UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K



[X]	ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934

For the fiscal year ended December 31, 2018



[ ]	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 001-36318

ATRM Holdings, Inc.

(Exact name of registrant as specified in its charter)



Minnesota (State of incorporation)	41-1439182 (I.R.S. employer identification no.)



5215 Gershwin Avenue N. Oakdale, Minnesota (Address of principal executive offices)	55128 (Zip code)

Registrant’s telephone number, including area code: (651) 704-1800

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: common stock, par value $0.001 per share

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [ ] No [X]

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 [ ] No [X]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [X]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Smaller reporting company [X] Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]

As of June 30, 2018, the aggregate market value of the common stock of the registrant (based upon the closing price of the common stock at that date as reported by OTC Markets Group, Inc.), excluding outstanding shares beneficially owned by directors and executive officers, was $2,947,038.

As of June 14, 2019, there were 2,576,219 shares outstanding of the registrant’s common stock.

TABLE OF CONTENTS



PART I
ITEM 1.	BUSINESS	3
ITEM 1A.	RISK FACTORS	6
ITEM 2.	PROPERTIES	11
ITEM 3.	LEGAL PROCEEDINGS	11
ITEM 4.	MINE SAFETY DISCLOSURES	12
PART II
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	12
ITEM 6.	SELECTED FINANCIAL DATA	12
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	12
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	20
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	20
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	20
ITEM 9A.	CONTROLS AND PROCEDURES	21
ITEM 9B.	OTHER INFORMATION	22
PART III
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	23
ITEM 11.	EXECUTIVE COMPENSATION	25
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	27
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	29
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	33
PART IV
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	34

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. Two customers, each commercial builders, accounted for approximately 10.4% and 10.8%, respectively, of our total net sales in 2018. 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 Apex Homes, Commodore Corporation, Skyline Champion Homes, Custom Building Systems, Durabuilt, Excel Homes, Huntington Homes (VT), Icon Legacy Homes, Kent Homes (Canada), Maple Leaf Homes (Canada), Muncy Homes, New England Homes, New Era, PennWest, Premier Builders (PA), Professional Builders Systems, RCM (Canada), Redmond Homes, Ritzcraft, Simplex Homes, Westchester Modular.

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 2018, sales of residential homes and commercial structures represented approximately 57% and 43%, respectively, of total net sales. In 2018, 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, 2018, we had 144 employees. Of our 144 employees, 100 serve in manufacturing, 6 in sales, marketing, and customer service, and 38 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.



ITEM 1A.	RISK FACTORS.

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, 2018, we had an accumulated deficit of approximately $92.4 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, 2018, we had outstanding debt totaling approximately $11.7 million. Our debt primarily included (i) $3.7 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) $2.8 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 debt with related parties which includes (i) $1.4 million of unsecured promissory notes with Lone Star Value Co-Invest I, LLP ("LSV Co-Invest I") with interest payable semi-annually at a rate of 10.0% per annum (LSV Co-Invest I may elect to receive interest in-kind at a rate of 12.0% per annum), with any unpaid principal and interest due on January 12, 2020 (“LSVI Co-Invest I Notes Payable”, otherwise referred to herein and defined below as the LSV Co-Invest I January Note and LSV Co-Invest I June Note) (ii) $0.3 million of unsecured promissory notes with Lone Star Value Management, LLC ("LSVM"), with interest payable annually at a rate of 10.0% per annum (LSVM may elect to receive any interest payment entirely in-kind at a rate of 12.0% per annum), with any unpaid principal and interest due on November 30, 2020("LSVM Note"), and (iii) a $0.3

million unsecured promissory note with Digirad Corporation ("Digirad")(NASDAQ: DRAD), with interest payable at 10.0% per annum for the first 12 months of its term, and at 12.0% per annum for the remaining 12 months, with any unpaid principal and interest due on December 14, 2020.

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, 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.

As of December 31, 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, 2018.

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, 2018 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.

The report of our independent registered public accounting firm contains an emphasis paragraph regarding the substantial doubt about our ability to continue as a “going concern.”

The audit report of our independent registered public accounting firm covering the December 31, 2018 consolidated financial statements contains an explanatory paragraph that states that our recurring losses from operations and net capital deficiency, among other matters, raise substantial doubt about our ability to continue as a going concern. This going concern opinion could materially limit our ability to raise additional funds through the issuance of new debt or equity securities or otherwise. Future reports on our financial statements may also include an explanatory paragraph with respect to our ability to continue as a going concern. As of December 31, 2018, we had an accumulated deficit of approximately $92.4 million. Working capital has remained negative over the past several years. Cash used in operating activities, while improved over 2017, remains negative,

which has required us to generate funds from investing and financing activities. At December 31, 2018, we had outstanding debt of approximately $11.7 million. To date, our operating losses have been funded primarily from investing and financing activities.

We have had, and we will likely continue to have, an ongoing need to raise additional cash from outside sources to fund our future operations. However, no assurance can be given that additional capital will be available when required or on terms acceptable to us. If we are unsuccessful in our efforts to raise any such additional capital, we would be required to take actions that could materially and adversely affect our business, and 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. We also cannot give assurance that we will achieve sufficient revenues in the future to achieve profitability and cash flow positive operations to allow us to continue as a going concern. The perception that we may not be able to continue as a going concern may cause third parties to choose not to deal with us due to concerns about our ability to meet our contractual obligations, which could have a material adverse effect on our business.

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. Two customers, each commercial builders, accounted for approximately 10.4% and 10.8%, respectively, of our total net sales in 2018. 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 2018 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, 2018, we had federal net operating loss carryforwards (“NOLs”) of approximately $104.7 million and state NOLs of approximately $23.3 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 June 14, 2019, Jeffrey E. Eberwein, the Chairman of the Company’s Board of Directors (the "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 869,152 shares of Digirad's common stock, or approximately 4.3% of the shares outstanding. Mr. Eberwein is also the Chief Executive Officer of LSVM, which is the investment manager of Lone Star Value Investors, LP ("LSVI") and LSV Co-Invest. LSVI owns 222,577 shares of the Company’s 10.0% 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.

In addition to stock, LSV Co-Invest I also holds unsecured promissory notes of the Company with the principal amount totaling $1.4 million, LSVM holds an unsecured note with a principal amount totaling $0.3 million; and LSVI has pledged up to $3.0 million plus additional fees as collateral for a long term debt.



ITEM 2.	PROPERTIES.

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.



ITEM 3.	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

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.

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.



ITEM 4.	MINE SAFETY DISCLOSURES.

Not applicable.

PART II



ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

Our common stock is currently quoted on the OTC Pink market of the OTC Markets Group, Inc. under the symbol “ATRM.”

Holders

As of June 14, 2019, we had approximately 90 shareholders of record of our common stock.

Dividends

We have never paid cash dividends on our common stock. We currently intend to retain any earnings for use in our operations and do not anticipate paying cash dividends on our common stock in the foreseeable future.



ITEM 6.	SELECTED FINANCIAL DATA.

Not applicable.



ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements set forth in Part IV, Item 15, "Financial Statements of Registrant" of this Form 10-K (the "Consolidated Financial Statements"), and the notes thereto, and other financial information appearing elsewhere in this Form 10-K. 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.

Overview

Through our wholly-owned subsidiaries, KBS, Glenbrook and EdgeBuilder, we manufacture modular buildings for commercial and residential applications in two 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.

Results of Operations

Selected consolidated statement of operations data for the years ended December 31, 2018 and 2017 were as follows (dollars in thousands):



	2018					2017
Net sales	$	34,477		100.0	%	$	40,553		100.0	%
Cost of sales	31,501			91.4	%	37,668			92.9	%
Selling, general and administrative	5,501			16.0	%	6,690			16.5	%
Goodwill impairment charge	—			—	%	3,020			7.4	%
Total costs and expenses	37,002			107.3	%	47,378			116.8	%
Net operating loss from continuing operations	$	(2,525	)	(7.3	)%	$	(6,825	)	(16.8	)%

Net Sales

Our net sales by product line and as a percentage of total sales for the years ended December 31, 2018 and 2017 were as follows (dollars in thousands):



	2018				2017
Residential Homes	$	19,486	57	%	$	27,722	68	%
Commercial Structures	14,991		43	%	12,831		32	%
Total	$	34,477	100	%	$	40,553	100	%

Net sales were approximately $34.5 million in 2018 compared to approximately $40.6 million in 2017. The $6.1 million decrease was primarily due to a decrease in KBS’s net sales, which were approximately $16.9 million for 2018 as compared to $24.2 million for 2017, offset by an increase in EBGL net sales which were approximately $17.6 million for 2018 compared to $16.5 million for 2017. The decrease in KBS net sales was primarily due to a decrease in commercial developer sales as the Company adjusts to the strategic shift away from large commercial projects with significant site work to focus on its core competency of manufacturing modular buildings for residential customers, as disclosed in Note 2 to the Consolidated Financial Statements.

Cost of Sales

Cost of sales amounted to approximately $31.5 million for 2018, compared to approximately $37.7 million for 2017. This decrease of approximately $6.2 million was due to the decrease in net sales at KBS and also reflects the results of the Company's strategic initiatives at KBS, including more selectivity in the commercial projects the Company undertakes, improved project pricing (implementing regular price increases to its customers) and ongoing cost control and efficiency measures, as disclosed in Note 2 to the Consolidated Financial Statements, resulting in lower direct and overhead costs.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expense was approximately $5.5 million and $6.7 million for 2018 and 2017, respectively. The decrease in SG&A expense of approximately $1.2 million is primarily due to ongoing cost control measures at KBS, as disclosed in Note 2 to the Consolidated Financial Statements.

Goodwill Impairment Charge

We completed a goodwill impairment assessment as of June 30, 2017 and determined that the fair value of goodwill related to the EBGL Acquisition was zero versus the carrying value of goodwill of $3.0 million as of that date. Since the acquisition of the EBGL operations, the results of those operations have underperformed the pre-acquisition expectations from a net sales, gross profit margin and net income perspective. Additionally, given the significant increase in raw material costs, more specifically, lumber and sheet goods, the projection of EBGL’s profits are projected to be lower than initially expected. Accordingly, management’s updated projections for the EBGL operations could not support the carrying value of goodwill. Accordingly, we recorded a goodwill impairment charge in the amount of $3.0 million during 2017.

Interest Expense

Interest expense decreased by approximately $1.3 million from approximately $2.3 million for 2017 to approximately $1.0 million for 2018. The decrease is attributable to the Company's implementation of its strategic initiatives to refinance debt. See Notes 2, 15 and 16 to the Consolidated Financial Statements for further details of the Company’s strategic initiatives and outstanding debt.

