☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes ☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See definition of “accelerated filer,” “large accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The aggregate market value of voting stock
held by non-affiliates of the registrant as of June 30, 2019: $4,439,032
Number of shares of common stock, par value
$.001, outstanding as of March 25, 2020: 9,765,870
Certain portions of the registrant’s
definitive Proxy Statement filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 for the Annual Meeting of
Stockholders expected to be held on June 11, 2020 are incorporated by reference into Part III of this report.
In addition to historical
information, this Annual Report on Form 10-K of Blonder Tongue Laboratories, Inc., a Delaware Corporation (“Blonder Tongue”
or the “Company”), 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 sections entitled 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. 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
of our future financial performance, our anticipated trends in our business and other characterizations of future events or circumstances
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, except as may be required under applicable law.
Readers should carefully review the risk factors described herein and in other documents the Company files from time to time with
the Securities and Exchange Commission.
PART I
Introduction
Blonder Tongue, with
its subsidiary R. L. Drake Holdings, LLC (“Drake”), is a technology-development and manufacturing company that
delivers a wide range of products and services to the telecommunications, broadcasting, entertainment and media industries. For
70 years, Blonder Tongue/Drake products have been deployed in a long list of locations, including telco Central Offices (COs),
cable operator headends, broadcaster studios as well as lodging/hospitality, multi-dwelling units/apartments (“MDU”),
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 also variously described as commercial,
institutional, and/or enterprise environments and will be referred to herein collectively as “CIE.” The customers
we serve also include business entities distributing and 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 service providers.
From the cable television
pioneers that founded the Company in 1950, to the highly experienced research and development team that creates new products today,
the Company’s success stems from listening to the needs of its customers, providing quality products to meet those needs
and supporting those products following deployment. For over 70 years Blonder Tongue has provided innovative solutions based on
continually advancing technology, enabling the Company to maintain its position as a leader in many of the CIE markets it serves.
Since its founding, Blonder Tongue has continued to keep abreast of evolving technologies, from analog to digital television, Hybrid-Fiber
Coax (“HFC”) networks with Quadrature Amplitude Modulation (“QAM”) edge devices, High Definition
(“HD”) and Ultra HD (“4K”) and (“UHD”) encoding and transcoding, IPTV
processing and distribution, and Multiscreen Adaptive Bit Rate based services.
The cable and telecommunications
markets have reacted quickly to consumer demands for additional services by integrating multiple technologies into existing networks,
providing consumers with high speed internet access in addition to enhanced video offerings. Today, video offerings have expanded
from traditional broadcast linear delivery to the living room TV to live streaming to any device in your home or on the go. Traditional
TV content is now available in any format to be viewed on tablets, mobile phones, computers or gaming consoles. CIE and IPTV service
providers are migrating their video-on-demand (“VOD”) architecture to an internet protocol television (“IPTV”)
multiscreen ecosystem, which leads the transition to an all IP-based video delivery system. CIE businesses are upgrading their
networks from standard definition (“SD”) to deliver HD content to their first screen (TV) and adding the capability
of IPTV streaming to additional, normally small screens, thereby expanding viewer access to HD content on any IP-connected devices.
The infrastructure requirements to enable IP streaming provides the Company with an opportunity to market and sell its expanded
IP streaming encoders and digital product lines.
Both
the IPTV and CIE markets are forecast to grow over the next few years. The IPTV market was valued at $40.85 billion in 2019 and
is expected to reach $104.25 billion by 2025; a CAGR of 16.9%, and the CIE environment continues to grow modestly ($11.37
billion in 2019, up from $10.95 billion in 2018). The CIE market segments that the Company serves have been focused on the migration
to IPTV networks. The Company has expanded its video product line portfolio to address the growth of IP streaming. The Company
has collaborated with cable television (“CATV”) Multiple System Operators (“MSOs”) to produce
new cost-effective video encoder and transcoder products for IP support of Public Education Government (“PEG”)
video content, as well as more recent initiatives for the ingest of regional content for backhaul and redistribution from centralized
facilities using modern IP, IPTV and CDN distribution architectures. A custom electronic guide solution was developed for MSOs,
enabling them to extract guide source data from the headend and transmit it over traditional HFC networks to produce a custom electronic
guide at a lower price than traditional third-party solutions. The Company introduced in 2018 the NeXgen Gateway (“NXG”)
product line to specifically address the service provider challenges of migrating from traditional CATV HFC based topologies and
technologies to Internet Protocol (“IP”) based topologies and technologies. As the industry adopts UHD and 4K
and High Efficiency Video Coding (“HEVC”) encoding, the Company will be producing products to support traditional
customers as well as new customers. While already experiencing full scale commercialization in some international markets, the
United States market continues to increasingly embrace IPTV technology. The worldwide market for IPTV exceeded satellite during
2018. IPTV growth worldwide is expected to be over 100 million IPTV subscribers and is projected to have 357 million subscribers
by 2024. NXG sales were $913,000 in 2019 and $186,000 in 2018, respectively.
