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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)
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DELAWARE |
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72‑0925679 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. employer identification no.) |
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:
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Title of each class |
Trading symbol |
Name of each exchange on which registered |
Common Stock, $0.01 par value |
MICR |
New York Stock Exchange |
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.:
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Large Accelerated filer ☐ |
Accelerated filer ☐ |
Non‑Accelerated filer ☒ |
Smaller reporting company ☒ 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 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
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3 | ||
3 | ||
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3 | |
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4 | |
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5 | |
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6 | |
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7 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
12 | |
16 | ||
16 | ||
17 | ||
17 | ||
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18 |
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.
3
Micron Solutions, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
(unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2019 |
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2018 |
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2019 |
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2018 |
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Net sales |
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$ |
4,331,280 |
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$ |
5,001,660 |
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$ |
13,909,101 |
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$ |
15,441,134 |
Cost of sales |
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3,813,882 |
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4,266,636 |
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12,227,430 |
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13,096,930 |
Gross profit |
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517,398 |
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735,024 |
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1,681,671 |
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2,344,204 |
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Selling and marketing |
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170,065 |
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189,031 |
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486,449 |
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583,607 |
General and administrative |
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700,622 |
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509,179 |
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2,283,563 |
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1,642,306 |
Research and development |
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26,578 |
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25,372 |
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80,357 |
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80,094 |
Total operating expenses |
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897,265 |
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723,582 |
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2,850,369 |
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2,306,007 |
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Net income (loss) from operations |
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(379,867) |
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11,442 |
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(1,168,698) |
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38,197 |
Other income (expense): |
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Interest expense |
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(109,776) |
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(101,439) |
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(332,553) |
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(294,467) |
Other income (expense), net |
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(17,334) |
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12,826 |
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4,543 |
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33,133 |
Total other expense, net |
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(127,110) |
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(88,613) |
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(328,010) |
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(261,334) |
Net income (loss) before income tax provision (benefit) |
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(506,977) |
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(77,171) |
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(1,496,708) |
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(223,137) |
Income tax provision (benefit) |
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— |
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— |
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— |
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— |
Net income (loss) |
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$ |
(506,977) |
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$ |
(77,171) |
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$ |
(1,496,708) |
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$ |
(223,137) |
Earnings (loss) per share - basic |
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$ |
(0.18) |
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$ |
(0.03) |
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$ |
(0.52) |
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$ |
(0.08) |
Earnings (loss) per share - diluted |
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$ |
(0.18) |
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$ |
(0.03) |
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$ |
(0.52) |
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$ |
(0.08) |
Weighted average common shares outstanding - basic and diluted |
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2,889,408 |
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2,853,111 |
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2,878,049 |
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2,847,660 |
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See accompanying notes to condensed consolidated financial statements.
4
Micron Solutions, Inc. and Subsidiary
Condensed Consolidated Statements of Shareholders’ Equity
(unaudited)
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Additional |
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Common stock |
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paid-in |
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Treasury stock |
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Accumulated |
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Shares |
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Amount |
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capital |
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Shares |
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Amount |
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deficit |
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Total |
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December 31, 2017 |
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3,926,491 |
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$ |
39,265 |
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$ |
11,532,207 |
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1,087,217 |
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$ |
(2,966,798) |
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$ |
(3,536,186) |
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$ |
5,068,488 |
Change in Accounting Principle - ASC 606 |
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(13,991) |
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(13,991) |
Share based compensation |
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14,370 |
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14,370 |
Issuance of common stock
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4,427 |
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(5,661) |
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15,448 |
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19,875 |
Net income (loss) |
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(179,647) |
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(179,647) |
March 31, 2018 |
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3,926,491 |
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$ |
39,265 |
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$ |
11,551,004 |
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1,081,556 |
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$ |
(2,951,350) |
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$ |
(3,729,824) |
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$ |
4,909,095 |
Share-based compensation |
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8,817 |
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8,817 |
Issuance of common stock
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5,571 |
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(5,242) |
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14,304 |
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19,875 |
Net income (loss) |
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33,681 |
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33,681 |
June 30, 2018 |
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3,926,491 |
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$ |
39,265 |
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$ |
11,565,392 |
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1,076,314 |
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$ |
(2,937,046) |