Change in Fair Value of Contingent Earn-Outs

We assess the fair value of our contingent earn-outs at the end of each quarter. The contingent earn-out receivable included in our consolidated balance sheets at December 31, 2018 and 2017 is related to the transfer of our test handler product line to BSA in April 2014. The change in fair value of contingent earn-out receivable during 2018 represented a net decrease of approximately $0.4 million in the fair value of this earn-out as a result of our assessments of the fair value of this earn-out as a result of timing and payments.

Income Taxes

Since 2009, we have maintained a valuation allowance to fully reserve our net 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 no income tax expense in fiscal 2018, and income tax expense of $11.0 thousand in fiscal 2017, which represented deferred income tax expense associated with taxable differences related to our indefinite-lived intangible assets which are omitted from the calculation of our valuation allowance due to unpredictability of the reversal of these differences.

Financial Condition, Liquidity and Capital Resources

Cash, cash equivalents and restricted cash increased by approximately $0.2 million in 2018.

Cash flows used in operating activities. In 2018, cash flows used in operating activities were approximately $1.5 million, consisting primarily of our net loss of approximately $3.5 million which were partially offset by depreciation and amortization expense of $0.7 million and changes in operating assets and liabilities of approximately $0.9 million. Changes in operating assets and liabilities for 2018 netted to approximately $1.3 million and primarily included a $1.4 million increase in trade accounts

payable partially offset by a $0.4 million increase in accounts receivable. Also, please refer to Note 5 "Revenue Recognition" in the notes to our Consolidated Financial Statements for an explanation of changes due to the adoption of ASC 606, Revenue From Contracts With Customers ("ASC 606").

In 2017, cash flows used in operating activities were approximately $2.0 million, consisting primarily of our net loss of approximately $8.7 million which were partially offset by (i) the non-cash goodwill impairment charge of approximately $3.0 million, (ii) non-cash paid-in-kind interest ("PIK Interest") of approximately $1.3 million, and (iii) approximately $1.4 million of non-cash depreciation and amortization and share-based compensation expense, as well as $0.4 million for the non-cash changes in fair value and changes in net working capital of approximately $0.8 million. Working capital changes for 2017 netted to approximately $0.8 million and included a $1.3 million increase in trade accounts receivable due to the timing of customer payments and increased production activity in 2017, offset by an increase in accounts payable of $1.1 million due to higher production levels.

Cash flows provided by investing activities. Net cash flows provided by investing activities were approximately $0.4 million and approximately $0.1 million for 2018 and 2017, respectively. Net cash flows provided by investing activities for 2018 included $0.4 million of proceeds from earn-out consideration. Net cash flows provided by investing activities for 2017 included $0.5 million of proceeds from earn-out consideration, partially offset by $0.4 million of net purchases of property and equipment.

Cash flows provided by financing activities. In 2018, cash flows provided by financing activities was approximately $1.3 million, which included approximately $2.0 million of proceeds from the issuance of long-term debt and approximately $0.5 million of net advances under the KBS Loan Agreement and the EBGL Loan Agreement, partially offset by the approximately $1.1 million to reduce principal balances of our long-term debt. In 2017, cash flows provided by financing activities was approximately $1.0 million, which included approximately $2.2 million of net advances under the KBS Loan Agreement and the EBGL Loan Agreement, $0.5 million of proceeds from the issuance of long-term debt, partially offset by the approximately $1.7 million to reduce principal balances of our long-term debt.

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 2018. We have incurred significant operating losses in recent years and, as of December 31, 2018, we had an accumulated deficit of approximately $92.4 million. Working capital has remained negative over the past several years. Cash used in operating activities, while improved over 2017, remains negative, which has required us to generate funds from investing and financing activities. At December 31, 2018, we had outstanding debt of approximately $11.7 million. These factors raise substantial doubt about the Company's ability to continue as a going concern.

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, 2018, we had outstanding debt totaling approximately $11.7 million. Our debt primarily included (i) $3.7 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, and $3.0 million principal outstanding under the Acquisition Loan Agreement, and (ii) $2.8 million principal outstanding on EBGL’s $3.0 million revolving credit facility under the Premier Loan Agreement, which became effective on June 30, 2017 and replaced the prior $3.0 million revolving credit facility under the EBGL Loan Agreement. We also have debt with related parties which includes (i) $1.4 million of unsecured promissory notes with LSV Co-Invest I with interest payable semi-annually at a rate of 10.0% per annum (LSV Co-Invest I may elect to receive interest in-kind at a rate of 12.0% per annum), with any unpaid principal and interest due on January 12, 2020 (“LSVI Co-Invest I Notes Payable”, otherwise referred to herein and defined below as the LSV Co-Invest I January Note and LSV Co-Invest I June Note) (ii) $0.3 million of unsecured promissory notes with LSVM, with interest payable annually at a rate of 10.0% per annum (LSVM may elect to receive any interest payment entirely in-kind at a rate of 12.0% per annum), with any unpaid principal and interest due on November 30, 2020("LSVM Note"), and (iii) a $0.3 million unsecured promissory note with Digirad Corporation ("Digirad")(NASDAQ: DRAD), with interest payable at 10.0% per annum for the first 12 months of its term, and at 12.0% per annum for the remaining 12 months, with any unpaid principal and interest due on December 14, 2020.

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. As of December 31, 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.

We have implemented several strategic initiatives, effected certain actions and continued to consider additional actions to improve the Company’s overall profitability and increase cash flows, including:


•	KBS’s strategic shift away from large commercial projects with significant site work to focus on its core competency of manufacturing modular buildings;


•	KBS’s efforts to improve operating efficiencies, including reconfiguring the South Paris factory to increase production, investments in automated equipment to reduce labor costs, implementing lean manufacturing techniques, and elimination of duplicate overhead costs through the shut-down of the Waterford factory;


•	Reduction in KBS workforce including manufacturing, sales, engineering and front-office staff;


•	KBS increased pricing on its base ranch model in 2017, and in November 2017, instituted a 6% lumber surcharge on all new orders to help offset the significant rise in lumber and other raw materials costs;


•	KBS 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;


•	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;


•	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;


•	In 2017, we instituted a lumber hedging program for EBGL to assist in preserving existing margins against the potential large fluctuations in lumber raw material prices;


•	In August 2016, we amended certain of our debt agreements to allow the Company to pay PIK Interest on approximately $11 million of our debt, reducing strain on current cash flows;


•	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;


•	As disclosed in Note 19, in September 2017, we converted $13.3 million of the Company’s outstanding debt, including accrued interest, to Series B Stock;


•	As discussed in Note 16, in January 2018 and in June 2018, the Company issued 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;


•	In April 2019, KBS and EBGL executed sale leasebacks of several of their real estate properties (see further discussion in Note 26); and


•	We continue to look for opportunities to refinance our remaining debt on more favorable terms.

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') (NASDAQ: DRAD). Under the terms contemplated in the LOI, ATRM stockholders would have received 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 26 for additional information). Although the LOI expired by its terms on December 31, 2018, Digirad and ATRM have had additional discussions regarding the terms and conditions of a proposed transaction and the consideration to be paid for ATRM shares. The parties are currently discussing that the consideration would not be Digirad shares of common stock, but some other form of security. In addition, on May 15, 2019, Digirad and ATRM entered into an Agreement which provides that, in the event the ATRM Acquisition does not close on or prior to December 31, 2019, ATRM will reimburse Digirad of certain consulting and related fees paid by Digirad on behalf of ATRM. We anticipate the ATRM Acquisition to close in the third quarter of 2019; however, the parties have not reached any definitive agreement, and there can be no assurance regarding timing of completion of regulatory approvals, which could delay timing of the closing and any ATRM Acquisition would remain subject to the satisfaction of customary closing conditions.

Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern. 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, 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.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of December 31, 2018 or 2017.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of our Consolidated Financial Statements in conformity with 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, allowance for doubtful accounts; asset lives used in computing depreciation and amortization; valuation of inventories, contingent consideration, 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.

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 net realizable value, with cost determined on a first-in, first-out basis. Inventories include work in process and finished goods not yet delivered. Direct and indirect costs incurred on contracts in process, such as direct and indirect materials, labor and overhead are capitalized to inventory. 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.

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. Leasehold improvements will be depreciated over the shorter of lease term or economic life. 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. Leasehold improvements are depreciated over the shorter of the lease or economic life. Maintenance and repairs are expensed as incurred and major improvements are capitalized.

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 9 and 13 to the Consolidated Financial Statements.

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 2018 or 2017.

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. Under commercial contracts the Company 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.

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 recognized at the point of return.

Effective January 1, 2018, the Company adopted FASB ASC Topic 606, Revenue From Contracts With Customers ("ASC 606") - see further discussion in Note 5.

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 14 to the Consolidated Financial Statements.

Income Taxes: We record income tax expense (benefit) based on our estimate of the effective tax rates for the jurisdictions in which we do business. We record the benefit we will drive in future accounting periods from tax losses and credits and deductible temporary differences as "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, we record a valuation allowance to reduce the carrying value of our deferred tax assets to the estimated realizable amount. If the valuation allowance is increased, we record additional income tax expense in the period the valuation allowance is increased. If the valuation allowance is reduced, we record an income tax benefit. Since 2009, we have maintained a valuation allowance to fully reserve our deferred tax assets. We make significant estimates and judgments in determining our income tax provision, deferred tax assets and valuation allowance recorded against our deferred tax assets. Actual results may differ significantly from those reflected in management estimates and could result in adjustments that have a material impact on our results of operations. See Note 23 to the Consolidated Financial Statements for additional information regarding income taxes.

Share-Based Compensation: We measure and recognize share-based compensation using the fair value method. See Note 20 to the Consolidated Financial Statements 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:


•	Level 1 – Quoted prices in active markets for identical assets or liabilities.


•	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.


•	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.

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 10 to the Consolidated Financial Statements 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.



ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.



ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The information required by this Item is included in our Consolidated Financial Statements and the report of our independent registered public accounting firm, which are included in this Form 10-K. The index to this report and the Consolidated Financial Statements is included in Item 15(a)(1) below.



ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Dismissal of Previous Independent Registered Public Accountant:

On April 1, 2019, the Company dismissed Boulay PLLP (“Boulay”) as the Company’s independent registered public accounting firm. The decision to dismiss Boulay was approved by the Audit Committee of the Board (the “Audit Committee”) on March 29, 2019. Boulay will continue to serve as the Company’s auditor for the duration of its review of the Company’s interim financial statements to be included in the Company’s Quarterly Reports on Form 10-Q for the quarters ended June 30, 2017 and September 30, 2017 and its audit of the consolidated financial statements of the Company as of and for the year ended December 31, 2017, which continuation was also approved by the Audit Committee. During the fiscal years ended December 31, 2015 and 2016 and during the period subsequent to December 31, 2016 to the date hereof, there were no “disagreements” (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K) with Boulay on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Boulay, would have caused Boulay to make reference to the subject matter of such disagreements in connection with its reports on the financial statements for such years.

