ITEM
1. FINANCIAL STATEMENTS
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
|
|
(unaudited)
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
199
|
|
|
$
|
468
|
|
Accounts receivable, net of allowance for doubtful accounts of $180
|
|
|
2,626
|
|
|
|
2,273
|
|
Inventories
|
|
|
5,644
|
|
|
|
5,064
|
|
Prepaid and other current assets
|
|
|
334
|
|
|
|
275
|
|
Total current assets
|
|
|
8,803
|
|
|
|
8,080
|
|
Inventories, net of current and reserves
|
|
|
865
|
|
|
|
991
|
|
Property, plant and equipment, net of accumulated depreciation and amortization
|
|
|
3,147
|
|
|
|
3,279
|
|
License agreements, net
|
|
|
41
|
|
|
|
117
|
|
Intangible assets, net
|
|
|
1,484
|
|
|
|
1,612
|
|
Goodwill
|
|
|
493
|
|
|
|
493
|
|
Other assets
|
|
|
346
|
|
|
|
428
|
|
|
|
$
|
15,179
|
|
|
$
|
15,000
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
2,427
|
|
|
$
|
2,120
|
|
Current portion of long-term debt
|
|
|
250
|
|
|
|
228
|
|
Accounts payable
|
|
|
1,367
|
|
|
|
1,390
|
|
Derivative liability
|
|
|
-
|
|
|
|
260
|
|
Accrued compensation
|
|
|
184
|
|
|
|
320
|
|
Accrued benefit pension liability
|
|
|
101
|
|
|
|
101
|
|
Other accrued expenses
|
|
|
361
|
|
|
|
197
|
|
Total current liabilities
|
|
|
4,690
|
|
|
|
4,616
|
|
|
|
|
|
|
|
|
|
|
Subordinated convertible debt with related parties
|
|
|
605
|
|
|
|
376
|
|
Long-term debt, net of current portion
|
|
|
3,157
|
|
|
|
3,335
|
|
Deferred income taxes
|
|
|
139
|
|
|
|
139
|
|
Total liabilities
|
|
|
8,591
|
|
|
|
8,466
|
|
Commitments and contingencies
|
|
|
-
|
|
|
|
-
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value; authorized 5,000 shares; No shares outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.001 par value; authorized 25,000 shares, 8,465 shares Issued, 8,122 shares outstanding
|
|
|
8
|
|
|
|
8
|
|
Paid-in capital
|
|
|
26,826
|
|
|
|
26,132
|
|
Accumulated deficit
|
|
|
(17,819
|
)
|
|
|
(17,179
|
)
|
Accumulated other comprehensive loss
|
|
|
(1,278
|
)
|
|
|
(1,278
|
)
|
Treasury stock, at cost, 342 shares
|
|
|
(1,149
|
)
|
|
|
(1,149
|
)
|
Total stockholders’ equity
|
|
|
6,588
|
|
|
|
6,534
|
|
|
|
$
|
15,179
|
|
|
$
|
15,000
|
|
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
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net sales
|
|
$
|
5,576
|
|
|
$
|
5,432
|
|
|
$
|
17,713
|
|
|
$
|
17,057
|
|
Cost of goods sold
|
|
|
3,399
|
|
|
|
3,531
|
|
|
|
11,010
|
|
|
|
10,471
|
|
Gross profit
|
|
|
2,177
|
|
|
|
1,901
|
|
|
|
6,703
|
|
|
|
6,586
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
631
|
|
|
|
645
|
|
|
|
1,941
|
|
|
|
1,961
|
|
General and administrative
|
|
|
956
|
|
|
|
959
|
|
|
|
2,802
|
|
|
|
2,906
|
|
Research and development
|
|
|
605
|
|
|
|
711
|
|
|
|
1,877
|
|
|
|
2,098
|
|
|
|
|
2,192
|
|
|
|
2,315
|
|
|
|
6,620
|
|
|
|
6,965
|
|
Earnings (loss) from operations
|
|
|
(15
|
)
|
|
|
(414
|
)
|
|
|
83
|
|
|
|
(379
|
)
|
Other Expense - net
|
|
|
(138
|
)
|
|
|
(107
|
)
|
|
|
(581
|
)
|
|
|
(285
|
)
|
Change in derivative liability
|
|
|
-
|
|
|
|
(121
|
)
|
|
|
(142
|
)
|
|
|
(193
|
)
|
Loss before income taxes
|
|
|
(153
|
)
|
|
|
(642
|
)
|
|
|
(640
|
)
|
|
|
(857
|
)
|
Provision (benefit) for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
$
|
(153
|
)
|
|
$
|
(642
|
)
|
|
$
|
(640
|
)
|
|
$
|
(857
|
)
|
Basic and diluted net loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.12
|
)
|
