It
em 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. There are a number of factors that could cause the Company’s actual results to differ materially from those forecasted or projected in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company is under no obligation and does not intend to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of any unanticipated events.
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
At March 31, 2019, 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 Company’s ability to generate sufficient cash to support the Company’s operations and to meet debt service requirements under the Company’s credit agreement. As of March 31, 2019, the Company has $1,684 of cash and
approximately
$343,000 of borrowing capacity on its revolving line of credit. As a result of the above factors, 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 and to improve overall financial performance. Management also believes that it is probable that he Company will close on the sale of the vacant buildings, shown as assets held for sale on the consolidated balance sheets, on or about June 30, 2019 and the proceeds of approximately $700,000 will be applied against the Company’s revolver. Additionally, on March 7, 2019, the Company entered into the First Amendment to the Credit and Security Agreement in which the quarterly debt service coverage ratio measurement requirements for 2019 were amended to lessen the burden of compliance.
Based on management’s analysis, the Company believes that cash flows from its operations, together with its existing working capital, booked orders, the sale of vacant buildings,
its intent and ability to raise funds through existing investors,
expen
se management, and 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.
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Three Months Ended
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March 31,
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2019
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2018
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Net sales
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100.0
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%
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100.0
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%
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Cost of sales
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86.0
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85.7
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Gross profit
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14.0
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14.3
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Selling and marketing
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3.2
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3.7
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General and administrative
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18.9
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11.8
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Research and development
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0.6
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0.5
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Other expense
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2.4
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1.7
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Loss before income tax provision (benefit)
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(11.1)
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(3.4)
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Income tax provision (benefit)
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—
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—
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Net loss
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(11.1)
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%
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(3.4)
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%
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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 March 31,
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$
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4,685,630
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$
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5,119,048
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$
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(433,418)
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(8.5)%
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The decrease in consolidated net sales for the three months ended March 31, 2019 versus the prior year period was due primarily to a decrease in net sales of sensors, machined components and thermoplastic injection molding. This was partly offset by increased net 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 March 31,
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$
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653,827
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$
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731,360
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$
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(77,533)
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(10.6)%
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As a percentage of sales
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14.0%
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14.3%
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The decrease in consolidated gross profit for the three months ended March 31, 2019 versus the prior year period was due to a decrease in gross profit from machined components and sensors partly offset by higher gross profit from thermoplastic injection molding.
Gross profit expressed as a percentage of sales from machined components decreased 16.4 percentage points. Despite lower net sales and lower gross profit, gross profit as a percentage of sales from thermoplastic injection molding and sensors improved by 10.0 and 1.4 percentage points, respectively.
Selling and Marketing
The Company's consolidated selling and marketing expenses amounted to $149,142 (3.2% of net sales) for the three months ended March 31, 2019 as compared to $190,540 (3.7% of net sales) for the three months ended March 31, 2018, a decrease of
$41,398
or 21.7%. For the three months ended March 31, 2019, the decrease was primarily due to lower marketing, advertising and professional fees related in part to lower costs related to online lead generation programs. Additionally, compensation was 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
$884,875
(18.
9
% of net sales) for the three months ended March 31, 2019 as compared to $604,035 (11.8% of net sales) for the three months ended March 31, 2018
, an in
crease of
$280,840
, or
46.5%
.
The in
crease in general and administrative expenses for the three months ended March 31, 2019 when compared to 2018 is due
primarily
to
several changes in upper management and to the recording of s
everance pay for the outgoing CO
O.
Research and Development
The Company's consolidated research and development expenses decreased to $27,177 (0.6% of net sales) for the three months ended March 31, 2019 as compared to $27,921 (0.5% of net sales) for the three months ended March 31, 2018, a decrease of $744, or 5.3%.
Other Expense, net
Other expense, net increased to $111,406 for the three months ended March 31, 2019, as compared to $88,511, for the three months ended March 31, 2018, an increase of $22,895. The increase in other expense, net was due largely to a $13,965 increase in interest expense.
Income Tax Provision
The tax provisions for the three and year ended March 31, 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 and year ended March 31, 2019 and 2018 of 0% is due to the 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 March 31, 2019 was $0.18 per share as compared to a loss of $0.06 per share for the
same period in 2018, an increase in loss per share of $0.12. The increase in loss per share for the three months ended March 31, 2019, is due in part to decreased net sales of $443,418, decreased gross profit of $77,533 and an increase of $238,698 in operating expenses.
Off-Balance Sheet Arrangements
Lease expense under all operating leases for the three months ended March 31, 2019 and 2018 was $6,056 and $5,913 respectively.
Liquidity and Capital Resources
Working capital was $2,197,934 as of March 31, 2019, as compared to $2,455,498 at December 31, 2018, a decrease of $257,564. The decrease in working capital is due primarily to operating
losses with an increase in the revolver and an increase in accrued expenses and other current liabilities partly offset by increases in accounts receivable and inventory.
Trade accounts receivable, net of allowance for doubtful accounts, were $2,767,238 and $2,325,804 at March 31, 2019 and December 31, 2018, respectively, an increase of
$441,434
.
The increase is due largely to higher sales in the first quarter of 2019 compared to the fourth quarter of 2018.
Inventories increased by $190,058 from December 31, 2018 to March 31, 2019, due in large p
art to the lower than anticipated sales of Sensors at the end of the quarter.
Acco
unts payable decreased
from December 31, 2018 to March 31, 2019, related to lower sales in the quarter. Accrued expenses and other curre
nt liabilities increased primarily due
to a severance arrangement with a former officer of
the company,
non-cash incentive compensation acc
ruals, and
increased accrued commissions
for new programs including
amounts for new outside sales representatives.
Capital equipment expenditures were $105,727 for the three months ended March 31, 2019. A majority of the first quarter capital expenditures related to internal tooling projects as well
as for
robotic automation in custom molding.
At March 31, 2019, the Company’s total debt was $6,644,426 as compared to $5,972,470 at Dece
mber 31, 2018, an increase of $6
71,956. The in
crease
is due to borrowings of $769,31
1 on the revolving line of credit partly offset by payment
s on
term notes.
Amounts available to borrow under the Revolver are $342,711 at March 31,2019.
No dividends were declared or paid in the three months ended March 31, 2019 or 2018, respectively.
The Company believes that cash flows from its operations, together with its existing working cap
ital, booked orders, the sale of the vacant buildings, 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 March 31, 2019, the Company had cash on hand of $1,684, as the Company’s cash is swept daily against the Revolver in accordance with the Company’s credit agreement. For the three months ended March 31, 2019 net cash used in operating activities was $549,329. Net cash used in investing activities for the three months ended March 31, 2019 was $105,727. Net cash provided by financing activities for the year ended March 31, 2019 was $655,025. The net cash flows for the three months ended March 31, 2019
are discussed in further detail below.
Operating Cash Flows
For the three months ended March 31, 2019, net cash used in operating activities was $549,329. Cash used in operating activities was primarily the result of the net loss, as well as increases in accounts receivable and inventory and a decrease in accounts payable, partially offset by an increase in accrued expense
s
and other current liabilities as well as non-cash addbacks, primarily depreciation and amortization.
Investing Cash Flows
For the three months ended March 31, 2019, net cash used in investing activities was $105,727. The net cash used was for capital expenditures largely due to internal tooling and robotic automation in custom molding.
Financing Cash Flows
For the three months ended March 31, 2019, net cash provided by financing activities was $655,025, primarily due to net draws on the revolver, partially offset by payment
s
on term notes.