ITEM
1. FINANCIAL STATEMENTS
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
1,628
|
|
|
$
|
559
|
|
Accounts receivable, net of allowance for doubtful accounts of $49 and $53 as of March 31, 2019 and December 31,2018, respectively
|
|
|
1,864
|
|
|
|
2,654
|
|
Inventories, current
|
|
|
6,780
|
|
|
|
6,172
|
|
Prepaid benefit costs
|
|
|
288
|
|
|
|
288
|
|
Deferred loan costs
|
|
|
112
|
|
|
|
149
|
|
Prepaid and other current assets
|
|
|
831
|
|
|
|
555
|
|
Total current assets
|
|
|
11,503
|
|
|
|
10,377
|
|
Inventories, net non-current
|
|
|
-
|
|
|
|
551
|
|
Property, plant and equipment, net
|
|
|
263
|
|
|
|
2,890
|
|
License agreements, net
|
|
|
7
|
|
|
|
12
|
|
Intangible assets, net
|
|
|
1,227
|
|
|
|
1,269
|
|
Goodwill
|
|
|
493
|
|
|
|
493
|
|
Right of use assets, net
|
|
|
3,859
|
|
|
|
-
|
|
Other assets, net
|
|
|
791
|
|
|
|
9
|
|
|
|
$
|
18,143
|
|
|
$
|
15,601
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
-
|
|
|
$
|
2,603
|
|
Current portion of long-term debt
|
|
|
24
|
|
|
|
3,075
|
|
Current portion of lease liability
|
|
|
653
|
|
|
|
-
|
|
Accounts payable
|
|
|
934
|
|
|
|
1,523
|
|
Accrued compensation
|
|
|
335
|
|
|
|
332
|
|
Income taxes payable
|
|
|
28
|
|
|
|
28
|
|
Other accrued expenses
|
|
|
201
|
|
|
|
702
|
|
Total current liabilities
|
|
|
2,175
|
|
|
|
8,263
|
|
|
|
|
|
|
|
|
|
|
Subordinated convertible debt with related parties
|
|
|
-
|
|
|
|
139
|
|
Lease liability, net of current portion
|
|
|
3,157
|
|
|
|
-
|
|
Long-term debt, net of current portion
|
|
|
30
|
|
|
|
32
|
|
Total liabilities
|
|
|
5,362
|
|
|
|
8,434
|
|
Commitments and contingencies
|
|
|
-
|
|
|
|
-
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value; authorized 5,000 shares; no shares outstanding as of March 31, 2019 and December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.001 par value; authorized 25,000 shares, 9,768 and 9,508 shares issued, 9,595 and 9,335 shares outstanding as of March 31, 2019 and December 31, 2018, respectively
|
|
|
9
|
|
|
|
9
|
|
Paid-in capital
|
|
|
28,199
|
|
|
|
27,910
|
|
Accumulated deficit
|
|
|
(13,853
|
)
|
|
|
(19,178
|
)
|
Accumulated other comprehensive loss
|
|
|
(832
|
)
|
|
|
(832
|
)
|
Treasury stock, at cost, 173 shares as of March 31, 2019 and December 31, 2018,
|
|
|
(742
|
)
|
|
|
(742
|
)
|
Total stockholders’ equity
|
|
|
12,781
|
|
|
|
7,167
|
|
|
|
$
|
18,143
|
|
|
$
|
15,601
|
|
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
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
4,082
|
|
|
$
|
5,363
|
|
Cost of goods sold
|
|
|
2,991
|
|
|
|
3,140
|
|
Gross profit
|
|
|
1,091
|
|
|
|
2,223
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling
|
|
|
727
|
|
|
|
603
|
|
General and administrative
|
|
|
1,466
|
|
|
|
876
|
|
Research and development
|
|
|
665
|
|
|
|
657
|
|
|
|
|
2,858
|
|
|
|
2,136
|
|
Operating (loss) income
|
|
|
(1,767
|
)
|
|
|
87
|
|
Other expense -net
|
|
|
(83
|
)
|
|
|
(150
|
)
|
Gain on building sale
|
|
|
7,175
|
|
|
|
-
|
|
Earnings (loss) before income taxes
|
|
|
5,325
|
|
|
|
(63
|
)
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Net earnings (loss)
|
|
$
|
5,325
|
|
|
$
|
(63
|
)
|
Basic net earnings (loss) per share
|
|
$
|
0.56
|
|
|
$
|
(0.01
|
)
|
Diluted net earnings (loss) per share
|
|
$
|
0.53
|
|
|
$
|
(0.01
|
)
|
Basic weighted average shares outstanding
|
|
|
9,506
|
|
|
|
8,211
|
|
Diluted weighted average shares outstanding
|
|
|
10,076
|
|
|
|
8,211
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In
thousands)
(unaudited)
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Accumulated Other Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Stock
|
|
|
Total
|
|
Balance at January 1, 2019
|
|
|
9,508
|
|
|
$
|
9
|
|
|
$
|
27,910
|
|
|
$
|
(19,178
|
)
|
|
$
|
(832
|
)
|
|
$
|
(742
|
)
|
|
$
|
7,167
