Table of Contents
Micron Solutions, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
1. Description of Business
Micron Solutions®, Inc., a Delaware corporation ("Micron Solutions"), through its wholly-owned Massachusetts operating subsidiary, Micron Products®, Inc. (“Micron” and together with Micron Solutions, the "Company"), is a diversified contract manufacturing organization (“CMO”) that produces highly-engineered, innovative components requiring precision machining and thermoplastic injection molding. The Company manufactures components, devices and equipment for military, law enforcement, automotive and consumer products applications. The Company's products include silver/silver chloride coated and conductive resin sensors used as consumable component parts in the manufacture of integrated disposable electrophysiological sensors. The Company’s machining operations produce quick-turn, high volume and patient-specific orthopedic implant components and instruments as well as products for the defense industry. The Company has diversified manufacturing capabilities with the capacity to participate in full product life-cycle activities from early stage development and engineering and prototyping to full scale manufacturing as well as packaging and product fulfillment services.
The Company competes globally, with approximately 37% of its revenue derived from exports.
Liquidity and Management’s Plan
At December 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 December 31, 2019, the Company has $503 of cash and approximately $810,000 of borrowing capacity on its revolving line of credit (“Revolver”). 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, to close on new and expanded business, to improve overall financial performance and its ability to obtain alternative financing, which may include a sale/leaseback of certain real estate and equipment.
On March 12, 2020, the Company entered into the Fourth Amendment to the Credit and Security Agreement in which the quarterly debt service coverage ratio measurement requirements for 2020 were amended to lessen the burden of compliance and non-compliance with the debt service coverage ratio for the fourth quarter of 2019 was waived. See Note 6.
Based on management’s analysis, the Company believes that cash flows from operations, together with existing working capital, booked orders, expense management, the Revolver and alternative financing options, which may include a sale/leaseback of certain real estate and equipment, will be sufficient to fund operations at current and projected levels and to repay debt obligations over the next twelve months. However, there can be no assurance that the Company will be able to do so.
2. Accounting Policies
Principles of consolidation
The consolidated financial statements (the "financial statements") include the accounts of Micron Solutions, Inc. and its operating subsidiary, Micron Products, Inc. All intercompany balances and transactions have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenue and expenses during the reporting periods. Actual results could differ from those estimates.
Revenue recognition
The Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers, Topic 606” (“Topic 606”) effective January 1, 2018 using the modified retrospective approach. Under the modified retrospective method, a cumulative effect of initially applying the new standard is recorded as an adjustment to the opening balance of retained earnings at the date of initial application. By electing to use this method, there is no restatement of the comparative periods presented (i.e., interim periods and fiscal year ending 2017). As permitted by Topic 606 transition guidance (outlined below), the Company has elected to apply the new standard only to
Table of Contents
Micron Solutions, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
contracts that were not completed contracts at the date of initial application, and therefore, the Company only evaluated those contracts that were in-process and not completed before January 1, 2018.
The Company determined that customer purchase orders represent contracts with a customer. For each contract, the Company considers the promise to transfer products, each of which are distinct, to be the identified performance obligations.
Shipping and handling activities for which the Company is responsible are not a separate promised service but instead are activities to fulfill the entity’s promise to transfer goods. Shipping and handling fees will be recognized at the same time as the related performance obligations are satisfied.
The Company determines the transaction price as the amount of consideration it expects to receive in exchange for transferring promised goods or services to the customer. If a contract includes a variable amount, such as a rebate, then the Company estimates the transaction price using either the expected value or the most likely amount of consideration to be received, depending upon the specific facts and circumstances. The Company includes estimated variable consideration in the transaction price only to the extent it is probable that a significant reversal of revenue will not occur when the uncertainty is resolved. The Company updates its estimate of variable consideration at the end of each reporting period to reflect changes in facts and circumstances.
The Company recognizes revenue at the point in time when it transfers control of the promised goods or services to the customer, which typically occurs once the product has shipped or has been delivered to the customer. For certain customer warehousing agreements, delivery is deemed to have occurred when the customer pulls inventory out of the warehouse for use in their production. Additionally, for certain customers, delivery is deemed to have occurred when items are delivered to bill and hold locations at the Company’s facility.