The Company is implementing a revised strategic
plan to improve operating results and create shareholder value. This plan consists of the following:
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Adapting operating expenses to match the market realities expected during the coming months,
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Continuing the Company heritage of technological development, now highly focused on short-term high confidence opportunities
having compelling ROI expectations,
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Expanding sales in cable and telecommunications MSO, broadcast television and media companies, and
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Increasing gross margins.
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The Company has entered
into and renewed several agreements through which it has acquired rights to use and incorporate certain proprietary technologies
in its digital encoder and transcoder lines of products, including:
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Implementation and System License Agreement with Dolby Laboratories Licensing Corporation (“Dolby
Labs”) for Dolby Digital Plus Professional Encoder, 5.1 and 2 channel licensed technology.
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License Agreement with LG Electronics as a Pro:Idiom content Protection System Manufacturer.
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Ownership from the Motion Picture Experts Group of an MPEG-2 4:2:2 Profile High Level Video Encoder
IP core.
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The Dolby® Labs
License Agreement grants the Company the right to manufacture, label and sell professional digital encoder products and consumer
digital decoder products and to use the Dolby trademarks. This technology has a number of improvements aimed at increasing quality
at a given bit rate compared with legacy Dolby Digital (AC-3). Most notably, it offers increased bit rates, support for more audio
channels, improved coding techniques to reduce compression artifacts, and backward compatibility with existing AC-3 hardware.
The LG Electronics
license agreement provides the Company with certain technology necessary for the provision of Pro:Idiom encryption and decryption
devices for the hospitality industry. Almost all of the high value content owners require that service providers protect the content
by employing this technology. Consequently, content can be transferred through and among these devices only if incorporating this
technology.
The Pro:Idiom digital
technology platform provides the hospitality market with a robust, secure Digital Rights Management (“DRM”)
system, ensuring rapid, broad deployment of HD television (“HDTV”) and other high-value digital content to licensed
users in the lodging industry. Lodging industry leaders such as World Cinema Inc. have licensed the Pro:Idiom DRM system. A growing
number of content providers have demonstrated their acceptance of Pro:Idiom by licensing their HD content for delivery by Pro:Idiom
licensees.
The MPEG-2 Encoder
IP core has a unique compression engine capable of creating HD MPEG-2 real-time encoding of a single channel of 1080i/720p/480i
video. The use of this real-time encoding technique enables the Company to provide broadcast MPEG-2 HD and SD encoding. MPEG-2
is widely used as the format of digital television signals that are broadcast by terrestrial (over-the-air), cable, and direct
broadcast satellite TV systems. The Company’s revenues for digital encoders were $4,044,000 in 2019 and $6,873,000 in 2018.
The H.264/AVC is a
video compression standard that enables a compelling solution for growing IP video services. The H.264 HD Encoder core has the
capability to cut the bandwidth requirement for digital video delivery in half when compared against MPEG-2 encoders. This essentially
facilitates the transmission of twice the number of programs in a given bandwidth. The use of this H.264 encoding technique enables
the Company to provide high quality video at higher resolutions like 720p & 1080i. H.264 is a widely used format for transmitting
high quality digital television signals over IP networks. The Company started shipping the H.264 capable encoders in 2012.
The H.265/HEVC technology
is a video compression standard that enables IP and IPTV video services to be better prepared for transmission and streaming over
even narrower and less robust networks as compared to both MPEG-2 and H.264 technologies. HEVC is and is expected to be primarily
used by current and future internet based and private IP based over-the-top video streaming services. The Company has started to
ship HEVC capable encoders and transcoders in early 2020.
In 2019, the Company
initiated a consumer premise equipment (“CPE”) sales initiative. The products sold in 2019 comprise primarily
Android-based IPTV set top boxes targeted to the Tier 2 and Tier 3 telecommunications and fiber optics based service providers.