|
|
Net earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,325
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,325
|
|
Conversion of subordinated convertible debt
|
|
|
260
|
|
|
|
-
|
|
|
|
140
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
140
|
|
Stock-based Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
149
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
149
|
|
Balance at March 31, 2019
|
|
|
9,768
|
|
|
$
|
9
|
|
|
$
|
28,199
|
|
|
$
|
(13,853
|
)
|
|
$
|
(832
|
)
|
|
$
|
(742
|
)
|
|
$
|
12,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2018
|
|
|
8,465
|
|
|
$
|
8
|
|
|
$
|
26,920
|
|
|
$
|
(17,821
|
)
|
|
$
|
(854
|
)
|
|
$
|
(840
|
)
|
|
$
|
7,413
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(63
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(63
|
)
|
Stock-based Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
84
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
84
|
|
Balance at March 31, 2018
|
|
|
8,465
|
|
|
$
|
8
|
|
|
$
|
27,004
|
|
|
$
|
(17,884
|
)
|
|
$
|
(854
|
)
|
|
$
|
(840
|
)
|
|
$
|
7,434
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(unaudited)
|
|
Three Month Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
5,325
|
|
|
$
|
(63
|
)
|
Adjustments to reconcile net earnings (loss) to cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Gain on building sale
|
|
|
(7,175
|
)
|
|
|
-
|
|
Stock compensation expense
|
|
|
149
|
|
|
|
84
|
|
Depreciation
|
|
|
52
|
|
|
|
79
|
|
Amortization
|
|
|
48
|
|
|
|
57
|
|
Recovery of bad debt expense
|
|
|
(4
|
)
|
|
|
(50
|
)
|
Amortization of loan fees
|
|
|
37
|
|
|
|
36
|
|
Non cash interest expense
|
|
|
1
|
|
|
|
19
|
|
Change in value of right to use assets
|
|
|
(49
|
)
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
794
|
|
|
|
301
|
|
Inventories
|
|
|
(57
|
)
|
|
|
(205
|
)
|
Prepaid and other current assets
|
|
|
(276
|
)
|
|
|
(186
|
)
|
Other assets
|
|
|
(782
|
)
|
|
|
(1
|
)
|
Accounts payable, accrued compensation and other accrued expenses
|
|
|
(1,087
|
)
|
|
|
434
|
|
Net cash (used in) provided by operating activities
|
|
|
(3,024
|
)
|
|
|
505
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(10
|
)
|
|
|
(14
|
)
|
Proceeds on sale of building
|
|
|
9,765
|
|
|
|
-
|
|
Acquisition of licenses
|
|
|
(1
|
)
|
|
|
-
|
|
Net cash provided by (used in) investing activities
|
|
|
9,754
|
|
|
|
(14
|
)
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Net repayments of line of credit
|
|
|
(2,603
|
)
|
|
|
(358
|
)
|
Repayments of long-term debt
|
|
|
(3,058
|
)
|
|
|
(63
|
)
|
Net cash used in financing activities
|
|
|
(5,661
|
)
|
|
|
(421
|
)
|
Net increase in cash
|
|
|
1,069
|
|
|
|
70
|
|
Cash, beginning of period
|
|
|
559
|
|
|
|
168
|
|
Cash, end of period
|
|
$
|
1,628
|
|
|
$
|
238
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
76
|
|
|
$
|
89
|
|
Non cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures financed by notes payable
|
|
$
|
5
|
|
|
$
|
8
|
|
Conversion of subordinated convertible debt to common stock
|
|
$
|
140
|
|
|
$
|
-
|
|
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 March 31, 2019 and for the three months then ended March
31, 2019 and 2018 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
”). 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, changes in stockholders’ equity
and cash flows for the periods presented. The condensed consolidated balance sheet at December 31, 2018 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, 2018 and notes thereto included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2018, which was filed with the SEC on April 1, 2019. The results of the three months ended March 31, 2019 are
not necessarily indicative of results to be expected for the year ending December 31, 2019 or for any future interim period.