The Company evaluated the nature of any guarantees or warranties related to its contracts with customers. The Company provides an assurance-type warranty that only covers the products’ compliance with agreed-upon specifications and does not provide the customer with a service in addition to the assurance that the product complies with agreed-upon specifications.
Certain contracts contain prepayment terms that result in liabilities for customer deposits. Additionally, certain contracts provide for invoicing before all performance obligations have been fulfilled which results in deferred revenue. Customer deposits and advance invoicing are recorded as contract liabilities on the Company’s consolidated balance sheet.
The Company generally expenses sales commission when incurred because the amortization period would have been one year or less. These costs are recorded within selling and marketing expenses.
The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.
The implementation of Topic 606 affects the timing of certain revenue related transactions primarily resulting from the earlier recognition of the Company's tooling revenue and costs. Under legacy GAAP, the Company accounted for tooling as multiple element arrangements whereby revenue and cost were recognized over a period of time after the tool was completed. Upon adoption of ASU 2014-09, tooling sales and costs are now recognized at the point in time upon which the tool is complete and the Company has satisfied all its performance obligations under the contract.
As a result of the initial application of Topic 606 in 2018, the Company made an adjustment to its beginning accumulated deficit of ($13,991) to recognize the remaining deferred revenue ($18,333) and deferred costs ($32,324) recorded as of December 31, 2017 relative to certain completed tooling sales.
During the twelve months ended December 31, 2019, the Company recognized as revenue $549,326 of amounts recorded as Contract Liabilities at December 31, 2018. During the twelve months ended December 31, 2018, the Company recognized as revenue $85,833 of amounts recorded as Contract Liabilities at December 31, 2017.
Fair value of financial instruments
The carrying amount reported in the balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the immediate or short-term nature of such instruments. The carrying value of debt approximates fair value since it provides for market terms and interest rates.
Table of Contents
Micron Solutions, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
Concentration of credit risk
Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of accounts receivable and cash and cash equivalents. It is the Company’s policy to place its cash in high quality financial institutions. The Company does not believe significant credit risk exists above federally insured limits with respect to these institutions.
Accounts receivable are customer obligations due under normal trade terms. A large portion of the Company's products are sold to large diversified medical, military and automotive parts product manufacturers. The Company does not generally require collateral for its sales; however, the Company believes that its terms of sale provide adequate protection against credit risk.
During the year ended December 31, 2019, the Company had net sales to two customers constituting 18% and 10% of total net sales. Accounts receivable from these two customers at December 31, 2019 was 16% and 9%, respectively, of the total accounts receivable balance at year end. During the year ended December 31, 2018, the Company had net sales to three customers constituting 18%, 12% and 10%, respectively, of total net sales. Accounts receivable from these three customers at December 31, 2018 was 20%, 7% and 7%, respectively, of the total accounts receivable balance at year end.
The Company competes globally, with 37% of its revenue derived from exports in 2019. While some risks exist in foreign markets, the Company’s customers have historically been based in stable regions. The Company has agreements with certain foreign customers to hold inventory at customer locations where title and control transfers and revenue is recognized when the product is consumed by the customer. Accounts receivable insurance is used where available and appropriate to reduce risk in these markets.
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents consist of cash on hand in high quality financial institutions The Company’s credit agreement provides for a daily sweep of cash balances against the balance of the Revolver (see Note 6).
Accounts receivable and allowance for doubtful accounts
Accounts receivable represent amounts invoiced by the Company. Management maintains an allowance for doubtful accounts based on information obtained regarding individual accounts and historical experience. Amounts deemed uncollectible are written off against the allowance for doubtful accounts.
Inventories
The Company values its inventory at the lower of average cost, or net realizable value, and cost is determined using first in first out (FIFO) or, for sensors, using average cost. The Company reviews its inventory for quantities in excess of production requirements, for obsolescence and for compliance with internal quality specifications. A review of inventory on hand is made at least annually and obsolete inventory may be disposed of and/or recycled. Any adjustments to inventory would be equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand, market conditions and expected cost to distribute those products to market. The Company also has supply agreements with certain foreign customers to hold inventory at the customer’s warehouses.
Property, plant and equipment
Property, plant and equipment are recorded at cost and include expenditures which substantially extend their useful lives. Depreciation on property, plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets. Expenditures for maintenance and repairs are charged to earnings as incurred. When equipment is retired or sold, the resulting gain or loss is reflected in earnings.
