MICRON SOLUTIONS INC /DE/ - Quarter Report: 2019 September (Form 10-Q)







UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10‑Q



☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2019 or



☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______ to ______

 

001-9731

(Commission file No.)



Micron Solutions, Inc.

(Exact name of registrant as specified in its charter)





25 Sawyer Passway

Fitchburg, Massachusetts  01420

(Address of principal executive offices and zip code)

 

(978) 345-5000

(Registrant's telephone number, including area code)



_________________________________________________________________

(Former name, former address and former fiscal year, if changed from last report)



Securities registered pursuant to Section 12(b) of the Act:



  

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 ☐



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 such files).   Yes ☒   No ☐



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.:





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 Rule 12b-2 of the Exchange Act).   Yes ☐   No ☒

 

As of November 13, 2019 there were 2,895,362 shares of the Company’s common stock outstanding.



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Micron Solutions, Inc. and Subsidiary

TABLE OF CONTENTS



 



 

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PART I - CONDENSED FINANCIAL STATEMENTS

Item 1.  Condensed Consolidated Financial Statements (unaudited) 



Micron Solutions, Inc. and Subsidiary

Condensed Consolidated Balance Sheets

(unaudited)









See accompanying notes to condensed consolidated financial statements.

 

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Micron Solutions, Inc. and Subsidiary

Condensed Consolidated Statements of Operations

(unaudited)







See accompanying notes to condensed consolidated financial statements.



 

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Micron Solutions, Inc. and Subsidiary

Condensed Consolidated Statements of Shareholders’ Equity

(unaudited)







See accompanying notes to condensed consolidated financial statements.



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Micron Solutions, Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows

(unaudited)











See accompanying notes to condensed consolidated financial statements.

 

 

1.  Basis of Presentation and Accounting Policies



The condensed consolidated financial statements (the "financial statements") include the accounts of Micron Solutions, Inc. (“Micron Solutions”) and its subsidiary, Micron Products, Inc. ("Micron" and together with Micron Solutions, the “Company”).  All intercompany balances and transactions have been eliminated in consolidation.



The financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC").  Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted pursuant to such rules and regulations.  These financial statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 19, 2019.



The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The Company's balance sheet at December 31, 2018 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by GAAP for complete financial statements.



The information presented reflects, in the opinion of the management of the Company, all adjustments necessary for a fair presentation of the financial results for the interim periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates. 



Liquidity and Management’s Plan



The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.



The Company identified certain conditions and events which in the aggregate required management to perform an assessment of the Company’s ability to continue as a going concern. These conditions included the Company’s negative financial history and the current liquidity position, including $503 of cash as of September 30, 2019 and approximately $1,000,000 of borrowing capacity on its revolving line of credit with Rockland Trust Company (the “Revolver”).    Management has performed an analysis to evaluate the entity’s ability to continue as a going concern for one year after the financial statements issuance date.



Management’s analysis includes forecasting future revenues, expenditures and cash flows, taking into consideration past performance and the requirements under the credit agreement.  Revenue and cash flow forecasts are dependent on the Company’s ability to fill booked orders from customers, its ability to close new and expanded business, its implementation of production efficiencies, and improvement of its overall financial performance.  In addition, the Company has amended its bank debt agreement to eliminate its debt service coverage covenant for the three months ended September 30, 2019.  





Based on management’s analysis, the Company believes that cash flows from its operations, together with its existing working capital, booked orders, expense management, and availability on its Revolver will be sufficient to fund operations at current levels and repay debt obligations over the next twelve months from the financial statements issuance date.  However, there can be no assurance that the Company will be able to do so.    



Recent Accounting Pronouncements



In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases,” which requires a lessee to recognize lease liabilities for the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and right-of-use assets, representing the lessee’s right to use, or to control the use of, specified assets for the lease term.  The Company adopted the ASU on January 1, 2019 and, based on its current portfolio of leases (which consists solely of an office equipment lease), no lease assets or liabilities have been recognized in these financial statements,

Management does not expect any recently issued, but not yet effective, accounting standards to have a material effect on its results of operations or financial conditions. 



Revenue Recognition



During the nine months ended September 30, 2019, the Company recognized as revenue $546,889 of amounts recorded as Contract Liabilities at December 31, 2018.