Note
2 – Summary of Significant Accounting Policies
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-based compensation and reserves related to accounts receivable, inventories and deferred tax assets. Actual results
could differ from those estimates.
|
(b)
|
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.
|
(c)
|
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 (loss) 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.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
(unaudited)
The
following table shows the calculation of diluted shares using the treasury stock method:
|
|
Three months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Shares used in computation of basic earnings (loss) per shares
|
|
|
9,506
|
|
|
|
8,211
|
|
Total dilutive effect of stock options
|
|
|
570
|
|
|
|
-
|
|
Shares used in computation of diluted earnings (loss) per share
|
|
|
10,076
|
|
|
|
8,211
|
|
The
diluted share base excludes the following incremental shares due to their antidilutive effect:
|
|
Three months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
|
1,752
|
|
|
|
1,800
|
|
Warrants
|
|
|
100
|
|
|
|
100
|
|
Convertible debt
|
|
|
-
|
|
|
|
1,190
|
|
|
|
|
1,852
|
|
|
|
3,090
|
|
|
(d)
|
Adoption
of Recent Accounting Pronouncements
|
In
June 2018, the FASB issued ASU No. 2018-07,
Compensation – Stock Compensation (“
Topic 718
”
):
Improvements to Nonemployee Share-Based Payment Accounting
. The guidance in this ASU expands the scope of ASC Topic 718 to
include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees.
This amendment will be effective for annual and interim periods beginning after December 31, 2018. The adoption of ASU 2018-07
did not have a material effect on the Company’s financial position, results of operations or financial statement disclosure.
In February 2016, the
FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which establishes a new lease accounting model for lessees. The updated
guidance requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along
with additional qualitative and quantitative disclosures. In June 2018, the FASB issued ASU No. 2018-10,
Codification Improvements
to Topic 842, Leases
, which further clarifies how to apply certain aspects of the new lease standard. In July 2018, the FASB
issued ASU No. 2018-11, Leases – Targeted Improvements, which provides another transition method that allows entities to
apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained
earnings in the period of adoption. This transition method option is in addition to the existing transition method of using a modified
retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements. Topic 842 is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2018, with early adoption permitted. The Company adopted Topic 842 on January 1, 2019, using a transition method
option approach as applied to leases existing as of or entered into after the adoption date. Topic 842 provides a number of optional
practical expedients and accounting policy elections. The Company elected the package of practical expedients requiring no reassessment
of whether any expired or existing contracts are or contain leases, the lease classification of any expired or existing leases,
or initial direct costs for any existing leases. Upon adoption of Topic 842, the Company recognized additional right of use assets
and corresponding lease liabilities pertaining to its operating leases on its unaudited condensed consolidated balance sheets.
The Company recognized approximately $290 of a right to use asset and liability under current operating leases at January 1, 2019.
The Company recognized approximately $3,627 of a right to use asset and lease liability in connection with the lease described
in Note 10. Operating lease liabilities are based on the net present value of the remaining lease payments over the lease term.
In determining the present value of lease payment, the Company used its incremental borrowing rate based on the information available
at the date of adoption of Topic 842. As of March 31, 2019, the weighted average remaining lease term is 4.83 years and the weighted
average discount rate used to determine the operating lease liabilities was 6.5%. The adoption of the new standard did not have
a significant impact on the Company’s results of operations and cash flows.
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 adoption of this guidance
did not have a material impact on the Company’s consolidated financial statements due to the presence of a full valuation allowance.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
(unaudited)
In
August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure
Requirements for Fair Value Measurement, which eliminates disclosure requirement regarding transfers between level 1 and level
2 of the fair value of hierarchy, however, adds disclosure requirements on the range and weighted average used to develop significant
unobservable inputs for level 3 fair value measurements. The Company adopted the guidance on January 1, 2019, however, there was
no adjustment required to its disclosures as it did not have fair value assets classified under level 2 or 3 as of March 31, 2019
and December 31, 2018.
|
(e)
|
Accounting
Pronouncements Issued But Not Yet Effective
|
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 is currently evaluating the effect this
new standard will have on its financial position, results of operations or financial statement disclosure.
In
June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments – Credit Losses (Topic 326)
. ASU 2016-13 changes
the impairment model for most financial assets, and will require the use of an expected loss model in place of the currently used
incurred loss method. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments
and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount
expected to be collected on the financial asset. The update to the standard is effective for interim and annual periods beginning
after December 15, 2019. The Company is currently evaluating the effect this new standard will have on its financial position,
results of operations or financial statement disclosure.
Note
3 – Revenue Recognition
The
Company recognized revenue when it satisfies a performance obligation by transferring the product or service to the customer,
typically at a point in time.