Fair value hierarchy
The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities. Valuations are obtained from readily available pricing sources.
Table of Contents
Micron Solutions, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using unobservable inputs to pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
There were no assets or liabilities measured at fair value at December 31, 2019. At December 31, 2018, assets held for sale is the only item in the financial statements measured at fair value. Assets held for sale are considered level 3. The fair value of assets held for sale was determined using the sales price per the amended purchase and sale agreement, less the estimated cost to sell (see Note 5).
Long-lived and intangible assets
The Company assesses the impairment of long-lived assets and intangible assets with finite lives annually or whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. Based upon the review, the Company did not record any impairment charges in 2019 or 2018.
Intangible assets consist of the following at:
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Estimated
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December 31, 2019
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December 31, 2018
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Useful Life
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Accumulated
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Accumulated
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(in years)
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Gross
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Amortization
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Net
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Gross
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Amortization
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Net
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Patents and trademarks
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10
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$
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36,880
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|
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15,382
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$
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21,498
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$
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36,880
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$
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12,134
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$
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24,746
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Patents and trademarks pending
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—
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2,143
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—
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2,143
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2,143
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—
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2,143
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Trade names
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15
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29,398
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5,530
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23,868
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29,398
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3,132
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26,266
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Total intangible assets
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$
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68,421
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$
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20,912
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$
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47,509
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$
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68,421
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$
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15,266
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$
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53,155
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Amortization expense related to intangible assets was $5,646 and $4,639 in 2019 and 2018, respectively. Estimated future annual amortization expense for currently amortized intangible assets is expected to range from approximately $5,600 annually, declining to approximately $2,600 annually, through the year 2033.
Income taxes
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using tax rates in effect for the year in which the differences are expected to reverse.
The Company follows the provisions of FASB ASC 740, “Accounting for Income Taxes”, which provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements. Tax positions must meet a “more-likely-than-not” recognition threshold at the effective date to be recognized. No interest and penalties related to uncertain tax positions were incurred during 2019 and 2018. The Company’s primary operations are located in the United States. Tax years ended December 31, 2016 or later remain subject to examination by the IRS and state taxing authorities.
Share-based compensation
Share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the share-based grant).
Table of Contents
Micron Solutions, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
Earnings per share data
Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding. The computation of diluted earnings (loss) per share is similar to the computation of basic earnings (loss) per share except that the denominator is increased to include the average number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, the numerator is adjusted for any changes in net income (loss) that would result from the assumed conversions of those potential shares.
Research and development
Research and development expenses include costs directly attributable to conducting research and development programs primarily related to the development of a unique process to improve silver coating during the manufacturing processes, including the design and testing of specific process improvements for certain medical device components. Such costs include salaries, payroll taxes, employee benefit costs, materials, supplies, depreciation on research equipment, and services provided by outside contractors. All costs associated with research and development programs are expensed as incurred.
Recently issued accounting pronouncements
In the normal course of business, management evaluates all new accounting pronouncements issued by the FASB to determine the potential impact they may have on the Company’s Consolidated Financial Statements. Based upon this review, management does not expect any of the recently issued accounting pronouncements, which have not already been adopted, to have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued 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 office equipment leases), no lease assets or liabilities have been recognized in these financial statements.
On August 29, 2018, the FASB issued ASU 2018-15, to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement (CCA) hosted by the vendor - that is a service contract. The Company adopted the ASU on January 1, 2019. ASU 2018-15 aligns the accounting for costs incurred to implement a CCA that is a service arrangement with the guidance on capitalizing costs associated with obtaining internal-use software. Specifically, implementation and development costs, including those for CCAs that do not transfer a software license, may qualify for capitalization based on the phase and nature of the costs. During 2019, the Company initiated a cloud-based software implementation. As of December 31, 2019, the company capitalized $4,331 (the first costs of implementation), which will be expensed over the remaining life of the service agreement upon completion.
Management does not expect any recently issued, but not yet effective, accounting standards to have a material effect on its results of operations or financial conditions.
Reclassification of prior period balances
Amounts in prior year financial statements are reclassified when necessary to conform to the current year presentation.