Total CPE product sales, including product accessories and replacement parts, were $3,977,000 in 2019; there were no CPE product
sales in 2018.
The Company’s
manufacturing is allocated primarily between its facility in Old Bridge, New Jersey (the “Old Bridge Facility”)
key contract manufacturers located in Taiwan, South Korea and the People’s Republic of China (“PRC”).
The Company currently manufactures a large majority of its digital products, including the latest NXG and other digital signal
processing product models at its Old Bridge Facility. Since 2007 the Company has been manufacturing certain high- volume, labor
intensive products, including certain 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. Since 2019 the Company also has been manufacturing
certain high-volume, labor intensive products in Taiwan and South Korea. This product mix represents a small percentage of the
Company’s revenue but allowed the Company to benefit from relatively favorable tariff policies. Manufacturing products at
the Company’s Old Bridge Facility and in the PRC, Taiwan and South Korea enables the Company to realize cost reductions and,
with regard to Taiwan and South Korea, favorable tariff treatment 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 $602,000 and $793,000 in 2019 and 2018, respectively. Sales to VBrick for sub-assemblies
were not material in 2019 or 2018.
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. The address of the Company’s principal executive offices is One Jake Brown Road, Old Bridge,
New Jersey 08857, and its telephone number at that location is (732) 679-4000.
Strategy
CIE
It is a constant challenge
for the Company to stay at the forefront of the technological requirements of the CIE market segments that it serves. Changes and
developments in the manner in which information (whether video, telephony or data) is transmitted, as well as the use of alternative
compression and delivery technologies, all require the Company to continue to develop innovative new products. The Company allocates
its resources as needed to create innovative products that are responsive to the demand for digital signal generation and transmission.
The Company’s key product lines are more thoroughly discussed under “Key Products” beginning on page 7. The ongoing
evolution of the Company’s product lines focuses on the increased needs created in the digital space by digital video, IPTV
and HDTV signals and the transport of these signals over state-of-the-art broadband networks.
The primary end locations
of the Company’s product are the CIE environments described above, including telco COs and cable operator headends, multi-dwelling
units/apartments, broadcast studios/networks, universities/schools, healthcare/hospitals, lodging/hospitality/assisted living,
fitness centers, government facilities/offices, prisons, airports, sports stadiums/arenas, entertainment venues/casinos, retail
stores, and small-medium businesses. We provide a wide range of products to meet the special needs of these applications, and we
serve many types of customers, from large telco and cable companies to private contractors. We sell to anyone installing or distributing
products into the CIE business market, including:
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Telephone and fiber optics telecommunications operators (both large and small) that design, package,
install and in most cases operate, upgrade and maintain the systems they build; Cable system operators (both large and small) that
design, package, install and in most instances operate, upgrade and maintain the systems they build;
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Television broadcasters that create signals for redistribution and require digital encoding, transcoding,
transmission and encryption/security technology;
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Lodging/Hospitality/Assisted Living video and high-speed internet system operators that specialize
in the Lodging, Hospitality and Assisted Living Markets; and
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Commercial/Institutional/Enterprise system operators that operate, upgrade, and maintain the systems
that are in their facilities, or contractors that install, upgrade and maintain these systems in a wide variety of applications.
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The key to proactively
responding to the evolving needs of the foregoing CIE environment is to build a suite of product solutions that are optimized for
the operator’s existing infrastructure, as well as future strategy. Operators look for the following features when selecting
technology:
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Versatility for Now, providing multiple source inputs and different output formats, including
simultaneous QAM, IPTV and analog television capability. Off-air local programs, locally generated content, and national broadcasts
can all be viewed on televisions via coax, as well as on desktops and other connected devices via an IP network. This allows operators
to expand the reach of their video without having to run additional cable throughout a facility and optimize the use of coax and/or
IP infrastructures.
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Flexibility for the Future, recognizing that even if an operator is not utilizing both QAM
and IP outputs today, these features may be needed tomorrow. Operators seek to choose scalable technology that can keep up with
advances in system architecture and allow them to best leverage existing data and Wi-Fi infrastructure, without overburdening it.
This includes considerations for TV Everywhere (bring your own content/device) as well as Ultra-HD and 4K resolution television.
