It em   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. There are a number of factors that could cause the Company’s actual results to differ materially from those forecasted or projected in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. 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.  More information about factors that potentially could affect the Company's financial results is included in the Company's filings with the SEC, including its Annual Report on Form 10-K for the year ended December  31, 2016 .



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, 2016 , 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, 2016 .



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 glob ally, with approximately thirty- five percent of its revenue derived from exports.



Operating matters and liquidity



Due to a non-compliance with the debt service coverage ratio covenant at June 30, 2017, the Company and the bank entered in to a forbearance agreement on September 29, 2017.  Under the agreement the bank agreed to forbear from collections on all outstanding debt prior to March 31, 2018, provided no further events of default occur, and agreed to extend the revolver to March 31, 2018 subject to certain modifications of the agreement.  Should a further event of default occur, the bank has the right to demand payments of all notes. 

Pursuant to the agreement, the interest rate under the revolver increased from the Prime Rate plus 0.25%, to the Prime Rate plus 1.00%, an increase of 75 basis points.  The Company also agreed to provide monthly financial reporting and daily cash sweeps and to a modification of the equipment line of credit (the “equipment line”) to immediately terminate the availability of further advances under the equipment line rather than expiration thereof in November 201 7 at which time the equipment line will convert into a five-year term note.  In addition, the bank agreed to modify the debt service coverage ratio calculation for the September  30, 2017 measurement date.     The Company is in compliance with this revised third quarter 2017 covenant calculation .    Additionally, under the agreement, and in accordance with its rights under subordination agreements between the bank and the Company’s subordinated note holders, the quarterly interest payments to the note holders have been deferred due to the non-compliance with the debt service coverage ratio covenant until such time as the bank otherwise permits resumption thereof.



The Company is working with its bank under the extended credit facility while exploring alternative financi ng arrangements .  The Company believes that cash flows from its operations, together with its existing working capital, increased booked orders and other resources, and the expected securing of a new facility will be sufficient to enable the Company to fund operations at current levels and repay debt obligations over the next twelve months; however, there can be no assurance that the Company will be able to do so.



Assessment of going concern



The Company follows accoun ting standard ASU No. 2014-15, “ Presentation of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern ” .   The accounting standard

requires management to evaluate whether there are conditions that give rise to substantial doubt as to the Company’s ability to continue as a going concern within one year from the date of issuance of these financial statements. Substantial doubt exists when conditions and events, considered in the aggregate, indicate that it is probable that a company will be unable to meet its obligations as they become due within one year after the financial statement issuance date. Management evaluations include identifying relevant conditions and events that were known and reasonably knowable as of the date these financial statements have been issued.



At December  31, 2016, 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 ability to renew the credit facility which was maturing in June 201 7, negative financial history and the Company’s limited liquidity to meet the working capital needs to support the Company’s operations.  While the Company was successful in extending the credit facility to March  31, 2018, similar conditions exist ed as of September  30 , 2017. 



As of the June  30, 2017 testing date, the Company was in compliance with the terms of the credit facility except with respect to the debt service coverage ratio covenant.  As a result of the non-compliance, the Company and the bank entered into a forbearance agreement   on September  29, 2017.  Under the agreement the bank agreed to forbear from collections on all outstanding debt prior to March  31, 2018 and agreed to extend the revolver to March  31, 2018, subject to certain modifications to the agreement.  These modifications include an increase in interest rates, daily cash sweeps, terminating the availability of further advances under the equipment line and modification of the debt service ratio covenant calculation for the September  30, 2017 measurement date.  The Company is in compliance with this revised third quarter 2017 covenant calculation.



Management’s assessment included an analysis of the Company’s year to date 2017 results and financial forecasts looking forward twelve months from the date of these financial statements. Management’s assessment also considered the Company’s history of meeting financial covenants and being able to renew and refinance its debt obligations.



During the first two quarters of 2017, the Company made strategic decisions to take on new large orders, at aggressive initial pricing, in order to land follow-on orders with lower material costs.  During this period the Company incurred extraordinary costs related to the starting up of these new customers, including increased scrap, tooling, labor, rework, expediting charges from suppliers, shift premiums and overtime, in order to meet customer delivery requirements.  The Company landed the follow-on orders with the lower material costs and mitigated the startup costs of these new products.



