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,
|
|
|
|
2019
|
|
|
2018
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
369
|
|
|
$
|
559
|
|
Accounts receivable, net of allowance
for doubtful accounts of $27 and $53 as of September 30, 2019 and December 31,2018, respectively
|
|
|
2,272
|
|
|
|
2,654
|
|
Inventories, current
|
|
|
8,462
|
|
|
|
6,172
|
|
Prepaid benefit costs
|
|
|
288
|
|
|
|
288
|
|
Deferred loan costs
|
|
|
40
|
|
|
|
149
|
|
Prepaid
and other current assets
|
|
|
648
|
|
|
|
555
|
|
Total current assets
|
|
|
12,079
|
|
|
|
10,377
|
|
Inventories, net non-current
|
|
|
-
|
|
|
|
551
|
|
Property, plant and equipment, net
|
|
|
377
|
|
|
|
2,890
|
|
License agreements, net
|
|
|
23
|
|
|
|
12
|
|
Intangible assets, net
|
|
|
1,141
|
|
|
|
1,269
|
|
Goodwill
|
|
|
493
|
|
|
|
493
|
|
Right of use assets, net
|
|
|
3,575
|
|
|
|
-
|
|
Other assets, net
|
|
|
815
|
|
|
|
9
|
|
|
|
$
|
18,503
|
|
|
$
|
15,601
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
803
|
|
|
$
|
2,603
|
|
Current portion of long-term
debt
|
|
|
30
|
|
|
|
3,075
|
|
Current portion of lease liability
|
|
|
754
|
|
|
|
-
|
|
Accounts payable
|
|
|
2,563
|
|
|
|
1,523
|
|
Accrued compensation
|
|
|
254
|
|
|
|
332
|
|
Income taxes payable
|
|
|
11
|
|
|
|
28
|
|
Other
accrued expenses
|
|
|
252
|
|
|
|
702
|
|
Total
current liabilities
|
|
|
4,667
|
|
|
|
8,263
|
|
|
|
|
|
|
|
|
|
|
Subordinated convertible debt with related parties
|
|
|
-
|
|
|
|
139
|
|
Lease liability, net of current portion
|
|
|
2,774
|
|
|
|
-
|
|
Long-term debt, net of current
portion
|
|
|
45
|
|
|
|
32
|
|
Total liabilities
|
|
|
7,486
|
|
|
|
8,434
|
|
Commitments and contingencies
|
|
|
-
|
|
|
|
-
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value; authorized 5,000
shares; no shares outstanding as of September 30, 2019 and December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.001 par value; authorized 25,000
shares 9,656 and 9,508 shares issued, 9,634 and 9,335 shares outstanding as of September 30, 2019 and December 31, 2018, respectively
|
|
|
10
|
|
|
|
9
|
|
Paid-in capital
|
|
|
28,023
|
|
|
|
27,910
|
|
Accumulated deficit
|
|
|
(16,078
|
)
|
|
|
(19,178
|
)
|
Accumulated other comprehensive
loss
|
|
|
(832
|
)
|
|
|
(832
|
)
|
Treasury stock, at cost,
22 and 173 shares as of September 30, 2019 and December 31, 2018, respectively
|
|
|
(106
|
)
|
|
|
(742
|
)
|
Total stockholders’ equity
|
|
|
11,017
|
|
|
|
7,167
|
|
|
|
$
|
18,503
|
|
|
$
|
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
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net sales
|
|
$
|
5,278
|
|
|
$
|
5,626
|
|
|
$
|
14,797
|
|
|
$
|
16,266
|
|
Cost of goods sold
|
|
|
3,747
|
|
|
|
3,213
|
|
|
|
10,170
|
|
|
|
9,439
|
|
Gross profit
|
|
|
1,531
|
|
|
|
2,413
|
|
|
|
4,627
|
|
|
|
6,827
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
781
|
|
|
|
683
|
|
|
|
2,253
|
|
|
|
1,894
|
|
General and administrative
|
|
|
1,185
|
|
|
|
1,102
|
|
|
|
3,978
|
|
|
|
3,135
|
|
Research and development
|
|
|
848
|
|
|
|
672
|
|
|
|
2,291
|
|
|
|
1,972
|
|
|
|
|
2,814
|
|
|
|
2,457
|
|
|
|
8,522
|
|
|
|
7,001
|
|
Loss from operations
|
|
|
(1,283
|
)
|
|
|
(44
|
)
|
|
|
(3,895
|
)
|
|
|
(174
|
)
|
Other Expense - net
|
|
|
(51
|
)
|
|
|
(155
|
)
|
|
|
(180
|
)
|
|
|
(423
|
)
|
Gain on building sale
|
|
|
|
|
|
|
-
|
|
|
|
7,175
|
|
|
|
-
|
|
(Loss) earnings before income taxes
|
|
|
(1,334
|
)
|
|
|
(199
|
)
|
|
|
3,100
|
|
|
|
(597
|
)
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net (loss) earnings
|
|
$
|
(1,334
|
)
|
|
$
|
(199
|
)
|
|
$
|
3,100
|
|
|
$
|
(597
|
)
|
Basic net (loss) earnings per