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Affordability, identifying high-quality, cost-effective, innovative solutions with a strong
performance-to-cost ratio, is the key to ensure that the service provider can offer a competitively priced package to their residential,
business and enterprise customers by focusing on the features required and its management, including remote setup, monitoring and
diagnostics through an IP interface and potentially providing a hot spare, hot swap or automatic failover capability.
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The functions and features
of the Blonder Tongue NXG product line are specifically targeted to deliver comprehensive and cost-effective solutions to all the
market needs described in the forgoing paragraphs.
A key component of
the Company’s growth strategy is to leverage its reputation across a comprehensive product line, offering one-stop-shop convenience
to the telco, cable, broadcast and professional markets and deliver products having a high performance-to-cost ratio. The Company
has historically enjoyed, and continues to enjoy, a leading position in many of the CIE and residential market segments that it
serves.
CPE
In 2019, the Company
initiated a consumer premise equipment (“CPE”) sales initiative. The products sold in 2019 comprise primarily
Android-based IPTV set top boxes to the Tier 2 and Tier 3 cable and telecommunications service providers. This is an important
strategic initiative, designed to secure an in-home position with the Company’s product offerings, more intimate, direct
relationships with a wide range of service providers, and increased sales of the Company’s CIE products by the BT Premier
Distributors to those same service providers. In its first year, the CPE Product initiative achieved sales to over 45 different
telco, municipal fiber and cable operators and accounted for approximately 20% of the Company’s 2019 revenues, although its
contribution to net income has not as yet met our expectations.
Markets Overview
The television industry
has been dominated by traditional cable operators, who subsequently expanded into high-speed internet and telephony services. The
penetration of wireless and direct-broadcast satellite (“DBS”) (such as DIRECTV® and DISH Network®)
in the video market, while reduced, still has a combined subscriber count of approximately 25.9 million. Telephone companies (i.e.
Verizon and AT&T) also compete with cable operators for services on a national level, delivering video, high-speed internet
and telephony services direct to the home or to the curb with an estimate of over 13.6 million subscribers.
With IPTV technology
comes additional market pressures and opportunities. First, there is the matter of alternative TV services riding “Over the
Top” (“OTT”) on existing infrastructures, where the delivered video is not part of the service provider’s
own video content or service. Examples include Web-delivered video such as Netflix, Hulu and Apple TV. Cable, satellite and telco
service providers will need to innovate to provide additional service offerings to compete with lower cost OTT television providers
(subscribers exceeding 300 million globally). In addition, content providers such as HBO, SHOWTIME and CBS have deployed their
own streaming services, without requiring a cable TV subscription. Streaming service subscribers are now larger in count than cable
TV subscribers. With the advent of “TV Everywhere”, where video is displayed not only on the traditional television,
but also on personal computers and mobile devices, service providers are trying to tackle not only technological challenges associated
with these offerings, but also content management and customer authentication. The idea that the consumer is at the center, and
not the hardware or the network, is revolutionizing how video (and media) content is delivered.
The long term implications
of these developments are increased competition for the provision of services and a trend toward delivery of these services using
IP technologies over the open internet and IPTV technologies over private networks. This continuing major market transition has
resulted in changing consumer expectations, placing the residential video delivery networks, business-to-business, lodging and
institutional markets under pressure to install new infrastructure and upgrade existing networks. Each sub market mentioned above
has different network upgrade cycles, but to remain competitive the Company has been and must continue to increase its product
offerings for digital television, IP and IPTV technologies, encoding, decoding and transcoding, and support of a wider range of
digital media delivery applications.
Cable Television
Most cable operators,
large and small, have built networks with various combinations of fiber optic and coax cable to deliver television, internet and
telephone services on one drop cable. Cable television deployment of fiber optic trunk has been completed in nearly all existing
systems. The HFC network architecture is employed to provide digital video, OTT, HDTV, IPTV, high speed internet, and digital telephone
service. With the adoption of new technology developed by CableLabs®, the cable industry is using “edge” devices,
node splitting and digital video switching to increase both services and subscriber capacity from each existing node as well as
lowering the cost to create new nodes in their deployment architectures, to accommodate IPTV offerings in both residential and
CIE market deployments. All of these networks are potential users of our product offerings.