Basic weighted averages shares outstanding
|
|
|
8,122
|
|
|
|
7,738
|
|
|
|
8,122
|
|
|
|
7,179
|
|
Diluted weighted average shares outstanding
|
|
|
8,122
|
|
|
|
7,738
|
|
|
|
8,122
|
|
|
|
7,179
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(640
|
)
|
|
$
|
(857
|
)
|
Adjustments to reconcile net loss to cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
292
|
|
|
|
129
|
|
Depreciation
|
|
|
242
|
|
|
|
336
|
|
Amortization
|
|
|
264
|
|
|
|
411
|
|
Amortization of loan fees
|
|
|
105
|
|
|
|
-
|
|
Reversal of inventory reserves
|
|
|
(28
|
)
|
|
|
(30
|
)
|
Non cash interest expense
|
|
|
229
|
|
|
|
37
|
|
Non cash directors’ fees
|
|
|
-
|
|
|
|
249
|
|
Change in derivative liability
|
|
|
142
|
|
|
|
194
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(353
|
)
|
|
|
179
|
|
Inventories
|
|
|
(426
|
)
|
|
|
877
|
|
Prepaid and other current assets
|
|
|
(59
|
)
|
|
|
(32
|
)
|
Other assets
|
|
|
(23
|
)
|
|
|
(52
|
)
|
Accounts payable, accrued compensation and other accrued expenses
|
|
|
5
|
|
|
|
(678
|
)
|
Net cash (used in) provided by operating activities
|
|
|
(250
|
)
|
|
|
763
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(100
|
)
|
|
|
(67
|
)
|
Acquisition of licenses
|
|
|
(60
|
)
|
|
|
(19
|
)
|
Net cash used in investing activities
|
|
|
(160
|
)
|
|
|
(86
|
)
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) of line of credit
|
|
|
307
|
|
|
|
(754
|
)
|
Borrowings from related parties
|
|
|
-
|
|
|
|
400
|
|
Repayments of debt
|
|
|
(166
|
)
|
|
|
(119
|
)
|
Net cash provided by (used in) financing activities
|
|
|
141
|
|
|
|
(473
|
)
|
Net (decrease) increase in cash
|
|
|
(269
|
)
|
|
|
204
|
|
Cash, beginning of period
|
|
|
468
|
|
|
|
9
|
|
Cash, end of period
|
|
$
|
199
|
|
|
$
|
213
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
218
|
|
|
$
|
227
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
Capital expenditures financed with debt
|
|
$
|
10
|
|
|
$
|
-
|
|
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
unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles
(
“GAAP”
) for interim financial information, the instructions to Form 10-Q and Article 8 of Regulation S-X.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments,
consisting primarily of normal recurring accruals, necessary for a fair presentation. 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 Securities and Exchange Commission (“
SEC
”) rules and regulations. These financial statements
should be read in conjunction with the financial statements and notes thereto that were included in the Company’s annual
report on Form 10-K for the year ended December 31, 2016. Operating results for the three and nine months ended September 30,
2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
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, inventory 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.
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). 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.
BLONDER TONGUE LABORATORIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except per share data)
(unaudited)
(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.
The
derivative liability is measured at fair value using quoted market prices and estimated volatility factors based on historical
quoted market prices for the Company’s common stock, and is classified within Level 3 of the valuation hierarchy.