3. Inventories
Inventories consist of the following:
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December 31,
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December 31,
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2019
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2018
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Raw materials
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$
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923,502
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$
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1,079,887
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Work-in-process
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393,433
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1,105,272
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Finished goods
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1,151,713
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1,499,900
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Total
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$
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2,468,648
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$
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3,685,059
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The total cost of silver in inventory as raw materials, as work-in-process or as a plated surface on finished goods had an estimated cost of $380,347 and $461,272 at December 31, 2019 and 2018, respectively.
Table of Contents
Micron Solutions, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
4. Property, Plant and Equipment, Net
Property, plant and equipment, net consist of the following:
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Asset Lives
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December 31,
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December 31,
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(in years)
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2019
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2018
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Machinery and equipment
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3
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to
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15
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$
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18,129,460
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$
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17,978,781
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Building and improvements
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5
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to
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25
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3,991,951
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3,991,951
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Vehicles
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3
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to
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5
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100,096
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98,119
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Furniture, fixtures, computers and software
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3
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to
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5
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1,470,102
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1,440,071
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Construction in progress
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25,207
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168,094
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Total property, plant and equipment
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23,716,816
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23,677,016
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Less: accumulated depreciation
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(19,914,900)
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(18,545,243)
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Property, plant and equipment, net
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$
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3,801,916
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$
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5,131,773
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For the year ended December 31, 2019, the Company recorded $1,457,797 of depreciation expense compared to $1,499,398 for the year ended December 31, 2018. There are no commitments related to the completion of construction in process as of December 31, 2019.
5. Assets Held for Sale
In January 2016, the Company entered into a Purchase and Sale Agreement with a buyer to sell two unoccupied buildings, with a total of approximately 52,000 square feet, and land. 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 $663,334 which is net of selling costs incurred.
6. Debt
The following table sets forth the items which comprise debt for the Company:
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December 31,
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December 31,
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2019
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2018
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Revolving line of credit
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$
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1,274,299
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$
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2,025,592
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Total term notes payable, net of issuance costs
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$
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3,557,458
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$
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3,946,878
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Less current portion, net
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3,557,458
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389,420
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Term notes payable, non-current, net
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—
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3,557,458
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Subordinated notes payable, non-current, net
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470,152
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—
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Total long term debt, net
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3,636,819
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3,557,458
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Total short and long term debt, net
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$
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5,301,909
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$
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5,972,470
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Bank Debt
On December 29, 2017, the Company entered into a three-year $9,500,000 Credit and Security Agreement (the “credit agreement”) with a Massachusetts trust company, replacing the credit facility and forbearance agreement with the Company’s previous lender. The credit agreement also provided funds with which to discharge existing subordinated promissory notes.
The credit agreement includes a revolving line of credit of up to $5.0 million (“Revolver”), a machinery and equipment term note of $2.5 million (“Equipment Loan”) and a real estate term note of $2.0 million (“Real Estate Loan” and together with the “Equipment Loan” the “Term Loans”).
Table of Contents
Micron Solutions, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
Revolver
The Revolver allows for interest only payments during the term of the facility with the full principal outstanding balance to be paid upon maturity on December 29, 2020. Interest on all borrowings from the Revolver shall be equal to the Wall Street Journal prime rate (“Prime Rate”) plus 0.5%. In lieu of having interest charged at the Prime Rate, the Company shall have the option, on the last day of each month, (the “LIBOR Option”) to have interest charged at a rate of interest equal to the daily one-month LIBOR plus 3.25% for the following month. The interest rate will automatically convert back to the Prime Rate at the beginning of the next month unless the Company elects the LIBOR Option for the next month. The interest rate was 4.94% and 5.59% at December 31, 2019 and at December 31, 2018, respectively.
The Revolver carries a provision for a quarterly unused facility fee equal to 0.25% per annum of the average daily undisbursed face amount of the Revolver during the three months immediately preceding the applicable due date and has no prepayment penalty. The credit agreement provides for a daily sweep of cash balances against the balance of the Revolver. Availability to borrow under the Revolver is based on conditions defined in the credit agreement and amounts to approximately $810,000 at December 31, 2019.
Term Loans
The Equipment Loan requires monthly principal payments of approximately $29,762, payable on the first day of each month commencing February 1, 2018. The Equipment Loan is based upon an 84 month amortization with a balloon payment of approximately $1,458,333 due and payable in full upon maturity on December 29, 2020.