Assisted Living/MDU/Hospitality
Historically, in response
to various privately-owned video distribution network property owners seeking additional revenue streams and their tenants and
guests demanding increased in-room technology enabled services, telco and cable operators serving the hospitality market sought
to provide more programs (especially in HD), and enhanced interactivity. Initially installed in higher-end properties and hospitality
properties, HD conversion is continuing today to complete all properties including older Assisted Living and Nursing Homes, Hospitals,
MDUs and also now smaller hotels and motels, all of which are being upgraded and outfitted with enhanced technology to provide
a full suite of HD programs and video streaming services.
More recently, the
competition among telco and cable providers to the Assisted Living, MDU and Hospitality industries has shifted from a previous
emphasis on VOD, to providing an ever-increasing number of HD programs and the capability of offering streaming OTT television
services. The Company believes that the demand for HD based headends that support free-to-guest service and OTT television, will
continue to grow in the near term. The rate of growth is limited by the costs associated with replacing all televisions in a property
with flat screen Pro:Idiom compatible televisions, the infrastructure required to support OTT television, authentication and system
management issues. For several years, the Company has been providing a unique system solution to the largest hotelier worldwide
through the Company’s network of hotelier approved system integrator and operator customers. The system consists of DOCSIS
3.0/3.1 compliant cable modem termination systems (“CMTS”) and cable modems (“CM”) and is
unique in that it is the only system approved by that hotelier that is able to provide a combination of the following services:
linear TV, OTT, DOCSIS-based ethernet, and WiFi from a common mini-CATV-type HFC-based infrastructure.
CIE-Commercial,
Institutional, and/or Enterprise
The Company defines
its target CIE markets to include educational campus environments, correctional facilities, sports stadiums and airport terminals.
All of these seemingly unrelated facilities contain private video and data distribution networks that are dependent on either locally
generated or externally sourced video and/or data content. As the advanced technologies of distance learning, HDTV and IPTV permeate
the market, institutional facilities are embracing these technologies to achieve site specific goals. The following are examples
of the types of applications:
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PEG Town Hall Meetings, Religious broadcasts and Local Sports
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Reception Room TV- Doctors, Dentists and Corporate Offices
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Patient Education and Entertainment
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Employee Facing- Training and Company Messaging
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Hotel Lobby Events and Advertising
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The Company traditionally
benefited from a very strong share of this market with its Analog Video Headend and Distribution Products. We anticipate that we
will continue to be a leader in this market with our digital video solutions and our evolving IP and IPTV platforms.
International
The Company has authorized
distributors and sales agents in various locations outside the United States, but the Company primarily manufactures products for
sale in the USA and North America. Historically, international sales have not materially contributed to the Company’s revenue
base. Towards the end of 2019, the Company began exploring product fitness and sales channels associated with a potential expansion
into Latin America. That work is on-going and at this time it is too early to predict whether the Company will undertake this expansion,
and if it does, the anticipated effect on sales and net income. Additionally, the Company has begun, in early 2020, to fulfill
small quantities of DOCSIS modem orders for an overseas market. This new line of business is not expected to have any material
impact on the Company’s overall performance.
Additional Considerations
The evolution of technology
with respect to video, internet and telephone services continues at a rapid pace. Cable TV’s QAM video is competing with
DIRECTV® and EchoStar’s DBS service and cable modems compete with digital subscriber lines and fiber-to-the-home offered
by regional telephone companies. Telephone companies are building national fiber optic networks and are delivering video, internet
and telephone services directly to the home over fiber optic cable, and digital telephone is being offered by cable companies and
others in competition with traditional phone companies. The convergence of data and video communications continues, wherein computer
and television systems merge. This merging of technologies is extending services and content delivery to mobile smart phone devices
and tablet computers with over-the-air data delivery competing with cable-delivered services.
Larger MSOs have transitioned
or are in the process of transitioning to all-digital platforms (and in most instances MPEG-4/H.264). Satellite DBS television,
digitally compressed programming and IP delivery require headend products, set-top decoding receivers, or digital terminal adapters,
to convert the transmitted signals back to analog or HDMI format so that they may be viewed on television sets. The split of analog
and digital offerings provided to customers varies as a function of the size of the operator and their deployment strategy. For
example, the majority of private cable and other smaller service providers continue to deliver an analog television signal on standard
channels to subscribers’ television sets using headend products at some distribution point in their networks or employ set-top
boxes or digital terminal adapters at each television set.
Key Products
Blonder Tongue’s
products can be separated according to function and technology. Five key categories account for the majority of the Company’s
revenue–Digital Video Headend, Analog Video Headend, HFC Distribution, Data and CPE products:
● Digital Video Headend
Products are used by a system operator for acquisition, processing, compression, encoding and management of digital video.