Boulay’s reports on the Company’s financial statements for the fiscal years ended December 31, 2015 and 2016 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.

During the Company’s fiscal years ended December 31, 2015 and 2016 and during the period subsequent to December 31, 2016 to the date hereof, there have been no “reportable events” (as defined in Item 304(a)(1)(v) of Regulation S-K), except that management identified a material weakness in the Company’s internal control over financial reporting related to inadequate accounting processes and internal control procedures pertaining to the operations of KBS for the fiscal years ended December 31, 2015 and 2016. Management also identified a material weakness in the Company’s internal control over financial reporting related to inadequate accounting processes and internal control procedures pertaining to the operations of the Company’s EBGL business for the fiscal year ended December 31, 2016 and three months ending March 31, 2017. However, there was no disagreement between the Company and Boulay with respect to these determinations.

Engagement of New Independent Registered Public Accountant:

On March 29, 2019, the Audit Committee selected BDO USA, LLP (“BDO”) as the Company’s independent registered public accounting firm, subject to completion of BDO’s standard acceptance procedures. On April 15, 2019, BDO was engaged to perform independent audit services for the fiscal year ending December 31, 2018. During the fiscal years ended December 31, 2016 and 2015 and during the period subsequent to December 31, 2016 to the date hereof, neither the Company nor anyone acting on its behalf consulted with BDO regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered with respect to the consolidated financial statements of the Company; or (ii) any matter that was the subject of a disagreement as described in Item 304(a)(1)(iv) of Regulation S-K or a “reportable event” as described in Item 304(a)(1)(v) of Regulation S-K.



ITEM 9A.	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 (the "Exchange Act")). Based on their evaluation of our disclosure controls and procedures and due to the material weaknesses described below, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2018, 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.

Management’s Annual Report on Internal Control over Financial Reporting

Our management, with oversight by the Board, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2018, based on the criteria established in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this evaluation and due to the material weaknesses described below, our management, including our chief executive officer and chief financial officer, concluded that our internal control over financial reporting was not effective as of December 31, 2018.

Description of Material Weaknesses

Our internal control over financial reporting is supported by written policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

We have identified certain deficiencies in the principles associated with each component of the COSO framework, as described below, which our management concluded constitute material weaknesses, either individually or in the aggregate.

Control Environment

We did not maintain an effective control environment based on the criteria established in the COSO framework to enable the identification and mitigation of risks of material accounting errors based on:

•

An insufficient number of personnel with an appropriate level of GAAP knowledge and experience to create the proper environment for effective internal control over financial reporting and to ensure that (i) there were adequate processes for oversight, (ii) there was accountability for the performance of internal control over financial reporting responsibilities, and (iii) corrective activities were appropriately applied, prioritized, and implemented in a timely manner.


•	Our oversight processes and procedures that guide individuals in applying internal control over financial reporting were not adequate in preventing or detecting material accounting errors.


•	The Company does not utilize a perpetual inventory system for tracking inventory at KBS. The Company’s processes and controls for tracking costs through the production processes and cost of sales was not considered effective.

Risk Assessment

We did not design and implement an effective risk assessment based on the criteria established in the COSO framework, specifically relating to: (i) identifying, assessing, and communicating appropriate objectives, (ii) identifying and analyzing risks to achieve these objectives, and (iii) identifying and assessing changes in the business that could impact our system of internal controls.

Control Activities

We did not design and implement effective control activities based on the criteria established in the COSO framework. Specifically, the control activities did not adequately (i) address relevant risks, (ii) provide evidence of performance, (iii) provide appropriate segregation of duties, or (iv) operate at a level of precision to identify all potentially material errors.

Information and Communication

We did not generate and provide quality information and communication based on the criteria established in the COSO framework, specifically relating to communicating accurate information internally and externally, including providing information pursuant to objectives, responsibilities, and functions of internal control.

Monitoring Activities

We did not design and implement effective monitoring activities based on the criteria established in the COSO framework. Specifically, we did not maintain effective monitoring controls to ascertain whether the components of internal control are present and functioning.

Remediation Plan and Status for Material Weaknesses in Internal Control over Financial Reporting

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017, management concluded as of December 31, 2017 that several material weaknesses existed at that date. Management has been engaged in remediation efforts to address the material weaknesses. We have made enhancements to our control environment from various activities including the following:


•	Engage external consultants to provide support related to more complex applications of GAAP and document and assess our accounting policies and procedures for existing accounts and processes.


•	At EBGL, we are in the process of implementing improvements in internal processes, procedures and controls and establishing regular reporting and routine management oversight.


•	The Company is in the process of analyzing its system limitations and designing or implementing system upgrades to be able to properly track production costs.

We continue to redesign and implement internal control activities. We continue to establish policies and procedures and enhance corporate oversight over process-level controls and structures to ensure that there is appropriate assignment of authority, responsibility, and accountability to enable remediating our material weaknesses.

While we have made and expect to make additional improvements to our internal controls, we may determine that additional steps beyond those described above may be necessary to remediate the material weaknesses. While we intend to resolve all of the material control deficiencies discussed above, we cannot provide any assurance that these remediation efforts will be successful, will be completed quickly, or that our internal control over financial reporting will be effective as a result of these efforts by any particular date. We have not yet quantified the cost to implement our planned remediation activities related to our existing or acquired businesses, which have not been fully assessed.



ITEM 9B.	OTHER INFORMATION.

None.

PART III



ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Directors and Executive Officers

The following table sets forth certain information regarding our directors and executive officers:



Name	Age	Position
Jeffrey E. Eberwein	48	Chairman of the Board
Daniel M. Koch⁽¹⁾	65	President, Chief Executive Officer and Director
Stephen A. Clark⁽¹⁾	50	Former Chief Financial Officer, Treasurer and Secretary
Mark C. Hood	54	Director
Rodney E. Schwatken	55	Director

⁽¹⁾ On June 4, 2019, the Company announced that Mr. Clark had voluntarily resigned as Chief Financial Officer, Treasurer and Secretary, effective May 31, 2019, and that Mr. Koch has been appointed as the Company's principal financial officer effective May 31, 2019.

Jeffrey E. Eberwein joined our Board in January 2013 and became Chairman in November 2013. In addition to his service to the Company, he has over 25 years of Wall Street experience and is CEO of Lone Star Value Management, LLC (referred to herein as LSVM), a U.S. investment company and subsidiary of the Company as of April 2019. Prior to founding LSVM in January 2013, Mr. Eberwein was a Portfolio Manager at Soros Fund Management from January 2009 to December 2011 and Viking Global Investors from March 2005 to September 2008. Mr. Eberwein is currently CEO of Hudson Global Inc. (NASDAQ: HSON), a global recruitment company, where he previously served as Chairman of the Board until his appointment to CEO in April 2018. He continues to serve as a director of HSON. Mr. Eberwein also serves on the board of Digirad Corporation (NASDAQ: DRAD), a medical imaging company, beginning his service as a director in April 2012 and as Chairman of the Board in February 2013. Previously, Mr. Eberwein served as chairman of the boards of: Novation Companies, Inc. (OTC: NOVC), a healthcare staffing company, from April 2015 to March 2018; Crossroads Systems, Inc. (OTC: CRDS), a data storage company, from April 2013 to May 2016; and Ameri Holdings, Inc. (OTC: AMRH) from May 2015 - August 2018, an IT services company. He also previously served as a director on the boards of: On Track Innovations Ltd. (NASDAQ: OTIV), a smart card company, from December 2012 to December 2014; NTS, Inc. (previously listed NYSE: NTS), a broadband services and telecommunications company, from December 2012 until its sale to a private equity firm in June 2014; and the Goldfield Corporation (NYSE:GV), a company in the electrical construction industry, from May 2012 to May 2013. Mr. Eberwein also served on the board of Hope for New York, a charitable organization dedicated to serving the poor in New York City, from 2011 to 2014, where he was the Treasurer and on its Executive Committee. Mr. Eberwein earned a Masters of Business Administration from The Wharton School, University of Pennsylvania, and a Bachelor of Business Administration degree with High Honors from The University of Texas at Austin.

Daniel M. Koch has served as our President and Chief Executive Officer and on our Board since November 2013. Previously, Mr. Koch served as our vice president – marketing since October 2012. From September 2010 to September 2012, Mr. Koch served as a Senior Account Manager for Delta Design – Rasco, a manufacturer of test handlers. From March 1991 to August 2010, Mr. Koch served as our vice president – worldwide sales. From March 1990 to March 1991, Mr. Koch served as the vice president of sales of Summation, Inc., a company involved with the testing of PC boards. From December 1973 to March 1990, Mr. Koch served in various sales positions and most recently as vice president of sales of Micro Component Technology, Inc. Mr. Koch’s extensive experience in sales and general management and knowledge of our products, our markets and our customers is invaluable to our Board.

Stephen A. Clark served as our Chief Financial Officer from September 2016 until May 2019, and previously served as our Interim Chief Financial Officer since joining the Company in June 2016. Mr. Clark has over 25 years of business, accounting and finance experience. Prior to joining the Company, Mr. Clark worked as a consultant for several companies in a variety of industries. Mr. Clark previously served as Vice President and Controller of Leaf River Energy Center, LLC, a natural gas storage company, from March 2013 to August 2014. Prior to that, from May 2002 to March 2013, Mr. Clark served as Executive Director of Finance of Long Island Power Authority, a $3 billion electric utility company servicing Long Island, New York. Mr. Clark began his career at PricewaterhouseCoopers, a certified public accounting firm, working in the Audit and Business Advisory Services group and the Transaction Services group from September 1990 to June 2000. Mr. Clark is a certified public accountant (inactive) and holds a Bachelor of Science in Accounting from Syracuse University and a Masters of Business Administration from Fairfield University.

Mark C. Hood has served as Vice President of Operations for Globalscape, Inc. (NYSE American: GSB) since August 2018. Until August 2018, he served as Executive Vice President of Crossroads Systems, Inc. From February 2015 to July 2017, he served as Executive Vice President of Corporate Development and previously served as Executive Vice President of Corporate Communications from January 2013 to January 2015. From 2009 to 2013, Mr. Hood was founder and CEO of MCH Advisors, and helped early stage technology clients design and launch sales and marketing programs in high-growth markets. From 1995 to 2009, Mr. Hood was CEO of Network Consulting Services, a master sales agency he launched to integrate services from multiple telecommunications companies. He also held Series 7, 65, and 66 securities licenses and served as General Partner of two equity investment funds. Mr. Hood earned a BBA in Marketing from Sam Houston State University and a MS in Technology Commercialization from The University of Texas at Austin, McCombs School of Business.