The Real Estate Loan requires monthly principal payments of approximately $8,333, payable on the first day of each month commencing February 1, 2018. The Real Estate Loan is based upon a 240 month amortization with a balloon payment of approximately $1,708,333 due and payable in full upon maturity on December 29, 2020.
Interest on the Term Loans shall be at such Wall Street Journal prime rate plus 0.75%. In lieu of having interest charged at the Prime Rate, the Company shall have a LIBOR Option, as described above, to have interest charged at a rate of interest equal to the daily one-month LIBOR plus 3.5% for the following month. The interest rate was 5.19% and 5.84% at December 31, 2019 and at December 31, 2018, respectively.
All interest will be calculated based upon a year of 360 days for actual days elapsed. All interest will accrue from the Closing Date and will be payable monthly in arrears. Upon the occurrence and during the continuation of an Event of Default, all interest will be increased by 2% above the per annum rate otherwise applicable thereto. The Term Loans carry a prepayment penalty with respect to the prepayment of any portion of either Term Loan.
This credit agreement contains covenants related to various matters including certain financial covenants, prohibitions on further borrowings and security interests, merger or consolidation, acquisitions, guarantees, sales of assets other than in the normal course of business, leasing, and payment of dividends. The lender has a security interest in all assets and a mortgage encumbering certain real property.
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. On August 6, 2019 the Company entered into the Second Amendment to the Credit and Security Agreement which consented to the sale of property (see Note 5) and to private placement loans in the form of subordinated promissory notes (see below). On August 19, 2019 the Company entered into the Third Amendment to the Credit and Security Agreement in which the debt service coverage ratio requirements for Q219 and Q319 were removed. On March 12, 2020 the Company entered into the Fourth Amendment to the Credit and Security Agreement in which the debt service coverage ratio requirement for Q419 was removed, the debt service coverage ratio for the first three quarters of 2020 was amended, and any noncompliance with the debt service coverage ratio for Q419 was waived.
Other debt
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 July 5, 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.
Table of Contents
Micron Solutions, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
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 10). 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 December 31, 2019, there was $5,970 in non-cash interest expense recorded related to the amortization of the discount.
Related parties participated in the private offering as follows:
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Jason Chambers, Director
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$
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50,000
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Rodd Friedman, Director
|
$
|
100,000
|
Andrei Soran. Director
|
$
|
50,000
|
Future maturities of term debt
Future maturities of term debt for the years ending December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
Thereafter
|
|
Total
|
Term loans
|
|
3,623,809
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
—
|
|
|
3,623,809
|
Subordinated promissory notes
|
|
—
|
|
|
—
|
|
|
500,000
|
|
|
—
|
|
|
—
|
—
|
|
|
500,000
|
Table of Contents
Micron Solutions, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
7. Income Taxes
The income tax provision consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
$
|
—
|
State
|
|
|
—
|
|
|
2,168
|
Total current income taxes
|
|
|
—
|
|
|
2,168
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
—
|
State
|
|
|
—
|
|
|
—
|
Total deferred income taxes
|
|
|
—
|
|
|
—
|
Total income tax provision
|
|
$
|
—
|
|
$
|
2,168
|
The components of deferred income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
3,541,500
|
|
$
|
3,144,600
|
Federal and state tax credit carryforwards
|
|
|
476,100
|
|
|
525,000
|
Accruals and reserves
|
|
|
150,800
|
|
|
104,400
|
Stock based compensation
|
|
|
106,400
|
|
|
68,300
|
Patents and intangibles
|
|
|
5,000
|
|
|
12,000
|
Other long-term
|
|
|
5,400
|
|
|
45,300
|
Total long-term deferred tax assets
|
|
|
4,285,200
|
|
|
3,899,600
|
|
|
|
|
|
|
|
Deferred tax valuation allowance
|
|
|
(3,877,700)
|
|
|
(3,374,800)
|
Deferred tax assets, net of allowance
|
|
|
407,500
|
|
|
524,800
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
(379,900)
|
|
|
(478,200)
|
Prepaid expenses
|
|
|
(24,500)
|
|
|
(43,500)
|
Total deferred tax liabilities
|
|
|
(404,400)
|
|
|
(521,700)
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
3,100
|
|
$
|
3,100
|
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax-planning strategies in making this assessment. As of December 31, 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.