The headend is the center of a digital television system. It is the central location where multiple programs are received and,
through additional processing, allocated to specific channels for digital distribution. Blonder Tongue continues to expand its
Digital Video Headend Product offerings to meet the evolving needs of its customers, which is expected to continue for years to
come. We offer a broad line of HD and SD, MPEG-2 and MPEG-4/H.264 encoders and transcoders optimized for the CIE environment. That
product line has also been recently expanded to include support of the HEVC digital video format. One example is a line of enhanced
encoders optimized for the extreme demands of broadcasting live sports, another is a cost-effective MPEG-2/H.264 encoder for IP
support of PEG channels. Yet another is a new highly cost-effective bulk IP to IP Transcoder that supports 24 channels of format
and rate conversion in a single Rack Unit (1RU) size. The Company’s STEP and custom hotel guide products were developed to
provide solutions for certain additional needs of the Company’s customers and customer prospects, that the Company believes
were not being met in a cost-effective manner by the Company’s competitors. IP interfaces have been added to a wide range
of products to help in the migration to IPTV. One such example is the AQT8-B, a multichannel 8VSB/QAM-IP transmodulator that receives
up to 64 programs of off-air broadcast signals over 8 different frequencies and transmodulates them for output on both coax and
IP distribution networks. Other lines of digital products provided by Blonder Tongue and Drake include our EdgeQAM devices, Satellite
Quadrature Phase Shift Key (“QPSK”) and Eight Phase Shift Key (“8PSK”) to QAM transcoders.
The Company’s
product development efforts culminated with the 2018 introduction of a next-generation-enterprise gateway (“NeXgen Gateway”
or “NXG”) series of products and solutions.
NXG is a
powerful, two-way, forward-looking digital video signal processing platform and series of modular add-on products that are ideal
for delivering the next generation of entertainment services for residential and enterprise applications; including IPTV format
conversion and simulcast use cases, education, MDU, healthcare, business parks, institutions, hospitality, cruise ships, and professional
sports venues. The goals of NXG are to addresses the service provider challenges of (a) migrating from traditional CATV transmission,
such as fiber and coaxial cable, to fully IP-based transmission and delivery, and (b) migrating from traditional content protection,
such as Commscope/Arris DigiCipher®, Cisco PowerKEY®, Verimatrix® CAS, and LG Pro:Idiom®, to IP-based digital rights
management (“IP-DRM”) - content protection systems of the future, such as Adobe DRM®, Verimatrix-M®, Widevine®,
PlayReady®, and IP Pro:Idiom®. In order to accomplish those goals, NXG was designed to be an anything-in to anything-out
solution. Based on key customer guidance and the Company’s research and development effort, NXG is a 100% fully modular,
passive-back-plane-based product that enables the service providers to (a) easily and seamlessly accomplish the migration described
in the forgoing, and (b) cost effectively and seamlessly address what may become any future, unforeseen, prospective transmission,
and content protection migrations. Unlike many competing products, in NXG, all “active” electronic components reside
in their respective modules. There are no active components in either the rack-chassis or backplane which brings the benefits of
ultra-high reliability, flexibility and future adaptability to as yet unknown use-cases. In addition, the Company’s plan
is for the functionality of all of the standalone key signal processing products described in both the foregoing and following
paragraphs are to be, over time, migrated and subsumed as modular optional features supported by the NXG product line.
Encoders
accept various input sources (analog and/or digital) and output digitally encoded 4K, UHD, HD or SD video in various output formats
such as Asynchronous Serial Interface (“ASI”), IP or QAM. ASI is a streaming data format which carries the MPEG-2
Transport Stream. The IP output format allows operators to stream video over private data networks with greater reliability and
content security. The QAM outputs can be used for digital video distribution over typical private coax and HFC networks to serve
a variety of CIE environments (i.e. sports arenas, broadcast and cable television studios, airports, hospitals, university campuses,
etc.). As a complement to the encoder line, Blonder Tongue also provides digital QAM multiplexers which take multiple inputs (ASI
or 8VSB/QAM) and delivers a single multiplexed QAM output, thereby optimizing the HD channel lineup by preserving bandwidth. The
Company’s QAM output MPEG-2 encoders have a low latency feature and superior motion optimization for fast-paced sporting
events, which is ideal for live sporting events within a stadium or arena. The Company’s Clearview transcoders support high
density highly cost-effective bulk re-encoding functions to support a wide range of service operator use-cases such as creating
digital television universal reception of signals, professional Dolby® audio encoding and format conversions, or conversion
of broadcast to IPTV expected video formats.
