ITEM
1. FINANCIAL STATEMENTS
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
|
|
(unaudited)
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
444
|
|
|
$
|
168
|
|
Accounts receivable, net of allowance for doubtful accounts of $130 and $180 as of June 30,2018 and December 31,2017, respectively
|
|
|
1,667
|
|
|
|
2,621
|
|
Inventories, current
|
|
|
5,886
|
|
|
|
5,496
|
|
Prepaid benefit costs
|
|
|
314
|
|
|
|
314
|
|
Prepaid and other current assets
|
|
|
518
|
|
|
|
351
|
|
Total current assets
|
|
|
8,829
|
|
|
|
8,950
|
|
Inventories, net non-current
|
|
|
791
|
|
|
|
850
|
|
Property, plant and equipment, net
|
|
|
3,011
|
|
|
|
3,106
|
|
License agreements, net
|
|
|
9
|
|
|
|
29
|
|
Intangible assets, net
|
|
|
1,355
|
|
|
|
1,441
|
|
Goodwill
|
|
|
493
|
|
|
|
493
|
|
Other assets, net
|
|
|
231
|
|
|
|
305
|
|
|
|
$
|
14,719
|
|
|
$
|
15,174
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
1,622
|
|
|
$
|
2,487
|
|
Current portion of long-term debt
|
|
|
257
|
|
|
|
249
|
|
Accounts payable
|
|
|
1,244
|
|
|
|
700
|
|
Accrued compensation
|
|
|
422
|
|
|
|
307
|
|
Other accrued expenses
|
|
|
198
|
|
|
|
196
|
|
Subordinated convertible debt with related parties
|
|
|
196
|
|
|
|
-
|
|
Total current liabilities
|
|
|
3,939
|
|
|
|
3,939
|
|
|
|
|
|
|
|
|
|
|
Subordinated convertible debt with related parties
|
|
|
-
|
|
|
|
624
|
|
Long-term debt, net of current portion
|
|
|
2,975
|
|
|
|
3,094
|
|
Deferred income taxes
|
|
|
104
|
|
|
|
104
|
|
Total liabilities
|
|
|
7,018
|
|
|
|
7,761
|
|
Commitments and contingencies
|
|
|
-
|
|
|
|
-
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value; authorized 5,000 shares;
no shares outstanding as of June 30, 2018 and December 31, 2017, respectively
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.001 par value; authorized 25,000 shares, 9,914 and 8,465
shares Issued, 9,661 and 8,211 shares outstanding as of June 30, 2018 and December 31, 2017, respectively
|
|
|
9
|
|
|
|
8
|
|
Paid-in capital
|
|
|
27,605
|
|
|
|
26,920
|
|
Accumulated deficit
|
|
|
(18,219
|
)
|
|
|
(17,821
|
)
|
Accumulated other comprehensive loss
|
|
|
(854
|
)
|
|
|
(854
|
)
|
Treasury stock, at cost, 253 shares as of June 30,
2018 and December 31, 2017, respectively
|
|
|
(840
|
)
|
|
|
(840
|
)
|
Total stockholders’ equity
|
|
|
7,701
|
|
|
|
7,413
|
|
|
|
$
|
14,719
|
|
|
$
|
15,174
|
|
See
accompanying notes to unaudited condensed consolidated financial statements
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
(unaudited)
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net sales
|
|
$
|
5,277
|
|
|
$
|
6,164
|
|
|
$
|
10,640
|
|
|
$
|
12,137
|
|
Cost of goods sold
|
|
|
3,086
|
|
|
|
4,039
|
|
|
|
6,226
|
|
|
|
7,611
|
|
Gross profit
|
|
|
2,191
|
|
|
|
2,125
|
|
|
|
4,414
|
|
|
|
4,526
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
608
|
|
|
|
631
|
|
|
|
1,211
|
|
|
|
1,310
|
|
General and administrative
|
|
|
1,157
|
|
|
|
988
|
|
|
|
2,033
|
|
|
|
1,916
|
|
Research and development
|
|
|
643
|
|
|
|
644
|
|
|
|
1,300
|
|
|
|
1,272
|
|
|
|
|
2.408
|
|
|
|
2.263
|
|
|
|
4,544
|
|
|
|
4,498
|
|
(Loss) earnings from operations
|
|
|
(217
|
)
|
|
|
(138
|
)
|
|
|
(130
|
)
|
|
|
28
|
|
Other Expense - net
|
|
|
(118
|
)
|
|
|
(93
|
)
|
|
|
(268
|
)
|
|
|
(373
|
)
|
Change in derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(142
|
)
|
Loss before income taxes
|
|
|
(335
|
)
|
|
|
(231
|
)
|
|
|
(398
|
)
|
|
|
(487
|
)
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
$
|
(335
|
)
|
|
$
|
(231
|
)
|
|
$
|
(398
|
)
|
|
$
|
(487
|
)
|
Basic and diluted net loss per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
Basic and diluted weighted averages shares outstanding
|
|
|
8,905
|
|
|
|
8,122
|
|
|
|
8,560
|
|
|
|
8,122
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(unaudited)
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(398
|
)
|
|
$
|
(487
|
)
|
Adjustments to reconcile net loss to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
231
|
|
|
|
152
|
|
Depreciation
|
|
|
157
|
|
|
|
163
|
|
Amortization
|
|
|
111
|
|
|
|
204
|
|
Recovery of bad debt expense
|
|
|
(50
|
)
|
|
|
-
|
|
Amortization of loan fees
|
|
|
72
|
|
|
|
-
|
|
Non cash interest expense
|
|
|
27
|
|
|
|
211
|
|
Change in derivative liability
|
|
|
-
|
|
|
|
142
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,004
|
|
|
|
(71
|
)
|
Inventories
|
|
|
(331
|
)
|
|
|
(107
|
)
|
Prepaid and other current assets
|
|
|
(167
|
)
|
|
|
11
|
|
Other assets
|
|
|
2
|
|
|
|
48
|
|
Accounts payable, accrued compensation and other accrued expenses
|
|
|
661
|
|
|
|
(50
|
)
|
Net cash provided by operating activities
|
|
|
1,319
|
|
|
|
216
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(47
|
)
|
|
|
(44
|
)
|
Acquisition of licenses
|
|
|
(5
|
)
|
|
|
(25
|
)
|
Net cash used in investing activities
|
|
|
(52
|
)
|
|
|
(69
|
)
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Net repayments of line of credit
|
|
|
(865
|
)
|
|
|
(148
|
)
|
Repayments of debt
|
|
|
(126
|
)
|
|
|
(106
|
)
|
Net cash used in financing activities
|
|
|
(991
|
)
|
|
|
(254
|
)
|
Net increase (decrease) in cash