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$ |
(3,696,143) |
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$ |
4,971,468 |
Share-based compensation |
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7,729 |
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7,729 |
Issuance of common stock
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4,201 |
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(5,744) |
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15,674 |
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19,875 |
Net income (loss) |
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(77,171) |
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(77,171) |
September 30, 2018 |
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3,926,491 |
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$ |
39,265 |
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$ |
11,577,322 |
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1,070,570 |
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$ |
(2,921,372) |
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$ |
(3,773,314) |
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$ |
4,921,901 |
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December 31, 2018 |
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3,926,491 |
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$ |
39,265 |
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$ |
11,604,817 |
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1,065,483 |
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$ |
(2,907,490) |
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$ |
(4,648,484) |
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$ |
4,088,108 |
Share-based compensation |
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29,862 |
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29,862 |
Issuance of common stock
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(2,562) |
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(11,200) |
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30,562 |
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28,000 |
Net income (loss) |
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(518,773) |
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(518,773) |
March 31, 2019 |
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3,926,491 |
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$ |
39,265 |
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$ |
11,632,117 |
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1,054,283 |
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$ |
(2,876,928) |
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$ |
(5,167,257) |
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$ |
3,627,197 |
Share-based compensation |
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30,000 |
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30,000 |
Issuance of common stock
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(1,965) |
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(10,981) |
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29,965 |
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28,000 |
Issuance of warrants |
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32,236 |
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32,236 |
Net income (loss) |
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(470,958) |
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|
(470,958) |
June 30, 2019 |
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3,926,491 |
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$ |
39,265 |
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$ |
11,692,388 |
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1,043,302 |
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$ |
(2,846,963) |
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$ |
(5,638,215) |
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$ |
3,246,475 |
Share-based compensation |
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24,250 |
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24,250 |
Issuance of common stock
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(5,218) |
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(12,173) |
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33,218 |
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28,000 |
Issuance of warrants |
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3,582 |
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3,582 |
Net income (loss) |
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(506,977) |
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(506,977) |
September 30, 2019 |
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3,926,491 |
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$ |
39,265 |
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$ |
11,715,002 |
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1,031,129 |
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$ |
(2,813,745) |
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$ |
(6,145,192) |
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$ |
2,795,330 |
See accompanying notes to condensed consolidated financial statements.
5
Micron Solutions, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(unaudited)
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Nine Months Ended |
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September 30, |
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2019 |
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2018 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(1,496,708) |
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$ |
(223,137) |
Adjustments to reconcile net loss to net cash provided by
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Gain on sale of assets |
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(7,602) |
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— |
Depreciation and amortization |
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1,108,018 |
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1,130,000 |
Non-cash interest expense |
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60,026 |
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50,443 |
Change in allowance for doubtful accounts |
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|
831 |
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— |
Share-based compensation expense |
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|
168,112 |
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|
90,541 |
Changes in operating assets and liabilities: |
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Accounts receivable |
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(54,523) |
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(334,469) |
Inventories |
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1,087,278 |
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(483,847) |
Prepaid expenses and other current and non-current assets |
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110,170 |
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(98,922) |
Other non-current assets |
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— |
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1,000 |
Accounts payable |
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(588,531) |
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(86,616) |
Accrued expenses and other current liabilities |
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320,092 |
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297,228 |
Contract liabilities |
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(536,079) |
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|
186,761 |
Net cash provided by operating activities |
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171,084 |
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|
528,982 |
Cash flows from investing activities: |
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Purchases of property, plant and equipment |
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(161,928) |
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(456,488) |
Proceeds from sale of property, plant and equipment |
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32,602 |
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— |
Proceeds from sale of assets held for sale |
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663,334 |
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Cash paid for patents and trademarks |
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— |
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(2,661) |
Net cash provided by (used in) investing activities |
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534,008 |
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(459,149) |
Cash flows from financing activities: |
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Payments on revolving line of credit, net |
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(863,447) |
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(334,830) |
Payments on term notes payable |
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(342,857) |
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(304,762) |
Payments of debt issuance costs |
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— |
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(34,389) |
Proceeds from (payments on) subordinated debt |
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500,000 |
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(350,000) |
Net cash provided by (used in) financing activities |
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(706,304) |
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(1,023,981) |
Net change in cash and cash equivalents |
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(1,212) |
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(954,148) |
Cash and cash equivalents, beginning of period |
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1,715 |
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|
956,988 |
Cash and cash equivalents, end of period |
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$ |
503 |
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$ |
2,840 |
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 $546,889 of amounts recorded as Contract Liabilities at December 31, 2018.