Disaggregation
of Revenue
The
following table presents the Company’s disaggregated revenues by revenue source:
|
|
Three months ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Digital video headend products
|
|
$
|
2,028
|
|
|
$
|
2,543
|
|
Data products
|
|
|
540
|
|
|
|
1,399
|
|
HFC distribution products
|
|
|
646
|
|
|
|
741
|
|
Analog video headend products
|
|
|
474
|
|
|
|
330
|
|
Contract manufactured products
|
|
|
28
|
|
|
|
224
|
|
Set top boxes
|
|
|
191
|
|
|
|
-
|
|
Other
|
|
|
175
|
|
|
|
126
|
|
|
|
$
|
4,082
|
|
|
$
|
5,363
|
|
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
(unaudited)
All
of the Company’s sales are to customers located primarily throughout the United States and Canada.
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. Set top boxes are used by cable operators to provide video delivery to customers
using IP technology. 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:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Raw Materials
|
|
$
|
2,002
|
|
|
$
|
2,581
|
|
Work in process
|
|
|
2,219
|
|
|
|
1,573
|
|
Finished Goods
|
|
|
2,559
|
|
|
|
2,569
|
|
|
|
|
6,780
|
|
|
|
6,723
|
|
Less current inventories
|
|
|
(6,780
|
)
|
|
|
(6,172
|
)
|
|
|
$
|
-
|
|
|
$
|
551
|
|
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 written down to net realizable value.
The
Company recorded a provision to reduce the carrying amounts of inventories to their net realizable value in the amount of $693
during the three months ended March 31, 2019.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
(unaudited)
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 provided 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, prior to entering into the Consent (defined below), 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 (2.49% and 1.88%
at March 31, 2019 and 2018, respectively) plus a margin of 4.00%. Interest on the Term Loan also is variable, based upon the 30-day
LIBOR rate (2.49% and 1.88% at March 31, 2019 and 2018, respectively) plus a margin of 4.50%. The Term Loan amortized 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, from December 31, 2016 to January 31, 2017, and modified certain terms relating to permitted
investments by the Company.
On February 1, 2019,
in connection with the completion of the sale of the Old Bridge Facility and entry into the Lease (as further described in Note
10), the Company entered into a Consent Under Loan and Security Agreement (the “
Consent
”) with Sterling, pursuant
to which, in consideration for Sterling’s consent to the Company’s sale of the Old Bridge Facility and Sterling’s
further agreement to execute and deliver a Discharge of Mortgage and Assignment of Leases and Rents (the “
Discharge
”)
to effect the discharge of Sterling’s mortgage thereon, the Company was required to apply the proceeds of the sale of the
Old Bridge Facility to fully pay, satisfy and discharge the Term Loan and to pay down the Revolver balance to $0.00 (with no reduction
in the Revolver commitment by Sterling). The Company paid approximately $3,014 to pay off the Term Loan in connection with the
Discharge. In addition, the Company paid down the outstanding balance under the Revolver of approximately $2,086. On March 29,
2019, the Company and Sterling entered into a certain Second Amendment to Loan and Security Agreement (the “
Second Amendment
”),
which replaced the existing fixed charge coverage ratio covenant with a minimum liquidity covenant. That covenant obligates the
Company to not permit the sum of its unrestricted cash (as described in the Second Amendment) plus availability under the Revolver
to drop below $2,000,000 at any time. The outstanding balances under the Revolver were zero and $2,603 at March 31, 2019 and December
31, 2018, 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) the minimum liquidity
described above 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). The Company was not in compliance with the fixed
charge coverage ratio covenant under the Sterling Agreement at December 31, 2018 and January 31, 2019. Sterling waived this non-compliance
in the Second Amendment. The Company was in compliance with its covenants as of March 31, 2019.
Note
6 – Subordinated Convertible Debt with Related Parties
On March 28, 2016,
the Company and RLD 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 could be drawn by the Company. Interest on the outstanding balance under the Subordinated Loan Facility from time to time,
accrued at 12% per annum (subject to increase under certain circumstances) and was 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 was permitted to pay interest
in cash on any interest payment date, in lieu of PIK Interest. The Subordinated Lenders had 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 RLD under the Subordinated Loan Agreement were secured by substantially all
of the Company’s and RLD’s assets, including by a mortgage against the Old Bridge Facility (the “
Subordinated
Mortgage”
). The Subordinated Loan Agreement had a maturity date 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, would be due and
payable in full. 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 were subordinated to the rights of Sterling
under the Sterling Agreement and related security documents. The Subordination Agreement precluded the Company from making cash
payments of interest in lieu of PIK Interest, in the absence of the prior written consent of Sterling.
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.
On
October 9, 2018, James H. Williams exercised his conversion right and converted $67 ($50 principal and $17 of accrued interest)
of his loan (representing the entire amount of principal and interest outstanding and held by Mr. Williams on that date) into
125 shares of the Company’s common stock.