The forecasts for the second half of 2017 and 2018 reflect the actual and expected results of cost savings   measures and productivity improvements implemented, beginning at the end of the second quarter of 2017.  These include more efficient use of labor by reducing overtime and modifying production schedules, process improvements, improved material yields, and decreased overhead expenses in part by compensation reductions for all salaried personnel including executive officers.  In July 201 7, the Company engaged a manufacturing consultancy firm with a focus on plastics, medical devices, contract manufacturing and outsourcing to analyze and benchmark the Company’s operations, suggest business development strategies and improve operating performance. Additionally, in August 201 7, the Company engaged an investment banking firm to evaluate the overall strategic direction of the Company.



The implementation of the cost savings   measures and improvements yielded results in the third quarter of 2017.  Despite a $482,638 decrease in net sales, gross profit increased $310,408, or 7.0 points when compared to the second quarter of 2017.  Further savings in operating expenses also contributed to the improvement in net loss from operations of $434,005 in the second quarter 2017 to a net loss from operations of $42,322,   excluding non-recurring charges of $77,606 related to outside consulting fees in the third quarter of 2017.  The Company anticipates continued margin improvement and operating results   through the fourth quarter and into 2018.  



Management continues to work with its bank under the credit facility, which was extended to March  31, 2018, to further extend the credit facility while also exploring alternative financing arrangements. Ba sed upon the continued results of cost savings   measures and improvements as noted above, cash forecasts ,   the expected fulfillment of booked orders from existing customers and new customer prospects, and the expected securing of a new credit facility, the Company expects to meet its debt obligations for the next twelve months, however there can be no assurance that the Company will be able to do so.  The financial statements do not include any adjustment that might result from the outcome of such uncertainties .

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 increase in consolidated net sales for the three months ended September  30, 2017   versus the prior year was due to an increase in net sales of   sensors , partly offset by decreased net sales of machined orthopedic implant components and instruments as well as   thermoplastic i njection molding . 



For the three months ended September  30, 2017, net sales of sensors increased 3 3.4 % when compared to the three months ended September  3 0, 2016.  The increase was largely   due to a   53.1 % increase in volume due largely to the timing of shipments, versus the recognition of revenue, related to supply agreements with certain foreign customers entered into in the third quarter of 2016.   Additionally, silver surcharge billed increased due in part to increased volume partly offset by a decrease in the weighted average price of silver as compared to the same period last year.    



The increase in net sales for the three months ended September  30, 2017 was partly offset by a 9.9% decrease in net sales of machined orthopedic implant components and instruments when compared to the same period   in 2016.  The decrease was due to reduced demand for femoral components from one customer in part due to the customer’s vertical integration, be ginning in the third quarter 2016. 



Also, partially offsetting the increase in net sales for the three months ended September  30, 2017 was a decrease of 7.3% in net sales of thermoplastic injection molding when compared to the three months ended September  30, 2016.  The decrease was due largely to decreased demand from customers in the automotive industry.  Additionally, tooling revenue decreased 72.0% due in part to the completion of a tooling program for a customer in the consumer products industry.







The increase in consolidated net sales for the nine months ended September  30, 2017 versus the prior year was due primarily to increases in net sales of sensors and thermoplastic injection molding ,   partly offset by decreased net sales of machined orthopedic implant components and instruments. 



For the nine months ended September  30, 2017, net sales of sensors increased 16.2% when compared to the nine months ended September  30, 2016.  The increase was largely due to a n 18.7% increase in volume .  Vo lume increased in part due to increase d order volume from the Company’s top sensor customers .  Volume also increased in part due to the timing of shipments, versus the recognition of revenue, related to supply agreements with certain foreign customers entered into in the third quarter of 2016.  Additionally, silver surcharge billed increased due to increased volume . 