2. Inventories
Inventories consist of the following:
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September 30, |
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December 31, |
||
|
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2019 |
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2018 |
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Raw materials |
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$ |
928,730 |
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$ |
1,079,887 |
Work-in-process |
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|
407,775 |
|
|
1,105,272 |
Finished goods |
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|
1,302,880 |
|
|
1,499,900 |
Total |
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$ |
2,639,385 |
|
$ |
3,685,059 |
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:
Jason Chambers, Director |
$50,000 |
Rodd Friedman, Director |
$100,000 |
Andrei Soran, Director |
$50,000 |
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 $1,000,000 of borrowing capacity on its revolving line of credit with Rockland Trust (the “Revolver”). Management has performed an analysis to evaluate the entity’s ability to continue as a going concern for one year after the financial statements issuance date.
Management’s analysis includes forecasting future revenues, expenditures and cash flows, taking into consideration past performance and the requirements under the credit agreement. Revenue and cash flow forecasts are dependent on the Company’s ability to fill booked orders from existing customers, its ability to close new and expanded business, its implementation of production efficiencies, and to improve overall financial performance. In addition, the Company has amended its bank debt agreement to eliminate its debt service coverage covenant for the three months ended September 30, 2019.
Based on management’s analysis, the Company believes that cash flows from its operations, together with its existing working capital, booked orders, expense management, and availability on its Revolver will be sufficient to fund operations at current levels and repay debt obligations over the next twelve months from the financial statements issuance date. However, there can be no assurance that the Company will be able to do so.
Results of Operations
The following table sets forth, for the periods indicated, the percentages of the net sales represented by certain items reflected in the Company's statements of operations.
Net Sales
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Net sales |
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2019 |
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2018 |
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$ Change |
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% Change |
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Three months ended September 30, |
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$ |
4,331,280 |
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$ |
5,001,660 |
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$ |
(670,380) |
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(13.4)% |
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Net sales |
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2019 |
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2018 |
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$ Change |
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% Change |
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Nine months ended September 30, |
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$ |
13,909,101 |
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$ |
15,441,134 |
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$ |
(1,532,033) |
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(9.9)% |
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
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Gross profit |
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2019 |
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2018 |
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$ Change |
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% Change |
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Three months ended September 30, |
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$ |
517,398 |
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$ |
735,024 |
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$ |
(217,626) |
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(29.6)% |
As a percentage of sales |
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11.9% |
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14.7% |
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Gross profit |
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2019 |
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2018 |
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$ Change |
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% Change |
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Nine months ended September 30, |
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$ |
1,681,671 |
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$ |
2,344,204 |
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$ |
(662,533) |
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(28.3)% |
As a percentage of sales |
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12.1% |
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15.2% |
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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.
6
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.