Rodney E. Schwatken is serving as a financial consultant for Canpango, Inc., a wholly-owned subsidiary of Scansource, Inc. (NASDAQ: SCSC). Canpango is a longstanding salesforce implementation and consulting partner. Prior to his work at Canpango, Mr. Schwatken was employed by Novation Companies, Inc. (OTC Pink: NOVC) (“Novation”). He served as Novation’s Chief Executive Officer from August 2015 to September 2017, as Chief Financial Officer from January 2008 to August 2017 and held various other officer positions at Novation from June 1993 to January 2008. Novation owns or has owned businesses engaged in a variety of activities, including healthcare staffing, residential mortgage lending and technology. From June 1993 to March 1997, Mr. Schwatken was employed in the finance and accounting department of U.S. Central Credit Union, a $30 billion investment manager and technology service provider for the credit union industry. From January 1987 to June 1993, Mr. Schwatken was employed by Deloitte. Mr. Schwatken received his Bachelor of Science degree from the University of Kansas.

Code of Ethics

We have adopted a Code of Business Conduct and Ethics (the “Code of Ethics”), which covers a wide range of business practices and procedures and is intended to ensure to the greatest extent possible that our business is conducted in a consistently legal and ethical manner. The Code of Ethics is consistent with how we have always conducted our business and applies to all of our directors, officers and other employees, including our principal executive officer and principal financial and accounting officer. A copy of the Code of Ethics is publicly available in the “About Us – Governance – Documentation” section of our website at www.atrmholdings.com. We intend to promptly disclose on our website any grant of waivers from or amendments to a provision of the Code of Ethics following such amendment or waiver.

Board Committees

Our Board has three standing committees to assist it with its responsibilities. These committees are described below.

Audit Committee. The primary purpose of the Audit Committee is to oversee the accounting and financial reporting processes of the Company and the audits of the consolidated financial statements of the Company. The Audit Committee is also charged with the review and approval of all related party transactions involving the Company. The current members of the Audit Committee are Messrs. Schwatken and Hood. Mr. Schwatken currently serves as Chairman of the Audit Committee. The Board has determined that all members of the Audit Committee are audit committee financial experts, as defined by the SEC rules, based on their past business experience and financial certifications. The Audit Committee charter is posted in the “About Us – Governance – Documentation” section of our website at www.atrmholdings.com.

Compensation Committee. The duties and responsibilities of the Compensation Committee include, among other things, reviewing and approving the Company’s general compensation policies, setting compensation levels for the Company’s executive officers, setting the terms of and grants of awards under share-based incentive plans and retaining and terminating executive compensation consultants. The current members of the Compensation Committee are Messrs. Schwatken and Hood. Mr. Schwatken currently serves as Chairman of the Compensation Committee. The Compensation Committee charter is posted in the “About Us – Governance – Documentation” section of our website at www.atrmholdings.com.

Nomination and Corporate Governance Committee. The duties and responsibilities of the Nomination and Corporate Governance Committee include, among other things, assisting the Board in identifying individuals qualified to become Board members and recommending director nominees for the next annual meeting of shareholders, and taking a leadership role in shaping the corporate governance of the Company. The current members of the Nomination and Corporate Governance Committee are Messrs. Schwatken and Hood. Mr. Hood currently serves as Chairman of the Nomination and Corporate Governance Committee. The Nomination and Corporate Governance Committee charter is posted in the “About Us – Governance – Documentation” section of our website at www.atrmholdings.com.

Involvement in Certain Legal Proceedings

LSVM and our director Jeffrey Eberwein are each subject to a SEC administrative order, dated February 14, 2017 (Securities Exchange Act Release No. 80038), relating to alleged violations of Section 13(d) of the Exchange Act and the rules promulgated thereunder, including failing to disclose the members of a stockholder group, and further allegations that Mr. Eberwein violated Section 16(a) of the Exchange Act and the rules promulgated thereunder, including failing to timely file initial statements of beneficial ownership on Form 3 and changes thereto on Form 4. Without admitting or denying any violations, (i) LSVM agreed to cease and desist from committing or causing any violations of Section 13(d) of the Exchange Act and Rules 13d-1 and 13d-2 promulgated thereunder, and paid a civil penalty of $120,000 to the SEC and (ii) Mr. Eberwein agreed to cease and desist from committing or causing any violations of (x) Section 13(d) of the Exchange Act and Rules 13d-1 and 13d-2 promulgated thereunder and (y) Section 16(a) of the Exchange Act and Rules 16a-2 and 16a-3 promulgated thereunder, and paid a civil penalty to the SEC in the amount of $90,000.

Our director Rodney Schwatken resigned from his positions as Chief Executive Officer and Chief Financial Officer of Novation effective October 1, 2017. From April 2015 until March 2018, Mr. Eberwein served as a director of Novation and became principal executive officer in 2017. On July 20, 2016, Novation and its subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the District of Maryland (Baltimore Division) seeking relief under chapter 11 of the United States Bankruptcy Code. On June 12, 2017, the Bankruptcy Court entered an order confirming Novation's plan of reorganization.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors, executive officers and holders of more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changes in the ownership of common stock and other equity securities of the Company. Such persons are required to furnish us with copies of all Section 16(a) filings.

Based solely upon a review of the copies of the forms furnished to us, we believe that our directors, officers and holders of more than 10% of our common stock complied with all applicable filing requirements during the 2018 fiscal year other than the inadvertent late Form 4 filings by Messrs. Clark, Eberwein, Elbaor, Hood, Koch and Schwatken made on May 14, 2019, and by Mr. Vetter made on May 15, 2019, each reporting one transaction that occurred on December 12, 2018.

ITEM 11. EXECUTIVE COMPENSATION.

Summary Compensation Table

The following table sets forth the cash and non-cash compensation for the fiscal years ended December 31, 2018 and December 31, 2017 earned by our named executive officers:



Name and Principal Position	Year	Salary ($)	Stock Awards ($)⁽¹⁾			Total ($)
Daniel M. Koch	2018	240,000	2,000	(2	)	242,000
President and Chief Executive Officer	2017	240,000	11,800	(3	)	251,800
Stephen A. Clark(4)	2018	205,000	2,000	(2	)	207,000
Former Chief Financial Officer, Treasurer and Secretary	2017	189,167	11,800	(3	)	200,967


⁽¹⁾	The fair value of these stock awards was computed in accordance with methods allowed under FASB ASC Topic 718 "Compensation - Stock Compensation"


⁽²⁾	Represents the grant date fair value of a restricted stock grant of 10,000 shares of common stock awarded on December 12, 2018. These shares are scheduled to vest on December 12, 2019.


⁽³⁾	Represents the grant date fair value of a restricted stock grant of 10,000 shares of common stock awarded on December 18, 2017. These shares vested on December 18, 2018.


⁽⁴⁾	Mr. Clark resigned from his positions as our Chief Financial Officer, Treasurer and Secretary effective May 31, 2019.

Employment Agreements

The Company’s current executive officer, Mr. Koch is an employee “at will” and does not have an employment agreement with the Company.

We are party to a Change of Control Agreement with Mr. Koch, as described in detail below under the heading, "Potential Payments Upon Termination or Change-in-Control."

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth equity incentive plan awards for each named executive officer outstanding as of December 31, 2018:



	Option Awards				Stock Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable	Number of Securities Underlying Unexercised Options (#) Unexercisable	Option Exercise Price ($)	Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested (#)		Market Value of Shares or Units of Stock That Have Not Vested ($)⁽²⁾
Daniel M. Koch	—	—	—	—	10,000	⁽¹⁾	2,000
Stephen A. Clark⁽³⁾	—	—	—	—	10,000	⁽¹⁾	2,000


⁽¹⁾	Represents the unvested portion of a restricted stock grant that was awarded on December 12, 2018 under the 2014 Incentive Plan (See Note 20 to the Consolidated Financial Statements). These shares are scheduled to vest on December 12, 2019.


⁽²⁾	Based on the closing share price on December 31, 2018 of $0.20 per share.


⁽³⁾	Mr. Clark resigned from his positions as our Chief Financial Officer, Treasurer and Secretary effective May 31, 2019.

Potential Payments Upon Termination or Change-in-Control

We are party to a Change of Control Agreement with Mr. Koch (a “Change of Control Agreement”) providing for severance pay and other benefits in the event of a change of control. The Change of Control Agreement provides for severance payments of two times the executive’s annual base salary in the event the executive’s employment is terminated, either voluntarily with “good reason” or involuntarily, during the two-year period following a change of control. The severance payments are to be made over 24 months following the date of employment termination according to our regular payroll practices and policies. An executive receiving severance payments is also entitled to reimbursement of the employer portion of group medical and group dental premiums under COBRA continuation coverage. The Change of Control Agreement also provides for immediate vesting of all of the executive’s unvested options outstanding upon a change of control.

For purposes of the Change of Control Agreement, a change of control is deemed to occur upon:


•	the sale or other transfer of all or substantially all of our assets;


•	the approval by our shareholders of a liquidation or dissolution of the Company;


•	any person, other than a bona fide underwriter, becoming the owner of more than 40% of our outstanding shares of common stock;


•	a merger, consolidation or exchange involving the Company, but only if our shareholders prior to such transaction own less than 65% of the combined voting power of the surviving or acquiring entity following the transaction; or


•	the “continuity” members of our Board, being the incumbent members of our Board as of the end of 2012 and future members of our Board who were approved by at least a majority of our continuity members, ceasing to constitute at least a majority of the Board.

Compensation of Non-Employee Directors



Name	Fees earned or paid in cash ($)		Stock Awards ($)⁽¹⁾		Option Awards ($)		Non-equity incentive plan compensation ($)		Nonqualified deferred compensation earnings ($)		All other compensation ($)		Total ($)
Jeffrey E. Eberwein	$	—	$	2,000	$	—	$	—	$	—	$	—	$	2,000
James C. Elbaor	—		4,000		—		—		—		—		4,000
Mark C. Hood	—		4,000		—		—		—		—		4,000
Rodney E. Schwatken	—		4,000		—		—		—		—		4,000
Galen G. Vetter	—		4,000		—		—		—		—		4,000

⁽¹⁾

Messrs. Elbaor, Hood, Schwatken and Vetter were each granted 20,000 shares of restricted stock on December 12, 2018, which are scheduled to vest on December 12, 2019. Mr. Eberwein was granted 10,000 shares of restricted stock on December 12, 2018, which are scheduled to vest on December 12, 2019. The amounts reported reflect the grant date award value as determined pursuant to Accounting Standard Codification Topic 718.

At the present time, our directors receive no cash compensation for their services as members of the Board, although their out-of-pocket expenses incurred on our behalf are reimbursed.



ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth information with respect to the beneficial ownership of our common stock as of June 14, 2019, by:


•	each person, or group of affiliated persons, known to us to beneficially own more than 5% of our outstanding common stock;


•	each of our directors and named executive officers; and


•	all of our directors and executive officers as a group.