share
|
|
$
|
(0.14
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.32
|
|
|
$
|
(0.07
|
)
|
Diluted net (loss) earnings per
share
|
|
$
|
(0.14
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.31
|
|
|
$
|
(0.07
|
)
|
Basic weighted averages shares outstanding
|
|
|
9,631
|
|
|
|
9,270
|
|
|
|
9,583
|
|
|
|
8,836
|
|
Diluted weighted averages shares outstanding
|
|
|
9,631
|
|
|
|
9,270
|
|
|
|
9,971
|
|
|
|
8,836
|
|
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
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(891
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(891
|
)
|
Shares issued from treasury stock
|
|
|
(45
|
)
|
|
|
-
|
|
|
|
(196
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
258
|
|
|
|
62
|
|
Stock-based
Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
168
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
168
|
|
Balance at June 30, 2019
|
|
|
9,723
|
|
|
$
|
9
|
|
|
$
|
28,171
|
|
|
$
|
(14,744
|
)
|
|
$
|
(832
|
)
|
|
$
|
(484
|
)
|
|
$
|
12,120
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,334
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,334
|
)
|
Shares issued from treasury stock
|
|
|
(67
|
)
|
|
|
1
|
|
|
|
(310
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
378
|
|
|
|
69
|
|
Stock-based
Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
162
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
162
|
|
Balance at September 30, 2019
|
|
|
9,656
|
|
|
$
|
10
|
|
|
$
|
28,023
|
|
|
$
|
(16,078
|
)
|
|
$
|
(832
|
)
|
|
$
|
(106
|
)
|
|
$
|
11,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(335
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(335
|
)
|
Conversion of subordinated convertible
debt
|
|
|
842
|
|
|
|
1
|
|
|
|
454
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
455
|
|
Stock-based
Compensation
|
|
|
475
|
|
|
|
-
|
|
|
|
147
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
147
|
|
Balance at June 30, 2018
|
|
|
9,782
|
|
|
$
|
9
|
|
|
$
|
27,605
|
|
|
$
|
(18,219
|
)
|
|
$
|
(854
|
)
|
|
$
|
(840
|
)
|
|
$
|
7,701
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(199
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(199
|
)
|
Stock-based
Compensation
|
|
|
132
|
|
|
|
-
|
|
|
|
163
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
179
|
|
Balance at September 30, 2018
|
|
|
9,914
|
|
|
$
|
9
|
|
|
$
|
27,768
|
|
|
$
|
(18,418
|
)
|
|
$
|
(854
|
)
|
|
$
|
(824
|
)
|
|
$
|
7,681
|
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
3,100
|
|
|
$
|
(597
|
)
|
Adjustments to reconcile net earnings
(loss) to cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Gain on building sale
|
|
|
(7,175
|
)
|
|
|
-
|
|
Stock based compensation expense
|
|
|
479
|
|
|
|
393
|
|
Depreciation
|
|
|
133
|
|
|
|
235
|
|
Amortization
|
|
|
158
|
|
|
|
160
|
|
Recovery of bad debt expense
|
|
|
(26
|
)
|
|
|
(126
|
)
|
Amortization of deferred loan
costs
|
|
|
109
|
|
|
|
108
|
|
Non cash interest expense
|
|
|
1
|
|
|
|
32
|
|
Amortization of right of use
assets
|
|
|
(47
|
)
|
|
|
-
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
408
|
|
|
|
39
|
|
Inventories
|
|
|
(1,739
|
)
|
|
|
(272
|
)
|
Prepaid and other current assets
|
|
|
(93
|
)
|
|
|
(315
|
)
|
Other assets
|
|
|
(806
|
)
|
|
|
2
|
|
Income taxes payable
|
|
|
(17
|
)
|
|
|
-
|
|
Accounts
payable, accrued compensation and other accrued expenses
|
|
|
512
|
|
|
|
437
|
|
Net cash
(used in) provided by operating activities
|
|
|
(5,003
|
)
|
|
|
96
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(205
|
)
|
|
|
(72
|
)
|
Proceeds on sale of building
|
|
|
9,765
|
|
|
|
-
|
|