|
|
|
276
|
|
|
|
(107
|
)
|
Cash, beginning of period
|
|
|
168
|
|
|
|
468
|
|
Cash, end of period
|
|
$
|
444
|
|
|
$
|
361
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
180
|
|
|
$
|
137
|
|
Non cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures financed by notes payable
|
|
$
|
15
|
|
|
$
|
-
|
|
Conversion of subordinated convertible debt to common stock
|
|
$
|
455
|
|
|
$
|
-
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except per share data)
(unaudited)
Note
1 - Company and Basis of Consolidation
Blonder Tongue Laboratories,
Inc. (together with its consolidated subsidiaries, the “
Company
”) is a technology-development and manufacturing
company that delivers television signal encoding, transcoding, digital transport, and broadband product solutions to the cable
markets the Company serves, including the multi-dwelling unit market, the lodging/hospitality market and the institutional market,
including hospitals, prisons and schools, primarily throughout the United States and Canada. The consolidated financial statements
include the accounts of Blonder Tongue Laboratories, Inc. and its wholly-owned subsidiaries. Significant intercompany accounts
and transactions have been eliminated in consolidation.
The
accompanying unaudited condensed consolidated financial statements as of June 30, 2018 and for the three and six months then ended
have been prepared in accordance with accounting principles generally accepted in the United States of America (“
GAAP
”)
for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities
and Exchange Commission (“
SEC
”) and on the same basis as the Company prepares its annual audited consolidated
financial statements. The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting
primarily of normal recurring adjustments, which the Company considers necessary for a fair presentation of the condensed consolidated
financial position, operating results and cash flows for the periods presented. The condensed consolidated balance sheet at December
31, 2017 has been derived from audited consolidated financial statements. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with GAAP for complete financial statements have been condensed or omitted
pursuant to SEC rules and regulations. The accompanying condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements for the year ended December 31, 2017, and notes thereto included in the Company’s
annual report on Form 10-K, which was filed with the SEC on April 2, 2018. The results of the three and six months ended June
30, 2018 are not necessarily indicative of results to be expected for the year ending December 31, 2018 or for any future interim
period.
Note
2- Summary of Significant Accounting Policies
(a)
Use of Estimates
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 the 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. The Company’s significant estimates
include stock compensation and reserves related to accounts receivable, inventories and deferred tax assets. Actual results could
differ from those estimates.
(b)
Derivative Financial Instruments
The Company evaluates
its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative financial
instruments to be separately accounted for in accordance with Topic 815 of the Financial Accounting Standards Board (“
FASB
”)
Accounting Standards Codification (
“ASC
”). The accounting treatment of derivative financial instruments requires
that the Company record the embedded conversion option at its fair value as of the inception date of the agreement and at fair
value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense
for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at
each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as
of the date of the event that caused the reclassification.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except per share data)
(unaudited)
The Black-Scholes Model
(which approximates the Binomial Lattice Model) was used to estimate the fair value of the conversion options that is classified
as a derivative liability on the condensed consolidated balance sheets. See Note 6 of the Notes to Condensed Consolidated Financial
Statements. The model includes subjective input assumptions that can materially affect the fair value estimates. The expected volatility
is estimated based on the most recent historical period of time equal to the weighted average life of the conversion options.
Conversion
options are recorded as a discount to the host instrument and are amortized as interest expense over the life of the underlying
instrument.
(c)
Fair Value of Financial Instruments
The
Company measures fair value of its financial assets on a three-tier value hierarchy, which prioritizes the inputs, used in the
valuation methodologies in measuring fair value:
●
|
Level 1 –
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
●
|
Level 2 –
Other inputs that are directly or indirectly observable in the marketplace.
|
●
|
Level 3 –
Unobservable inputs which are supported by little or no market activity.
|
The
fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value.