Additionally, f or the nine months ended September  3 0, 2017, net sales of th ermoplastic injection molding in creased 2.4 % when compared to the nine months ended September  30 , 2016.  The increase was due in part to increased sales volume of automotive components as well as increased sales volume of military and law enforcement component s when compared to the same period in 2016. 



The increase in net sales for the nine months ended September  30, 2017, was partly offset by a 15.2 %   decrease in net sales of machined orthopedic implant components and instruments when compared to the same period in 2016 .  The decrease was due in part to reduced orders from one customer as a result of relabeling of product to a longer expiration date.  The decrease is also due to reduced demand of femoral components from one customer which vertically integrated beginning in the third quarter of 2016.  Partially offsetting the decrease was new business from new customers for which the Company has expanded its machining operations to include surgical instrumentation including cutting guides, as well as hip stems, keel trays and other orthopedic components beginning in the second quarter of 2016.



The decrease in   consolidated gross profit for the three months ended September  30, 2017   versus the prior year was due primarily to a de crease in gross profit from machined orthopedic implant components and instruments as well as   thermoplastic injection molding ,   partly offset by an increase in gross profit from sensors.

The de crease in gross profit for the three months ended September  30 , 2017 was primarily due to a 45.9 % de crease in gross profit from machined orthopedic implant components and instruments as compared to the same period in 2016 .  The decrease was due in part to decreased sales due to lower demand from two customers, as noted above .  The decrease was also due in part to the Company offering aggressive initial pricing to secure new customers , as well the impact of reworking many of the related parts , as the Company refined its production process .     The increased costs included costs related to increased scrap, tooling, labor, rework, expediting charges from suppliers, shift premiums and overtime, in order to meet customer delivery requirements.  Gross margin as a percent of sales decreased 1 0.3 percentage points due to th is rework and the investments in these new customers.



The decrease in gross profit for the three months ended September  30, 2017 was also due to a 15.4 % decrease in gross profit from thermoplastic injection molding due largely to de creased sales volume from customer s in the automotive i ndustry .  Gross margin a s a percent of sales decreased   3.0   percentage points due to customer and product mix.



The decreases in gross profit above were partially offset by an increase in sensors gross profit of 16.6 % for the three months ended September  30 , 2017 when compared to the same period last year.  The increase was due in part to certain production efficiency enhancements implemented in the third quarter of 2017 as well as increased volume from certain customers .  The increase was partly offset by price concessions result ing in margin deterioration .  Additionally, while net sales from silver surcharge billed increased based largely on volume , gross profit from silver surcharge billed decreased 11.2 % due in part to the de crease in the weighted average cost of silver when compared to the same period last year . 



The de crease in gross profit above for the three months ended September  30 , 2017 versus the prior year period was also partly offset as a result of  a n   8.1 % de crease in expenses for other indirect manufacturing overhead departments.     The lower expenses were due largely to lower engineering, mold shop maintenance and material handling expenses, partly offset by increased quality department expenses versus the same period in the prior year.







The decrease in consolidated gross profit for the nine months ended September  30, 2017 versus the prior year was due primarily to a decrease in gross profit from machined orthopedic implant components and instruments   as well as   thermoplastic injection molding ,   partly offset by an increase in sensors.



The decrease in gross profit for the nine months ended September  30, 2017 was primarily due to a 61.2 % decrease in gross profit from machined orthopedic implant components and instruments as compared to the same period in the prior year .  The decrease was due in part to decreased sales due to lower demand from two customers, as noted above .  The decrease was also due in part to aggressive initial pricing to secure new customers, as well as the impact of reworking many of the related parts, as the Company refined its production process.  The increased costs included costs related to increased scrap, tooling, labor, rework, expediting

charges from suppliers, shift premiums and overtime, in order to meet customer delivery requirements.  Gross margin as a percent of sales decreased 13.6   percentage points due to these investments in new customers.



The decrease in gross profit for the nine months ended September  30, 2017 was also due to a 6.6 % decrease in gross profit from thermoplastic injection molding due largely to customer and product mix.  Gross margin as a percent of sales decreased 3.0   percentage points .