In connection with
the anticipated completion of the sale of the Old Bridge Facility (as described in Note 10), on January 24, 2019, the Company and
RLD, as Borrower, the Lenders and the Agent entered into a Debt Conversion and Lien Termination Agreement (the “
Conversion
and Termination Agreement
”). As of the date of the Conversion and Termination Agreement, the Borrower was indebted to
Steven L. Shea (
“Shea
”) for the principal and accrued interest relating to a $100 loan advanced by Shea under
the Subordinated Loan Agreement (the “
Shea Indebtedness
”). In addition, as of the date of the Conversion and
Termination Agreement Robert J. Pallé and Carol M. Pallé (collectively, “
Initial Lenders
”), remained
subject to a commitment to lend Borrower up to an additional $250 (the “
Additional Commitment
”). The Conversion
and Termination Agreement provided for (i) the full payment of the Shea Indebtedness (unless such amounts were converted into shares
of common stock prior to repayment), (ii) the termination of the Additional Commitment, and (iii) the release and termination of
all liens and security interests in the collateral under the Subordinated Loan Documents, including with respect to the Subordinated
Mortgages, each to become effective as of the closing of the sale of the Old Bridge Facility. In connection with the execution
and delivery of the Conversion and Termination Agreement, Shea provided the Company with a notice of conversion, and upon completion
of the sale of the Old Bridge Facility was issued 260 shares of the Company’s common stock in full satisfaction of the Shea
Indebtedness.
Note
7 – 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 month periods ended March 31, 2019 and 2018, this law firm billed the Company approximately $151 and $96, respectively
for legal services provided by this firm. Included in accounts payable on the accompanying balance sheets at March 31, 2019 and
December 31, 2018, is approximately $21 and zero, respectively, owed to this law firm.
Note
8 – Concentration of Credit Risk
The
following table summarizes credit risk with respect to customers as percentage of sales for the three month periods ending March
31, 2019 and 2018, respectively and as a percentage of accounts receivable as of March 31, 2019 and December 31, 2018, respectively:
|
|
Net sales
|
|
|
|
|
Three months ended
|
|
|
Accounts Receivable
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
14
|
%
|
|
|
16
|
%
|
|
|
-
|
|
|
|
14
|
%
|
Customer B
|
|
|
10
|
%
|
|
|
27
|
%
|
|
|
16
|
%
|
|
|
22
|
%
|
Customer C
|
|
|
12
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Customer D
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
%
|
Customer E
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
%
|
|
|
-
|
|
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
(unaudited)
Note
9 – Commitments and Contingencies
Leases
The
Company leases certain real estate, factory, and office equipment under non-cancellable operating leases at various dates through
January, 2024.
Maturities
of the lease liabilities are as follows:
|
|
Amount
|
|
Amount remaining year ending December 31, 2019
|
|
$
|
462
|
|
2020
|
|
|
768
|
|
2021
|
|
|
809
|
|
2022
|
|
|
809
|
|
2023
|
|
|
885
|
|
Thereafter
|
|
|
77
|
|
Lease liability
|
|
$
|
3,810
|
|
Litigation
The
Company from time to time 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
10 – Building Sale and Leaseback
On
February 1, 2019, the Company completed the sale of the Old Bridge Facility to Jake Brown Road, LLC (the “
Buyer
”).
In addition, in connection with the completion of the sale, the Company and the Buyer (as landlord) entered into a lease (the
“
Lease
”), pursuant to which the Company will continue to occupy, and continue to conduct its manufacturing,
engineering, sales and administrative functions in the Old Bridge Facility.
The
sale of the Old Bridge Facility was made pursuant to an Agreement of Sale dated as of August 3, 2018 as amended and extended (collectively,
the “
Sale Agreement
”). Pursuant to the Sale Agreement, at closing, Buyer paid the Company $10,500. In addition,
at closing, the Company advanced to the Buyer the sum of $130, representing a preliminary estimate of the Company’s share
(as a tenant of the Old Bridge Facility following closing) of property repairs, as contemplated by the Sale Agreement. The
Company recognized a gain of approximately $7,175 in connection with the sale.
The
Lease will have an initial term of five years and allows the Company to extend the term for an additional five years following
the initial term. The Company is obligated to pay base rent of approximately $837 for the first year of the lease with the amount
of base rent adjusted for each subsequent year to equal 102.5% of the preceding year’s base rent. The Lease was accounted
for under Topic 842 as described in Note 1.
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, 2018, filed with
the Securities and Exchange Commission on April 1, 2019 (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.
During
2019, the Company introduced a line of Android TV set top boxes. These products were designed to help transition cable subscribers
coming from traditional PayTV services onto a modern IPTV platform combining access to OTT and PayTV video services. The
Company expects growth in this business during 2019 and in future years.
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 $2,028,000 and $2,543,000 in the first three months of 2019 and 2018, respectively,
while sales of analog video headend products were $474,000 and $330,000 in the first three months of 2019 and 2018, 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 $28,000 and $224,000 in the first three months of 2019 and 2018, respectively.