(d)
Earnings (loss) Per Share
Earnings
(loss) per share is calculated in accordance with ASC Topic 260 “Earnings Per Share,” which provides for the calculation
of “basic” and “diluted” earnings (loss) per share. Basic earnings (loss) per share includes no dilution
and is computed by dividing net earnings by the weighted average number of common shares outstanding for the period. Diluted earnings
(loss) per share reflect, in periods in which they have a dilutive effect, the effect of potential issuances of common shares.
The diluted share base excludes incremental shares related to stock options, restricted stock and convertible debt of 1,187 and
3,049 for the three-month periods ended June 30, 2018 and 2017, respectively and 2,170 and 2,853 for the six-month periods ended
June 30, 2018 and 2017, respectively. These shares were excluded due to their antidilutive effect.
(e)
Adoption of Recent Accounting Pronouncements
On
January 1, 2018, the Company adopted Accounting Standards Update (“
ASU
”) No. 2014-09, “Revenue from Contracts
with Customers (Topic 606)” using the modified retrospective method. Under the modified retrospective method, the Company
recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained
earnings. This adjustment did not have a material impact on the Company’s Condensed Consolidated Financial Statements. Results
for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted
and continue to be reported in accordance with the Company’s historic accounting under Revenue Recognition (“
Topic
605
”). The adoption of Topic 606 did not have a material impact on the Company’s Condensed Consolidated Statements
of Operations and Condensed Consolidated Balance Sheets.
(f)
Accounting Pronouncements Issued But Not Yet Effective
In
February 2016, the FASB ASU No. 2016-02,
Leases (“
Topic 842
”)
which supersedes FASB ASC Topic
840,
Leases
(“
Topic 840
”) and provides principles for the recognition, measurement, presentation and
disclosure of leases for both lessees and lessors. The FASB has continued to clarify this guidance and most recently issued ASU
2017-13 “Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission
of Prior SEC Staff Announcements and Observer Comments.” The new standard requires lessees to apply a dual approach, classifying
leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase
by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or
on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and
a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of
twelve months or less will be accounted for similar to existing guidance for operating leases. The standard will be effective
for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company is
currently evaluating the impact that ASU 2016-02 will have on its financial statements and related disclosures.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except per share data)
(unaudited)
In January 2017, the
FASB issued ASU 2017-04,
Intangibles—Goodwill and Other
(“
Topic 350
”)
Simplifying the Test for
Goodwill Impairment
. This standard simplifies the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill
impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a
reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The revised guidance
will be applied prospectively, and is effective for calendar year-end SEC filers for its annual or any interim goodwill impairment
tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. The Company has not yet adopted this update and is currently evaluating
the effect this new standard will have on its financial condition and results of operations.
In
February 2018, the FASB issued ASU No. 2018-02,
Income Statement – Reporting Comprehensive Income
(“
Topic
220
”)
: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
("
ASU 2018-02
").
ASU 2018-02 provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive
income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the
Tax Reform (or portion thereof) is recorded. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018. Early
adoption is permitted for any interim period for which financial statements have not been issued. The Company does not believe
that the adoption of this guidance will have a material impact on the Company's consolidated financial statements due the presence
of a full valuation allowance. However, the Company is in the process of evaluating the impact of this new guidance on its consolidated
financial statements and related disclosures.
Note
3– Revenue Recognition
The
adoption of Topic 606 represents a change in accounting principle that will provide financial statement readers with enhanced
revenue recognition disclosures. In accordance with Topic 606, the Company recognizes revenue when goods or services are transferred
to customers in an amount that reflects the consideration which it expects to receive in exchange for those goods or services.
In determining when and how revenue is recognized from contracts with customers, the Company performs the following five-step
analysis: (i) identification of contract with customer; (ii) determination of performance obligations; (iii) measurement
of the transaction price; (iv) allocation of the transaction price to the performance obligations; and (v) recognition
of revenue when (or as) the Company satisfies each performance obligation.
The
Company generates revenue through the sale of products and services. Revenue from the sale of products and services is recorded
when the performance obligation is fulfilled, usually at the time of shipment or when the service is provided, at the net sales
price (transaction price). Estimates of variable consideration, such as volume discounts and rebates, are reviewed and revised
periodically by management. The Company elected to present revenue net of sales tax and other similar taxes and account for shipping
and handling activities as fulfillment costs rather than separate performance obligations. Payments are typically due in 30 days,
following delivery of products or completion of services.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except per share data)
(unaudited)
Disaggregation
of Revenue
The
following table presents the Company’s disaggregated revenues by revenue source:
|
|
For the three months ended
June 30,
2018
|
|
|
For the six months ended
June 30,
2018
|
|
Digital video headend products
|
|
$
|
2,542
|
|
|
$
|
5,085
|
|
Data products
|
|
|
1,055
|
|
|
|
2,454
|
|
HFC distribution products
|
|
|
761
|
|
|
|
1,502
|
|
Analog video headend products
|
|
|
493
|
|
|
|
823
|
|
Contract manufactured products
|
|
|
155
|
|
|
|
379
|
|
Other
|
|
|
271
|
|
|
|
397
|
|
|
|
$
|
5,277
|
|
|
$
|
10,640
|
|
All
of the Company’s sales are to customers located in North America.