ATSC/QAM-IP
Transcoder series of products (“AQT8”) allow the user to create a customized line up from off-air and/or cable
feeds for coax IP distribution. The customizable IP output contains multiple programs with a combination of single and multiple
transport streams, from multiple RF input sources. The unique MPEG-2 transport systems information tables associated with each
of the selected input programs are transferred to the IP outputs. This means the virtual channel numbers and program names on the
IP outputs can be the same as their RF program input sources. The Company’s AQT8 products enable the user to modify the metadata,
including PSIP parameters, such as the Program ID, Program #, Short Name, Major Ch., and Minor Ch. Information, to provide a customized
IP program delivery solution. The AQT8-IP features Emergency Alert System (“EAS”) program switching through
either an ASI or IP format EAS input and terminal block contacts for triggering.
EdgeQAM devices
accept Ethernet input and capture MPEG over IP transport streams, decrypt service provider conditional access or content protection,
and insert proprietary conditional access, such as Pro:Idiom, into the stream. These streams are then combined and modulated on
to QAM RF carriers, in most cases providing multiple streams on to one 6MHz digital channel. Inputs to EdgeQAM devices can come
from satellite receivers, set-top boxes, network devices or video servers. The use of these devices adds flexibility for the service
provider, in part, because all of this routing happens in one device. Scaling is accomplished via software and modules embedded
inside the hardware. Since it is a true network device, the EdgeQAM can be managed over a traditional Ethernet network or over
the Internet.
The QPSK
and 8PSK to QAM transcoders (QTM Series) are used for economically deploying or adding a satellite-based tier of digital or HDTV
digital programming. The units transcode a satellite signal’s modulation from QPSK to QAM or from 8PSK modulation format
to QAM format. Since QPSK and 8PSK are optimum for satellite transmission and QAM is optimum for fiber/coax distribution, precious
system bandwidth is saved while the signal retains its digital information.
Digital Video
Headend Product use continues to expand in all of the Company’s primary markets, bringing more advanced technology to consumers
and operators. It is expected that this area will continue to be a major component of the Company’s business. The Company’s
Digital Video Headend Products accounted for approximately 34% and 48% of the Company’s revenues in 2019 and 2018, respectively,
with an overall decrease of $3,594,000 year-over-year.
● 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. Among the products offered by the Company in this category are prefabricated headends to accommodate
legacy analog TV systems, modulators, demodulators, and processors. The Company’s Analog Video Headend Products accounted
for approximately 8% of the Company’s revenues in both 2019 and 2018, with an overall decrease of $129,000 year-over-year.
● 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. Among the products offered by the Company
in this category are broadband amplifiers, directional taps, splitters and wall outlets for coax distribution and fiber optic transmitters,
receivers (nodes), and couplers. In cable television systems, the HFC distribution products are either mounted on exterior utility
poles or encased in pedestals, vaults or other security devices. In CIE systems the distribution system is typically enclosed within
the walls of the building (if a single structure) or added to an existing structure using various techniques to hide the coax cable
and devices. The non-passive devices within this category are designed to ensure that the signal distributed from the headend is
of sufficient strength when it arrives at its final destination to provide high quality audio/video images. The Company’s
HFC Distribution Products accounted for approximately 13% and 15% of the Company’s revenues in 2019 and 2018, respectively,
with an overall decrease of $708,000 year-over-year.
● DOCSIS Data Products
give service providers, integrators, and premise owners a means to deliver data, video, and voice-over-coaxial in locations such
as hospitality, MDU's, and college campuses using IP technology. Among the products offered by the Company are CMTS and CM. The
Company’s DOCSIS Data Products accounted for approximately 14% and 21% of the Company’s revenues in 2019 and 2018,
respectively, with an overall decrease of $1,766,000 year-over-year.
● CPE Products
are comprised mainly of Android-based IPTV set top boxes sold to the Tier 2 and Tier 3 cable and telecommunications service providers
for use in mainstream residential services to consumer households. The Company began selling CPE Products in 2019. The Company’s
CPE Product initiative achieved sales to over 45 different telco, municipal fiber and cable operators and accounted for approximately
20% of the Company’s revenues in 2019.