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Exhibit
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Description of Exhibit |
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Page |
4.1 |
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4.2 |
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4.3 |
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10.1** |
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X-1 |
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10.2** |
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X-2 |
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10.3* |
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X-3 |
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31.1** |
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Certification of the CEO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) |
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X-4 |
31.2** |
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Certification of the CFO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) |
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X-5 |
32.1** |
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X-6 |
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32.2** |
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X-7 |
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101.INS† |
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XBRL Instance Document |
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101.SCH† |
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XBRL Taxonomy Extension Schema Document |
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101.CAL† |
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XBRL Taxonomy Extension Calculation Linkbase Document |
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101.PRE† |
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XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF† |
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XBRL Taxonomy Extension Definition Linkbase Document |
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*Indicates a management contract or compensatory plan required to be filed as an exhibit. |
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**Filed herewith |
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† XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
7
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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MICRON SOLUTIONS, INC. |
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November 14, 2019 |
By: /s/ William J. Laursen |
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William J. Laursen |
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President and Chief Officer |
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(principal executive officer) |
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November 14, 2019 |
By: /s/ Wayne Coll |
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Wayne Coll |
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Chief Financial Officer |
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(principal financial and accounting officer) |
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8
Exhibit 10.1
SECOND AMENDMENT AND CONSENT TO CREDIT AND SECURITY AGREEMENT
This Second Amendment and Consent to Credit and Security Agreement (this “Amendment”) is dated as of August 6, 2019 by and among MICRON PRODUCTS INC., a Massachusetts corporation ("Borrower"), MICRON SOLUTIONS, INC. a Delaware corporation (“Guarantor”, Borrower and Guarantor, each an “Obligor” and collectively, “Obligors”), and ROCKLAND TRUST COMPANY, a Massachusetts trust company ("Lender").
RECITALS
A. Borrower and Lender are parties to that certain Credit and Security Agreement dated as of December 29, 2017, as amended by a First Amendment and Waiver to Credit and Security Agreement dated as of March 7, 2019 (the "Credit Agreement"), and Guarantor has guaranteed the obligations of Borrower thereunder and relating thereto.
B. Obligors have disclosed that (i) Guarantor incurred $500,000 in Indebtedness in breach of Section 5.6 of the Credit Agreement, and (ii) Borrower has breached Section 4.3 of the Credit Agreement with respect to the Debt Service Coverage Ratio test for the fiscal quarter ending June 30, 2019. Such breaches have resulted in Events of Default under Section 6.1(c) of the Credit Agreement (the "Existing Defaults").
C. Obligors have requested that, notwithstanding the Existing Defaults, Lender agree to amend certain provisions of the Credit Agreement and continue to make Advances.
D. Lender has agreed to so amend the Credit Agreement and to make Advance on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Obligors hereby agree as follows:
1. Capitalized Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to them in the Credit Agreement.
2. Amendments to Credit Agreement.
a. The definition of “Permitted Indebtedness” in Schedule A of the Credit Agreement is amended in its entirety as follows:
“‘Permitted Indebtedness’ means (a) the Obligations, (b) the Indebtedness existing on the date hereof disclosed in each case along with extensions, refinancings, modifications, amendments and restatements thereof, provided that (i) the principal amount thereof is not increased, (ii) if such Indebtedness is subordinated to any or all of the Obligations, the applicable subordination terms shall not be modified without the prior written consent of Lender, and (iii) the terms thereof are not modified to impose more burdensome terms upon any Obligor, (c) obligations under Capitalized Leases and purchase money Indebtedness secured by Permitted Liens in an amount not to exceed $150,000 in the aggregate at any one time, (d) Indebtedness incurred as a result of endorsing negotiable instruments received in the ordinary course of business, (e) guaranty obligations permitted hereunder, (f) obligations in respect of performance bonds or sureties incurred in the ordinary course of business, (g) Indebtedness between and among Corporate Obligors, and (h) the Indebtedness of Parent not to exceed $500,000 in the aggregate under subordinated promissory notes dated on or before August 5, 2019 in form and substance satisfactory to Lender, provided such Indebtedness is subordinated to the Obligations on terms and conditions satisfactory to Lender pursuant to subordination agreements, in form and substance satisfactory to Lender, executed in favor of Lender by the holders of such Indebtedness.”
b. Notwithstanding anything to the contrary contained in the Credit Agreement and as a result of the Existing Defaults, Lender may make Advances (without any obligation to do so) in its absolute and sole discretion.