Sales to VBrick for sub-assemblies were not material in the first three months of 2019 or 2018.
Results
of Operations
First
three months of 2019 Compared with first three months of 2018
Net
Sales.
Net sales decreased $1,281,000, or 23.9%, to $4,082,000 in the first three months of 2019 from $5,363,000 in the first
three months of 2018. The decrease is primarily attributed to a decrease in sales of data products, digital video headend products
and contract manufactured products, offset by an increase in sales of analog video head products and set top box products. Sales
of data products were $540,000 and $1,399,000, digital video headend products were $2,028,000 and $2,543,000, contracted manufactured
products were $28,000 and $224,000, analog video headend products were $474,000 and $330,000 and set top box products were $191,000
and zero in the first three months of 2019 and 2018, respectively.
Cost
of Goods Sold.
Cost of goods sold decreased to $2,991,000 for the first three months of 2019 from $3,140,000 for the first
three months of 2018 but increased as a percentage of sales to 73.3% from 58.6%. The decrease was primarily due to a reduction
in sales offset by an increase in the write down of inventory to net realizable value of $692,000. The increase as a percentage
of sales was primarily attributed to the above. Had the write down not occurred, cost of goods sold as a percentage of sales would
have been 56.3% for the three months ended March 31, 2019.
Selling
Expenses.
Selling expenses increased to $727,000 for the first three months of 2019 from $603,000 in the first three months
of 2018, and increased as percentage of sales to 17.8% for the first three months of 2019 from 11.2% for the first three months
of 2018. The $124,000 increase was primarily the result of an increase in salaries and fringe benefits due to an increase in head
count and salary adjustments of $99,000, an increase in freight expense of $27,000 and an increase in department supplies of $21,000.
General
and Administrative Expenses.
General and administrative expenses increased to $1,466,000 for the first three months of 2019
from $876,000 for the first three months of 2018 and increased as a percentage of sales to 35.9% for the first three months of
2019 from 16.3% for the first three months of 2018. The $590,000 increase was primarily the result of an increase in salaries
and fringe benefits due to an increase in head count and salary adjustments of $390,000 and an increase in consulting fees of
$96,000 related to IT outsourcing.
Research
and Development Expenses.
Research and development expenses increased to $665,000 in the first three months of 2019 from $657,000
in the first three months of 2018 and increased as a percentage of sales to 16.3% for the first three months of 2019 from 12.3%
for the first three months of 2018. This $8,000 increase is primarily the result of an increase in salaries and fringe benefits
due to an increase in head count and salary adjustments of $45,000 and an increase in consulting fees of $26,000, offset by a
decrease in department supplies of $41,000 and a decrease in labor related to product software revisions of $22,000.
Operating(Loss)
Income.
Operating loss of $1,767,000 for the first three months of 2019 represents a decrease from operating income of $87,000
for the first three months of 2018. Operating (loss) income as a percentage of sales was (43.3)% in the first three months of
2019 compared to 1.6% in the first three months of 2018.
Interest
Expense.
Interest expense decreased to $83,000 in the first three months of 2019 from $150,000 in the first three months of
2018. The decrease is primarily the result of lower average borrowing.
Liquidity
and Capital Resources
As
of March 31, 2019, and December 31, 2018, the Company’s working capital was $9,328,000 and $2,144,000, respectively. The
increase in working capital is primarily due to the proceeds of the sale of the Old Bridge Facility after paying off the Term
Loan and paying down the Revolver under the Sterling Facility.
The
Company’s net cash used in operating activities for the three-month period ended March 31, 2019 was $3,024,000 primarily
due to non cash adjustments of $(6,941,000) and a decrease in accounts payable, accrued compensation and other accrued expenses
of $1,087,000, offset by net earnings of $5,325,000. The Company’s net cash provided by operating activities for the three-month
period ended March 31, 2018 was $505,000 primarily due to an increase in accounts payable, accrued compensation and other accrued
expenses of $434,000 and a reduction in accounts receivable of $301,000, offset by a reduction in prepaid and other current assets
of $186,000.
Cash
provided by investing activities for the three-month period ended March 31, 2019 was $9,754,000, of which $9,765,000 was attributable
to proceeds on the sale of the Old Bridge Facility, $1,000 was attributable to additional license fees and $10,000 was attributable
to capital expenditures. Cash used in investing activities for the three-month period ended March 31, 2018 was $14,000, all of
which was attributable to capital expenditures
.
Cash
used in financing activities was $5,661,000 for the first three months of 2019, which was comprised of net repayments of borrowings
on the Revolver under the Sterling Facility of $2,603,000 and repayments of long-term debt of $3,058,000. Cash used in financing
activities was $421,000 for the first three months of 2018, which was comprised of net repayments of line of credit of $358,000
and repayments of debt of $63,000.