2.  Inventories



Inventories consist of the following:







Silver included in raw materials, work-in-process and finished goods inventory had an estimated cost of $394,056 and $461,272 as of September 30, 2019 and December 31, 2018, respectively.

 

3.  Property, Plant and Equipment, net



Property, plant and equipment, net consist of the following:







Construction in progress is generally comprised of internal tooling in process. 



For the three months ended September 30, 2019 and 2018, the Company recorded depreciation expense of $358,024 and $361,077, respectively. For the nine months ended September 30, 2019 and 2018, the Company recorded depreciation expense of $1,103,783 and $1,126,773, respectively.

 

4.  Assets Held for Sale



In January 2016, the Company entered into a Purchase and Sale Agreement with a buyer (collectively the “Parties”) to sell two unoccupied buildings, with a total of approximately 52,000 square feet, and land, at its Fitchburg, Massachusetts campus. As a result, the Company classified the property as Assets Held for Sale with a carrying value of $688,750,  which approximated the fair value less the expected cost to sell.



On August 6, 2019, the Company closed on the sale of the property and received proceeds of $663,334 which is net of selling costs incurred.







5.  Debt



The following table sets forth the items which comprise debt for the Company:











Availability to borrow under the Revolver is based on conditions defined in the credit agreement and amounts to $1,013,270, at September 30, 2019. The interest rate at September 30, 2019 was 5.36%.



The interest rate on the Term Notes at September 30, 2019 was 5.61%.    



Subordinated promissory notes



In June 2019, the Company initiated a private offering to raise up to $500,000 through the sale of subordinated promissory notes (the “Notes”).  The subscription for $500,000 was completed on July 5, 2019. The Notes bear interest on the unpaid principal at a simple annual interest rate equal to 10% per annum from the date of issuance. Interest only is payable in cash on a quarterly basis.  The Notes mature on June 28, 2022.  Each investor entered into a Subordination Agreement providing that the indebtedness pursuant to the Notes shall be subordinated to all indebtedness of the Company pursuant to its existing credit agreement with Rockland Trust Company. 



For every $50,000 in principal invested in the notes, each investor received a warrant to purchase 10,000 shares of common stock (collectively, the “Warrants”, see Note 8).  The Warrants are exercisable at an exercise price equal to $2.90 per share, namely, the average closing market price of the Company’s common stock on the fifteen days prior to the date of the Warrant, plus 12%. The Warrants contain standard provisions relating to anti-dilution adjustments for stock splits and recapitalizations.  The Warrants also provide the investors with standard piggy-back registration rights in the event the Company files a registration statement (other than a registration statement on Form S-4 or S-8) to register the shares of common stock subject to standard limitations in the discretion of any underwriter.



In order to account for the subordinated notes payable and warrants, the Company allocated the proceeds between the notes and warrants on a relative fair value basis.  As a result, the Company allocated $464,182 to the notes and $35,818 to the warrants.  The total discount on the notes is being recognized as non-cash interest expense over the term of the notes.  As of September 30, 2019, non-cash interest expense in the amount of $2,985 was recorded as amortization of the discount.



Related parties participated in the private offering as follows:





 

6.  Income Taxes



As of September 30, 2019, the Company continues to maintain a valuation allowance against all of its domestic and foreign deferred tax assets, except for its AMT Credit carryforward, which is treated as a refundable attribute under the new tax law.



At September 30, 2019, the Company has federal and state net operating loss carryforwards totaling $11,300,000 and $12,195,000, respectively, which begin to expire in 2031. The Company also has federal and state tax credit carryovers of $306,000 and $278,000 respectively. The federal and state tax credits begin to expire in 2027 and 2019, respectively. 

 

7.  Commitments and Contingencies



Legal matters



In the ordinary course of its business, the Company is involved in various legal proceedings involving a variety of matters. The Company does not believe there are any pending legal proceedings that will have a material impact on the Company’s financial position or results of operations.



Off-balance sheet arrangements



Lease expense under all operating leases for the three months ended September 30, 2019 and 2018 was $4,713 and $6,056 respectively, and for the nine months ended September 30, 2019 and 2018, was $15,900 and $17,977 respectively.  The underlying lease is not being capitalized under ASC 842, Leases, as management has determined it is not material.