3. Consent to Sale of Certain Real Estate Collateral. Notwithstanding anything contained in the Credit Agreement (including, without limitation, Section 5.2(e) thereof) or any other Loan Document, Lender hereby consents to Borrower’s sale of certain Real Estate Collateral described on Exhibit A attached hereto (the “Released
Real Estate Collateral”). The Real Estate Collateral that is not the Released Real Estate Collateral is referred to herein as the “Remaining Real Estate Collateral”.
4. Representations and Warranties. Obligors represents and warrants to Lender that, except as set forth on Schedule I attached hereto, (a) all of the representations and warranties made in the Credit Agreement are true and accurate as of the date hereof as if made as of the date hereof (except as the same may relate to an earlier date), and (b) no Default or Event of Default exists.
5. Conditions Precedent. The effectiveness of this Amendment is subject to the satisfaction of the following:
a. the execution and delivery of this Amendment by all parties hereto;
b. receipt by Lender of a final settlement statement, executed by all parties thereto, showing the amount due to Borrower, as seller thereunder, representing Borrower’s proceeds from the sale of the Released Real Estate Collateral in an amount equal to $662,759.28 (the “Sales Proceeds”), and receipt by Lender from Borrower of the Sales Proceeds for application by Lender to Advances;
c. receipt by Lender of evidence that Fidelity National Title Insurance Company (the “Title Company”) is unconditionally committed, subject only to the recording of the Declaration of Easements and the Deed (each as defined below), to issue an endorsement to its Title Policy No. 27307-213042491 (the “Title Policy”), in form and substance acceptable to Lender, insuring that the Remaining Real Estate Collateral has the benefit of easements created by that certain Declaration of Easements (the “Declaration of Easements”) to be recorded prior to the deed from Borrower conveying the Released Real Estate Collateral (the “Deed”); and
d. receipt by the Lender from Obligors of such other documents reasonably requested by Lender.
6. Additional Obligation of Borrower. Within (a) ten (10) days following the date of this Agreement, Borrower shall deliver copies of the executed promissory note described in clause (h) of the definition of “Permitted Indebtedness”, along with the subordination agreement described therein, executed by the payees of such notes, and (b) sixty (60) days following the date of this Amendment, Borrower shall use commercially reasonable efforts, at Borrower’s sole cost and expense, to cause the Title Company to issue an endorsement to the Title Policy to add the parcel of land shown as Parcel VIII on a plan entitled “Plan of Land in Fitchburg, Massachusetts owned by: Micron Products, Inc.” which plan is dated July 26, 2018, and is recorded with the Worcester North District Registry of Deeds in Plan Book 517, Page 6, as part of the Land referred to in the Title Policy and amending Exhibit “A” attached to the Title Policy accordingly. As used in this Section 6, “commercially reasonable efforts” shall include, but not be limited to, paying the cost for title examination required by the Title Company to issue such endorsement.
7. Acknowledgements. Each Obligor hereby acknowledges, ratifies, reaffirms, and agrees that the (a) Credit Agreement and the other Loan Documents are enforceable against the Obligors party thereto in accordance with their respective terms and applicable law, (b) the security interests granted to Lender thereunder in the Collateral are and will remain enforceable perfected first priority security interests which secure the payment and performance by Borrower of the Obligations, (c) the Existing Defaults have occurred and are continuing, and (d) no delay or inaction by Lender in the exercise of its rights and remedies under the Loan Documents shall (i) constitute a (x) modification or an alteration of the terms, conditions or covenants of the Loan Documents, all of which remain in full force and effect or (y) a waiver, release or limitation upon Lender's exercise of any of its rights and remedies thereunder or under applicable law, all of which are hereby expressly reserved or (ii) relieve or release Obligors in any way from any of their respective duties, obligations, covenants or agreements under the Loan Documents or from the consequences of the Existing Defaults, any other Events of Default or any Defaults, whether now existing or occurring after the date of this letter.
