TNLX Trans Lux Corporation (PK)

Note 1 – Basis of Presentation

As used in this report, “Trans-Lux,” the “Company,” “we,” “us,” and “our” refer to Trans-Lux Corporation and its subsidiaries.

Financial information included herein is unaudited, however, such information reflects all adjustments (of a normal and recurring nature), which are, in the opinion of management, necessary for the fair presentation of the Condensed Consolidated Financial Statements for the interim periods. The results for the interim periods are not necessarily indicative of the results to be expected for the full year.  The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”) and therefore do not include all information and footnote disclosures required under accounting principles generally accepted in the United States of America (“GAAP”).  The Condensed Consolidated Financial Statements included herein should be read in conjunction with the Consolidated Financial Statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.  The Condensed Consolidated Balance Sheet at December 31, 2022 is derived from the December 31, 2022 audited financial statements.

Critical Accounting Policies and Estimates

Accounting policies used in the preparation of our financial statements may involve the use of management judgments and estimates.  Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial statements and require significant or complex judgments on the part of management.  Our judgments and estimates are based on experience and assumptions that we believe are reasonable under the circumstances.  Further, we evaluate our judgments and estimates from time to time as circumstances change.  Actual financial results based on judgments or estimates may vary under different assumptions or circumstances.  Our critical accounting policies are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Securities and Exchange Commission on March 31, 2023.

Restricted cash:  The Company classifies cash as restricted when the cash is unavailable for withdrawal or usage for general operations.  Restrictions may include legally restricted deposits, contracts entered into with others, or the Company’s statements of intention with regard to particular deposits.  As of September 30, 2023, the Company had $200,000 of Restricted cash.  The Company had no Restricted cash as of December 31, 2022.

Note 2 – Liquidity and Going Concern

A fundamental principle of the preparation of financial statements in accordance with GAAP is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business.  This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent.  In accordance with this requirement, the Company has prepared its accompanying Condensed Consolidated Financial Statements assuming the Company will continue as a going concern.

The Company has incurred recurring operating losses and continues to have a working capital deficiency including being in default of several debt obligations.  The Company recorded a loss of $2.6 million in the nine months ended September 30, 2023, and had a working capital deficiency of $12.5 million as of September 30, 2023.  In addition, the Company’s obligations under the Loan Agreement mature on December 31, 2023.  As of December 31, 2022, the Company had a working capital deficiency of $9.3 million.  The Company is dependent on future operating performance in order to generate sufficient cash flows in order to continue to run its businesses.  Future operating performance is dependent on general economic conditions, as well as financial, competitive and other factors beyond our control, including the impact of the current economic environment, the spread of major epidemics (including coronavirus), increases in interest rates and other related uncertainties such as government-imposed travel restrictions, interruptions to supply chains, extended shut down of businesses and the impact of inflation.  In order to more effectively manage its cash resources, the Company has, from time to time, increased the timetable of its payment of some of its payables, which delayed certain product deliveries from our vendors, which in turn delayed certain deliveries to our customers.

If we are unable to (i) obtain additional liquidity for working capital, (ii) make the required minimum funding contributions to the defined benefit pension plan, (iii) make the required principal and interest payments on our outstanding 8¼% Limited convertible senior subordinated notes due 2012 (the “Notes”) and 9½% Subordinated debentures due 2012 (the “Debentures”), (iv) repay our obligations under our Loan Agreement (hereinafter defined) with Unilumin and/or (v) repay our obligations under our loan agreements with Carlisle, there would be a significant adverse impact on our financial position and operating results.  The Company continually evaluates the need and availability of long-term capital in order to meet its cash requirements and fund potential new opportunities.  Due to the above, there is substantial doubt as to whether we will have adequate liquidity, including access to the debt and equity capital markets, to continue as a going concern over the next 12 months from the date of issuance of this Form 10-Q.

Note 3 – Revenue Recognition

We recognize revenue in accordance with two different accounting standards: 1) Accounting Standards Codification (“ASC”) Topic 606 and 2) ASC Topic 842.  Under Topic 606, revenue from contracts with customers is measured based on the consideration specified in the contract with the customer, and excludes any sales incentives and amounts collected on behalf of third parties.  A performance obligation is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account under Topic 606.  Our contracts with customers generally do not include multiple performance obligations.  We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer.  The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for such products or services.  None of the Company’s contracts contained a significant financing component as of September 30, 2023.  Revenue from the Company’s digital product and maintenance service is recognized ratably over the lease term in accordance with ASC Topic 842.

Disaggregated Revenues

The following table represents a disaggregation of revenue from contracts with customers for the three and nine months ended September 30, 2023 and 2022, along with the reportable segment for each category:

The Company has two primary revenue streams which are Digital product sales and Digital product lease and maintenance.