For the year ended December 31, 2019, the Company has federal and state net operating loss carryforwards totaling $12,988,000 and $12,885,000, respectively, which begin to expire in 2031. The Company also had federal and state tax credit carryovers of $306,000 and $219,000, respectively. The federal and state credits begin to expire in 2027 and 2020, respectively.
Table of Contents
Micron Solutions, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
The Company files a consolidated federal income tax return. The actual income tax provision differs from applying the Federal statutory income tax rate (21%) to the pre-income tax loss from continuing operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Tax benefit computed at statutory rate
|
|
$
|
(481,139)
|
|
$
|
(216,791)
|
Increases (reductions) due to:
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
502,900
|
|
|
202,700
|
State income taxes, net of federal benefit
|
|
|
(19,580)
|
|
|
1,713
|
Permanent differences
|
|
|
12,348
|
|
|
9,669
|
Tax credits (federal and state)
|
|
|
—
|
|
|
(7,326)
|
Differences on prior returns (federal and state)
|
|
|
(14,529)
|
|
|
12,203
|
Income tax provision
|
|
$
|
—
|
|
$
|
2,168
|
8. Employee Benefit Plans
The Company sponsors an Employee Savings and Investment Plan under Section 401(k) of the Internal Revenue Code covering all eligible employees of the Company. Employees can contribute up to 90% of their eligible compensation to the maximum allowable by the IRS. The Company’s matching contributions are at the discretion of the Company. The Company’s matching contributions in 2019 and 2018 were $40,477 and $39,039, respectively.
9. 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.
Operating lease agreements
No lease assets or liabilities have been recognized under ASC 842 in these financial statements as management has determined the individual leases to be immaterial. Lease expense under all operating leases was $20,613 and $24,033 for the years ended December 31, 2019 and 2018, respectively. Future minimum lease payments for the years ending December 31 are as follows:
|
|
|
2020
|
$
|
18,851
|
2021
|
$
|
10,996
|
10. Shareholders’ equity
Common stock
In 2019 and 2018, the Company issued 22,181 and 21,734 shares of the Company’s common stock from treasury, pursuant to the 2010 Equity Incentive Plan, with a fair value of $55,791 and $75,750, respectively, for directors’ fees in lieu of cash payments.
In 2019, the Company issued 23,420 shares of the Company’s common stock from Treasury, pursuant to the 2019 Equity Incentive Plan with a fair value of $54,750 for directors’ fees in lieu of cash payments.
No shares were issued as a result of the exercise of stock options or the exercise of warrants in 2019 or 2018.
No dividends were declared or paid in 2019 or 2018.
Warrants
No warrants were exercised in 2019 or 2018. 70,000 warrants expired on December 31, 2018.
Table of Contents
Micron Solutions, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
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 and expire in July 2022.
Stock options and Share-based incentive plans
Equity Incentive Plans
In March 2010, the Company's Board of Directors adopted the Micron Solutions, Inc. 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan authorizes the issuance of an aggregate of 500,000 shares. The Plan provides the Company flexibility to award a mix of stock options, equity incentive grants, performance awards and other types of stock-based compensation to certain eligible employees, non-employee directors, or consultants. An aggregate of 500,000 shares were reserved for such grants. The options granted have ten year contractual terms that vest annually between three to five-year terms.
At December 31, 2019, there were options to acquire an aggregate of 293,665 shares outstanding under the 2010 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. The options granted have five year contractual terms for grants issued to greater than 10% stockholders and ten year contractual terms for less than 10% stockholders.
At December 31, 2019, there were options to acquire an aggregate of 37,500 shares outstanding under the 2019 Plan.
The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the common stock using historical periods consistent with the expected term of the options. The expected term of options granted under the Company’s equity incentive plan, all of which qualify as “plain vanilla,” is based on the average of the contractual term and the vesting period as permitted under SEC Staff Accounting Bulletin Nos. 107 and 110. The risk-free rate is based on the yield of a U.S. Treasury security with a term consistent with the option.
Table of Contents
Micron Solutions, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
During 2019, there were 7,500 new option grants under the 2010 Equity Incentive Plan and 37,500 new option grants under the 2019 Equity Incentive Plan. During 2018, there were 195,000 new option grants under the 2010 Equity Incentive Plan.