The decrease in gross profit for the nine months ended September  30, 2017 was partly offset by a 2.5 % in crease in sensors due largely to increased sales volume, partly offset by price concessions resulting in margin deterioration.  Gross margin as a percent of sales decreased 2.2 percentage points due to th e aforementioned price concessions .



The de crease in gross profit above for the nine months ended September  30, 2017 versus the prior year period was also partly the result of a   15.1 % increase in expenses for other indirect manufacturing overhead departments.   The higher expen ses were due largely to higher q uality expenses, largely associated with the machining product line, as well as higher mold shop maintenance and repairs due to an increase in machine utilization requirements as a result of increased volume of sensors and thermoplastic injection molding.  



Selling and Marketing



The Company's consolidated selling and marketing expenses amounted to $171,304  ( 3.5% of net sales) for the three months ended September  30, 2017 as compared to $303,279  ( 6.4% of net sales) for the three months ended September  30, 2016 ,   a   decrease of $131,975 , or 43.5% .  For the three months ended September  30, 2017 , the decrease was primarily due to de creased compensation of $ 103,520 as a result of the departure of a sales person and customer service representative in the first quarter of 2017 and an a dditional sales person in the third quarter of 2017.  Additional ly, commissions were lower   by $ 30,137 due in part to fewer sales persons and due in part to the mix of commissionable parts.  Additionally, travel, advertising and marketing expenses were lower by $ 10,714 due to less travel and reduced attendance at trade shows.  Partially offsetting the decreases was an increase in professional services of $13,990 related to the development of an online marketing an d lead generation program.



For the nine months ended September  30, 2017, t he Company's consolidated selling and marketing expenses amounted to $ 671,99 7 (4. 3 % of net sales) as compared to $ 900,189  ( 6.1 % of net sales) for the nine months ended September  30, 2016, a decrease of $228,19 2 , or 25.3 %.  For the nine months ended September  30, 2017, the decrease was primarily due to d ecreased compensation of $202,978 as a result of the departure of a sales person and customer service representative in the first quarter of 2017 and an additional sales person in the third quarter of 2017 .  Additionally, commissions were lower by $ 45,769 due in part to fewer sales persons and the mix of commissionable parts.  Additionally, trav el expenses were lower by $18,913 due in part to two   fewer sales people and reduced attendance at trade shows .  Partly offsetting these decreases were increased marketing and advertising expenses related to trade shows, web site enhancements and the development of an online marketing and lead generation program.



General and Administrative



The Company's consolidated genera l and administrative expenses in creased to $614,082  ( 12.5% of net sales) for the three months ended September  30, 2017 as compared to $482,115  ( 10.2%  o f net sales) for the same period 2016 ,  a n in crease of $131,967 , or 27.4% . 



The increase in general and administrative expenses for the three months ended September  30, 2017 compared to 2016 is due in part to non-recurring charges of $77,606 related to outside consulting services.  The increase was also due to an increase of $39,068 in bad debt expense, due to the prior year impact of insurance proceeds received related to collections of an outstanding insured receivable.  In addition, professional fees and consulting services increased $16,898 related to financial reporting and outsourcing the environmental, health and safety function partly offset by lower legal fees.  Additionally, compensation expense increased $10,360 due primarily to replacement hires and general and products liability insurance increased $9,018 due in part to increased premiums related to military and law enforcement operations and directors ’ and officers ’ insurance.  The increases were partly offset by decreases in office and computer supplies, investor relations and other expenses.



The Company’s consolidated general and administrative expenses increased to $ 1, 783,5 90   (1 1. 5 % of net sales) f or the nine months ended September  30, 2017, a s compared to $ 1 ,664,18 2  ( 11. 2 % of net sales) for the same period 2016 ,  a n   in crease of $ 119,408 , or 7.2 %.    



The increase in general and administrative expenses for the nine months ended September  30, 2017 compared to 2016 is due in part to non-recurring charges of $77,606 related to the outside consulting services in the third quarter of 2017 .  The increase was also due to an increase of $95,635 of compensation expense due in part to the timing of replacement hires in accounting, IT and administration . Directors’ fees increased $39, 750 due to the Board foregoing its fees for the second quarter of 201 6 .  Bad debt expense increased $27,951 due primarily to the prior year impact of insurance proceeds received related to collections of an outstanding insured receivable.  General and product liability insurance increased $18,661 due in part to increased premiums related to military

and law enforcement operations and directors’ and officers’ insurance.  Additionally, accounting and other professional fees increased $44,153 due to financial reporting and outsourcing the environmental, health and safety function.