(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 and convertible debt of 2,053 and 1,121 and 1,875 and 995 for the three-month periods
ended September 30, 2017 and 2016, respectively and 1,862 and 1,121 and 2,028 and 995 for the nine-month periods ended September
30, 2017 and 2016, respectively. These shares were excluded due to their antidilutive effect.
Note
3 – New Accounting Pronouncements
In July 2017, the FASB issued a
two-part ASU No. 2017-11, “Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives
and Hedging (Topic 815): I “Accounting for Certain Financial Instruments With Down Round Features” and II “Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests With a Scope Execution.” The ASU Part I changes the classification analysis of certain
equity –linked financial instruments with down round features and the related disclosures. Part II of the amendment recharacterizes
the indefinite deferral of certain provisions of Topic 480 and do not have an accounting effect. The ASU is effective for public
business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption
is permitted. The Company is currently evaluating the impact that the adoption of this new standard will have on its consolidated
financial position and results of operations.
BLONDER TONGUE LABORATORIES, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(In thousands, except per share data)
(unaudited)
In
May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”).
ASU 2014-09 superseded the revenue recognition requirements in ASC Topic 604 “Revenue Recognition” and some cost guidance
included in ASC Subtopic: 05-35, “Revenue Recognition – Construction-Type and Production-Type Contracts.” The
core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in an amount
that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. ASU 2014-09
requires the disclosure of sufficient information to enable readers of the Company’s financial statements to understand
the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 also requires
disclosure of information regarding significant judgments and changes in judgments, and assets recognized from costs incurred
to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would require
the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company to apply
ASU 2014-09 to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date of initial application. ASU
2014-09 will be effective for the Company beginning in fiscal 2019 as a result of ASU 2015-14, “Revenue from Contracts with
Customers (Topic 606): Deferral of the Effective Date, “which was issued by the FASB in August 2015 and extended the original
effective date by one year. In preparation for the adoption of the new standard in the fiscal year beginning January 2019, the
Company continues to evaluate contract terms and potential impacts of the five-step model specified by the new guidance. That
five-step model includes: (1) determination of whether a contract-an agreement between two or more parties that creates legally
enforceable rights and obligations-exists; (2) identification of the performance obligations in the contract; (3) determination
of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition
of revenue when (or as) the performance obligation is satisfied. The Company anticipates adopting the standard using the modified
retrospective approach at adoption. The Company is currently evaluating individual customer contracts and will be documenting
changes, as needed, to its accounting policies and controls as the Company continues to evaluate the impact of the adoption of
this standard. The results of its procedures to date indicate that the adoption of this standard will not have a material
impact on its net income; however, the Company continues to evaluate the impact of the adoption on related financial statement
disclosures.
There
have been four new ASUs issued amending certain aspects of ASU 2014-09, ASU 2016-08, “Principal versus Agent Considerations
(Reporting Revenue Gross Versus Net),” was issued in March 2016 to clarify certain aspects of the principal versus agent
guidance in ASU 2014-09. In addition, ASU 2016-10, “Identifying Performance Obligations and Licensing,” issued in
April 2016, amends other sections of ASU 2014-09 including clarifying guidance related to identifying performance obligations
and licensing implementation. ASU 2016-12, “Revenue from Contracts with Customers — Narrow Scope Improvements and
Practical Expedients” provides amendments and practical expedients to the guidance in ASU 2014-09 in the areas of assessing
collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification
of using the full retrospective approach to adopt ASU 2014-09. Finally, ASU 2016-20, “Technical Corrections and Improvements
to Topic 606, Revenue from Contracts with Customers,” was issued in December 2016, and provides elections regarding the
disclosures required for remaining performance obligations in certain cases and makes other technical corrections and improvements
to the standard. With its evaluation of the impact of ASU 2014-09, the Company will also consider the impact on its financial
statements related to the updated guidance provided by these four new ASUs.