The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. The information relating to our 5% beneficial owners is based on information we received from such holders. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares voting power, which includes the power to vote or direct the voting of a security, or investment power, which includes the power to dispose of or to direct the disposition of a security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest. Except as otherwise set forth below, the address of the persons listed below is c/o ATRM Holdings, Inc., 5215 Gershwin Avenue N., Oakdale, Minnesota 55128, and each of the persons listed has, to our knowledge, sole voting and investment power with respect to the indicated shares of common stock.



Name of Beneficial Owner	Number of Shares of Common Stock			Percentage of Outstanding Common Stock⁽¹⁾
5% or Greater Shareholders
Jeffrey E. Eberwein	438,017	(2	)	17.0	%
Directors and Named Executive Officers
Jeffrey E. Eberwein	438,017	(2	)	17.0	%
Daniel M. Koch	43,510	(3	)	1.7	%
Stephen A. Clark	30,000	(4	)	1.2	%
Mark C. Hood	30,000	(5	)	1.2	%
Rodney E. Schwatken	30,000	(5	)	1.2	%
All executive officers and directors as a group (five persons)	541,527	(6	)	21.0	%

⁽¹⁾

The applicable percentage of ownership for each beneficial owner is based upon 2,576,219 shares of common stock outstanding as of June 14, 2019. Shares of our common stock issuable upon exercise of options, warrants or other rights or the conversion of other convertible securities beneficially owned that are exercisable within 60 days are deemed outstanding for the purpose of computing the percentage ownership of the person holding such securities and rights and all executive officers and directors as a group.

⁽²⁾

Represents 435,012 shares of common stock owned directly by Mr. Eberwein (including 10,000 unvested shares of restricted stock) and 3,005 shares of common stock owned by Lone Star Value General Partner ("LSVGP"). Mr. Eberwein is the general manager and sole member of LSVGP and as such, may be deemed beneficial owner of the securities owned by LSVGP. Mr. Eberwein disclaims beneficial ownership of such securities, except to the extent of his pecuniary interest therein.


⁽³⁾	Includes 10,000 unvested shares of restricted stock. An additional 3,510 shares of common stock held separately in a brokerage account.


⁽⁴⁾	Includes 10,000 unvested shares of restricted stock.


⁽⁵⁾	Includes 20,000 unvested shares of restricted stock.


⁽⁶⁾	Excludes shares beneficially owned by Mr. Clark, who is no longer an executive officers of the Company.

Securities Authorized for Issuance under Equity Compensation Plans

The following table summarizes information about our equity compensation plans as of December 31, 2018:



Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column)
Equity compensation plans approved by security holders⁽¹⁾	—	$	—	130,000	⁽²⁾
Equity compensation plans not approved by security holders	—	—		—
Total	—	$	—	130,000


⁽¹⁾	These equity compensation plans consist of our 2003 Stock Incentive Plan and our 2014 Incentive Plan.


⁽²⁾	Represents 130,000 shares of common stock available for issuance under our 2014 Incentive Plan.



ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Related Person Transactions and Certain Relationships

Jeffrey E. Eberwein and Lone Star Value

As of June 14, 2019, Jeffrey E. Eberwein, Chairman of the Board, may be deemed to beneficially own 438,017 shares of our common stock, including 3,005 shares of our common stock owned directly by LSVGP, constituting approximately 17% of our outstanding shares. Mr. Eberwein is the manager of LSVGP.

As of December 31, 2017, we had outstanding the following unsecured promissory notes made for the benefit of LSVI and LSV Co-Invest I:


•	$4.3 million principal amount outstanding under an unsecured promissory note, dated April 1, 2014, issued to LSVI;


•	$2.7 million principal amount outstanding under an unsecured promissory note, dated July 21, 2014, issued to LSV Co-Invest I;


•	$2.0 million principal amount outstanding under an unsecured promissory note, dated October 4, 2016, issued to LSV Co-Invest I; and


•	$0.5 million principal amount outstanding under an unsecured promissory note, dated March 31, 2017, issued to LSV Co-Invest I.

Interest on these notes was payable semiannually and any unpaid principal and interest was due on April 1, 2019. On August 12, 2016, the Company, LSVI and LSV Co-Invest I amended the then-existing notes to allow the Company, at its sole option, 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 subsequently issued notes provide for PIK Interest payment options, subject to certain conditions, at an effective rate of 12% per annum. The Company elected the PIK Interest option for its interest payments in 2018 and 2017 and recorded $411.0 thousand and $1.3 million of PIK Interest as of December 31, 2018 and 2017, respectively.

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 Series B Stock 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.

On October 4, 2016, LSVI pledged via a pledge and securities agreement (“LSVI Pledge Agreement”) up to $3 million plus additional fees as collateral to secure a promissory note payable to Gerber Finance, also dated October 4, 3016 to be used toward the acquisition of EBGL “EBGL Acquisition Note”. The EBGL Acquisition Note bears interest at the current prime rate plus 3.0% payable monthly with any unpaid principal and interest due on December 31, 2018. Per the terms of the EBGL Acquisition Note and corresponding loan and Security agreement it was automatically extended to December 31, 2019 as neither party elected to terminate.

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.

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.

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.

We are party to a Registration Rights Agreement (the “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 107,297 shares of common stock issued upon the conversion of a convertible promissory note held by LSVI in 2014.

ATRM's issuance of each of the promissory notes to LSVI, LSV Co-Invest I and LSVM, and the Company's entry into each of the related agreements, were approved by a Special Committee of the Board consisting solely of independent directors.

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 as discussed in more detail in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K.

LSVM and LSV Co-Invest I are party to subordination agreements with ATRM and Gerber Finance pursuant to which LSVM and LSV Co-Invest I agreed to subordinate the obligations of ATRM under their unsecured promissory notes to the obligations of the borrowers to Gerber Finance. Additionally, as a condition to the Premier Loan Agreement, Mr. Eberwein entered into a guaranty in favor of Premier Bank, absolutely and unconditionally guaranteeing all of the borrowers’ obligations.

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.

Jeffrey E. Eberwein and Digirad Corporation

Mr. Eberwein is the Chairman of the Board of Digirad and beneficially owns 869,152 shares of Digirad's common stock, or approximately 4.3% 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. As discussed above, LSVI owns 216,094 shares of 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.

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. Accordingly, on September 10, 2018, ATRM entered into a non-binding LOI relating to the acquisition of ATRM (see Note 26 for additional information). Under the terms contemplated in the LOI, ATRM stockholders would have received 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 26 for additional information). Although the LOI expired by its terms on December 31, 2018, Digirad and ATRM have had additional discussions regarding the terms and conditions of a proposed transaction and the consideration to be paid for ATRM shares. The parties are currently discussing that the consideration would not be Digirad shares of common stock, but some other form of security. In addition, on May 15, 2019, Digirad and ATRM entered into an Agreement which provides that, in the event the ATRM Acquisition does not close on or prior to December 31, 2019, ATRM will reimburse Digirad of certain consulting and related fees paid by Digirad on behalf of ATRM. We anticipate the ATRM Acquisition to close in the third quarter of 2019; however, the parties have not reached any definitive agreement, and there can be no assurance regarding timing of completion of regulatory approvals, which could delay timing of the closing and any ATRM Acquisition would remain subject to the satisfaction of customary closing conditions.

We anticipate the ATRM Acquisition to close in the third quarter of 2019; however, there can be no assurance regarding timing of completion of regulatory approvals, which could delay timing of the closing.

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.

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 of 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, 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.

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 $990,000, 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. 300 Park is a wholly-owned indirect subsidiary of Digirad, formed for the purpose of acquiring and holding the Park Facility.

Lease of Maine Facilities

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. ATRM has unconditionally guaranteed the performance of all obligations under the Waterford Lease and Park Lease to be performed by KSB, including, without limitation, the payment of all required rent.

On April 3, 2019, KBS entered into a lease agreement (the “Oxford Lease”) with 56 Mechanic Falls Road, LLC (“56 Mechanic”), in connection with that 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 Premises”). The Oxford Lease was amended as of April 18, 2019 (the “Oxford Lease Amendment”) to provide that the commencement date will be the later of the closing of the sale of the Oxford Premises (the "Oxford Transaction"), which occurred on March 27, 2019, and the date that possession of the leased premises is able to be delivered to KBS, which is anticipated to occur on or prior to June 30, 2019. 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 the Oxford Lease to be performed by KBS, including, without limitation, the payment of all required rent.

Procedures for Review and Approval of Transactions with Related Parties

All transactions between us and any of our officers, directors, director nominees, principal shareholders or their immediate family members are required to be reviewed and approved by the Audit Committee. Such policy and procedures are set forth in the Audit Committee charter.

Director Independence

The Board has determined that all of our non-employee directors other than Mr. Eberwein are independent within the meaning of the SEC rules. The Board has also determined that all directors serving on the Audit Committee, the Compensation Committee, and the Nomination and Corporate Governance Committee are independent within the meaning of SEC rules with respect to membership on each such committee.



ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES.

Audit and Non-Audit Fees

The following table presents aggregate fees billed for professional services rendered by BDO USA, LLP, our current independent registered public accounting firm for fiscal year 2018 and Boulay PLLP, our former independent registered public accounting firm, for fiscal year 2017. There were no other professional services rendered or fees billed by Boulay PLLP or BDO USA, LLP for fiscal years 2018 and 2017.



Services Rendered	2018		2017
Audit Fees⁽¹⁾	$	240,000	$	220,750
Audit-Related Fees⁽²⁾	—		10,185
Tax Fees⁽³⁾	—		39,646
Total	$	240,000	$	270,581


⁽¹⁾	These fees include the audits of our annual consolidated financial statements for fiscal years 2018 and 2017 and the reviews of our consolidated financial statements included in our Quarterly Reports on Form 10-Q for fiscal years 2018 and 2017.


⁽²⁾	These fees are related to consultations regarding various accounting issues, including revenue recognition, debt restructuring, lease accounting, etc.


⁽³⁾	These fees are related to the preparation of our 2018 and 2017 federal and state income tax returns and consultations regarding Section 382 of the Code.

Pre-Approval Policies and Procedures

All services provided by our independent registered public accounting firms are subject to pre-approval by our Audit Committee. The Audit Committee has authorized each of its members to approve services by our independent registered public accounting firms in the event there is a need for such approval prior to the next full Audit Committee meeting. The Audit Committee has also adopted policies and procedures that are detailed as to the particular service and that do not include delegation of the Audit Committee’s responsibilities to management under which management may engage our independent registered public accounting firm to render audit or non-audit services. Any interim approval given by an Audit Committee member and any such engagement by management must be reported to the Audit Committee no later than its next scheduled meeting. Before granting any approval, the Audit Committee (or a committee member if applicable) gives due consideration to whether approval of the proposed service will have a detrimental impact on the independence of the independent registered public accounting firm. The full Audit Committee pre-approved all services provided by BDO USA, LLP in fiscal year 2018.

