims against the sellers of KBS pursuant to an asset
purchase agreement executed in April 2014. On June 26, 2015 we entered into a settlement agreement with the sellers related to
such claims. The settlement agreement provided for, among other things, a reduction in the principal amount of the KBS Note from
$5.5 million to $2.5 million and the forgiveness of all then-accrued interest related to the note. We recorded a gain of $3.7
million in the three and six month periods ended June 30, 2015 related to the settlement.
Change
in Fair Value of Contingent Earn-Out. We assess the fair value of contingent earn-outs at the end of each quarter. The contingent
earn-out included in our condensed consolidated balance sheet at June 30, 2015 is related to the transfer of test handler product
line to BSA in April 2014. Our assessments of this earn-out at March 31, 2015 and June 30, 2015 resulted in no adjustments to
fair value at those dates. For the three and six-month periods ended June 30, 2014, change in fair value of contingent earn-out
amounted to approximately $28,000 and $103,000, respectively, and represented increases in the fair value of the contingent earn-out
related to the sale of our RTP line of products based on reassessments of fair value at the end of those periods.
Income
Taxes. Since 2009, we have maintained a valuation allowance to fully reserve our deferred tax assets. We expect to continue
to maintain a full valuation allowance until we determine that we can sustain a level of profitability that demonstrates our ability
to realize these assets. To the extent we determine that the realization of some or all of these benefits is more likely than
not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. Such a reversal would
be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders’
equity. We recorded income tax expense of $2,000 for the three and six-month periods ended June 30, 2015 which represents deferred
income tax expense associated with taxable differences related to our indefinite-lived intangible assets which are omitted from
the calculation of our valuation allowance due to the unpredictability of the reversal of these differences. We recorded no income
tax expense or benefit for the three and six months ended June 30, 2014. The income tax expense attributed to discontinued operations
for the three and six months ended June 30, 2014, calculated using a 35% marginal tax rate, is offset by a corresponding income
tax benefit for continuing operations.
Discontinued
Operations. Results related to our divested test handler operations have been reclassified and presented as discontinued operations
for the three and six months ended June 30, 2014. Condensed results of discontinued operations are summarized in Note 5 to our
unaudited condensed consolidated financial statements.
Financial
Condition, Liquidity and Capital Resources
Cash
and cash equivalents decreased by approximately $0.9 million in the six months ended June 30, 2015.
Cash
flows used in operating activities. In the six months ended June 30, 2015, cash flows used in operating activities was approximately
$2.7 million, consisting primarily of our net loss of approximately $2.8 million (excluding a $3.7 million non-cash settlement
gain) and approximately $0.3 million in working capital changes, partially offset by approximately $0.4 million in non-cash depreciation
and amortization expense. Working capital changes using cash included an increase of approximately $1.2 million in accounts receivable
and decreases of approximately $0.5 million in accounts payable and $0.1 million in other accrued liabilities, partially offset
by decreases of approximately $0.7 million in costs and estimated profit in excess of billings and $0.2 million in inventories
and increases of approximately $0.4 million in billings in excess of costs and estimated profit and $0.2 million in accrued compensation.
The increases in accounts receivable and billings in excess of costs and estimated profit and the decreases in costs and estimated
profit in excess of billings and inventories primarily reflected a relatively higher average percentage of completion of KBS commercial
projects in progress at June 30, 2015 compared with that at December 31, 2014. The decrease in accounts payable resulted primarily
from the timing of payments. The decrease in other accrued liabilities included the settlement of approximately $0.2 million in
accrued sales rebates and a decrease of approximately $0.2 million in accrued health insurance expenses, partially offset by a
$0.3 million increase in accrued interest expense. In the six months ended June 30, 2014, cash flows used in operating activities
were approximately $1.0 million, consisting primarily of our net loss from continuing operations of approximately $6.2 million
(which was our net loss excluding a $1.1 million pre-tax gain on the sale of our test handler product line and a $0.1 million
non-cash increase in fair value of contingent earn-out), partially offset by a $3.7 million non-cash goodwill impairment charge,
$0.7 million in non-cash depreciation and amortization expense and approximately $0.8 million in working capital changes. Working
capital changes generating cash included a decrease of $0.7 million in inventories and increases of $1.3 million in accounts payable,
$0.4 million in billings in excess of costs and estimated profit and $0.7 million in other accrued liabilities, partially offset
by increases of $1.1 million in accounts receivable, $1.2 million in costs and estimated profit in excess of billings and $0.2
million in other current assets. The decrease in inventories was primarily attributed to the sale of seven VMAX test
handlers prior to the transfer of our test handler product line to BSA in April 2014. The increase in other accrued liabilities
included increases of $0.3 million in accrued facility expenses, $0.2 million in accrued sales taxes and $0.2 million in accrued
interest expense. The increase in accounts receivable included a $1.3 million increase in receivables at our KBS operations since
the April 2014 acquisition date which was related solely to the timing of collections as approximately $2.3 million was collected
on July 1, 2014. The increase in costs and estimated profit in excess of billings was largely attributed to costs incurred on
two large commercial projects during the period.