 

8.  Shareholders’ Equity



Stock options and share-based incentive plans



The following table sets forth the stock option transactions for the year ended September 30, 2019:







For the three months ended September 30, 2019 and 2018, share based compensation expense related to stock options amounted to $11,318 and $7,729, respectively.  For the nine months ended September 30, 2019 and 2018, those amounts were $56,662 and $30,910 respectively.  Share based compensation is included in general and administrative expenses.



For the three months ended September 30, 2019, 37,500 options were granted,  none were exercised and none were forfeited.    For the three months ended September 30, 2018, no options were granted, none were exercised and none were forfeited.    For the nine months ended September 30, 2018, 90,000 options were granted with a fair value of $0.50 per share, no options were exercised and 2,000 options were forfeited.



Unrecognized stock based compensation expense related to stock options as of September 30, 2019 was $108,571 which is expected to be recognized over a period of 2.7 years.



In March 2019, the Company issued 15,000 restricted stock units with a fair value of $3.20 per share which vest on the one year anniversary of the grant.    In September 2019, the Company issued 6,667 restricted stock units with a fair value of $2.25 per share and which vest one year from the date of grant.  For the three months ended September 30, 2019 and 2018, share based compensation expense related to restricted stock units amounted to $12,932 and $0, respectively. For the nine months ended September 30, 2019 and 2018, share based compensation expense related to restricted stock units amounted to $27,450 and $0, respectively.



 Unrecognized stock based compensation related to restricted stock units as of September 30, 2019 was $35,551,  which is expected to be recognized over a period of 0.65 years.



2019 Equity Incentive Plan

On March 25, 2019, the Company’s Board of Directors adopted the 2019 Equity Incentive Plan (the “2019 Plan”) which was approved by the stockholders at the May 23, 2019 Annual Meeting.  The 2019 Plan authorizes the issuance of an aggregate of 500,000 shares.  All non-issued shares of the 2010 Equity Incentive Plan expired upon the adoption of the 2019 Plan.  The 2019 Plan provides the Company flexibility to award a mix of stock options, equity incentive grants, performance awards and other types of stock-based compensation.



Warrants



On June 28, 2019, 90,000 warrants were issued with an exercise price of $2.90 in conjunction with the Company’s subordinated notes payable offering.  On July 5, 2019, 10,000 warrants were issued with an exercise price of $2.90.  The warrants are exercisable upon issuance for three years.  90,000 warrants expire in June 2022 and 10,000 warrants expire in July 2022.



Common Stock



For the three months ended September 30, 2019, the Company issued 12,173 shares of the Company’s common stock, with a fair value of $28,000 for director fees in lieu of cash payments.  For the three months ended September 30, 2018, the Company issued 5,744 shares of the Company’s common stock, with a fair value of $19,875 for director fees in lieu of cash payments.  For the nine months ended September 30, 2019, the Company issued 34,354 shares of the Company’s common stock, with a fair value of $84,000 for director fees in lieu of cash payments.  For the nine months ended September 30, 2018, the Company issued 16,647 shares of the Company’s common stock, with a fair value of $59,625 for director fees in lieu of cash payments.

















 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations



Forward-Looking Statements



This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties.

Any forward-looking statements made herein are based on current expectations of the Company that involve a number of risks and uncertainties and should not be considered as guarantees of future performance.  These statements are made under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements may be identified by the use of words such as “expect,” “anticipate,” “believe,” “intend,” “plans,” “predict,” or “will”. Although the Company believes that expectations are based on reasonable assumptions, management can give no assurance that the expectations will materialize.  Many factors could cause actual results to differ materially from the Company’s forward-looking statements.  These factors include the following, among other matters:  the Company's ability to obtain and retain order volumes from customers who represent high proportions of revenue; the Company's ability to maintain the pricing model, offset higher costs with price increases and/or decrease the cost of sales; the variability of customer delivery requirements and the ability of the Company to anticipate and respond thereto; the level of sales of higher margin products and services and the Company's ability to increase such sales; volatility in commodity and energy prices; the Company's level of debt and provisions in the debt agreements which could limit the Company's ability to react to changes in the economy or its industry; the Company's ability to comply with the financial and other covenants contained in its credit agreement, including as a result of events beyond its control, which could result in an event of default; the Company’s reliance on revenue from exports and the impact on the Company’s financial results due to economic uncertainty, changes in trade policy and tariffs, tax laws and regulations, or downturns in foreign markets; and continued availability of supplies or materials used in manufacturing at competitive prices.  The Company is under no obligation and does not intend to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of any unanticipated events. 