For
a full description of the Company’s 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 have been its existing cash balances, cash generated from operations and amounts available
under the Sterling Facility and the Subordinated Loan Facility. In connection with the completion of the sale of the Old Bridge
Facility, as described below, the Subordinated Loan Facility was terminated. On a going-forward basis, the Company expects its
primary sources of liquidity will be its existing cash balances (including amounts the Company received upon completion of the
sale of the Old Bridge Facility, as described below), cash generated from operations and amounts available under the Sterling Facility.
The Company was not in compliance with the fixed charge coverage ratio under the Sterling Agreement at December 31, 2018 and January
31, 2019. Sterling has waived this non-compliance, and the Company and Sterling have agreed to an amendment to the Sterling Agreement
(the “
Second Amendment
”), which replaced the existing fixed charge coverage ratio covenant with a minimum liquidity
covenant. That covenant obligates the Company to not permit the sum of its unrestricted cash (as described in the Second Amendment)
plus availability under the Revolver to drop below $2,000,000 at any time. The Company was in compliance with its covenants as
of March 31, 2019.
As of March 31, 2019, the Company had zero outstanding under the Revolver, $1,111,000 of availability
for borrowing under the Revolver and $1,628,000 cash on hand.
The minimum liquidity covenant will
effectively reduce the amount that the Company is able to borrow under the Sterling Facility. The Sterling Facility matures in
December 2019. We currently intend to seek to extend the Sterling facility, but if we are unable to do so, we would seek new debt
financing arrangements. We cannot assure you that new debt financing will be available to us on acceptable terms or at all.
On
February 1, 2019, the Company completed the sale of the Old Bridge Facility to Jake Brown Road, LLC (the “
Buyer
”).
In addition, in connection with the completion of the sale, the Company and the Buyer (as landlord) entered into a lease (the
“
Lease
”), pursuant to which the Company will continue to occupy, and continue to conduct its manufacturing,
engineering, sales and administrative functions in the Old Bridge Facility.
The
sale of the Old Bridge Facility was made pursuant to an Agreement of Sale dated as of August 3, 2018 (the “
Initial
Sale Agreement
”), as amended by an Extension Letter Agreement dated as of September 20, 2018, the Second Amendment
to Agreement of Sale dated as of October 8, 2018 and the Third Amendment to Agreement of Sale dated as of January 30, 2019
(the Initial Sale Agreement together with the Extension Letter Agreement, Second Amendment to Agreement of Sale and Third
Amendment to Agreement of Sale, collectively, the “
Sale Agreement
”). Pursuant to the Sale Agreement, at
closing, the Buyer paid the Company $10,500,000. In addition, at closing, the Company advanced to the Buyer the sum of
$130,000, representing a preliminary estimate of the Company’s share (as a tenant of the Old Bridge Facility following
closing) of property repairs, as contemplated by the Sale Agreement.
On February 1, 2019,
in connection with the completion of the sale of the Old Bridge Facility and entry into the Lease, the Company entered into a
Consent Under Loan and Security Agreement (the “
Consent
”) with Sterling National Bank (“
Sterling
”),
pursuant to which, in consideration for Sterling’s consent to the Company’s sale of the Old Bridge Facility and Sterling’s
further agreement to execute and deliver a Discharge of Mortgage and Assignment of Leases and Rents (the “
Discharge
”)
to effect the discharge of Sterling’s mortgage on the Old Bridge Facility, the Company was required to apply the proceeds
of the sale of the Old Bridge Facility to fully pay, satisfy and discharge the Term Loan and to pay down the Revolver balance
to $0.00 (with no reduction in the Revolver commitment by Sterling). The Company paid approximately $3,014,000 to pay off the
Term Loan in connection with the Discharge. In addition, the Company paid down the outstanding balance under the Revolver of approximately
$2,086,000.
On
January 24, 2019, the Company and RLD (with the Company, collectively, the “
Borrower
”) entered into a Debt
Conversion and Lien Termination Agreement (the “
Conversion and Termination Agreement
”) with Robert J. Pallé
(“
RJP
”) and Carol M. Pallé (collectively, “
Initial Lenders
”), and Steven L. Shea
and James H. Williams (collectively, the “
Supplemental Lenders
,” and together with the Initial Lenders, collectively,
the “
Lenders
”), and Robert J. Pallé, as Agent for the Lenders (in such capacity, the “
Agent
”).