Note 4 – Inventories

Inventories consist of the following:

Note 5 – Rental Equipment, net

Rental equipment consists of the following:

Depreciation expense for rental equipment for the nine months ended September 30, 2023 and 2022 was $86,000 and $139,000, respectively.  Depreciation expense for rental equipment for the three months ended September 30, 2023 and 2022 was $29,000 and $46,000, respectively.

Note 6 – Property, Plant and Equipment, net

Property, plant and equipment consists of the following:

Machinery, fixtures and equipment having a net book value of $1.8 million and $1.7 million at September 30, 2023 and December 31, 2022, respectively, were pledged as collateral under various financing agreements.

Depreciation expense for property, plant and equipment for the nine months ended September 30, 2023 and 2022 was $192,000 and $189,000, respectively.  Depreciation expense for property, plant and equipment for the three months ended September 30, 2023 and 2022 was $67,000 and $63,000, respectively.

Note 7 – Long-Term Debt

Long-term debt consists of the following:

On September 16, 2019, the Company entered into a loan agreement (the “Loan Agreement”) with MidCap, which was subsequently modified.  On July 30, 2021, MidCap assigned the loan to Unilumin.  On March 20, 2023, the Company and Unilumin entered into a modification agreement to the Loan Agreement effective December 31, 2022.  The Loan Agreement matures on December 31, 2023.  The Loan Agreement allows the Company to borrow up to an aggregate of $2.2 million at an interest rate of the Prime Rate as published in the Wall Street Journal plus 4.75% (13.25% at September 30, 2023) on a revolving credit loan based on accounts receivable, inventory and equipment for general working capital purposes.  As of September 30, 2023, the balance outstanding under the Loan Agreement was $2.2 million. The Loan Agreement is secured by substantially all of the Company’s assets.

The Company entered into a loan note (the “SBA Loan Note”) with the Small Business Administration of the United States of America (“SBA”) as lender (“SBA Lender”) under their Economic Injury Disaster Loan (“EIDL”) program, dated as of December 10, 2021.  Under the SBA Loan Note, the Company borrowed $500,000 from SBA Lender under the EIDL Program.  As of September 30, 2023, $500,000 was outstanding.  The loan matures on December 10, 2051 and carries an interest rate of 3.75%.  As of September 30, 2023 and December 31, 2022, the Company had accrued $34,000 and $20,000, respectively, of interest related to the SBA Loan Note, which is included in Accrued liabilities in the Consolidated Balance Sheets.

On April 23, 2020, the Company entered into a loan note (the “CARES Loan Note”) with Enterprise Bank and Trust (“CARES Lender”) as lender under the CARES Act of the SBA, dated as of April 20, 2020.  Under the CARES Loan Note, the Company borrowed $811,000 from CARES Lender under the Paycheck Protection Program (“PPP”) included in the SBA’s CARES Act.  The CARES Loan Note proceeds were forgivable as long as the Company uses the loan proceeds for eligible purposes including payroll costs, including salaries, commissions, and similar compensation, group health care benefits, and paid leave; rent; utilities; and maintains its payroll levels.  In January 2022, the loan was forgiven in full and the payments that had previously been paid were refunded.  Refund proceeds in the amount of $453,000 are included in proceeds from long-term debt in the accompanying condensed consolidated statements of Cash Flows for the nine months ended September 30, 2022.

Note 8 – Pension Plan

As of December 31, 2003, the benefit service under the pension plan had been frozen and, accordingly, there is no service cost.  As of April 30, 2009, the compensation increments had been frozen and, accordingly, no additional benefits are being accrued under the pension plan.

Note 9 – Leases

The Company leases administrative and manufacturing facilities through operating lease agreements. The Company has no finance leases as of September 30, 2023.  Our leases include both lease (e.g., fixed payments including rent) and non-lease components (e.g., common area or other maintenance costs). The facility leases include one or more options to renew.  The exercise of lease renewal options is typically at our sole discretion, therefore, the renewals to extend the lease terms are not included in our right of use (“ROU”) assets or lease liabilities as they are not reasonably certain of exercise.  We regularly evaluate the renewal options and, when they are reasonably certain of exercise, we include the renewal period in our lease term.  In April 2023, the Company exercised its 5-year renewal option at its Hazelwood, MO facility.  In connection with the renewal, the Company remeasured its lease liability, which increased the ROU asset and lease liability by $1.6 million on the remeasurement date.