In
May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting (“ASU
2017-09”). This ASU clarifies which changes to the terms or conditions of a share-based payment award require an entry to
apply modification accounting in Topic 718. The standard is effective for the Company on January 1, 2018, with early adoption
permitted. The impact of this new standard will depend on the extent and nature of future changes to the terms of the Company’s
share-based payment awards.
Note
4 – Inventories
Inventories
net of reserves are summarized as follows:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Raw Materials
|
|
$
|
3,797
|
|
|
$
|
4,001
|
|
Work in process
|
|
|
1,576
|
|
|
|
1,860
|
|
Finished Goods
|
|
|
3,832
|
|
|
|
4,143
|
|
|
|
|
9.205
|
|
|
|
10,004
|
|
Less current inventory
|
|
|
(5,644
|
)
|
|
|
(5,064
|
)
|
|
|
|
3,561
|
|
|
|
4,940
|
|
Less reserve for slow moving and excess inventory
|
|
|
(2,696
|
)
|
|
|
(3,949
|
)
|
|
|
$
|
865
|
|
|
$
|
991
|
|
Inventories are stated
at the lower of net realizable value or cost, determined by the first-in, first-out (“FIFO”) method.
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
59% and 68% of the non-current inventories were comprised of finished goods at September 30, 2017 and December 31, 2016, 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 establishes reserves. 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 (1.23% at September 30, 2017) plus a margin of 4.00%. Interest on the Term Loan also is variable, based
upon the 30-day LIBOR rate (1.23% at September 30, 2017) 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, from December 31, 2016 to January 31, 2017, and modified certain terms relating to permitted investments
by the Company. At September 30, 2017, the outstanding balances under the Revolver and the Term Loan were $2,427 and $3,344, 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).
By virtue of the First Amendment, compliance with the foregoing financial covenants was tested commencing as of January 31, 2017.
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 Property (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)
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 September 30, 2017,
the Subordinated Lenders advanced $500 to the Company. In addition, $18 and $52 of PIK interest was accrued in the three months
and nine months ended September 30, 2017, respectively. 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 reclassified the aggregate value of the derivative liability at the date
of modification in the amount of $402 to additional paid-in capital. In addition, during the nine months ended September 30, 2017
and 2016, the Company incurred interest of $229 and $37, respectively, related to these loans. The Company computed the fair value
of the derivative liability at the date of modification using the Black-Scholes Model, which approximates a binomial lattice model
with the following assumptions: stock price of $0.65, conversion price of $0.54, volatility of 104%, expected term of two years,
risk free rate of 1.30% and dividend yield 0%.
Note
7 – 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
8 – Subsequent Events
The
Company has evaluated subsequent events through the filing of its consolidated financial statements with the SEC.
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, 2016 (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 $2,100,000 and $2,763,000 in the third three months of 2017 and 2016, respectively
and $7,330,000 and $8,889,000 in the first nine months of 2017 and 2016, respectively. Sales of analog video headend products
were $324,000 and $559,000 in the third three months of 2017 and 2016, respectively and $1,360,000 and $1,789,000 in the first
nine months of 2017 and 2016, 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. VBrick
purchases of these products were approximately $244,000 and $465,000 in the third three months of 2017 and 2016, respectively
and $599,000 and $994,000 in the first nine months of 2017 and 2016, respectively.
Results
of Operations
Third
three months of 2017 Compared with third three months of 2016
Net Sales
.
Net
sales increased $144,000, or 2.7%, to $5,576,000 in the third three months of 2017 from $5,432,000 in the third three months of
2016. The increase is primarily attributed to an increase in sales of data products offset by a decrease in digital video headend
products, analog headend products, HFC distribution products and contract manufactured products. Sales of data products were $1,782,000
and $315,000, digital video headend products were $2,100,000 and $2,763,000, analog headend products were $324,000 and $559,000,
HFC distribution products were $838,000 and $1,046,000 and contract manufactured products were $244,000 and $465,000 in the third
three months of 2017 and 2016, respectively.
Cost
of Goods Sold.