PART IV



	ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

1. Financial Statements of Registrant.

The following Consolidated Financial Statements of ATRM Holdings, Inc. and the Independent Registered Public Accounting Firm’s Report thereon are included herein:



Description		Page(s)

Report of Independent Registered Public Accounting Firm		36

Consolidated Financial Statements:

Consolidated Statements of Operations		38

Consolidated Balance Sheets		39

Consolidated Statements of Changes in Shareholders’ Deficit		40

Consolidated Statements of Cash Flows		41

Notes to Consolidated Financial Statements		43

2. Financial Statement Schedule of Registrant.

None.

3. Exhibits.

The exhibits to this Form 10-K are listed in the Exhibit Index of this Form 10-K.

If you are one of our shareholders and you want a copy of any of the exhibits listed or referred to in the Exhibit Index, we will furnish it to you at a reasonable cost upon your written request sent to ATRM Holdings, Inc., 5215 Gershwin Avenue N., Oakdale, Minnesota 55128, Attn.: Shareholder Relations.

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

ATRM Holdings, Inc.

Oakdale, Minnesota

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of ATRM Holdings, Inc. (the “Company”) and subsidiaries as of December 31, 2018, the related consolidated statements of operations, changes in shareholders' deficit, and cash flows for the year then ended (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2018, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Going Concern Uncertainty

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency, among other matters, that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Change in Accounting Principle

As discussed in Note 5 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers in fiscal year 2018 due to the adoption of Topic 606: Revenue from Contracts with Customers.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provide a reasonable basis for our opinion.

We have served as the Company's auditor since 2019.

San Diego, California



/s/ BDO USA, LLP
June 26, 2019

Report of Independent Registered Public Accounting Firm

To the Board of Directors and

Shareholders of ATRM Holdings, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of ATRM Holdings, Inc. (the “Company”) as of December 31, 2017, and the related consolidated statements of operations, changes in shareholders’ deficit, and cash flows for the year then ended (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.



/s/ Boulay PLLP

We have served as the Company’s auditor since 2013.

Minneapolis, Minnesota

April 30, 2019

ATRM Holdings, Inc.

Consolidated Statements of Operations

(in thousands, except per share amounts)



Years ended December 31,	2018			2017
Net sales	$	34,477		$	40,553
Costs and expenses:
Cost of sales	31,501			37,668
Selling, general, and administrative expenses	5,501			6,690
Goodwill impairment charge	—			3,020
Total costs and expenses	37,002			47,378
Operating loss	(2,525		)	(6,825		)
Other (expense) income:
Interest expense, net	(997		)	(2,278		)
Change in fair value of contingent earn-outs, net	6			437
Loss before income taxes	(3,516		)	(8,666		)
Income tax expense	—			(11		)
Net loss	(3,516		)	(8,677		)
Preferred stock dividend	—			(407		)
Accrued preferred stock dividend	(1,716		)	—
Net loss attributable to common shareholders	$	(5,232	)	$	(9,084	)

Net loss per share, basic and diluted	$	(2.17	)	$	(3.83	)

Weighted average common shares outstanding
basic and diluted	2,407			2,372

The accompanying notes are an integral part of the consolidated financial statements.

ATRM Holdings, Inc.

Consolidated Balance Sheets

(in thousands)



December 31,	2018			2017
ASSETS
Current assets:
Cash and cash equivalents	$	187		$	48
Restricted cash	501			482
Accounts receivable, net of allowance for doubtful accounts of $113 and $185 at December 31, 2018 and 2017, respectively	3,289			3,840
Costs and estimated profit in excess of billings	—			565
Inventories	1,790			1,285
Fair value of contingent earn-out receivable, current	63			373
Other current assets	343			216
Total current assets	6,173			6,809

Property, plant and equipment, net	4,131			4,456
Fair value of contingent earn-out receivable, noncurrent	—			61
Intangible assets, net	1,274			1,589
Total assets	$	11,578		$	12,915

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:
Notes payable	$	6,513		$	5,969
Current portion of long-term debt	3,048			1,068
Trade accounts payable	6,240			4,856
Customer deposits	184			—
Billings in excess of costs and estimated profit	—			983
Accrued compensation	492			416
Other accrued liabilities	2,697			2,370
Total current liabilities	19,174			15,662

Long-term debt	2,113			3,061
Deferred income taxes	10			28
Total long-term liabilities	2,123			3,089
Total liabilities	21,297			18,751

Commitments and contingencies

Shareholders' deficit:
Preferred stock, $.001 par value; 2,000,000 shares authorized as of December 31, 2018 and 2017, respectively; 597,139 shares issued and outstanding at December 31, 2018 and 546,466 shares issued and outstanding at December 31, 2017	1			—
Common stock, $.001 par value; 7,500,000 shares authorized as of December 31, 2018 and 2017, respectively; 2,466,219 shares issued and outstanding at December 31, 2018 and 2,396,219 issued and outstanding at December 31, 2017	2			2
Additional paid-in capital	82,646			83,014
Accumulated deficit	(92,368		)	(88,852		)
Total shareholders' deficit	(9,719		)	(5,836		)
Total liabilities and shareholders' deficit	$	11,578		$	12,915

The accompanying notes are an integral part of the consolidated financial statements.

ATRM Holdings, Inc.

Consolidated Statements of Changes in Shareholders’ Deficit

(in thousands)



	Common Stock			Preferred Stock			Additional			Accumulated			Total Shareholders’
	Shares	Amount		Shares	Amount		Paid-in Capital			Deficit			Deficit
Balance, December 31, 2016	2,366	$	2	—	$	—	$	69,702		$	(80,175	)	$	(10,471	)
Share-based compensation expense	30	—		—	—		57			—			57
Preferred stock issuance (exchange of promissory notes)	—	—		133	—		13,255			—			13,255
Preferred stock 4-for-1 stock split	—	—		398	—		—			—			—
Net loss	—	—		—	—		—			(8,677		)	(8,677		)
Dividend on preferred stock	—	—		—	—		(407		)	—			(407		)
Preferred dividend PIK (paid)	—	—		16	—		407			—			407
Balance, December 31, 2017	2,396	$	2	547	$	—	$	83,014		$	(88,852	)	$	(5,836	)
Share-based compensation expense	70	—		—	—		81			—			81
Net loss	—	—		—	—		—			(3,516		)	(3,516		)
Dividend on preferred stock accrued	—	—		—	—		(449		)	—			(449		)
Dividend on preferred stock	—	—		—	—		(1,267		)	—			(1,267		)
Preferred dividend PIK (paid)	—	—		50	1		1,267			—			1,268
Balance, December 31, 2018	2,466	$	2	597	$	1	$	82,646		$	(92,368	)	$	(9,719	)

The accompanying notes are an integral part of the consolidated financial statements.

ATRM Holdings, Inc. Consolidated Statements of Cash Flows (in thousands)

Years Ended December 31,	2018			2017
Cash flows from operating activities:
Net loss	$	(3,516	)	$	(8,677	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense	739			903
Amortization expense, deferred financing costs	64			351
Share-based compensation expense	81			57
Provision for bad debts	129			71
Gain on sale of equipment	(1		)	(21		)
Unrealized loss (gain) on lumber derivatives	9			(6		)
Deferred income taxes	(18		)	9
Change in fair value of contingent earn-out receivable	(6		)	(361		)
Goodwill impairment charge	—			3,020
Change in fair value of contingent earn-out payable	—			(76		)
Accrued interest	(411		)	1,331
Imputed interest on seller deferred payment obligations	66			130
Changes in operating assets and liabilities:
Accounts receivable	423			(1,308		)
Costs and estimated profit in excess of billings	565			480
Inventories	(505		)	119
Other current assets	(138		)	28
Trade accounts payable	1,385			1,079
Customer deposits	184			—
Billings in excess of costs and estimated profit	(983		)	331
Accrued compensation	76			10
Other accrued liabilities	326			496
Net cash used in operating activities	(1,531		)	(2,034		)
Cash flows from investing activities:
Proceeds from earn-out consideration	377			488
Purchase of property and equipment	(34		)	(443		)
Proceeds from sale of equipment	24			79
Net cash provided by investing activities	367			124
Cash flows from financing activities:
Proceeds from issuance of long-term debt	1,975			514
Proceeds from revolving line of credit	33,232			43,800
Principal payments on revolving line of credit	(32,734		)	(41,564		)
Principal payments on long-term debt	(1,133		)	(1,668		)
Payment of deferred financing costs	(18		)	(39		)
Net cash provided by financing activities	1,322			1,043
Net increase (decrease) in cash, cash equivalents and restricted cash	158			(867		)
Cash, cash equivalents and restricted cash at beginning of period	530			1,397
Cash, cash equivalents and restricted cash at end of period	$	688		$	530

The accompanying notes are an integral part of the consolidated financial statements.

ATRM Holdings, Inc. Consolidated Statements of Cash Flows (in thousands)

Years Ended December 31,	2018			2017
Supplemental cash flow information
Cash paid for interest expense	$	1,240		$	1,175
Supplemental disclosure of non-cash investing and financing activities
PIK payment of preferred stock dividend	$	(1,268	)	$	407
Deferred financing costs recorded in accounts payable	—			55
Capital expenditures financed through debt	—			53
Decrease in fair value of contingent earn-out payable for restructuring of contingent earn-out payable	—			(891		)
Increase in long-term debt for restructuring of contingent earn-out payable	—			891
Long-term debt exchanged for preferred stock	—			(12,865		)
Decrease in other accrued liabilities (accrued interest) for preferred stock exchange	—			(390		)

The accompanying notes are an integral part of the consolidated financial statements.

ATRM Holdings, Inc.

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.

The Company’s corporate headquarters is located at Glenbrook's offices in Oakdale, Minnesota, a suburb of St. Paul.

NOTE 2: GOING CONCERN, LIQUIDITY AND CAPITAL RESOURCES

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, 2018, we had outstanding debt totaling approximately $11.7 million. Our debt primarily included (i) $3.7 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) $2.8 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 debt with related parties which includes (i) $1.4 million of unsecured promissory notes with Lone Star Value Co-Invest I, LP ("LSV Co-Invest I"), with interest payable semi-annually at a rate of 10.0% per annum (LSV Co-Invest I may elect to receive interest in-kind at a rate of 12.0% per annum), with any unpaid principal and interest due on January 12, 2020 (“LSVI Co-Invest I Notes Payable”, otherwise referred to herein and defined below as the LSV Co-Invest I January Note and LSV Co-Invest I June Note) (ii) $0.3 million of unsecured promissory notes with Lone Star Value Management, LLC ("LSVM"), with interest payable annually at a rate of 10.0% per annum (LSVM may elect to receive any interest payment entirely in-kind at a rate of 12.0% per annum), with any unpaid principal and interest due on November 30, 2020 ("LSVM Note"), and (iii) a $0.3 million unsecured promissory note with Digirad Corporation ("Digirad")(NASDAQ: DRAD), with interest payable at 10.0% per annum for the first 12 months of its term, and at 12.0% per annum for the remaining 12 months, with any unpaid principal and interest due on December 14, 2020.