Acquisition of licenses
|
|
|
(41
|
)
|
|
|
(20
|
)
|
Net cash
provided by (used in) investing activities
|
|
|
9,519
|
|
|
|
(92
|
)
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Net (repayments) proceeds of
line of credit
|
|
|
(1,800
|
)
|
|
|
95
|
|
Repayments of long-term debt
|
|
|
(3,037
|
)
|
|
|
(189
|
)
|
Proceeds
from exercise of stock options
|
|
|
131
|
|
|
|
18
|
|
Net cash
used in financing activities
|
|
|
(4,706
|
)
|
|
|
(76
|
)
|
Net decrease in cash
|
|
|
(190
|
)
|
|
|
(72
|
)
|
Cash, beginning of period
|
|
|
559
|
|
|
|
168
|
|
Cash, end of period
|
|
$
|
369
|
|
|
$
|
96
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
100
|
|
|
$
|
273
|
|
Non cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Capital expenditures financed
by notes payable
|
|
$
|
5
|
|
|
$
|
15
|
|
Conversion of subordinated convertible
debt to common stock
|
|
$
|
140
|
|
|
$
|
455
|
|
See accompanying
notes to unaudited condensed consolidated financial statements.
BLONDER TONGUE
LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(In thousands,
except per share data)
(unaudited)
Note 1 - Company and Basis of Consolidation
Blonder
Tongue Laboratories, Inc. (together with its consolidated subsidiaries, the “Company”)
is a technology-development and manufacturing company that delivers television signal encoding, transcoding, digital transport,
and broadband product solutions to the cable markets the Company serves, including the multi-dwelling unit market, the lodging/hospitality
market and the institutional market, including hospitals, prisons and schools, primarily throughout the United States and Canada.
The consolidated financial statements include the accounts of Blonder Tongue Laboratories, Inc. and its wholly-owned subsidiaries.
Significant intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited
condensed consolidated interim financial statements as of September 30, 2019 and for the three and nine months ended September
30, 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 interim
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 unaudited condensed consolidated interim 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 and nine months
ended September 30, 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)
|
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
September
30
|
|
|
Nine months ended
September
30
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Weighted average shares used in computation of basic earnings
(loss) per shares
|
|
|
9,631
|
|
|
|
9,270
|
|
|
|
9,583
|
|
|
|
8,836
|
|
Total dilutive effect of stock
options
|
|
|
-
|
|
|
|
-
|
|
|
|
388
|
|
|
|
-
|
|
Weighted average shares used in computation of diluted
earnings (loss) per share
|
|
|
9,631
|
|
|
|
9,270
|
|
|
|
9,971
|
|
|
|
8,836
|
|
The
diluted share base excludes the following potential common shares due to their antidilutive effect:
|
|
Three months ended
September
30
|
|
|
Nine months ended
September
30
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
|
3,021
|
|
|
|
1,152
|
|
|
|
2,544
|
|
|
|
1,032
|
|
Warrants
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
Convertible debt
|
|
|
-
|
|
|
|
374
|
|
|
|
-
|
|
|
|
374
|
|
|
|
|
3,121
|
|
|
|
1,626
|
|
|
|
2,644
|
|
|
|
1,506
|
|
|
(c)
|
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 of use asset and liability
under current operating leases at January 1, 2019. The Company recognized approximately $3,627 of a right of 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 September 30, 2019, the weighted
average remaining lease term is 4.33 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.