Cost of goods sold decreased to $3,399,000 for the third three months of 2017 from $3,531,000 for the third
three months of 2016 and decreased as a percentage of sales to 61.0% from 65.0%. The decrease was primarily due to a more favorable
product mix. The decrease as a percentage of sales was primarily attributed to an overall reduction in the amount of manufacturing
overhead capitalized, as well as a more favorable product mix.
Selling
Expenses.
Selling expenses decreased to $631,000 for the third three months of 2017 from $645,000 in the third three months
of 2016, and decreased as percentage of sales to 11.3% for the third three months of 2017 from 11.9% for the third three months
of 2016. The $14,000 decrease was primarily the result of a decrease in salary expense (including fringe benefits) of $36,000
due to a decrease in headcount and a decrease in royalty expense of $39,000 offset by an increase in department supplies of $23,000
and an increase in sales commissions of $29,000.
General and Administrative
Expenses.
General and administrative expenses decreased to $956,000 for the third three months of 2017 from $959,000 for the
third three months of 2016 and decreased as a percentage of sales to 17.1% for the third three months of 2017 from 17.7% for the
third three months of 2016. The $3,000 decrease was primarily the result of an increase in legal expenses of $37,000, an increase
in salary expense (including fringe benefits) of $27,000 due to an increase in headcount, and principally offset by a decrease
in building reconfiguration expenses of $58,000, amongst other decreases.
Research and Development
Expenses.
Research and development expenses decreased to $605,000 in the third three months of 2017 from $711,000 in the third
three months of 2016 and decreased as a percentage of sales to 10.9% for the third three months of 2017 from 13.1% for the third
three months of 2016. This $106,000 decrease is primarily the result of a decrease in amortization expense of $69,000 relating
to certain license fees becoming fully amortized, a decrease in depreciation of $15,000, and a decrease of salary expense (including
fringe benefits) of $21,000 due to reduced headcount.
Operating Loss.
Operating loss of $15,000 for the third three months of 2017 represents a reduction from the operating loss of $414,000 for the
third three months of 2016. Operating loss as a percentage of sales was (0.3%) in the third three months of 2017 compared to (7.6%)
in the third three months of 2016.
Interest Expense.
Interest expense increased to $138,000 in the third three months of 2017 from $107,000 in the third three months of 2016. The increase
is attributable to amortization of loan fees of approximately $35,000 offset by a decrease in borrowings under the Revolver.
First
nine months of 2017 Compared with first nine months of 2016
Net
Sales.
Net sales increased $656,000, or 3.9%, to $17,713,000 in the first nine months of 2017 from $17,057,000 in the first
nine months of 2016. The increase is primarily attributed to an increase in sales of data products offset by a decrease in digital
video headend products, analog headend products and contract manufactured products. Sales of data products were $5,168,000 and
$1,592,000, digital video headend products were $7,330,000 and $8,889,000, analog video headend products were $1,360,000 and $1,789,000
and contract manufactured products were $599,000 and $994,000 in the first nine months of 2017 and 2016, respectively.
Cost of Goods Sold.
Cost of goods sold increased to $11,010,000 for the first nine months of 2017 from $10,471,000 for the first nine months
of 2016 and increased as a percentage of sales to 62.2% from 61.4%. The increase as a percentage of sales was primarily attributed
to an overall reduction in the amount of manufacturing overhead capitalized, as well as a less favorable product mix, whereby
the data products yield a lower gross margin.
Selling
Expenses.
Selling expenses decreased to $1,941,000 for the first nine months of 2017 from $1,961,000 in the first nine months
of 2016, and decreased as percentage of sales to 11.0% for the first nine months of 2017 from 11.5% for the first nine months
of 2016. The $20,000 decrease was primarily the result of a decrease in salary expense (including fringe benefits) of $77,000
due to a decrease in headcount and a decrease in royalty expense of $68,000 offset by an increase in department supplies of $108,000.
General and Administrative
Expenses.