Overview



Micron Solutions, Inc., a Delaware corporation ("Micron Solutions”), through its wholly-owned Massachusetts subsidiary, Micron Products, Inc. (“Micron” and together with Micron Solutions, the "Company"), is a diversified contract manufacturing organization (“CMO”) that produces highly-engineered, innovative medical device components requiring precision machining and injection molding. The Company also manufactures components, devices and equipment for military, law enforcement, automotive and consumer product applications. The Company is engaged in the production and sale of silver/silver chloride coated and conductive resin sensors used as consumable component parts in the manufacture of integrated disposable electrophysiological sensors. These disposable medical devices are used worldwide in the monitoring of electrical signals in various medical applications. The Company's machining operations produce quick-turn, high volume patient-specific and off-the-shelf orthopedic implants and instruments.  The Company’s machining operations also include laser marking, automated polishing, passivation and coating. The Company has thermoplastic injection molding capabilities as well, and provides a full array of design, engineering, production services and management. The Company competes globally, with approximately forty-five percent of its revenue derived from exports.



Critical Accounting Policies



The critical accounting policies utilized by the Company in preparation of the accompanying financial statements are set forth in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. There have been no material changes to these policies since December 31, 2018.



Liquidity and Management’s Plan



The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.



The Company identified certain conditions and events which in the aggregate required management to perform an assessment of the Company’s ability to continue as a going concern. These conditions included the Company’s negative financial history and the current liquidity position, including $503 of cash as of September 30, 2019 and approximately $1,000,000 of borrowing capacity on its revolving line of credit with Rockland Trust (the “Revolver”).  Management has performed an analysis to evaluate the entity’s ability to continue as a going concern for one year after the financial statements issuance date.



Management’s analysis includes forecasting future revenues, expenditures and cash flows, taking into consideration past performance and the requirements under the credit agreement.  Revenue and cash flow forecasts are dependent on the Company’s ability to fill booked orders from existing customers, its ability to close new and expanded business, its implementation of production efficiencies, and to improve overall financial performance.  In addition, the Company has amended its bank debt agreement to eliminate its debt service coverage covenant for the three months ended September 30, 2019.   



Based on management’s analysis, the Company believes that cash flows from its operations, together with its existing working capital, booked orders, expense management, and availability on its Revolver will be sufficient to fund operations at current levels and repay debt obligations over the next twelve months from the financial statements issuance date.  However, there can be no assurance that the Company will be able to do so.    

 





Results of Operations



The following table sets forth, for the periods indicated, the percentages of the net sales represented by certain items reflected in the Company's statements of operations.







Net Sales









The decrease in consolidated net sales for the three months ended September 30, 2019 versus the prior year period was due primarily to a decrease in net sales of sensors, and lesser decreases for thermoplastic injection molding and tooling. 



The decrease in consolidated net sales for the nine months ended September 30, 2019 versus the prior year period was due primarily to a decrease in net sales of sensors and lesser decreases for machined components and thermoplastic injection molding, partially offset by increased tooling sales.



Gross Profit









The decrease in consolidated gross profit for the three months ended September 30, 2019 versus the prior year period was due primarily to decreased  gross profits for sensors and lesser decreases for thermoplastic injection molding and tooling.



Gross profit expressed as a percentage of sales from sensors and thermoplastic injection molding decreased by 38% and 6.6%, respectively.  Gross profit as a percentage of sales from machined components increased by 68%.



The decrease in consolidated gross profit for the nine months ended September 30, 2019 versus the prior year period was due to decreased gross profits for sensors and for machined components.



Gross profit expressed as a percentage of sales from machined components decreased 48%.  Gross profit as a percentage of sales from sensors decreased by 29%.