The
Company is a technology-development and manufacturing company that delivers a wide range of products and services to the cable
entertainment and media industry. Digital video headend products (including encoders) are used by a system operator for acquisition,
processing, compression, encoding and management of digital video. Data products give service providers, integrators, and premises
owners a means to deliver data, video, and voice-over-coaxial in locations such as hospitality, MDU's, and college campuses, using
IP technology. HFC distribution products are used to transport signals from the headend to their ultimate destination in a home,
apartment unit, hotel room, office or other terminal location along a fiber optic, coax or HFC distribution network. Analog video
headend products are used by a system operator for signal acquisition, processing and manipulation to create an analog channel
lineup for further transmission. Contract-manufactured products, provides manufacturing, research and development and product
support services for other companies’ products. The Company also provides technical services, including hands-on training,
system design engineering, on-site field support and complete system verification testing.
Note
4 – Inventories
Inventories
are summarized as follows:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Raw Materials
|
|
$
|
2,040
|
|
|
$
|
1,869
|
|
Work in process
|
|
|
1,934
|
|
|
|
1,793
|
|
Finished Goods
|
|
|
2,703
|
|
|
|
2,684
|
|
|
|
|
6,677
|
|
|
|
6,346
|
|
Less current inventories
|
|
|
(5,886
|
)
|
|
|
(5,496
|
)
|
|
|
$
|
791
|
|
|
$
|
850
|
|
Inventories
are stated at the lower of cost, determined by the first-in, first-out (“
FIFO
”) method, or net realizable value.
The Company periodically
analyzes anticipated product sales based on historical results, current backlog and marketing plans. Based on these analyses, the
Company anticipates that certain products will not be sold during the next twelve months. Inventories that are not anticipated
to be sold in the next twelve months have been classified as non-current.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except per share data)
(unaudited)
Approximately 52% and
51% of the non-current inventories were comprised of finished goods at June 30, 2018 and December 31, 2017, respectively. The Company
has established a program to use interchangeable parts in its various product offerings and to modify certain of its finished goods
to better match customer demands. In addition, the Company has instituted additional marketing programs to dispose of the slower
moving inventories.
The
Company continually analyzes its slow-moving and excess inventories. Based on historical and projected sales volumes for finished
goods, historical and projected usage of raw materials and anticipated selling prices, the Company writes down inventory to net
realizable value. Inventory that is in excess of current and projected use is reduced by an allowance to a level that approximates
its estimate of future demand. Products that are determined to be obsolete are written down to net realizable value.
Note
5 – Debt
On December 28, 2016,
the Company entered into a Loan and Security Agreement (the “
Sterling Agreement
”) with Sterling National Bank
(“
Sterling
”). The Sterling Agreement provides the Company with a credit facility in an aggregate amount of $8,500
(the “
Sterling Facility
”), consisting of a $5,000 asset-based revolving line of credit (the “
Revolver
”)
and a $3,500 amortizing term loan (the “
Term Loan
”). The Sterling Facility matures in December 2019. Interest
on the Revolver is variable, based upon the 30-day LIBOR rate (2.09% at June 30, 2018) plus a margin of 4.00%. Interest on the
Term Loan also is variable, based upon the 30-day LIBOR rate (2.09% at June 30, 2018) plus a margin of 4.50%. The Term Loan will
amortize at the rate of $19 per month. On March 30, 2017, the Company and Sterling entered into a certain First Amendment to Loan
and Security Agreement (the “
First Amendment
”), pursuant to which, among other things, the parties amended the
definitions of certain items used in the calculation of the fixed charge coverage ratio, deferred the first measurement period
of the financial covenants contemplated by the Sterling Agreement, until January 31, 2017, and modified certain terms relating
to permitted investments by the Company. At June 30, 2018 and December 31, 2017, the outstanding balances under the Revolver and
the Term Loan were $1,622 and $3,169 and $2,487 and $3,286, respectively. All outstanding indebtedness under the Sterling Agreement
is secured by all of the assets of the Company and its subsidiaries.
The Sterling Agreement
contains customary covenants, including restrictions on the incurrence of additional indebtedness, encumbrances on the Company’s
assets, the payment of cash dividends or similar distributions, the repayment of any subordinated indebtedness and the sale or
other disposition of the Company’s assets. In addition, the Company must maintain (i) a fixed charge coverage ratio of not
less than 1.1 to 1.0 for any fiscal month (determined as of the last day of each fiscal month on a rolling twelve-month basis,
as calculated for the Company and its consolidated subsidiaries) and (ii) a leverage ratio of not more than 2.0 to 1.0 for any
fiscal month (determined as of the last day of each fiscal month, as calculated for the Company and its consolidated subsidiaries.
At June 30, 2018, the Company was in compliance with all financial covenants under the Sterling Agreement.