8. Release. Each Obligor hereby acknowledges and agrees that it has no defense, counterclaim, offset, cross-complaint, claim or demand of any kind of nature whatsoever that can be asserted to reduce or eliminate all or any part of its liability to repay the Obligations or to seek affirmative relief or damages of any kind or nature from Lender which are known to it as of the date hereof. Borrower hereby voluntarily and knowingly releases and forever discharges Lender and each of its respective predecessors, agents, employees, affiliates, successors and assigns (collectively, the “Released Parties”) from all known claims, demands, actions, causes of action, damages, costs, expenses and liabilities whatsoever, anticipated or unanticipated, suspected or unsuspected, fixed, contingent or conditional, at law or in equity, in any case originating in whole or in part on or before the date this Amendment becomes effective that such Obligor may now or hereafter have against the Released Parties, if any, irrespective of whether any such claims arise out of contract, tort, violation of law or regulations, or otherwise, and that arise from any extension of credit made
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under the Credit Agreement, the exercise of any rights and remedies under the Credit Agreement or any other Loan Document, and/or the negotiation for and execution of this Amendment, including, without limitation, any contracting for, charging, taking, reserving, collecting or receiving interest in excess of the highest lawful rate applicable.
9. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together constituting one and the same instrument.
10. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the Applicable State.
[Signature page follows]
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IN WITNESS WHEREOF, the parties hereto have executed this Amendment as a sealed instrument as of the first date above written.
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BORROWER: |
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MICRON PRODUCTS INC. |
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By: |
/s/ Wayne Coll |
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Name: Wayne Coll |
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Title: Chief Financial Officer |
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GUARANTOR: |
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MICRON SOLUTIONS, INC. |
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By: |
/s/ Wayne Coll |
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Name: Wayne Coll |
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Title: Chief Financial Officer |
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LENDER: |
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ROCKLAND TRUST COMPANY |
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By: |
/s/ Thomas Meehan |
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Name: Thomas Meehan |
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Title: Vice President |
Signature Page to Second Amendment and Consent to Credit and Security Agreement
Exhibit A
Description of Released Real Estate Collateral
FIRST PARCEL:
A certain parcel of land, with the buildings thereon, situated on the southerly side of Main Street in Fitchburg, Worcester County, Massachusetts, being shown as Parcel V on a plan entitled “Plan of Land in Fitchburg, Massachusetts owned by: Micron Products, Inc.” which plan is dated July 26, 2018, and is recorded with the Worcester North District Registry of Deeds in Plan Book 517, Page 6, and to which plan reference may be made for a more particular description.
Parcel V contains 10,186 square feet according to said plan.
SECOND PARCEL:
A certain parcel of land on southwesterly side of Summer Street and at land formerly of The Brown Bag Filling Machine now of Micron Products, Inc., being shown as Parcel VI on a plan entitled “Plan of Land in Fitchburg, Massachusetts owned by: Micron Products, Inc.” which plan is dated July 26, 2018, and is recorded with the Worcester North District Registry of Deeds in Plan Book 517, Page 6, and to which plan reference may be made for a more particular description.
Parcel VI contains 9,687 square feet according to said plan.
THIRD PARCEL:
A certain parcel of land, with the buildings thereon, situated on the southerly side of Summer Street in Fitchburg, Worcester County, Massachusetts, being shown as Parcel VII on a plan entitled “Plan of Land in Fitchburg, Massachusetts owned by: Micron Products, Inc.” which plan is dated July 26, 2018 and is recorded with the Worcester North District Registry of Deeds in Plan Book 517, Page 6, and to which plan reference may be made for a more particular description.
Parcel VII contains 5,062 square feet according to said plan.
Exhibit 10.2
THIRD AMENDMENT AND WAIVER TO CREDIT AND SECURITY AGREEMENT
This Third Amendment and Waiver to Credit and Security Agreement (this “Amendment”) is dated as of August 13, 2019 by and among MICRON PRODUCTS INC., a Massachusetts corporation ("Borrower"), MICRON SOLUTIONS, INC., a Delaware corporation (“Guarantor” and, together with Borrower, each an “Obligor” and collectively, the “Obligors”), and ROCKLAND TRUST COMPANY, a Massachusetts trust company ("Lender").