BLONDER TONGUE
LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(In thousands,
except per share data)
(unaudited)
|
(d)
|
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.
As of September 30,
2019 and December 31, 2018, the Company’s working capital was $7,412 and $2,114, respectively. The increase in working capital
was primarily due to the receipt of proceeds from the sale of the Old Bridge Facility after paying off the Term Loan and paying
down the Revolver under the Sterling Facility. During the nine months ended September 30, 2019, the Company experienced an increase
in expenses that, together with the decline in sales and buildup of inventory for our new products, resulted in the Company using
$5,003 in its operations. Management is currently reviewing alternatives to address these issues by making adjustments to operating
expenses so as to better align expenses with the Company’s sales expectations and focusing on new product sales initiatives.
In addition, the Company believes that the terms of the new credit agreement which was entered into in October 2019 will provide
greater flexibility to finance current and planned operations. Although the Company has a history of cash used in operating activities
which may raise doubt about our ability to continue as a going concern, we believe that the new product introductions described
above, the ability to reduce operating expenses and the additional liquidity provided under the new credit agreement mitigate this
risk While the Company currently believes that its efforts to control expenses and increase sales will improve the Company’s
liquidity, there can no assurances that our efforts will be successful and/or that the financing available under the new facility
or other financing the Company may pursue will be sufficient to allow the Company to continue implementing its business strategy.
Note 3– Revenue Recognition
The
Company recognizes 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
September 30
|
|
|
Nine months ended
September 30
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Digital video headend products
|
|
$
|
1,292
|
|
|
$
|
2,814
|
|
|
$
|
5,482
|
|
|
$
|
7,899
|
|
Set top boxes
|
|
|
1,498
|
|
|
|
-
|
|
|
|
2,691
|
|
|
|
-
|
|
Data products
|
|
|
884
|
|
|
|
1,112
|
|
|
|
1,989
|
|
|
|
3,566
|
|
HFC distribution products
|
|
|
645
|
|
|
|
843
|
|
|
|
1,872
|
|
|
|
2,345
|
|
Analog video headend products
|
|
|
366
|
|
|
|
411
|
|
|
|
1,249
|
|
|
|
1,234
|
|
NeXgen
|
|
|
91
|
|
|
|
-
|
|
|
|
535
|
|
|
|
-
|
|
Contract manufactured products
|
|
|
319
|
|
|
|
227
|
|
|
|
393
|
|
|
|
606
|
|
Other
|
|
|
183
|
|
|
|
219
|
|
|
|
586
|
|
|
|
616
|
|
|
|
$
|
5,278
|
|
|
$
|
5,626
|
|
|
$
|
14,797
|
|
|
$
|
16,266
|
|
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. NeXgen is a two-way forward looking platform that is used to deliver next generation entertainment services
in both enterprise and residential locations. 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:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Raw Materials
|
|
$
|
3,022
|
|
|
$
|
2,581
|
|
Work in process
|
|
|
3,435
|
|
|
|
1,573
|
|
Finished Goods
|
|
|
2,005
|
|
|
|
2,569
|
|
|
|
|
8,462
|
|
|
|
6,723
|
|
Less current inventories
|
|
|
(8,462
|
)
|
|
|
(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 $863
during the nine months ended September 30, 2019.
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 (2.02%
and 2.26% at September 30, 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 (2.02% and 2.26% at September 30, 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.