Note
6 – Subordinated Convertible Debt with Related Parties
On
March 28, 2016, the Company and its wholly-owned subsidiary, R.L. Drake Holdings, LLC (
“Drake”
), as borrowers
and Robert J. Pallé, as agent (in such capacity “
Agent
”) and as a lender, together with Carol M. Pallé,
Steven Shea and James H. Williams as lenders (collectively, the “
Subordinated Lenders
”) entered into a certain
Amended and Restated Senior Subordinated Convertible Loan and Security Agreement (the “
Subordinated Loan Agreement
”),
pursuant to which the Subordinated Lenders agreed to provide the Company with a delayed draw term loan facility of up to $750
(“
Subordinated Loan Facility
”), under which individual advances in amounts not less than $50 may be drawn by
the Company. Interest on the outstanding balance under the Subordinated Loan Facility from time to time, accrues at 12% per annum
(subject to increase under certain circumstances) and is payable monthly in-kind by the automatic increase of the principal amount
of the loan on each monthly interest payment date, by the amount of the accrued interest payable at that time (“
PIK Interest
”);
provided, however, that at the option of the Company, it may pay interest in cash on any interest payment date, in lieu of PIK
Interest. The Subordinated Lenders have the option of converting the principal balance of the loan, in whole (unless otherwise
agreed by the Company), into shares of the Company’s common stock at a conversion price of $0.54 per share (subject to adjustment
under certain circumstances). This conversion right was subject to stockholder approval as required by the rules of the NYSE MKT,
which approval was obtained on May 24, 2016 at the Company’s annual meeting of stockholders. The obligations of the Company
and Drake under the Subordinated Loan Agreement are secured by substantially all of the Company’s and Drake’s assets,
including by a mortgage against the Old Bridge Facility (the “
Subordinated Mortgage”
). The Subordinated Loan
Agreement terminates three years from the date of closing, at which time the accreted principal balance of the loan (by virtue
of the PIK Interest) plus any other accrued unpaid interest, will be due and payable in full.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(In thousands, except per share data)
(unaudited)
On
April 17, 2018, Robert J. Pallé and Carol Pallé exercised their conversion rights and converted $455 ($350 principal
and $105 of accrued interest) of their loan (representing the entire amount of principal and interest outstanding and held by
Mr. and Mrs. Pallé on that date) into 842 shares of the Company’s common stock.
In
connection with the Subordinated Loan Agreement, the Company, Drake, the Subordinated Lenders and Sterling entered into a Subordination
Agreement (the “
Subordination Agreement
”), pursuant to which the rights of the Subordinated Lenders under the
Subordinated Loan Agreement and the Subordinated Mortgage are subordinate to the rights of Sterling under the Sterling Agreement
and related security documents. The Subordination Agreement precludes the Company from making cash payments of interest in lieu
of PIK Interest, in the absence of the prior written consent of Sterling.
As of both June 30,
2018 and December 31, 2017, the Subordinated Lenders had advanced $500 to the Company. In addition, $151 and $124 of PIK interest
was accrued as of June 30, 2018 and December 31, 2017, respectively. As noted above, in April 2018, $455 under the Subordinated
Loan Facility was converted by certain Subordinated Lenders. The Company evaluated the conversion option embedded in the Subordinated
Loan Agreement issued in December 2016 in accordance with the provisions of ASC Topic 815,
Derivatives and Hedging
, and
determined that the conversion option had all of the characteristics of a derivative in its entirety and did not qualify for an
exception to the derivative accounting rules. Specifically, prior to the adoption of the First Sub-Debt Amendment, pursuant to
Section 4.4(e)(ii) of the Subordinated Debt Agreement, the exercise price of the conversion option entitled the Subordinated Lenders
to an adjustment of the exercise price in the event that the Company subsequently issued equity securities or equity linked securities
at prices more favorable to a new investor than the exercise price of the conversion option embedded in the Subordinated Loan Agreement
(the “
Price Protection Provision
”). Accordingly, the conversion option was not indexed to the Company’s
own stock. Due to the derivative treatment of the conversion option, the Company recorded $260 derivative liability at December
31, 2016. On March 21, 2017, the Company, Drake, and the Subordinated Lenders entered into a certain First Amendment to Amended
and Restated Convertible Loan and Security Agreement (the “
First Sub-Debt Amendmen
t”), pursuant to which the
Subordinated Loan Agreement was amended to eliminate the Price Protection Provision, effective as of such date. The First Sub-Debt
Amendment also eliminated certain defined terms related to the Price Protection Provision. As a result of the First Sub-Debt Amendment,
during the first quarter of 2017, the Company recorded a change in the derivative liability (expense) of $142, the fair value of
the liability at the date of the modification and reclassed the aggregate value of the derivative liability at the date of modification
in the amount of $402 additional paid-in capital. In addition, during the three months and six months ended June 30, 2018 and 2017,
the Company incurred interest of $8 and $27 and $ 17 and $34, respectively, related to these loans.
Note 7 – Issuance of Restricted Common Stock
In connection with the hiring of the Company’s
new Executive Vice President and Chief Operating Officer (the “
COO
”), on April 23, 2018, the Company granted
the COO 400 shares of restricted common stock at $1.05 per share, with 100 shares vesting on each of the first four one-year anniversaries
of his first day of employment with the Company.
Note 8 – Related Party Transactions
A
director
and shareholder of the Company is a partner of a law firm that serves as outside
legal counsel for the Company. During the three and six month periods ended June 30, 2018 and 2017, this law firm billed the Company
approximately $304, $401, $156 and $290, respectively for legal services provided by this firm. Included in accounts payable on
the accompanying balance sheets at June 30, 2018 and December 31, 2017, is approximately $203 and $25, respectively, owed to this
law firm.