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, 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

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

Gerber Finance for these events. In addition, the Company and Gerber Finance agreed to eliminate the minimum leverage ratio covenant for years after 2018.


•	KBS’s strategic shift away from large commercial projects with significant site work to focus on its core competency of manufacturing modular buildings;


•	KBS’s efforts to improve operating efficiencies, including reconfiguring the South Paris factory to increase production, investments in automated equipment to reduce labor costs, implementing lean manufacturing techniques, and elimination of duplicate overhead costs through the shut-down of the Waterford factory;


•	Reduction in KBS workforce including manufacturing, sales, engineering and front-office staff;


•	KBS increased pricing on its base ranch model in 2017, and in November 2017, instituted a 6% lumber surcharge on all new orders to help offset the significant rise in lumber and other raw materials costs;


•	KBS 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;


•	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;


•	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;


•	In 2017, we instituted a lumber hedging program for EBGL to assist in preserving existing margins against the potential large fluctuations in lumber raw material prices;


•	In August 2016, we amended certain of our debt agreements to allow the Company to pay PIK Interest on approximately $11.0 million of our debt, reducing strain on current cash flows;


•	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;


•	As disclosed in Note 19, in September 2017, we converted $13.3 million of the Company’s outstanding debt, including accrued interest, to the Company's 10.00% Series B Cumulative Preferred Stock ("Series B Stock");


•	As discussed in Note 16, in January 2018 and in June 2018, the Company issued 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;


•	In April 2019, KBS and EBGL executed sale leasebacks of several of their real estate properties (see further discussion in Note 26); and

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements


•	We continue to look for opportunities to refinance our remaining debt on more favorable terms.

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, allowance for doubtful accounts; asset lives used in computing depreciation and amortization; valuation of inventories, contingent consideration, 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.

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

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.

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 recognized at the point of return.

The Company's historic accounting practice under FASB ASC Topic 605, Revenue Recognition ("ASC 605") was to apply 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 performance obligation identified in the wall panel (EBGL) contracts.

Effective January 1, 2018, the Company adopted FASB ASC Topic 606, Revenue From Contracts With Customers ("ASC 606") - see further discussion in Note 5.

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

In accordance with the new guidance, the Company recognizes revenue at an amount that reflects the consideration that the Company expects to be entitled to receive in exchange for transferring goods or services to its customers. The Company's policy is to record revenue when control of the goods transfers to the customer. Net sales are comprised of gross revenues from sales of products less trade discounts and rebates.

Self-Insurance Costs: During 2017 and for the first six months of 2018, we maintained a self-insurance program for a portion of our employee health care costs. Self-insurance costs were 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 was estimated based on an analysis of historical claims experience and other assumptions. On July 1, 2018, the Company ended the self-insurance program and became fully insured. Accrued health insurance costs are included in the caption “Other accrued liabilities” in our consolidated balance sheet. See Note 14.

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 23 for additional information regarding income taxes.

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.

Share-Based Compensation: We measure and recognize share-based compensation using the fair value method. See Note 20 for additional information regarding share-based compensation and our stock-based compensation plans.


•	Level 1 – Quoted prices in active markets for identical assets or liabilities.


•	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.


•	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 and estimated profit, other current assets, trade accounts payable and accrued expenses at December 31, 2018 and 2017 approximate fair value due to the short-term maturities of these instruments.

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

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.

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. We adopted this ASU on January 1, 2018, and there were no material impacts on the Company’s results based on the adoption of this update.

Recently Issued

In August 2018, the FASB issued ASU No. 2018-13 (ASU 2018-13), which eliminates disclosures, modifies existing disclosures and adds new Fair Value disclosure requirements to Topic 820 for the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The ASU is effective for annual and interim reporting periods beginning after December 15, 2019. The Company is currently in the process of evaluating the impact the adoption of this ASU will have on the Company’s consolidated financial statements.

In July 2018, the FASB issued ASU 2018-09, "Codification Improvements", which does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several different FASB ASC areas based on comments and suggestions made by various stakeholders. Certain updates are applicable immediately while others provide for a transition period to adopt as part of the next fiscal year beginning after December 15, 2018. The Company does not expect the adoption of this guidance to have a material impact on the Company's consolidated financial statements.

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 either at the beginning of the earliest period presented using a modified retrospective approach or as of the adoption date using a modified retrospective approach. The Company will adopt the standard effective January 1, 2019 and has chosen to use the effective date as our date of initial application. 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

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

of this standard will add a right to use asset of $0.7 million and an additional lease liability of $0.7 million The Company does not expect a material impact to the consolidated statement of operations or cash flows.

NOTE 5. REVENUE RECOGNITION

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." This new standard replaced most existing revenue recognition guidance in U.S. GAAP and codified guidance under FASB ASC Topic 606 Revenue from Contracts with Customers ("ASC 606"). The underlying principle of this new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services.

The Company adopted ASU No. 2014-09 as of January 1, 2018 using the modified retrospective method. Under this method, results for the reporting period beginning after January 1, 2018 are presented under ASC 606, while prior period amounts continue to be reported in accordance with the Company's historic accounting practices under FASB ASC Topic 605, Revenue Recognition ("ASC 605").

The Company's historic accounting practice under ASC 605 was to apply 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 performance obligation identified in the wall panel (EBGL) contracts. Under ASC 606, it was determined that since the Company does not meet the criteria to recognize revenue over time, point in time revenue recognition should be applied. While the Company had previously recognized revenue upon delivery, it had also applied the uncompleted construction contract accounting to record a "Costs" and estimated profit in excess of billings and a "Billings" in excess of costs and estimated profit amount each reporting period. With the adoption of ASC 606, recording estimates of completion by specific contract activity will no longer be required.

The Company’s contracts do not offer a right to return any of the products sold unless covered under the assurance-type warranty offered. Assurance-type warranties provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications. Such warranties do not represent a separate performance obligation. The Company does not offer additional service-type warranties for its products.

Costs incurred to obtain a customer contract are not material to the Company for the KBS or EBGL revenue streams. The Company elected to apply the practical expedient to not capitalize costs to obtain contracts with a duration of one year or less, which are expensed and included within Cost of sales in the Consolidated Statements of Operations.

The Company generally requires deposits prior to the start of production of customer orders. The Company will not finance any part of the sale. The full balance is due upon delivery. Below is a summary of deposits utilized during the year by operating segment:



	Modular Home Manufacturing			Structured Wall Panel Manufacturing			Total
(in thousands)
January 1, 2018	$	682		$	300		$	982
Revenue recognized that was included in deposit at beginning of period	(682		)	(300		)	(982		)
Increase due to cash received, excluding amounts recognized as revenue during the period	180			4			184
December 31, 2018	$	180		$	4		$	184

The Company has expanded its financial statement disclosures as required by this new standard. See Note 25, "Operating Segments" for additional disclosures provided as a result of this ASU.

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

A summary of the amount by which each financial statement line item was affected in the current reporting period by ASC 606 as compared with the guidance that was in effect prior to adoption is set forth in the tables below:



	Impact of ASC 606 Adoption on Consolidated Balance Sheet as of December 31, 2018
(in thousands)	As reported under ASC 606		Adjustments			Balances without adoption of ASC 606
Inventory	$	1,790	$	(201	)	$	1,589
Costs and estimated profit in excess of billings	—		186			186
Billings in excess of costs and estimated profit	—		972			972
Customer deposits	184		184			—



	Impact of ASC 606 Adoption on Consolidated Statement of Cash Flows for the twelve months ended December 31, 2018
(in thousands)	As reported under ASC 606			Adjustments			Balances without adoption of ASC 606
Inventory	$	(505	)	$	201		$	(304	)
Costs and estimated profit in excess of billings	565			(186		)	379
Billings in excess of costs and estimated profit	(983		)	(972		)	(1,955		)
Customer deposits	184			184			—

NOTE 6: CASH, CASH EQUIVALENTS AND 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,
	2018		2017
Cash and cash equivalents	$	187	$	48
Restricted cash	501		482
Total cash, cash equivalents, and restricted cash shown in the consolidated statement of cash flows	$	688	$	530

In fiscal 2018, amounts included in restricted cash represent $0.5 million on deposit with Gerber Finance from time-to-time as additional collateral to support borrowing under the KBS loan agreement and an additional $30.9 thousand on deposit with INTL FC Stone related to our lumber commodity hedging program.

In fiscal 2017, Amounts included in restricted cash represent $0.4 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 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 $0.4 million and $0.5 million for the

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

year ended December 31, 2018 and 2017, respectively. The contingent earn-out receivable totaled approximately $63.0 thousand and $0.4 million at December 31, 2018 and 2017, respectively.

NOTE 8: PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are comprised of the following (in thousands):



December 31,	2018			2017
Land	$	858		$	858
Buildings and improvements	2,763			2,763
Equipment	2,028			1,946
Less: accumulated depreciation	(1,518		)	(1,111		)
Property, plant and equipment, net	$	4,131		$	4,456

Depreciation expense was $0.4 million in fiscal 2018 and 2017, respectively.

NOTE 9: FAIR VALUE MEASUREMENTS

Financial assets and liabilities reported at fair value on a recurring basis include the following (in thousands):



December 31,	2018		2017
Lumber derivative contracts (Level 1)	$	5	$	9

Contingent earn-out receivable (based on Level 3 inputs):
Current portion	$	63	$	373
Noncurrent portion	—		61
Total	$	63	$	434

Our Level 1 assets (lumber derivative contracts) fair value is based upon quoted market prices and is included in other current assets in the Consolidated Balance Sheet.

The following table summarizes the activity for our Level 3 assets and liabilities measured on a recurring basis (in thousands):



	Earn-Out Receivable ⁽¹⁾			Earn-Out Payable ⁽²⁾
Balance at December 31, 2016	$	561		$	(967	)
Add - adjustment based on re-assessments	361			—
Add - net decrease based on re-assessments	—			76
Subtract - settlements	(488		)	—
Subtract - amendment	—			891
Balance at December 31, 2017	434			—
Add – adjustment based on re-assessments	8			—
Subtract - settlements	(379		)	—
Balance at December 31, 2018	$	63		$	—


⁽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. This liability is now complete with no potential residual payables.

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

Quantitative information about Level 3 fair value assets and liabilities measured on a recurring basis at December 31, 2018 is summarized in the table below:

Quantitative information about Level 3 fair value assets measured on a recurring basis at December 31, 2017 is summarized in the table below:

There were no Level 3 fair value assets or liabilities measured on a nonrecurring basis at December 31, 2018. 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:

Financial assets reported at fair value on a nonrecurring basis include the following (in thousands):



Years ended December 31,	2017
	Fair Value (Level 3)		Total Gains and (Losses)⁽¹⁾
Goodwill	$	—	$	(3,020	)

⁽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 its fair value of $0 (see Note 13).