Cash
flows generated by (used in) investing activities. In the six months ended June 30, 2015, cash flows generated by investing
activities was approximately $0.9 million, consisting primarily of $0.9 million of royalty payments received from BSA related
to the transfer of our test handler product line to BSA in fiscal year 2014. In the six months ended June 30, 2014, cash flows
used in investing activities were approximately $4.1 million, which consisted of the $4.6 million net cash portion of the purchase
price paid in connection with our acquisition of KBS ($5.0 million paid at closing less $0.4 million of cash acquired), partially
offset by approximately $0.4 million received in final settlement of the contingent earn-out in connection with our sale of our
RTP product line to Cascade.
Cash
flows provided by financing activities. In the six months ended June 30, 2015, cash flows generated by financing activities
was approximately $1.0 million, which consisted primarily of the $1.0 million received from the sale of a $1.0 million promissory
note to LSVI as described in Note 14 to our unaudited condensed consolidated financial statements. In the six months ended June
30, 2014, cash flows provided by financing activities were approximately $5.1 million, which consisted primarily of the $6.5 million
in financing received from the sale of promissory notes, less $1.4 million of debt that was assumed and paid at the closing of
the KBS acquisition.
Historically,
we have supported our capital expenditure and working capital needs with cash generated from operations, debt financings and our
existing cash and cash equivalents. We have incurred significant losses in recent years. Since July of 2013, we implemented several
strategic initiatives intended to stabilize the Company and return us to profitability, including the sales of our RTP product
line in July 2013 and our test handler product line in April 2014. Also in April 2014, we acquired KBS, a business that manufactures
modular housing units for commercial and residential applications, because we believe there is significant growth opportunity
within the industry and it provides ATRM with the potential to return to profitability. We are working to implement strategies
to improve profitability at KBS, including management changes and the implementation of improved processes, operating and financial
reporting and controls. However, there can be no assurance that the acquisition of KBS will lead to sufficient revenue in the
future to cover our expenses and allow us to achieve profitability, on a consistent basis or at all.
As
of June 30, 2015, our cash and cash equivalents amounted to approximately $1.1 million. As of June 30, 2015, our interest-bearing
debt totaled approximately $12.8 million, including the Amended and Restated KBS Note of $2.3 million, $6.0 million owed to LSVI
and $4.5 million owed to LSV Co-Invest I. We intend to pursue new financing to replace all or a portion of the debt owing to LSVI
and LSV Co-Invest I and to provide for our general working capital needs. We anticipate commencing a rights offering on or about
August 17, 2015 for the sale of up to 1,246,473 shares of our common stock at an offering price of $3.00 per share. The offering
is expected to close in September 2015. We expect to retain a portion of the net proceeds for our working capital needs, and to
use the remainder to reduce our long-term debt. There can be no assurance we will be successful in obtaining any such new financing
with terms favorable to us or at all. Until such time as we obtain such new financing, we may be dependent on LSVI and LSV Co-Invest
I, or other third parties, to provide for our general working capital needs. Although not a binding commitment, LSVM has advised
us of its present intention to continue to financially support the Company as it pursues new financing.
There
can be no assurance that our cash and cash equivalents, together with funds generated by our operations and any future financings,
will be sufficient to satisfy our debt payment obligations. In addition, in order to execute our long-term growth strategy, which
may include additional acquisitions, we may need to raise additional funds through public or private equity offerings, debt financings,
or other means.