RECITALS
A. Borrower and Lender are parties to that certain Credit and Security Agreement dated as of December 29, 2017, as amended by that certain First Amendment and Waiver to Credit and Security Agreement dated as of March 7, 2019, and as further amended by that certain Second Amendment and Consent to Credit and Security Agreement dated as of August 6, 2019 (the “Second Amendment”) (the "Credit Agreement").
B. Obligors have requested that Lender agree to (i) amend certain provisions of the Credit Agreement and (ii) waive certain Events of Default that have occurred as a result of (x) Borrower’s failure to satisfy certain requirements of Section 4.3 and paragraph 1 of Schedule B-3 of the Credit Agreement, namely by virtue of failing to maintain a Debt Service Coverage Ratio of not less than 1.10 to 1.0 for the fiscal quarter ended June 30, 2019 for the trailing 3 month period then ended, and (y) Guarantor’s incurrence of certain Indebtedness in violation of Section 5.6 of the Credit Agreement, as set forth in further detail in the Second Amendment (collectively, the “Specified Events of Default”).
C. Lender has agreed to so amend certain provisions of the Credit Agreement and to waive the Specified Events of Default on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and each Obligor hereby agree as follows:
1. Capitalized Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to them in the Credit Agreement.
2. Waiver of Specified Events of Default; No Other Waiver. Effective as of the date of the occurrence of the Specified Events of Default, Lender hereby waives the Specified Events of Default. Except as expressly set forth herein with respect to the Specified Events of Default, Lender has not waived, is not hereby waiving, and has no intention of waiving, any other Event of Default or any Default. All of the terms and conditions of the Credit Agreement remain in full force and effect and none of such terms and conditions are, or shall be construed as, otherwise amended or modified, except as specifically set forth herein, and nothing in this Amendment shall constitute a waiver by Lender of any Default or Event of Default, or of any right, power or remedy available to Lender under the Credit Agreement or any other Loan Document, whether any such defaults, rights, powers or remedies presently exist or arise in the future, except as specifically set forth herein.
3. Amendments to Credit Agreement.
a. Paragraph 1 in Schedule B-3 of the Credit Agreement is amended in its entirety as follows:
“1. DEBT SERVICE COVERAGE RATIO. Borrower shall cause to be maintained a Debt Service Coverage Ratio of not less than 1.1 to 1.0 with respect to the Borrower’s fiscal quarters ending December 31, 2019 and each fiscal quarter thereafter, in each case as calculated for the trailing 12 month period then ended with respect to each such fiscal quarter; provided that the fiscal quarter ending December 31, 2019 shall be calculated for the trailing 3 month period then ended with respect to such fiscal quarter, the fiscal quarter ending March 31, 2020 shall be calculated for the trailing 6 month period then ended with respect to such fiscal quarter and the fiscal quarter ending June 30, 2020 shall be calculated for the trailing 9 month period then ended with respect to such fiscal quarter.”.
4. Representations and Warranties. Borrower represents and warrants to Lender that (a) all of the representations and warranties made in the Credit Agreement are true and accurate as of the date hereof as if made as of the date hereof (except as the same may relate to an earlier date), and (b) after giving effect to this Amendment, no Default or Event of Default exists.
5. Conditions Precedent. The effectiveness of this Amendment is subject to the satisfaction of the following:
a. the execution and delivery of this Amendment by all parties hereto;
b. [receipt by the Lender from the Borrower of a $5,000 amendment fee, together with payment for any fees and expenses reasonably incurred by Lender in connection with this Amendment; and
c. receipt by the Lender from the Obligors of such other documents reasonably requested by the Lender, including, without limitation, (i) that certain Certificate of Secretary of each Obligor, each dated as of the date hereof, and (ii) the executed promissory notes and related subordination agreements as described and set forth in Section 6(a) of the Second Amendment.