Note 9 – Concentration of Credit Risk
During the three and
six months ended June 30, 2018, one customer represented approximately 26% and 26% and one customer represented approximately 14%
and 15% of the Company’s net sales, respectively. During the three and six months ended June 30, 2017, one customer represented
approximately 42% and 34% and one customer represented approximately 12% and 14% of the Company’s net sales, respectively.
At June 30, 2018, one customer represented approximately 24%, one customer represented approximately 12% and one customer represented
approximately 11% of the Company’s net accounts receivable. At December 31, 2017, one customer represented approximately
26%, one customer represented approximately 19% and two customers each represented approximately 10% of the Company’s net
accounts receivable.
Note 10 - Legal Proceedings
The Company is a party
to certain proceedings incidental to the ordinary course of its business, none of which, in the opinion of management, is likely
to have a material adverse effect on the Company’s business, financial condition, results of operations, or cash flows.
Note 11 – Subsequent Events
The Company evaluates
events that have occurred after the balance sheet date but before the financial statements are issued.
Based upon the evaluation,
the Company did not identify any recognized or non-recognized subsequent events that would require adjustment to or disclosure
in the condensed consolidated financial statements.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of the Company’s historical results of operations and liquidity and capital resources
should be read in conjunction with the unaudited consolidated financial statements of the Company and notes thereto appearing
elsewhere herein. The following discussion and analysis also contains forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors.
See “Forward Looking Statements,” below.
Forward-Looking
Statements
In
addition to historical information this Quarterly Report contains forward-looking statements regarding future events relating
to such matters as anticipated financial performance, business prospects, technological developments, new products, research and
development activities and similar matters. The Private Securities Litigation Reform Act of 1995, the Securities Act of 1933 and
the Securities Exchange Act of 1934 provide safe harbors for forward-looking statements. In order to comply with the terms of
these safe harbors, the Company notes that a variety of factors could cause the Company’s actual results and experience
to differ materially and adversely from the anticipated results or other expectations expressed in the Company’s forward-looking
statements. The risks and uncertainties that may affect the operation, performance, development and results of the Company’s
business include, but are not limited to, those matters discussed herein in the section entitled Item 2 - Management’s Discussion
and Analysis of Financial Condition and Results of Operations. The words “believe,” “expect,” “anticipate,”
“project,” “target,” “intend,” “plan,” “seek,” “estimate,”
“endeavor,” “should,” “could,” “may” and similar expressions are intended to identify
forward-looking statements. In addition, any statements that refer to projections for our future financial performance, our ability
to extend or refinance our debt obligations, our anticipated growth trends in our business and other characterizations of future
events or circumstance are forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management’s analysis only as of the date hereof. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully
review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission,
including without limitation, the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with
the Securities and Exchange Commission on April 2, 2018 (See Item 1 – Business; Item 1A – Risk Factors; Item 3 –
Legal Proceedings and Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations).
General
The
Company was incorporated in November 1988, under the laws of Delaware as GPS Acquisition Corp. for the purpose of acquiring the
business of Blonder-Tongue Laboratories, Inc., a New Jersey corporation, which was founded in 1950 by Ben H. Tongue and Isaac
S. Blonder to design, manufacture and supply a line of electronics and systems equipment principally for the private cable industry.
Following the acquisition, the Company changed its name to Blonder Tongue Laboratories, Inc. The Company completed the initial
public offering of its shares of Common Stock in December 1995.
Today,
the Company is a technology-development and manufacturing company that delivers a wide range of products and services to the cable
entertainment and media industry. For 65 years, Blonder Tongue/Drake products have been deployed in a long list of locations,
including lodging/hospitality, multi-dwelling units/apartments, broadcast studios/networks, education universities/schools, healthcare
hospitals/fitness centers, government facilities/offices, prisons, airports, sports stadiums/arenas, entertainment venues/casinos,
retail stores, and small-medium businesses. These applications are variously described as commercial, institutional and/or enterprise
environments and will be referred to herein collectively as “
CIE
”. The customers we serve include business
entities installing private video and data networks in these environments, whether they are the largest cable television operators,
telco or satellite providers, integrators, architects, engineers or the next generation of Internet Protocol Television (“
IPTV
”)
streaming video providers. The technology requirements of these markets change rapidly and the Company’s research and development
team is continually delivering high performance-lower cost solutions to meet customers’ needs.
The
Company’s strategy is focused on providing a wide range of products to meet the needs of the CIE environments described
above (e.g., hotels, hospitals, prisons, schools, etc.), and to provide offerings that are optimized for an operator’s existing
infrastructure, as well as the operator’s future strategy. A key component of this growth strategy is to provide products
that deliver the latest technologies (such as IPTV and digital SD and HD video content) and have a high performance-to-cost ratio.
The
Company has seen a continuing long-term shift in product mix from analog products to digital products and expects this shift to
continue. Sales of digital video headend products were $2,542,000 and $2,059,000 in the second three months of 2018 and 2017,
respectively and $5,085,000 and $5,230,000 in the first six months of 2018 and 2017, respectively. Sales of analog video headend
products were $493,000 and $450,000 in the second three months of 2018 and 2017, respectively and $823,000 and $1,036,000 in the
first six months of 2018 and 2017, respectively. Any substantial decrease in sales of analog products without a related increase
in digital products could have a material adverse effect on the Company’s results of operations, financial condition and
cash flows.