Item
3. |
Quantitative
and Qualitative Disclosures About Market Risk |
Not
applicable
Item
4. |
Controls and
Procedures |
Evaluation
of Disclosure Controls and Procedures
As
of the end of the period covered by this report, our chief executive officer and our chief financial officer conducted an evaluation
of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on their evaluation of
our disclosure controls and procedures, our chief executive officer and chief financial officer concluded that our disclosure
controls and procedures were not effective as of June 30, 2015, to ensure that information required to be disclosed by the Company
in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms and (b) accumulated and communicated to management, including our chief executive
officer and chief financial officer, as appropriate to allow for timely decisions regarding required disclosure.
Description
of Material Weakness
As
discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations above and Notes 4 and
5 to our accompanying condensed consolidated financial statements, in April 2014 we acquired the assets and assumed certain liabilities
related to the operations of KBS and transferred our test handler product line to BSA. As a result, the KBS business currently
represents our primary business activity. Prior to the acquisition, the KBS operations were a privately-owned business with very
limited administrative and accounting resources, outdated accounting software and generally weak accounting processes and internal
control procedures. Due to the lack of adequate processes, procedures and controls at KBS, management concluded that we have material
weaknesses in our internal control over financial reporting, and that our disclosure controls and procedures and our internal
control over financial reporting were not effective as of June 30, 2015. Specifically, material weaknesses were found in our financial
reporting process with respect to (1) poor control over accounts payable cut-offs and (2) inadequate segregation of duties in
certain accounting processes, including the cash receipts and disbursements processes and management of user access rights in
our accounting system, partly as a result of our limited size and accounting staff.
Remediation
of Material Weakness
We
are working to remediate these material weaknesses. Since the April 2014 acquisition of KBS, we hired an additional accounting
professional in July 2014 with relevant experience to assist in the effort to implement improvements at KBS. We have implemented
improvements in processes, procedures and controls, including in the areas of contract accounting, proper transaction cutoffs,
inventory controls, financial reporting and management oversight. In August 2015, we selected a new accounting and management
information software package which we expect to implement in stages beginning in the first quarter of 2016. We will to work to
improve such processes, procedures and controls, and will disclose in future periods the progress we have made in our efforts
to remediate these material weaknesses.
Changes
in Internal Control Over Financial Reporting
As
a result of the control deficiencies at KBS discussed above, we determined that we have material weaknesses in our internal control
over financial reporting. We are working to remediate these material weaknesses as discussed above.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
As
reported in our Annual Report on Form 10-K for the year ended December 31, 2014, we are subject to litigation captioned UTHE Technology
Corporation vs. Aetrium Incorporated et al. in the United States District Court for the Northern District of California. On September
13, 2013 the court entered final judgment dismissing all remaining claims UTHE Technology Corporation (“UTHE”) asserted
against us in the litigation. On September 23, 2013, UTHE appealed the district court judgment to the United States Court of Appeal
for the Ninth Circuit. The appeal is currently pending.
Item
1A. Risk Factors
Not
applicable.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item
3. Defaults on Senior Securities
None.
Item
4. Mine Safety Disclosures
None.
Item
5. Other Information
None.
Item
6. Exhibits
|
4.1 |
Amended and Restated Promissory Note,
dated June 26, 2015, made by KBS Builders, Inc. for the benefit of Modular Fun I, Inc. (f/k/a KBS Building Systems, Inc.)
(Incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on June 29, 2015). |
|
|
|
|
10.1 |
Agreement, dated as of June 26, 2015,
by and among ATRM Holdings, Inc. (f/k/a Aetrium Incorporated), KBS Builders, Inc., Modular Fun I, Inc. (f/k/a KBS Building
Systems, Inc.), Modular Fun III, LLC (f/k/a Maine Modular Haulers, LLC), Modular Fun II, LLC (f/k/a All-Set, LLC (d/b/a KBS
Homes)), Paris Holdings, LLC, and Robert H. Farnham, Jr. (incorporated by reference to Exhibit 10.1 to our Current Report
on Form 8-K filed on June 29, 2015). |
|
|
|
|
31.1 |
Certification of Principal Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
31.2 |
Certification of Principal Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
32.1 |
Certification pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
101.INS * |
XBRL Instance Document |
|
|
|
|
101.SCH * |
XBRL Taxonomy Extension Schema |
|
|
|
|
101.CAL * |
XBRL Taxonomy Extension Calculation
Linkbase |
|
|
|
|
101.DEF * |
XBRL Taxonomy Extension Definition
Linkbase |
|
|
|
|
101.LAB * |
XBRL Taxonomy Extension Label Linkbase |
|
|
|
|
101.PRE * |
XBRL Taxonomy Extension Presentation
Linkbase |
*
Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall
not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise
subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document
filed under Sections 11 or 12 of the Securities Act of 1933, as amended, or otherwise subject to the liability of those sections,
except as shall be expressly set forth by specific reference in such filings.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
ATRM
HOLDINGS, INC. |
|
(Registrant) |
|
Date:
August 14, 2015 |
By: |
/s/
Daniel M. Koch |
|
|
|
Daniel M. Koch |
|
|
|
President and
Chief Executive Officer (Principal Executive Officer) |
|
|
|
|
|
Date:
August 14, 2015 |
By: |
/s/
Paul H. Askegaard |
|
|
|
Paul H. Askegaard |
|
|
|
Chief Financial
Officer (Principal Financial and Accounting Officer) |
EXHIBIT
INDEX
|
4.1 |
Amended and Restated Promissory Note, dated June
26, 2015, made by KBS Builders, Inc. for the benefit of Modular Fun I, Inc. (f/k/a KBS Building Systems, Inc.) (incorporated
by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on June 29, 2015). |
|
|
|
|
10.1
|
Agreement, dated as of June 26, 2015, by and among
ATRM Holdings, Inc. (f/k/a Aetrium Incorporated), KBS Builders, Inc., Modular Fun I, Inc. (f/k/a KBS Building Systems, Inc.),
Modular Fun III, LLC (f/k/a Maine Modular Haulers, LLC), Modular Fun II, LLC (f/k/a All-Set, LLC (d/b/a KBS Homes)), Paris
Holdings, LLC, and Robert H. Farnham, Jr. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed
on June 29, 2015). |
|
|
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
31.2 |
Certification
of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
32.1 |
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
101.INS * |
XBRL Instance
Document |
|
|
|
|
101.SCH * |
XBRL Taxonomy
Extension Schema |
|
|
|
|
101.CAL * |
XBRL Taxonomy
Extension Calculation Linkbase |
|
|
|
|
101.DEF * |
XBRL Taxonomy
Extension Definition Linkbase |
|
|
|
|
101.LAB * |
XBRL Taxonomy
Extension Label Linkbase |
|
|
|
|
101.PRE * |
XBRL Taxonomy
Extension Presentation Linkbase |
*
Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall
not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise
subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document
filed under Sections 11 or 12 of the Securities Act of 1933, as amended, or otherwise subject to the liability of those sections,
except as shall be expressly set forth by specific reference in such filings.
Exhibit
31.1
Certification
of the Principal Executive Officer
Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
I, Daniel
M. Koch, certify that:
|
1. |
I
have reviewed this Quarterly Report on Form 10-Q of ATRM Holdings, Inc. for the quarterly period ended June 30, 2015; |
|
|
|
|
2. |
Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report; |
|
|
|
|
3. |
Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
|
|
4. |
The
registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
|
5. |
The
registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date:
August 14, 2015 |
|
/s/
Daniel M. Koch |
|
|
Daniel
M. Koch |
|
|
President
and Chief Executive Officer
(Principal
Executive Officer) |
Exhibit
31.2
Certification
of the Principal Financial Officer
Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
I, Paul
H. Askegaard, certify that:
|
1. |
I
have reviewed this Quarterly Report on Form 10-Q of ATRM Holdings, Inc. for the quarterly period ended June 30, 2015; |
|
|
|
|
2. |
Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report; |
|
|
|
|
3. |
Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
|
|
4. |
The
registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
|
5. |
The
registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date:
August 14, 2015 |
|
/s/
Paul H. Askegaard |
|
|
Paul
H. Askegaard |
|
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer) |
Exhibit
32.1
CERTIFICATION
PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In connection
with the Quarterly Report of ATRM Holdings, Inc. (the “Company”) on Form 10-Q for the quarterly period ended June
30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Daniel M. Koch,
as Chief Executive Officer of the Company, and Paul H. Askegaard, as Chief Financial Officer of the Company, each hereby certifies,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
|
(1) |
the
Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
|
|
|
(2) |
the
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company. |
Date:
August 14, 2015 |
/s/
Daniel M. Koch |
|
Daniel
M. Koch |
|
President and
Chief Executive Officer |
|
(Principal Executive
Officer) |
|
|
Date:
August 14, 2015 |
/s/
Paul H. Askegaard |
|
Paul
H. Askegaard |
|
Chief Financial
Officer |
|
(Principal Financial
and Accounting Officer) |