BLONDER TONGUE
LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(In thousands,
except per share data)
(unaudited)
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 zero (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 $803 and $2,603 at September 30, 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.
On
September 19, 2019, the Company and Sterling entered into a certain Third Amendment to Loan and Security Agreement (the “Third
Amendment”), which, among other things, adds certain definitions to Section 1.1 of the Amended Loan Agreement
to permit certain bill-and-hold arrangements with one of the Company’s customers, and makes related changes to the definition
of “Eligible Accounts” and the provisions restricting sales of inventory on a bill-and-hold basis.
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 financial covenants as of September 30, 2019. On October 25, 2019, all
outstanding obligations under the Sterling Facility were paid in full and the Sterling Agreement was terminated. See Note 11.
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 and nine month periods ended September 30, 2019 and 2018, this law firm billed
the Company approximately $123, $398, $225 and $626, respectively for legal services provided by this firm. Included in accounts
payable on the accompanying unaudited condensed balance sheet at September 30, 2019 is approximately $92 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 and nine month periods ending
September 30, 2019 and 2018, respectively and as a percentage of accounts receivable as of September 30, 2019 and December 31,
2018, respectively:
|
|
Net
sales
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
Accounts
receivable
|
|
|
|
September
30,
2019
|
|
|
September
30,
2018
|
|
|
September
30,
2019
|
|
|
September
30,
2018
|
|
|
September
30,
2019
|
|
|
December
31,
2018
|
|
Customer
A
|
|
|
17
|
%
|
|
|
-
|
|
|
|
12
|
%
|
|
|
-
|
|
|
|
28
|
%
|
|
|
-
|
|
Customer
B
|
|
|
11
|
%
|
|
|
23
|
%
|
|
|
12
|
%
|
|
|
25
|
%
|
|
|
-
|
|
|
|
22
|
%
|
Customer
C
|
|
|
-
|
|
|
|
11
|
%
|
|
|
10
|
%
|
|
|
13
|
%
|
|
|
-
|
|
|
|
14
|
%
|
Customer
D
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
%
|
|
|
-
|
|
Customer
E
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
%
|
|
|
-
|
|
Customer
F
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
%
|
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.
Lease costs and cash paid for the three month period ended September 30, 2019 were $160 and $220, respectively. Lease costs and
cash paid for the nine month period ended September 30, 2019 were $381 and $524, respectively.
BLONDER TONGUE
LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(In thousands,
except per share data)
(unaudited)
Maturities
of the lease liabilities are as follows:
For
the year ended December 31,
|
|
Amount
|
|
Amount remaining year ending December 31,
2019
|
|
$
|
180
|
|
2020
|
|
|
768
|
|
2021
|
|
|
809
|
|
2022
|
|
|
809
|
|
2023
|
|
|
885
|
|
Thereafter
|
|
|
77
|
|
Lease liability
|
|
$
|
3,528
|
|
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, the 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 has 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 a sale and leaseback as described in Note 2.
Note 11 – Subsequent Events
On October 25, 2019,
the Company entered into a Loan and Security Agreement (All Assets) (the “Loan Agreement”) with MidCap Business
Credit LLC (“MidCap”). The Loan Agreement provides the Company with a credit facility comprising a $5,000 revolving
line of credit (the “MidCap Facility”). The MidCap Facility matures following the third anniversary of the Loan
Agreement. Interest on the amounts outstanding under the Loan Agreement is variable, based upon the three-month LIBOR rate plus
a margin of 4.75%, subject to re-set each month. All outstanding indebtedness under the Loan Agreement is secured by all of the
assets of the Company and its subsidiaries.
The Loan Agreement
contains customary covenants, including restrictions on the incurrence of additional indebtedness, the payment of cash dividends
or similar distributions, the repayment of any subordinated indebtedness and the encumbrance, sale or other disposition of assets.
In addition, the Company must maintain minimum availability of $500 initially with the minimum availability to be reduced to $400
upon the deliverance of an inventory appraisal satisfactory to MidCap.