6. Acknowledgements. Each Obligor hereby acknowledges, ratifies, reaffirms, and agrees that the Credit Agreement and the other Loan Documents, as applicable, are enforceable against each Obligor in accordance with their terms and applicable law, and the security interests granted to Lender thereunder in the Collateral are and will remain enforceable perfected first priority security interests which secure the payment and performance by Borrower of the Obligations and Guarantor’s guarantee of Borrower’s payment and performance of the Obligations.
7. Release. Each Obligor hereby acknowledges and agrees that it has no defense, counterclaim, offset, cross-complaint, claim or demand of any kind of nature whatsoever that can be asserted to reduce or eliminate all or any part of its liability to repay or guarantee the repayment of the Obligations or to seek affirmative relief or damages of any kind or nature from Lender which are known to it as of the date hereof. Each Obligor hereby voluntarily and knowingly releases and forever discharges Lender and each of its respective predecessors, agents, employees, affiliates, successors and assigns (collectively, the “Released Parties”) from all known claims, demands, actions, causes of action, damages, costs, expenses and liabilities whatsoever, anticipated or unanticipated, suspected or unsuspected, fixed, contingent or conditional, at law or in equity, in any case originating in whole or in part on or before the date this Amendment becomes effective that either Obligor may now or hereafter have against the Released Parties, if any, irrespective of whether any such claims arise out of contract, tort, violation of law or regulations, or otherwise, and that arise from any extension of credit made under the Credit Agreement, the exercise of any rights and remedies under the Credit Agreement or any other Loan Document, and/or the negotiation for and execution of this Amendment, including, without limitation, any contracting for, charging, taking, reserving, collecting or receiving interest in excess of the highest lawful rate applicable.
8. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together constituting one and the same instrument.
9. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the Applicable State.
[Signature page follows]
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IN WITNESS WHEREOF, the parties hereto have executed this Amendment as a sealed instrument as of the first date above written.
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BORROWER: |
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MICRON PRODUCTS INC. |
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By: |
/s/ Wayne Coll |
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Name: Wayne Coll |
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Title: Chief Financial Officer |
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GUARANTOR: |
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MICRON SOLUTIONS, INC. |
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By: |
/s/ Wayne Coll |
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Name: Wayne Coll |
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Title: Chief Financial Officer |
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LENDER: |
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ROCKLAND TRUST COMPANY |
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By: |
/s/ Thomas Meehan |
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Name: Thomas Meehan |
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Title: Vice President |
Signature Page to Third Amendment and Waiver to Credit and Security Agreement
OFFICER'S CERTIFICATION
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, William J. Laursen, certify that:
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I have reviewed this report on Form 10-Q of Micron Solutions, Inc. for the fiscal quarter ended September 30, 2019; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d -15(f)) for the registrant and have: |
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designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; |
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disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during the registrant's first fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and |
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The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. |
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DATE: November 14, 2019 |
/s/ |
William J. Laursen |
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William J. Laursen |
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President and Chief Executive Officer |
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(principal executive officer) |
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X-1
OFFICER'S CERTIFICATION
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Wayne Coll, certify that:
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I have reviewed this report on Form 10-Q of Micron Solutions, Inc. for the fiscal quarter ended September 30, 2019; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d -15(f)) for the registrant and have: |
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designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; |
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disclosed in this report any change in the registrant's internal controls over financial reporting that occurred during the registrant's first fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and |
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The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. |
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DATE: November 14, 2019 |
/s/ |
Wayne Coll |
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Wayne Coll |
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Chief Financial Officer |
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(principal financial and accounting officer) |
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X-2
CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Micron Solutions, Inc. (the “Company”) for the quarter ended
September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned principal executive officer certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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DATE: November 14, 2019 |
/s/ |
William J. Laursen |
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William J. Laursen |
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Chief Executive Officer |
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(principal executive officer) |
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X-3
CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Micron Solutions, Inc. (the “Company”) for the quarter ended
September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned principal executive officer certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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DATE: November 14, 2019 |
/s/ |
Wayne Coll |
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Wayne Coll |
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Chief Financial Officer |
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(principal financial and accounting officer) |
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X-4