The following table summarizes the activity for our Level 3 assets measured on a nonrecurring basis (in thousands):



	Goodwill ⁽¹⁾
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 13.

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

NOTE 10: 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, 2018, the Company had long positions of 1,110,000 board feet under ten different lumber derivatives call contracts and had a short position of 1,100,000 board feet under ten different lumber derivatives put contracts with a net fair value of $5.1 thousand, which is included in other current assets.

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.

The Company had restricted cash on deposit with the broker totaling $30.9 thousand and $52.3 thousand at December 31, 2018 and December 31, 2017, respectively.

Gains (losses) from derivative instruments, none of which are designated as hedging instruments, are recorded in cost of sales in the Company’s statements of operations and included the following (in thousands):



	December 31, 2018			December 31, 2017
Realized (loss) gain, net	$	(60	)	$	37
Unrealized (loss) gain, net	(9		)	6
Total	$	(69	)	$	43

NOTE 11: ACCOUNTS RECEIVABLE, NET

Accounts receivable are comprised of the following (in thousands):



December 31,	2018			2017
Contract billings	$	3,094		$	3,751
Retainage	308			274
Subtotal	3,402			4,025
Less - allowance for doubtful accounts	(113		)	(185		)
Accounts receivable, net	$	3,289		$	3,840

Retainage balances are expected to be collected within the next twelve months.

NOTE 12: INVENTORIES

Inventory is comprised of the following (in thousands):



December 31,	2018		2017
Raw materials	$	1,438	$	1,285
Work-in-process	352		—
Inventories, net	$	1,790	$	1,285

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

NOTE 13: GOODWILL AND INTANGIBLE ASSETS

Intangible assets are comprised of the following (in thousands):



	December 31, 2018							December 31, 2017
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value		Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
Indefinite-lived intangible assets:
Trademarks	$	394	$	—		$	394	$	394	$	—		$	394
Total	394		—			394		394		—			394
Finite-lived intangible assets:
Customer relationships	2,097		(1,217		)	880		2,097		(902		)	1,195
Purchased backlog	—		—			—		1,290		(1,290		)	—
Total	2,097		(1,217		)	880		3,387		(2,192		)	1,195
Total intangible assets	$	2,491	$	(1,217	)	$	1,274	$	3,781	$	(2,192	)	$	1,589

The following table summarizes the activity for Goodwill (in thousands):



	Goodwill
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 performed an annual assessment of goodwill during the second quarter of 2017. Since the acquisition of EBGL in 2016, EBGL’s operating results had lagged behind management’s expectations. Rising lumber costs and other factors had 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.

Amortization expense amounted to approximately $0.3 million and $0.5 million in 2018 and 2017, respectively. Estimated amortization of purchased intangible assets is as follows over the next five years (in thousands):



2019	$	316
2020	315
2021	164
2022	85
2023	—
Thereafter	—
Total	$	880

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

NOTE 14: OTHER ACCRUED LIABILITIES

Other accrued liabilities are comprised of the following (in thousands):



December 31,	2018		2017
Accrued taxes ⁽¹⁾	$	1,815	$	1,562
Accrued dividend payable	373		—
Accrued interest expense	224		20
Accrued sales rebates	141		420
Accrued health insurance costs	67		285
Accrued warranty	56		50
Other	21		33
Total other accrued liabilities	$	2,697	$	2,370

⁽¹⁾Primarily includes accrued sales and use taxes.

The following table summarizes product warranty expense accruals and settlements for the two years ended December 31, (in thousands):



	Accrual balance at beginning of year		Accruals for warranties		Settlements made			Accrual balance at end of year
2018	$	50	$	6	$	—		$	56
2017	49		91		(90		)	50

NOTE 15: NOTES PAYABLE

As of December 31, 2018, we had outstanding revolving lines of credit of approximately $6.5 million. Our notes payable primarily included (i) $3.7 million principal outstanding on KBS’s $4.0 million revolving credit facility under the KBS Loan Agreement and (ii) $2.8 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, 2018, approximately $3.7 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 $3.7 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.

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

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 I (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 over advances. 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.

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 over advances 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.

As of December 31, 2018 and 2017, 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 26). 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

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

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.

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.

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

NOTE 16: LONG-TERM DEBT

Long-term debt is comprised of the following (in thousands):



December 31,	2018			2017
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
Promissory note 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 January 12, 2020	909			—
Promissory note 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 January 12, 2020	528			—
Promissory note payable to LSVM (a Related Party), unsecured, interest of 10.0% per annum (12% per annum PIK Interest) payable annually, with any unpaid principal and interest due on November 30, 2020	300			—
Digirad (a Related Party) unsecured promissory note, 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	275			—
Vehicle financing, interest at 5.9% per annum, due June 20, 2023	79			—
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	39			48
KBS software installment payment agreement, unsecured, interest at 8.0% per annum, payable in monthly installments of $1,199 through September 2020	21			35
Revolving equipment credit line, unsecured	10			12
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
Total long-term debt	5,161			4,129
Current portion	(3,048		)	(1,068		)
Noncurrent portion	$	2,113		$	3,061

Under the terms of the amended LSVI and LSV Co-Invest I promissory notes, the Company, at its sole option, may elect to make any interest payment in PIK Interest at an effective rate of 12% per annum (versus the 10% interest rate applied to cash payments) for that period.

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 Holdings, Inc.

Notes to Consolidated Financial Statements

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.

As of December 31, 2018, the Company was not in compliance with certain covenants with its Gerber promissory note totaling $3 million. These covenant breaches include: debt service coverage ratio and timely reporting of financial statements. The Company received a waiver for these covenant breaches through December 31, 2018. The waiver was dated as of June 25, 2019.

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 Lone Star Value Investors GP, LLC ("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.

As of June 1, 2018, LSV Co-Invest I held 353,060 shares of 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.

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 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

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

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, 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 19 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.

Promissory Note Sale to Digirad

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 (defined also above “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 LSVM, which is the investment manager

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

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 LSV Co-Invest I. LSV Co-Invest I also holds unsecured promissory notes of the Company in the principal amount totaling $1.4 million, the LSV Co-Invest I Notes Payable. 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.

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:



2019	$	3,048
2020	2,048
2021	28
2022	21
2023	16
Total long-term debt	$	5,161

NOTE 17: LEGAL PROCEEDINGS

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.

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

NOTE 18: 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 10% of our common stock. These lease agreements provide for monthly base rents totaling $22,135 as of December 31, 2018 and expire on September 30, 2021, with an option to renew for an additional five-year period. As of December 31, 2018, future minimum lease payments under operating leases were as follows (in thousands):



2019	$	267
2020	272
2021	207
2022	—
2023	—
Total minimum lease payments	$	746

Rent expense, including facility and various short-term equipment operating leases, was as follows (in thousands):



Years ended December 31,	2018		2017
Paid to companies controlled by certain shareholders	$	294	$	278
Paid to others	43		53
Total rent expense	$	337	$	331

NOTE 19: 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

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

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.

NOTE 20: 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.

On October 19, 2016, ATRM granted 30,000 restricted shares of the Company’s common stock to its Chief Executive Officer and two former Chief Financial Officers (10,000 shares each). The shares vested 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 $53.8 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.

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 vested 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 $80.6 thousand and $3.1 thousand for the twelve months ended December 31, 2018 and 2017,

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

respectively, and is included in the caption "Selling, general and administrative expenses" in our Consolidated Statement of Operations.

On December 12, 2018, ATRM granted 70,000 shares of the Company's common stock to its directors, its Chief Executive Officer and Chief Financial Officer (10,000 shares each) and granted 40,000 additional shares of the Company's common stock to each member of the Board of Director's Special Committee (10,000 shares each). The shares vested one year after the grant date and the fair value of the awards was determined to be $0.20 per share, the closing price of our common stock on the grant date. Compensation expense related to these grants was not material and is included in the caption "Selling, general and administrative expenses" in our Consolidated Statement of Operations.

NOTE 21: TAX BENEFIT PRESERVATION PLAN / PREFERRED STOCK RIGHTS

As of December 31, 2018, ATRM had federal net operating loss carryforwards (“NOLs”) of approximately $104.7 million and state NOLs of approximately $23.3 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 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.

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 10th 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 10th 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 2018 or 2017. No rights were exercisable at December 31, 2018. The Rights Plan expired on February 13, 2017.

NOTE 22: 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 2018 or 2017.

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

NOTE 23: INCOME TAXES

A reconciliation of income tax expense (benefit) computed using the federal statutory rate to the income tax expense in our consolidated statements of operations is as follows (in thousands):



Years ended December 31,	2018			2017
Tax benefit computed at federal statutory rate	$	(745	)	$	(3,084	)
State taxes, net of federal benefit	230			557
Increase (decrease) in valuation allowance	894			(10,645		)
Adjustment to income tax accruals	(380		)	(870		)
Non-deductible expenses	1			317
Impact of Tax Reform	—			13,736
Total income tax expense	$	—		$	11

Deferred tax assets (liabilities) are comprised of the following (in thousands):



December 31,	2018			2017
Accounts receivable	$	76		$	48
Employee compensation and benefits	52			61
Contingent consideration	(16		)	(106		)
Amortization	1,810			1,445
Deferred acquisition costs	194			212
NOL and tax credit carryforwards	24,154			24,064
Other, net	392			27
Deferred tax assets	$	26,662		$	25,751
Less valuation allowance	(26,672		)	(25,779		)
Net deferred tax liabilities	$	(10	)	$	(28	)

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 $104.7 million of which $102.5 million that will begin to expire in 2020 and $2.2 million can be carried forward indefinitely. We also have state NOLs of approximately $23.3 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 $0.8 million that will expire at various times, beginning in 2020, 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, 2018 and 2017 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

ATRM Holdings, Inc.

Notes to Consolidated Financial Statements

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.

U.S. Tax Reform

During 2017, we recorded tax charges for the impact of the Tax Act effects using the current available information and technical guidance on the interpretations of the Tax Act. As permitted by SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, we recorded provisional estimates and have subsequently finalized our accounting analysis based on the guidance, interpretations, and data available as of December 31, 2018. Adjustments made in the fourth quarter of 2018 upon finalization of our accounting analysis were not material to our Consolidated Financial Statements.

NOTE 24: 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,	2018		2017
Residential homes	57	%	68	%
Commercial structures	43	%	32	%
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,
	2018	2017	2018	2017
Residential Customers
Customer A	10.4%	*	*	14.1%

Commercial Customers

Fair Value Asset/Liability

Valuation Technique

Unobservable Input

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 Discount rate

$6.9 million
2.41%

ATRM Holdings, Inc. 10-K