The MidCap Facility
replaces the Sterling Facility and the Sterling Agreement, which has been terminated.
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 additional 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 Over the Top (“OTT”)
and PayTV video services. The Company expects growth in this business during 2019 and in future years.
During
2019, the Company introduced a line of products known as NeXgen (“NXG”).
NXG is a two-way forward looking platform that is used to deliver next generation entertainment services in both enterprise and
residential locations. 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 $1,292,000 and $2,814,000 in the third three months of 2019 and 2018, respectively
and $5,482,000 and $7,899,000 in the first nine months of 2019 and 2018, respectively. Sales of analog video headend products
were $366,000 and $411,000 in the third three months of 2019 and 2018, respectively and $1,249,000 and $1,234,000 in the first
nine months of 2019 and 2018, respectively. Any substantial decrease in sales of analog products without a related substantial
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 $319,000 and $227,000 in the third three months of 2019
and 2018, respectively and $393,000 and $606,000 in the first nine months of 2019 and 2018, respectively.
Results of Operations
Third three months of
2019 Compared with third three months of 2018
Net
Sales. Net sales decreased $348,000, or 6.2%, to $5,278,000 in the third three months of 2019 from $5,626,000 in the third
three months of 2018. The decrease is primarily attributed to a decrease in sales of data products and digital video headend products,
offset by an increase in set top box products. Sales of data products were $884,000 and $1,112,000, digital video headend products
were $1,292,000 and $2,814,000 and set top boxes were $1,498,000 and zero in the third three months of 2019 and 2018, respectively.
Cost of Goods Sold.
Cost of goods sold increased to $3,747,000 for the third three months of 2019 from $3,213,000 for the third three months of
2018 and increased as a percentage of sales to 71.0% from 57.1%. The increase and the increase as a percentage of sales was primarily
attributed to an unfavorable change in product mix. As a result of the Company’s growth of set top box sales, which carry
a higher cost of goods sold than the Company’s more traditional product lines, the cost of goods sold as a percentage of
sales is higher than historical trends. The Company anticipates additional growth in sales of set top boxes and, as a result, the
Company expects that cost of goods sold as a percentage of sales will remain at this higher level for the foreseeable future.
Selling Expenses.
Selling expenses increased to $781,000 for the third three months of 2019 from $683,000 in the third three months of 2018, and
increased as percentage of sales to 14.8% for the third three months of 2019 from 12.1% for the third three months of 2018. The
$98,000 increase was primarily the result of an increase in salaries and fringe benefits due to an increase in head count and salary
adjustments of $125,000.
General
and Administrative Expenses. General and administrative expenses increased to $1,185,000 for the third three months of 2019
from $1,102,000 for the third three months of 2018 and increased as a percentage of sales to 22.5% for the third three months
of 2019 from 19.6% for the third three months of 2018. The $83,000 increase was primarily the result of a bad debt recovery in
2018 of $76,000 which was not in 2019 and an increase in salaries and fringe benefits due to an increase in head count and salary
adjustments of $44,000, offset by a decrease in legal expense of $50,000.
Research
and Development Expenses. Research and development expenses increased to $848,000 in the third three months of 2019 from $672,000
in the third three months of 2018 and increased as a percentage of sales to 16.1% for the third three months of 2019 from 11.9%
for the third three months of 2018. This $176,000 increase is primarily the result of an increase in consulting fees of $110,000
and an increase in department supplies of $55,000.
Operating
Loss. Operating loss of $1,283,000 for the third three months of 2019 represents an increase from operating loss of $44,000
for the third three months of 2018. Operating loss as a percentage of sales was (24.3)% in the third three months of 2019 compared
to (0.8)% in the third three months of 2018.