As
previously disclosed, the Borrower, the Lenders and the Agent were parties to a First Amendment to Amended and Restated Senior
Subordinate Convertible Loan and Security Agreement, dated as of March 21, 2017 (as amended to date, the “
Subordinated
Loan Agreement
”), pursuant to which the Lenders provided the Borrower with commitments to lend Borrower up to $750,000
in the form of loans convertible, under the terms provided in the Subordinated Loan Agreement, into shares of the Company’s
Common Stock. The obligations of Borrower to pay, satisfy and discharge the obligations under the Subordinated Loan Agreement
were secured by security interests in and liens upon certain specified collateral, including certain mortgages in favor of the
Lenders and the Agent (the “
Subordinated Mortgages
,” and together with the Subordinated Loan Agreement and
all other agreements, documents and instruments related thereto, collectively, the “
Subordinated Loan Documents
”).
As
of the date of the Conversion and Termination Agreement, the Borrower was indebted to Steven L. Shea (“
Shea
”)
for the principal and accrued interest relating to a $100,000 loan advanced by Shea under the Subordinated Loan Agreement (the
“
Shea Indebtedness
”). In addition, as of the date of the Conversion and Termination Agreement the Initial Lenders
remained subject to a commitment to lend Borrowers up to an additional $250,000 (the “
Additional Commitment
”).
In
connection with the anticipated completion of the sale of the Old Bridge Facility, on January 24, 2019, the Borrower, the Lenders and the Agent
entered into the Conversion and Termination Agreement to provide for (i) the full payment of the Shea Indebtedness (unless
such amounts were converted into shares of Common Stock prior to repayment), (ii) the termination of the Additional
Commitment and (iii) the release and termination of all liens and security interests in the collateral under the Subordinated
Loan Documents, including with respect to the Subordinated Mortgages, each to become effective as of the closing of the sale
of the Old Bridge Facility. In connection with the execution and delivery of the Conversion and Termination Agreement by the
Borrower, the Lenders and the Agent, Shea provided the Company with a notice of conversion, and upon completion of the sale
of the Old Bridge Facility was issued 259,983 shares of Company Common Stock in full satisfaction of the Shea
Indebtedness.
As
previously disclosed, the Lease will have an initial term of five years and allows the Company to extend the term for an additional
five years following the initial term. The Company is obligated to pay base rent of $836,855.50 for the first year of the Lease,
with the amount of the base rent adjusted for each subsequent year to equal 102.5% of the preceding year’s base rent. Without
regard to any reduction in the Company’s lease expense derived from its sublease to a third party of the Sublease Space
(defined below), for the first year of the Lease, the base rent of $836,855.00 would offset, in part, the anticipated annualized
saving of interest and depreciation expense of approximately $469,000 and the cash debt service of approximately $562,000. The
Lease further provides for a security deposit in an amount equal to eight months of base rent, which may be reduced to three months
of base rent upon certain benchmarks being met. The landlord may, once during the lease term or any renewal thereof, require the
Company to relocate to another facility made available by the landlord that meets the Company’s specifications for a replacement
facility within a defined geographical area, by providing notice which confirms that all of the Company’s specifications
for a replacement facility will be met, that all costs relating to such relocation will be paid by the landlord, and that security
for the repayment of those relocation costs has been established. The Company will also be provided a six month overlap period
(the “
Overlap Period
”) during which the Company may operate in the Old Bridge Facility with rent therein being
abated, but with rent being paid at the replacement facility, to mitigate interruptions of the Company’s on-going business
while the move occurs. If the Company declines to be relocated to the facility proposed by the landlord, the Lease will terminate
18 months from the date of the landlord’s notice, but the Company will continue to be entitled to receive the same benefits
in terms of reimbursement of its relocation costs and an Overlap Period during which no rent will be due at the Old Bridge Facility,
while the Company moves its operations to an alternative facility that it has identified.
The
Company anticipates subleasing to a third party up to 40,000 square feet of the Old Bridge Facility (the “
Sublease Space
”),
the rental proceeds from which will inure to the benefit of the Company. The Company’s ability to sublease all or part of
the Sublease Space, the specific terms of any sublease of the Sublease Space and the amount of rent that will be derived therefrom
cannot be predicted at this time. The landlord will provide the Company with up to six months of free rent for the Sublease Space,
as the Company undertakes to identify a suitable tenant or tenants therefor.
The
Company’s primary long-term obligations are for payment of interest and principal on the Sterling Facility, which expires
on December 28, 2019. The Company expects to use cash generated from operations and the Sale Agreement proceeds to meet its long-term
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 $10,000 and $81,000 in the three months ended March 31, 2019
and the year ended December 31, 2018, respectively. The Company expects to use cash generated from operations, amounts available
under the Sterling Facility, proceeds from the Sale Agreement and purchase-money financing to meet any anticipated long-term capital
expenditures.
The
Company believes that it has sufficient liquidity and capital resources to sustain its planned operations for at least the next
12 months from the filing date of this Form 10-Q.
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(d) and (e) 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.