The increases in general and administrative expenses for the nine months ended September  30, 2017 as compared to 2016, were partly offset by a decrease of $60,212 in legal fees due in part to the prior year impact of corporate governance and shareholder relations matters, as well as a decrease of $51,600 in recruiting agency fees for three hires in 2016.  Investor relations expenses also decreased $24,706 when compared to the prior year period.



Research and Development



The Company's consolidated rese arch and development expenses in creased to $26,787  ( 0.5% of net sales) for the three months ended September  30, 2017 as compared to $24,534  ( 0.5% of net sales) for the three months ended September  30, 2016 , a n   increase of $2,253 , or 9.2 % .  Research and development expenses increased to $84,427 for the nine months ended September  30, 2017 (0.5% of net sales) as compared to $74,792 for the nine months ended September  30, 2016, an increase of $9,635 or 12.9%.  The increases for the three and nine months ended September  30, 2017 and 2016 , respectively , are due largely to an increase in compensation expense.



Other Expense, net



Other expense, net de creased to $60,939 for the three months ended September  30, 2017 , as compared to $69,394 , for the   three months ended September  30, 2016 , a de crease of $8,455 .  The decrease in other expense, net was due largely to other income of $24,000 related to extension fees related to the real estate held for sale, partly offset by an increase in interest expense of $14,23 9 , due to higher principal balances outstanding on the revolve r.



For the nine months ended September  30, 2017, other expense, net decreased to $178,199 as compared to $192,063 for the nine month s ended September  30, 2016, a decrease of $13,864 .  The decrease in other expense, net was due largely to other income of $36,000 related to extension fees related to the real estate held for sale, as well as $21,750 of gains on the sale of fixed assets, partially offset by an increase of $42,073 of interest expense due to higher principal balances outstanding on the revolver.



Income Tax Provision



The tax provisions for the three and nine months ended September  30, 2017 and 2016 attributable to the U.S. federal and state income taxes are zero . The Company’s combined federal and state effective income tax rate from continuing operations for both the three and nine months ended September  30, 2017 and 2016 of 0% is due to the deferred tax assets being 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, 2017 was $0. 06 per share as compared to $0.02 per share for the same period in 2016 , a n   increase   in loss per share of $0.04 . The increase in loss per share for the three months ended September  30, 2017 , is due   largely to a decrease of $ 118,515 in gross profit despite a $ 194,965 increase in net sales compared to the prior year period . 



Consolidated basic and diluted loss per share for the nine months ended September  30, 2017 was $0. 35 per share as compared to $0.1 4 per share for the same period in 2016, a n in crease in loss per share of $0.21 . The increased loss per share for the nine months ended September  30, 2017 , is due largely to a decrease of $ 713,173 in gross profit despite a $ 738,374 increase in net sales compared to the prior year period . 



Off-Balance Sheet Arrangements



Lease expense under all operating leases was approximately $6,625 and $4,615 for the three months ended September  30, 2017 and 2016, respectively , and were approximately $ 22 , 222  a nd $ 23 , 651 for the nine months ended September  30, 2017 and 2016, respectively.

Liquidity and Capital Resources



Working capital was $(1,014,292) as of September  30, 2017 , as compared to $1,530,773 at December  31, 2016 , a decrease of $2,545,065 .  The decrease in working capital is due largely to the reclassification of $1, 630,593   of term notes from long term to short term as a result of the non-compliance with the debt service coverage ratio covenant at June  30, 2017 , and the Company entering into a forbearance agreement with its bank .  The decrease is also due to an increase of $ 1,2 84,205 in the revolver.  Cash and cash equivalents were $524,606 and $380,381 at September  30, 2017 and December  31, 2016 , respectively, a n   increase of $144,225 .  Substantially all of these funds are maintained in bank deposit accounts.