Interest
Expense. Interest expense decreased to $51,000 in the third three months of 2019 from $155,000 in the third three months of
2018. The decrease is primarily the result of lower average borrowing.
First nine months of 2019
Compared with first nine months of 2018
Net
Sales. Net sales decreased $1,469,000, or 9.0%, to $14,797,000 in the first nine months of 2019 from $16,266,000 in the first
nine months of 2018. The decrease is primarily attributed to a decrease in sales of data products and digital video headend products,
offset by an increase in sales of set top box products. Sales of data products were $1,989,000 and $3,566,000, digital video headend
products were $5,482,000 and $7,899,000 and set top box products were $2,691,000 and zero in the first nine months of 2019 and
2018, respectively.
Cost
of Goods Sold. Cost of goods sold increased to $10,170,000 for the first nine months of 2019 from $9,439,000 for the first
nine months of 2018 and increased as a percentage of sales to 68.7% from 58.0%. The increase was primarily due to an increase
in the write down of inventories to net realizable value of $778,000. The increase as a percentage of sales was primarily attributed
to the above as well as an unfavorable product mix. Had the write down not occurred, cost of goods sold as a percentage of sales
would have been 63.5% for the nine months ended September 30, 2019. As a result of the Company’s growth of set top box sales, which carry a higher cost of goods
sold than the Company’s more traditional product lines, the cost of goods sold as a percentage of sales is higher than historical
trends. The Company anticipates additional growth in sales of set top boxes and, as a result, the Company expects that cost of
goods sold as a percentage of sales will remain at this higher level for the foreseeable future.
Selling
Expenses. Selling expenses increased to $2,253,000 for the first nine months of 2019 from $1,894,000 in the first nine months
of 2018 and increased as percentage of sales to 15.2% for the first nine months of 2019 from 11.6% for the first nine months of
2018. The $359,000 increase was primarily the result of an increase in salaries and fringe benefits due to an increase in head
count and salary adjustments of $346,000.
General
and Administrative Expenses. General and administrative expenses increased to $3,978,000 for the first nine months of 2019
from $3,135,000 for the first nine months of 2018 and increased as a percentage of sales to 26.9% for the first nine months of
2019 from 19.3% for the first nine months of 2018. The $843,000 increase was primarily the result of an increase in salaries and
fringe benefits due to an increase in head count and salary adjustments of $458,000, an increase in consulting fees of $223,000
related to IT outsourcing and bad debt recovery in 2018 of $126,000 which was not in 2019.
Research
and Development Expenses. Research and development expenses increased to $2,291,000 in the first nine months of 2019 from
$1,972,000 in the first nine months of 2018 and increased as a percentage of sales to 15.5% for the first nine months of 2019
from 12.1% for the first nine months of 2018. This $319,000 increase is primarily the result of an increase in consulting fees
of $213,000 and an increase in occupancy costs of $68,000 related to the Old Bridge lease.
Operating
Loss. Operating loss of $3,895,000 for the first nine months of 2019 represents an increase from operating loss of $174,000
for the first nine months of 2018. Operating loss as a percentage of sales was (26.3)% in the first nine months of 2019 compared
to (1.1)% in the first nine months of 2018.
Interest
Expense. Interest expense decreased to $180,000 in the first nine months of 2019 from $423,000 in the first nine months of
2018. The decrease is primarily the result of lower average borrowing.
Liquidity and Capital Resources
As
of September 30, 2019 and December 31, 2018, the Company’s working capital was $7,412,000 and $2,114,000, respectively.
The increase in working capital was primarily due to the receipt of proceeds from 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 nine-month period ended September 30, 2019 was $5,003,000, primarily
due to non-cash adjustments of $(6,368,000) and an increase in inventories of $1,739,000, offset by net earnings of $3,100,000.
The Company’s net cash provided by operating activities for the nine-month period ended September 30, 2018 was $96,000 primarily
due to an increase in accounts payable, accrued compensation and other accrued expenses of $437,000 offset, in part, by a net
loss of $597,000.
Cash
provided by investing activities for the nine-month period ended September 30, 2019 was $9,519,000, of which $9,765,000 was attributable
to proceeds on the sale of the Old Bridge Facility, offset by $41,000 attributable to additional license fees and $205,000 attributable
to capital expenditures. Cash used in investing activities for the nine-month period ended September 30, 2018 was $92,000, of
which $72,000 was attributable to capital expenditures and $20,000 was attributable to additional license fees.