Selling and Marketing



The Company's consolidated selling and marketing expenses amounted to $170,065  (3.9% of net sales) for the three months ended September 30, 2019 as compared to $189,031  (3.8% of net sales) for the three months ended September 30, 2018, a cost decrease of 10.0%.  For the three months ended September 30, 2019, the decrease was primarily due to lower marketing and consulting costs. Compensation was also lower due to the departure of a salesperson in the first quarter 2019.



The Company's consolidated selling and marketing expenses amounted to $486,450 (3.5% of net sales) for the nine months ended September 30, 2019 as compared to $583,606 (3.8% of net sales) for the nine months ended September 30, 2018, a decrease of 16.6%.  This decrease was primarily due to lower marketing and consulting costs. Compensation was also lower due to the departure of a salesperson in the first quarter 2019.



General and Administrative



The Company's consolidated general and administrative expenses was $700,622  (16.2% of net sales) for the three months ended September 30, 2019 as compared to $509,179  (10.2% of net sales) for the three months ended September 30, 2018, an increase of $191,443, or 37.6%. 



The increase in general and administrative expenses for the three months ended September 30, 2019 when compared to the same period in 2018 is due primarily to costs incurred associated with management and personnel restructuring and professional fees.



The Company's consolidated general and administrative expenses was $2,283,562 (16.4% of net sales) for the nine months ended September 30, 2019 as compared to $1,642,305 (10.6% of net sales) for the nine months ended September 30, 2018, an increase of $641,257, or 39%. 



The increase in general and administrative expenses for the nine months ended September 30, 2019 when compared to the same period in 2018 is due primarily to costs incurred associated with management and personnel restructuring, the recording of severance pay for the outgoing COO, consulting services, and professional fees.



Research and Development    



The Company's consolidated research and development expenses were level for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018, at $26,578 and $25,372, respectively.



The Company's consolidated research and development expenses were level for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018, at $80,357 and $80,094, respectively.



Other Expense, net



Other expense, net increased to $127,110 for the three months ended September 30, 2019, as compared to $88,613, for the three months ended September 30, 2018, an increase of $38,497.  The increase in other expense, net was due to an  $8,336 increase in interest expense,  $12,000 received in 2018 in extension fees related to the sale of the buildings, and other miscellaneous costs, net of a gain on the sale of fully depreciated fixed assets.



Other expense, net increased to $328,010 for the nine months ended September 30, 2019, as compared to $261,334, for the nine months ended September 30, 2018, an increase of $66,677.  The increase in other expense, net was due to a $38,085 increase in interest expense, $32,000 received in 2018 in extension fees related to the sale of the buildings, and other miscellaneous costs, net of a gain on the sale of fully depreciated fixed assets



Income Tax Provision



The tax provisions for the three months and nine months ended September 30, 2019 and 2018 attributable to the U.S. federal and state income taxes are $0. The Company’s combined federal and state effective income tax rate for the three months and nine months ended September 30, 2019 and 2018 of 0% is due to deferred tax assets being nearly fully reserved for with a valuation allowance.



Earnings (Loss) Per Share



Consolidated basic and diluted loss per share for the three months ended September 30, 2019 was $0.18 per share as compared to a loss per share of $0.03 for the same period in 2018, an increase in loss per share of $0.15. The increase in loss per share for the three months ended September 30, 2019, is due in part to decreased net sales of $670,380, decreased gross profit of $217,626 and an increase of $173,683 in operating expenses.

 

Consolidated basic and diluted loss per share for the nine months ended September 30, 2019 was $0.52 per share as compared to a loss per share of $0.08 for the same period in 2018, an increase in loss per share of $0.44.  The increase in loss per share for the nine months ended September 30, 2019, is due in part to decreased net sales of $1,532,033, decreased gross profit of $662,533 and an increase of $544,362 in operating expenses.



Off-Balance Sheet Arrangements



Lease expense under all operating leases for the three months ended September 30, 2019 and 2018 was $4,713 and $6,056,   respectively.  Lease expense for the nine months ended September 30, 2019 and 2018 was $15,900 and $17,977, respectively.

 

Liquidity and Capital Resources



Working capital was $2,325,095 as of September 30, 2019, as compared to $2,455,498 at December 31, 2018, a decrease of $130,403.  The decrease in working capital is due primarily to inventory reductions partially offset by decreases in the Revolver, accounts payable, and contract liabilities. 