The
Company’s manufacturing is allocated primarily between its facility in Old Bridge, New Jersey the (“
Old Bridge
Facility
”) and a key contract manufacturer located in the People’s Republic of China (“
PRC
”).
The Company currently manufactures most of its digital products, including the latest encoder and EdgeQAM collections at the Old
Bridge Facility. Since 2007 the Company has been manufacturing certain high volume, labor intensive products, including many of
the Company’s analog products, in the PRC, pursuant to a manufacturing agreement that governs the production of products
that may from time to time be the subject of purchase orders submitted by (and in the discretion of) the Company. Although the
Company does not currently anticipate the transfer of any additional products to the PRC for manufacture, the Company may do so
if business and market conditions make it advantageous to do so. Manufacturing products both at the Company’s Old Bridge
Facility as well as in the PRC, enables the Company to realize cost reductions while maintaining a competitive position and time-to-market
advantage.
The Company may, from
time to time, provide manufacturing, research and development and product support services for other companies’ products.
In 2015, the Company entered into an agreement with VBrick Systems, Inc. (“
VBrick
”) to provide procurement,
manufacturing, warehousing and fulfillment support to VBrick for a line of high end encoder products and sub-assemblies. Sales
to VBrick of encoder products were approximately $155,000 and $267,000 in the second three months of 2018 and 2017, respectively
and $379,000 and $355,000 in the first six months of 2018 and 2017, respectively. Sales to VBrick for sub-assemblies were not material
in the second three months or first six months of 2018 or 2017.
Results
of Operations
Second
three months of 2018 Compared with second three months of 2017
Net Sales.
Net
sales decreased $887,000, or 14.4%, to $5,277,000 in the second three months of 2018 from $6,164,000 in the second three months
of 2017. The decrease is primarily attributed to a decrease in sales of data products, HFC distribution products and contract manufactured
products, offset, in part, by an increase in digital video headend products. Sales of data products were $1,055,000 and $2,256,000,
HFC distribution products were $761,000 and $905,000, contract-manufactured products were $155,000 and $267,000 and digital video
headend products were $2,542,000 and $2,059,000, in the second three months of 2018 and 2017, respectively.
Cost
of Goods Sold.
Cost of goods sold decreased to $3,086,000 for the second three months of 2018 from $4,039,000 for the second
three months of 2017 and decreased as a percentage of sales to 58.5% from 65.5%. The decrease was primarily due to a reduction
in sales. The decrease as a percentage of sales was primarily attributed to an overall reduction in manufacturing overhead, as
well as a more favorable product mix.
Selling
Expenses.
Selling expenses decreased to $608,000 for the second three months of 2018 from $631,000 in the second three months
of 2017, but increased as percentage of sales to 11.5% for the second three months of 2018 from 10.2% for the second three months
of 2017. The $23,000 decrease was primarily the result of a decrease in commissions of $29,000.
General
and Administrative Expenses.
General and administrative expenses increased to $1,157,000 for the second three months of 2018
from $988,000 for the second three months of 2017 and increased as a percentage of sales to 21.9% for the second three months
of 2018 from 16.0% for the second three months of 2017. The $169,000 increase was primarily the result of an increase in salaries
and fringe benefits of $140,000 due to an increase in headcount.
Research and Development Expenses.
Research
and development expenses decreased to $643,000 in the second three months of 2018 from $644,000 in the second three months of 2017,
but increased as a percentage of sales to 12.2% for the second three months of 2018 from 10.5% for the second three months of 2017.
This $1,000 decrease is primarily the result of a decrease in amortization expense of $49,000 relating to license fees, offset,
in part, by an increase in department supplies of $32,000 and an increase in salaries and fringe benefits of $20,000 due to compensation
adjustments.
Operating
Loss.
Operating loss of $217,000 for the second three months of 2018 represents an increase from the operating loss of $138,000
for the second three months of 2017. Operating loss as a percentage of sales was (4.1)% in the second three months of 2018 compared
to (2.2)% in the second three months of 2017.
Interest
Expense.
Interest expense increased to $118,000 in the second three months of 2018 from $93,000 in the second three months
of 2017. The increase is primarily the result of higher interest rates and higher average borrowing.
First
six months of 2018 Compared with first six months of 2017
Net
Sales.
Net sales decreased $1,497,000, or 12.3%, to $10,640,000 in the first six months of 2018 from $12,137,000 in the first
six months of 2017. The decrease is primarily attributed to a decrease in sales of data products, analog video head products,
HFC distribution products and digital video headend products. Sales of data products were $2,454,000 and $3,386,000, analog video
headend products were $823,000 and $1,036,000, HFC distribution products were $1,502,000 and $1,707,000 and digital video headend
products were $5,085,000 and $5,230,000, in the first six months of 2018 and 2017, respectively.
Cost
of Goods Sold.
Cost of goods sold decreased to $6,226,000 for the first six months of 2018 from $7,611,000 for the first six
months of 2017 and decreased as a percentage of sales to 58.5% from 62.7%. The decrease was primarily due to a reduction in sales.
The decrease as a percentage of sales was primarily attributed to an overall reduction in manufacturing overhead, as well as a
more favorable product mix.
Selling Expenses.