Operating leases result in the recognition of ROU assets and lease liabilities on the Condensed Consolidated Balance Sheets.  ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments.  Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.  As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate at the commencement date to determine the present value of lease payments.  Most real estate leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 5 years or more.  Lease expense is recognized on a straight-line basis over the lease term.  Leases with an initial term of 12 months or less are not recorded on the Condensed Consolidated Balance Sheets.  The primary leases we enter into with initial terms of 12 months or less are for equipment.

Note 10 – Stockholders’ Deficit and (Loss) Income Per Share

The following table presents the calculation of (loss) income per share for the three and nine months ended September 30, 2023 and 2022:

Basic (loss) earnings per common share is computed by dividing net (loss) income attributable to common shares by the weighted average number of common shares outstanding for the period.  Diluted (loss) earnings per common share is computed by dividing net (loss) income attributable to common shares, by the weighted average number of common shares outstanding, adjusted for shares that would be assumed outstanding after warrants and stock options vested under the treasury stock method.

On March 28, 2022, the Company issued stock options to purchase 280,000 shares to executives and employees at an exercise price of $0.40 per share, which vested on March 28, 2023.  The options were valued at the grant date using the Black-Scholes model with the following inputs:  expiration date March 28, 2026; risk-free rate of return 2.55%; and volatility 108%.

As of September 30, 2023, the Company excluded the effects of the outstanding stock options to purchase 235,000 shares in the calculation of diluted loss per share since their inclusion would have been anti-dilutive.  As of September 30, 2023 and 2022, the Company had warrants to purchase 1.6 million shares of Common Stock outstanding, which were excluded from the calculation of diluted (loss) income per share because their exercise price was greater than the average stock price for the period and their inclusion would have been anti-dilutive.

A summary of the status of the Company’s stock options as of September 30, 2023 and the changes during the nine months then ended is presented below:

Equity based compensation was $38,000 and $76,000 for the nine months ended September 30, 2023 and 2022, respectively.  There was no equity based compensation for the three months ended September 30, 2023.  Equity based compensation was $38,000 for the three months ended September 30, 2022.  There is no unrecognized equity based compensation cost related to unvested stock options as of September 30, 2023.

Note 11 – Contingencies

The Company is subject to legal proceedings and claims which arise in the ordinary course of its business and/or which are covered by insurance.  The Company has accrued reserves individually and in the aggregate for such legal proceedings.  Should actual litigation results differ from the Company’s estimates, revisions to increase or decrease the accrued reserves may be required.  There are no open matters that the Company deems material.

Note 12 – Related Party Transactions

The Company has the following related party transactions:

As of September 30, 2023, Unilumin USA (“Unilumin”) owns 51.8% of the Company’s Common Stock and beneficially owns 53.5% of the Company’s Common Stock.  Nicholas J. Fazio, Jie Feng and Yantao Yu, each directors of the Company, are each directors and/or officers of Unilumin.  Mr. Fazio and Mr. Yu are both executive officers of the Company, but had not yet been added to the Company’s payroll until January 2023 at annual rates of compensation of $125,000 and $26,000, respectively.  In 2022 and prior, they had been compensated solely by Unilumin, with no charge to the Company.  In 2023, they continue to receive some compensation directly from Unilumin.  The Company purchased $2.7 million and $5.9 million of product from Unilumin in the nine months ended September 30, 2023 and 2022, respectively, and purchased $1.7 million and $2.1 million of product from Unilumin in the three months ended September 30, 2023 and 2022, respectively.  The total amount payable by the Company to Unilumin, including accounts payable, accrued interest and long-term debt, was $9.6 million and $7.3 million as of September 30, 2023 and December 31, 2022, respectively.  The Company occupies space at no cost in a New York office that is leased by Unilumin.  In addition, Unilumin is currently the lender under the Loan Agreement described in Note 7 – Long-Term Debt.

Marco Elser, a director of the Company, exercises voting and dispositive power as investment manager of Carlisle.  The total amount payable by the Company to Carlisle, including accrued interest and long-term debt, was $1.7 million and $1.6 million as of September 30, 2023 and December 31, 2022, respectively.

Note 13 – Business Segment Data

Operating segments are based on the Company’s business components for which separate financial information is available and are evaluated regularly by the Company’s chief operating decision makers in deciding how to allocate resources and in assessing performance of the business.

The Company evaluates segment performance and allocates resources based upon operating income (loss). The Company’s operations are managed in two reportable business segments: Digital product sales and Digital product lease and maintenance.  Both design and produce large-scale, multi-color, real-time digital displays.  Both operating segments are conducted on a global basis, primarily through operations in the United States.  The Company also has operations in Canada.  The Digital product sales segment sells equipment and the Digital product lease and maintenance segment leases and maintains equipment.  Corporate general and administrative items relate to costs that are not directly identifiable with a segment.  There are no intersegment sales.