The assumptions used to measure the fair value of option grants in 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Expected option term
|
|
|
5.5 to 6.0
|
|
|
|
5.5 to 6.25
|
|
Expected volatility factor
|
|
|
53.42%
|
|
|
|
16.96% to 26.87%
|
|
Risk-free rate
|
|
|
1.52% to 2.51%
|
|
|
|
2.36% to 2.94%
|
|
Expected annual dividend yield
|
|
|
-
|
|
|
|
-
|
|
The following table sets forth stock option activity for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
average
|
|
|
|
|
|
|
|
Average
|
|
remaining
|
|
Aggregate
|
|
|
Number of
|
|
Exercise
|
|
contractual
|
|
Intrinsic
|
|
|
options
|
|
Price
|
|
term (in years)
|
|
Value
|
Outstanding at December 31, 2018
|
|
393,500
|
|
$
|
4.89
|
|
7.22
|
|
$
|
960
|
Granted
|
|
45,000
|
|
|
2.50
|
|
|
|
|
|
Forfeited
|
|
(51,671)
|
|
|
4.04
|
|
|
|
|
|
Expired
|
|
(55,664)
|
|
|
5.68
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
331,165
|
|
$
|
4.57
|
|
6.63
|
|
$
|
1,050
|
Exercisable at December 31, 2019
|
|
179,824
|
|
$
|
5.62
|
|
4.75
|
|
$
|
1,050
|
Exercisable at December 31, 2018
|
|
182,164
|
|
$
|
6.09
|
|
4.81
|
|
$
|
960
|
During 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.
The following table sets forth restricted stock unit activity for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
Number of
|
|
Grant Date
|
|
|
options
|
|
Fair Value
|
Outstanding at December 31, 2018
|
|
—
|
|
$
|
—
|
Granted
|
|
21,667
|
|
|
2.58
|
Exercised
|
|
—
|
|
|
—
|
Forfeited
|
|
(6,667)
|
|
|
2.25
|
Expired
|
|
—
|
|
|
—
|
Outstanding at December 31, 2019
|
|
15,000
|
|
$
|
3.20
|
Exercisable at December 31, 2019
|
|
—
|
|
$
|
—
|
Exercisable at December 31, 2018
|
|
—
|
|
$
|
—
|
Table of Contents
Micron Solutions, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
For the years ended December 31, 2019 and 2018, share-based compensation expense related to stock options and the non-cash issuance of common stock amounted to $70,133 and $56,168, respectively. For the year ended December 31, 2019 share-based compensation expense related to restricted stock units amounted to $38,583. Share-based compensation is included in general and administrative expenses. As of December 31, 2019 there was $166,820 of unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the stock option plans. This cost is expected to be recognized over a weighted average period of 2.59 years for stock option and .2 years for restricted stock units. The weighted average grant date fair value of grants made in 2019 was $0.44 for stock options and $3.20 for restricted stock units.
At December 31, 2019 there were 439,080 shares available for future grants under the 2019 Plan after giving effect to shares which became available for reissuance due to expired or forfeited options.
11. Subsequent Events
Amendment to the Credit and Security Agreement
In March 2020, the Company executed the Fourth Amendment to its Credit and Security Agreement (see Note 1).
NYSE American Voluntary Delisting
On March 16, 2020, the Company notified the NYSE American of its intent to delist from the NYSE American. On March 26, 2020, the Company filed a Form 25 with the SEC notifying them of the Company’s delisting from the NYSE American, which is expected to take place on or about April 6. 2020.
COVID-19
On January 30, 2020, the World Health Organization declared that the recent coronavirus disease (“COVID-19”) outbreak was a global health emergency. On March 11, 2020, the World Health Organization raised the COVID-19 outbreak to pandemic status. The Company has taken steps to protect the health, safety and well-being of its employees, customers, and associates while continuing to operate as an essential business. The full impact of COVID-19 continues to evolve as of the date of this Annual Report. Management is actively monitoring the global situation on its financial condition, liquidity, operations, customers, suppliers and workforce and given the daily evolution of COVID-19 and the global and local responses to curb its spread, the Company is uncertain as to what effects COVID-19 will have on its customers, suppliers and workforce, and the Company’s results of operations, financial condition, or liquidity.