Selling expenses decreased to $1,211,000 for the first six months of 2018 from $1,310,000 in the first six months of 2017, but
increased as a percentage of sales to 11.4% for the first six months of 2018 from 10.8% for the first six months of 2017. The $99,000
decrease was primarily the result of a decrease in freight expense of $39,000 and a decrease in commissions of $39,000.
General
and Administrative Expenses.
General and administrative expenses increased to $2,033,000 for the first six months of 2018
from $1,916,000 for the first six months of 2017 and increased as a percentage of sales to 19.1% for the first six months of 2018
from 15.8% for the first six months of 2017. The $117,000 increase was primarily the result of an increase in salaries and fringe
benefits of $150,000 due to an increase in headcount.
Research and Development
Expenses.
Research and development expenses increased to $1,300,000 in the first six months of 2018 from $1,272,000 in the
first six months of 2017 and increased as a percentage of sales to 12.2% for the first six months of 2018 from 10.5% for the first
six months of 2017. This $28,000 increase is primarily the result of an increase in department supplies of $80,000, an increase
in labor related to product software revisions of $27,000 and an increase in salaries and fringe benefits of $19,000 due to compensation
adjustments, offset by a decrease in amortization expense of $94,000 relating to license fees.
Operating
(Loss) Income.
Operating loss of $(130,000) for the first six months of 2018 represents a decrease from operating income of
$28,000 for the first six months of 2017. Operating (loss) income as a percentage of sales was (1.2)% in the first six months
of 2018 compared to 0.2% in the first six months of 2017.
Interest
Expense.
Interest expense decreased to $268,000 in the first six months of 2018 from $373,000 in the first six months of 2017.
The decrease is primarily the result of the accretion of the debt discount related to the former derivative liability of $177,000
in the first six months of 2017 which does not exist in 2018, offset by higher interest rates and higher average borrowing.
Liquidity
and Capital Resources
As of June 30, 2018
and December 31, 2017, the Company’s working capital was $4,890,000 and $5,011,000, respectively. The decrease in working
capital is primarily due to a decrease of accounts receivable of $954,000 and an increase of accounts payable of $544,000, offset
by an increase of inventories of $390,000, an increase in prepaid expenses of $167,000 and a decrease in the line of credit of
$865,000.
The Company’s
net cash provided by operating activities for the six-month period ended June 30, 2018 was $1,318,000 primarily due to an increase
in accounts payable, accrued compensation and other accrued expenses of $661,000 and a reduction in accounts receivable of $1,004,000,
offset, in part, by a reduction in inventories of $331,000. The Company’s net cash provided by operating activities for the
six-month period ended June 30, 2017 was $216,000 primarily due to non cash adjustments of $849,000, offset by a net loss of $487,000.
Cash
used in investing activities for the six-month period ended June 30, 2018 was $52,000, of which $47,000 was attributable to capital
expenditures and $5,000 was attributable to additional license fees. Cash used in investing activities for the six-month period
ended June 30, 2017 was $69,000, of which $25,000 was attributable to additional license fees and $44,000 was attributable to
capital expenditures.
Cash
used in financing activities was $990,000 for the first six months of 2018, which was comprised of net repayments of line of credit
of $865,000, repayments of debt of $126,000 and stock issuance of $1,000. Cash used in financing activities was $254,000 for the
first six months of 2017, which was comprised of net repayments of borrowings on the Revolver of $148,000 and long term debt of
$106,000.
For
a full description of the Company’s senior secured indebtedness under the Sterling Facility and the Company’s senior
subordinated convertible indebtedness under the Subordinated Loan Facility, and their respective effects upon the Company’s
condensed consolidated financial position and results of operations, see Note 5 – Debt and Note 6 – Subordinated Convertible
Debt with Related Parties, of the Notes to Condensed Consolidated Financial Statements.
The
Company’s primary sources of liquidity are its existing cash balances, cash generated from operations and amounts available
under the Sterling Facility and the Subordinated Loan Facility. As of June 30, 2018, the Company had approximately $1,622,000
outstanding under the Revolver and $142,000 of additional availability for borrowing under the Revolver, as well as $196,000 outstanding
under the Subordinated Loan Facility and $250,000 of additional availability for borrowing under the Subordinated Loan Facility.
The
Company believes it has the ability to sustain its operations and satisfy its obligations in the normal course of business for
at least one year from the issuance date of this filing.
The Company’s
primary obligations are for payment of interest and principal on the Sterling Facility, which expires on December 28, 2019, and
the Subordinated Loan Facility, which expires on March 28, 2019. Repayment of the Subordinated Loan Facility is subject to the
prior payment, satisfaction and discharge of the Sterling Facility. The Company expects to use cash generated from operations to
meet its debt obligations. The Company also expects to make financed and unfinanced long-term capital expenditures from time to
time in the ordinary course of business, which capital expenditures were $47,000 and $138,000 in the six months ended June 30,
2018 and the year ended December 31, 2017, respectively. The Company expects to use cash generated from operations, amounts available
under the Sterling Facility and the Subordinated Loan Facility, and purchase-money financing to meet any anticipated long-term
capital expenditures.
Critical Accounting Estimates
See the Notes to Condensed
Consolidated Financial Statements for a description of where estimates are required.
Recent
Accounting Pronouncements
See
Notes 2(e) and (f) of the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements,
including the anticipated dates of adoption and the effects on the Company’s consolidated financial position and results
of operations.