Trade accounts receivable, net of allowance for doubtful accounts, were $2,379,496 and $2,325,804 at September 30, 2019 and December 31, 2018, respectively, an increase of $53,692. 



Inventories decreased by $1,045,674 from December 31, 2018 to $2,639,385 as of September 30, 2019 due to the reduction of tooling in process related to tooling sales and ongoing efforts to reduce inventory levels.



Accounts payable decreased from December 31, 2018 to September 30, 2019 by $588,531,  partially offset by a $320,092 increase in accrued expenses.    The increase in accrued expenses and other current liabilities was primarily due  to a severance arrangement with the former Chief Operating Officer of the Company, incentive compensation accruals, and increased accrued commissions for new programs including amounts for new outside sales representatives. Contract liabilities decreased by $536,079 due to the revenue recognition of several closed tooling projects.



Capital equipment expenditures of $161,928 for the nine months ended September 30, 2019 were primarily for robotic automation in custom molding.



At September 30, 2019 the Company’s total debt was $5,284,125 as compared to $5,972,470 at December 31, 2018, a decrease of $688,345.  The decrease in total debt is due to payments made on the Revolver and on Term Notes, offset by $500,000 in proceeds from the issuance of subordinated notes issued in July 2019.



Amounts available to borrow under the Revolver are $1,013,270 at September 30, 2019.



No dividends were declared or paid in the three and nine months ended September 30, 2019 and 2018.



The Company believes that cash flows from its operations, together with its existing working capital, booked orders, expense management, and its Revolver, will be sufficient to fund operations at current levels and repay debt obligations over the next twelve months from the date these financial statements were issued. However, there can be no assurance that the Company will be able to do so.



Summary of Changes in Cash Position



As of September 30, 2019, the Company had cash on hand of $503, as the Company’s cash is swept daily against the Revolver in accordance with the Company’s credit agreement.  For the nine months ended September 30, 2019,  cash provided by operating activities was $171,084.  Net cash provided by investing activities for the nine months ended September 30, 2019 was $534,008. Net cash used in financing activities for the nine months ended September 30, 2019 was $706,304. The net cash flows for the nine months ended September 30, 2019 are discussed in further detail below.



Operating Cash Flows 



For the nine months ended September 30, 2019, net cash provided by operating activities was $171,084,  primarily the result of the net loss, decreases in accounts payable and contract liabilities offset by cash provided from decreases in inventory and by increases in accrued expenses and other current liabilities as well as non-cash addbacks, primarily depreciation and amortization.



Investing Cash Flows



For the nine months ended September 30, 2019, net cash provided by investing activities was $534,008.  Proceeds from the sale of vacant buildings plus some fully depreciated equipment provided $695,936, offset by $161,928 in cash used for capital expenditures, primarily internal tooling and robotic automation for custom molding.



Financing Cash Flows



For the nine months ended September 30, 2019, net cash used by financing activities was $706,304 consisting of Revolver and term note repayments of $1,206,304, offset by $500,000 received from the issuance of subordinated notes payable.



 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk



Not Applicable.



Item 4.  Controls and Procedures



Evaluation of Disclosure Controls and Procedures



Our principal executive officer and principal financial officer (“the Certifying Officers”) have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)).  Based on such evaluation, our Certifying Officers have concluded the Company's disclosure controls and procedures, as of the end of the period covered by this report, were effective.



The effectiveness of a system of disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of internal controls, and fraud. Due to such inherent limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud, or in making all material information known in a timely manner to the appropriate levels of management.



Changes in Internal Control over Financial Reporting



During the three months ended September 30, 2019, there have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II - OTHER INFORMATION



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



On August 15, 2019, the Company granted, in the aggregate, 12,173 shares of Common Stock (the “Stock Grants”) pursuant to the Company’s 2019 Equity Incentive Plan to the members of the Board of Directors for the payment of their directors fees in the amount of approximately $28,000.  The Stock Grants were granted to the members of the Board of Directors, who are each “accredited investors” as such term is defined in the Securities Act of 1933, as amended (the “Securities Act”), pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D.



Item 6. Exhibit Index



 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





 

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