Trade accounts receivable, net of allowance for doubtful accounts were $2,898,677 and $2,276,608 at September  30, 2017 and December  31, 2016 , respectively, a n   increase of $ 622,069 .  The increase is due largely to higher shipments at the end of the third quarter of 2017.



Inventories were $3, 214 , 157 as of September  30, 2017 , as compared to $ 3,060,085 at December  31, 201 6 , an increase of $154,072 .  The increase was due largely to an increase in work-in-process inventory of $134,985.



Accounts payable were $1,711,661 and $1,744,261 at September  30 , 2017 and December  31, 2016, respectively, a de crease of  $ 32,599 due largely to the timing of disbursements .  O ther non-current liabilities decreased $156,953 from a decreased in long term deferred revenue.  Additionally, deferred revenue, current portion decreased $102,099. 



Accrued expenses and other current liabilities increased  $ 123,222 for the   nine months ended September  30 , 2017 as compared to December  31, 2016   due largely to an increase in payroll accruals based on timing of quarter end .  O ther non-current assets decreased $ 14 7,085 as a result of a decrease in prepaid cost of goods sold related to deferred tooling revenue.     In addition, cus tomer deposits increased $138,143 related to tooling. 

Capital equipment expenditures were $ 868,716 for the nine months ended September  30, 2017 , due to investments in machinery and equipment primarily for the contract manufacturing of machined orthopedic implants and instruments as well as thermoplastic injection molding as compared to $ 1,069,325 in the same period in 201 6 .



At September  30 , 2017 ,   the Company’s total debt was $ 6,136,027 as compared to $4, 778,637 at December  31, 201 6 , an increase of $ 1 ,357,390 .  The in crease is due largely to $ 1,2 84 , 205 in net borrowing from the revolver and $ 402 , 281 of borrowings from the equipment line of credit to fund working capital and finance investments in capital equipment, respectively, partially offset by payments of $ 381,682   on term debt.  



At September  30 , 2017,   total outstanding balan ce of the Company’s term debt was   $2, 093,133   as compared to $2,458,331 at December  31, 2016, a decrease of $ 365,198 .



The Company has a multi-year credit facility with a Massachusetts based bank.  At September  30 , 2017 , this credit facility consisted of a revolving line of credit (the "revolver"), a commercial term loan and an equipment line of credit (“equipment line”) .  The bank facility contains both financial and non-financial covenants , and is secured by substantially all assets of the Company with the exception of real property . 



Due to a non-compliance with the debt service coverage ratio covenant at June 30, 2017, the Company and the bank entered in to a forbearance agreement on September 29, 2017.  Under the agreement the bank agreed to forbear from collections on all outstanding debt prior to March 31, 2018, provided no further events of default occur, and agreed to extend the revolver to March 31, 2018 subject to certain modifications of the agreement.  Should a further event of default occur, the bank has the right to demand payments of all notes. 

The revolver provides for borrowings up to 80% of eligible accounts receivable and 50% of eligible raw materials inventory.  The interest rate on the revolver is calculated at the bank's prime rate plus 1.00 % ( 5.25 % at September  30 , 2017). The revolver has a maturity date of March  31, 2018 .     Amounts available to borrow under the revolver are   $ 95,767   at September  30 , 2017 . 



The commercial term loan has a remaining principal balance of   $2, 078 , 006, net of debt issuance costs of $29,374, at September  30, 2017 and matures in November 202 1.  The interest rate on the loan is a fixed 4.65% per annum and the loan requires monthly payments of principal and interest of approximately $46,500.



In November 201 6, the Company entered into the equipment line that allows for advances of up to $1.0  million under the Company's multi-year credit facility. The term o f this equipment line is six years, maturing in November 202 2, inclusive of a maximum one-year draw period. Repayment shall consist of monthly interest only payments, equal to the bank's prime rate plus 0.25% as to each advance commencing on the date of the loan through the earlier of: (i) one year from the date of the loan or (ii) the date upon whi ch the equipment line is fully advanced (the “Conversion Date”). On the Conversion Date, principal and interest payments will be due and payable monthly in an amount sufficient to pay the loan in full based upon an amortization schedule commensurate with the remaining term of the loan. 