Cash
used in financing activities was $4,706,000 for the first nine months of 2019, which was comprised of net repayments of borrowings
on the Revolver under the Sterling Facility of $1,800,000, repayments of long-term debt of $3,037,000 offset by proceeds from
the exercise of stock options of $131,000. Cash used in financing activities was $76,000 for the first nine months of 2018, which
was comprised of repayments of debt of $189,000 offset by net borrowings under the line of credit of $95,000, and proceeds from
the exercise of stock options of $18,000.
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. For a full description of the Company’s secured indebtedness
under the MidCap Facility, which became effective as of October 25, 2019, see Note 11 – Subsequent Events, 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.
In connection with the Company’s entry into the MidCap Facility, the Sterling 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 MidCap Facility.
Although
the Company had considered seeking to extend the Sterling Facility, the Company completed its negotiations of an alternative financing
arrangement and on October 25, 2019, the Company entered into a Loan and Security Agreement (All Assets) (the “Loan
Agreement”) with MidCap Business Credit LLC (“MidCap”) The Loan Agreement
provides the Company with a credit facility comprising a $5,000,000 revolving line of credit (the “MidCap Facility”),
which matures in three years. Interest on the amounts outstanding under the MidCap Facility is variable, based upon the three-month
LIBOR rate plus a margin of 4.75%, subject to re-set each month, and all outstanding indebtedness is secured by all of the assets
of the Company and its subsidiaries. The terms of the MidCap Facility include customary restrictions on the incurrence of additional
indebtedness, the payment of cash dividends or similar distributions, the repayment of any subordinated indebtedness and the encumbrance,
sale or other disposition of assets. In addition, the Company must maintain minimum availability of $500,000 initially with the
minimum availability to be reduced to $400,000 upon the delivery of a satisfactory inventory appraisal to MidCap. A portion of
the proceeds of the MidCap Facility were used to fully pay, satisfy and discharge the Sterling Facility.
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 agreed to provide the Company with up to six months of free rent
for the Sublease Space, as the Company undertook to identify a suitable tenant or tenants therefor. The provision of free rent
for the Sublease Space expired on July 31, 2019. The Company has not as yet been successful in identifying a tenant or tenants
for the Sublease Space.
The
Company’s primary long-term obligations are for payment of interest and principal on amounts outstanding under the MidCap
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 $205,000 and $81,000 in the nine months ended September 30, 2019 and the year ended December 31, 2018,
respectively. The Company expects to use cash generated from operations, amounts available under
the MidCap Facility and purchase-money financing to meet any anticipated long-term capital expenditures.
As noted above, the
Company’s working capital increased significantly during the first nine months of 2019, primarily due to the receipt of proceeds
from the sale of the Old Bridge Facility after paying off amounts under the Sterling Facility. However, during the nine months
ended September 30, 2019 we have experienced an increase in expenses that, together with the decline in sales and buildup of inventory
for our new products, have resulted in our use of much the proceeds of the sale of the Old Bridge Facility to finance our expenses
and losses resulting from the decline in sales and the costs to introduce new products. Management is currently reviewing alternatives
to address these issues by making adjustments to operating expenses so as to better align expenses with the Company’s sales
expectations and focusing on new product sales initiatives, including with respect to IPTV set top box and NeXgen Gateway products.
In addition, the Company believes that the terms of the MidCap Facility provide greater flexibility to finance current and planned
operations. Although the Company has a history of cash used in operating activities which may raise doubt about our ability to
continue as a going concern, we believe that the new product introductions described above, the ability to reduce operating expenses
and the additional liquidity provided under the MidCap facility mitigate this risk While the Company currently believes that its
efforts to control expenses and increase sales will improve the Company’s liquidity, there can no assurances that our efforts
will be successful and/or that the financing available under the MidCap facility or other financing the Company may pursue will
be sufficient to allow the Company to continue implementing its business strategy.
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.