General and administrative expenses decreased to $2,802,000 for the first nine months of 2017 from $2,906,000 for
the first nine months of 2016 and decreased as a percentage of sales to 15.8% for the first nine months of 2017 from 17.0% for
the first nine months of 2016. The $104,000 decrease was primarily the result of an increase in legal fees of $112,000 and an
increase in salaries (including fringe benefits) of $32,000, offset by decreased travel and entertainment expense of $66,000 due
to decreased business travel and a decrease in building reconfiguration expenses of $64,000 amongst other cost containment measures.
Research and Development
Expenses.
Research and development expenses decreased to $1,877,000 in the first nine months of 2017 from $2,098,000 in the
first nine months of 2016 and decreased as a percentage of sales to 10.6% for the first nine months of 2017 from 12.3% for the
first nine months of 2016. This $221,000 decrease is primarily the result of a decrease in amortization expense of $150,000 relating
to certain license fees becoming fully amortized, a decrease in depreciation of $43,000 and a decrease in salaries (including
fringe benefits) of $32,000 due to a decrease in headcount.
Operating Income
(Loss).
Operating income of $83,000 for the first nine months of 2017 represents an improvement from the operating loss of
$379,000 for the first nine months of 2016. Operating income as a percentage of sales was 0.5% in the first nine months of 2017
compared to a loss of (2.2%) in the first nine months of 2016.
Interest Expense.
Interest expense increased to $581,000 in the first nine months of 2017 from $281,000 in the first nine months of 2016. The increase
is primarily the result of the accretion of the debt discount related to the former derivative liability of $177,000 and $105,000
of amortization of deferred loan fees both non-cash expenses.
Liquidity
and Capital Resources
As of September 30, 2017
and December 31, 2016, the Company’s working capital was $4,113,000 and $3,464,000, respectively. The increase in working
capital is primarily due to improved operations, an increase of inventories of $426,000 and an increase in accounts receivable
of $353,000.
The Company’s net
cash used in operating activities for the nine-month period ended September 30, 2017 was $250,000 primarily due to a net loss
of $640,000, an increase of inventories of $426,000 and an increase in accounts receivable of $353,000 offset by non cash adjustments
of $1,246,000.
Cash
used in investing activities for the nine-month period ended September 30, 2017 was $160,000, of which $60,000 was attributable
to additional license fees and $100,000 was attributable to capital expenditures.
Cash
provided by financing activities was $141,000 for the first nine months of 2017, which was comprised of net borrowings on the
Revolver of $307,000 offset by repayments of long term debt of $166,000.
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 September 30, 2017, the Company had approximately $2,427,000
outstanding under the Revolver and $813,000 of additional availability for borrowing under the Revolver, as well as $605,000 outstanding
under the Subordinated Loan Facility and $250,000 of additional availability for borrowing under the Subordinated Loan Facility.
Prior
to 2016, the Company incurred significant operating losses and did not have the necessary financing arrangements in place to support
its capital resource needs. These factors contributed to the Company’s substantial doubt of its ability to continue as a
going concern, which were set forth in its Form 10-K for the fiscal year ended December 31, 2015 and in subsequent quarterly reports
on Form 10-Q prior to consummation of the Sterling Facility. During 2016, management addressed going concern remediation through
entering into the Sterling Facility (a long term obligation due in December 2019), which refinanced its prior Santander Agreement
(which was due to expire in December 2016). In addition, the Company reduced operating expenses to approximately $9,028,000 in
2016 from approximately $10,555,000 in 2015. Net losses were reduced dramatically and cash flows from operations also improved,
as cash generated from operating activities was approximately $771,000 in 2016 compared to cash used in operating activities of
approximately $(798,000) in 2015. At December 31, 2016 and September 30, 2017, the Company had approximately $3,464,000 and $4,113,000
of working capital, respectively. As a result of continued improvements in the Company’s operations, liquidity, capital
resources and working capital, 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 long-term 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 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 $100,000 and $37,000
in the nine months ended September 30, 2017 and the year ended December 31, 2016, 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.
New
Accounting Pronouncements
See
Note 3 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.