Pursuant to the Company’s September  29, 2017 agreement with the bank, the bank terminated the availability of further advances under the equipment line rather than expiration thereof in November 201 7 at which time the equipment line will convert into a five-year term note.     At September  30, 2017, $504,781 has been drawn on the equipment line of credit.  At December  31, 2016, $102,500 had been drawn on the equipment line of credit.



The credit facility contains both financial and non-financial covenants. The financial covenants include maintaining certain debt service coverage and leverage ratios. The non-financial covenants relate to various matters including notice prior to executing further borrowings and security interests, mergers or consolidations, acquisitions, guarantees, sales of assets other than in the normal course of business, leasing, changes in ownership and payment of dividends. 



As of the June  30, 2017 testing date, the Company was in compliance with the terms of the credit facility except with respect to the debt service coverage ratio covenant.  As a result of the non-compliance, the Company entered into the September  29, 2017 agreement with the bank whereby, among other things, the bank agreed to forbear collections of all outstanding debt , prior to March  31, 2018.  In addition, the bank agreed to modify the debt service coverage ratio calculation for the September  30, 2017 measurement date.     The Company is in compliance with this revised third quarter 2017 covenant calculation .      



In January 201 3, the Company entered into two equipment notes totaling $272,500 with a financing company to acquire production equipment. The notes bear interest at the fixed rate of 4.66% and require monthly payments of principal and interest of approximately $5,000 over a five year term maturing in January 201 8.



In December 201 3, the Company completed a private offering in which the Company sold an aggregate of $500,000 in subordinated promissory notes. The unsecured notes required quarterly interest-only payments at a rate of 10% per annum for the first two years.  In December 201 5, the interest rate increased to 12% per annum.  Th ree related parties participated in the private offering as follows:  REF Securities, LLP, and with Mr. Rodd E. Friedman, a director of the Company since July  21, 2017 ,   a   beneficial owner of approximately 13% of the Company’s common stock, invested $100,000 in the offering ; the Chambers Medical Foundation (the “Foundation”), beneficial owner of approximately 10% of the Company’s common stock, invested $100,000 in the offering; and Mr. E.P. Marinos, a director, invested $50,000 in the offering.  The Company’s Chairman of the Board is a co-trustee of the Foundation but has held no dispositive powers since his appointment as such. 



In October 2016, the Company and six of the seven investors in the private offering, aggregating $450,000 of the notes, including the three related parties holding $250,000 of the notes, agreed to extend the maturity dates of the notes to December  31, 2018 at a rate of 10% per annum.  One investor did not extend the maturity date and that $50,000 note was paid at maturity in December 201 6.  The notes are subordinated to all indebtedness of the Company pursuant to its multi-year bank credit facility. Pursuant to the subordination agreements entered into among the bank, each of the note holders and the Company upon issuance of the subordinated notes, quarterly interest payments to the note holders have been deferred due to the non-compliance with the debt service coverage ratio covenant   until such time as the bank otherwise permits resumption thereof.



No dividends were declared or paid in the nine months ended September  30, 2017 and 2016 .  



The Company believes that based upon the continued results of cost savings   measures and improvements as noted above, cash forecasts, the expected fulfillment of booked orders from existing customers and new customer prospects, and the extension of the Company’s credit facility to March  31, 2018, the Company expects to continue to meet its obligations for the next twelve months.  Additionally, management continues to work with its bank under the extended credit facility while exploring alternative financing arrangements.  The financial statements do not include any adjustment that might result from the outcome of such uncertainties.



Summary of Changes in Cash Position



As of September  30, 2017 , the Company had cash on hand of $524,606 . For the nine months ended September  30, 2017 , net cash used in operating activities was $297,156 .  Net cash used in investing activities for the nine months ended September  30, 2017 was $863,423 . Net cash provided by financing activities for the nine months ended September  30, 2017 was $1,304,804 .   The net cash flows for the nine months ended September  30, 2017 are discussed in further detail below.