● Other Products.
There are a variety of other products that the Company sells to a lesser degree, either to fill a customer need or where sales
have reduced due to changes in Company direction, technology, or market influences. Sales of products in these categories contributed
less significantly to the Company’s revenues in 2019 and 2018 and are expected to remain this way for 2020. These products
include:
Test instruments, for measuring
both digital and analog CATV and Broadcast TV signals, as well as capture, analyze and/ or generate MPEG ASI transport streams.
Contract Manufacturing Services,
providing manufacturing, research and development and product support services for other companies’ products.
Reception products for receiving
off-air broadcast television and satellite transmissions prior to headend processing.
Technical Services, including
hands-on training, system design engineering, on-site field support and complete system verification testing.
Miscellaneous products and services,
filling customers’ needs for satellite distribution, repair, and parts.
The Company will modify
its products to meet specific customer requirements. Typically, these modifications are minor and do not materially alter either
the product functionality or the ability to sell such altered products to other customers.
Research and Product Development
The markets served
by Blonder Tongue are characterized by technological change, new product introductions, and evolving industry standards. To compete
effectively in this environment, the Company must engage in ongoing research and development in order to (i) create new products,
(ii) expand features of existing products to accommodate customer demand for greater capability, (iii) license new technologies,
(iv) acquire products incorporating technology that could not otherwise be developed quickly enough using internal resources and
(v) acquire complementary products incorporating technology from third parties allowing internal resources to focus on higher-value
strategic areas of research and development. Research and development projects are often initially undertaken at the request of
or in an effort to address the particular needs of the Company’s customers and customer prospects, with the expectation or
promise of substantial future orders. Projects may also result from new technologies that become available, or new market applications
of existing technology. In the new product development process, the vast experience of the Company’s engineering group is
leveraged to ensure the highest level of suitability and widest acceptance in the marketplace. Products tend to be developed in
a functional building block approach that allows for different combinations of blocks to generate new relevant products. Additional
research and development efforts are also continuously underway for the purpose of enhancing product quality and lowering production
costs. This building block philosophy of research and development has recently been expanded upon since fourth quarter 2018 with
several new hardware designs each yielding 3, 4 or even 5 different product models based on a single common design yielding the
Company improved engineering cost efficiencies. For the acquisition of new technologies, the Company may rely upon technology licenses
from third parties or customized derivative product development. The Company will also license technology if it can obtain technology
more quickly, or more cost-effectively from third parties than it could otherwise develop on its own, or if the desired technology
is proprietary to a third party. There were 18 employees involved in the technical product definition, technology systems architecture
and research and development departments of the Company at December 31, 2019, distributed among the Company’s operating locations.
Marketing and Sales
Blonder Tongue markets
and sells its products for use in a wide range of IPTV and CIE markets, including with telco and municipal fiber optic operators,
traditional cable television, MDU, lodging/hospitality, and institutional (schools, hospitals and prisons). The Company also sells
into a multitude of niche CIE markets such as sports arenas and the cruise ship industry. Sales are made directly to customers
by the Company’s internal sales force, as well as through Blonder Tongue Premier Distributors. The Company instituted its
Premier Distributor Program in 2007, through which a limited group of larger distributors who stock a significant amount of the
Company’s products in their inventory are given access to a special purchase incentive program allowing them to achieve volume
price concessions measured on a year-to-year basis. Sales to the Company’s Premier Distributors accounted for approximately
28% and 33% of the Company’s revenues for 2019 and 2018, respectively. These Premier Distributors serve multiple markets.
Direct sales to telco operators, municipal fiber operators, cable operators and system integrators accounted for approximately
33% and 18% of the Company’s revenues for 2019 and 2018, respectively.
The Company’s
sales and marketing function is performed by its internal sales and marketing associates working in partnership and conjunction
its Premier Distributors, as well as its smaller company integrator and distributor network. Should it be deemed necessary, the
Company may retain independent sales representatives in particular geographic areas or targeted to specific customer prospects
or target market opportunities. Sales and marketing make up 12% of the Company’s overall workforce, divided into central
and regional coverage in Old Bridge, NJ, Patton, PA, Seminole, FL (Tampa area), Tigard, OR, Stevensville, PA, and Johns Creek,
GA (Atlanta area), as well as Canada sales coverage from Toronto.
The Company’s
standard customer payment terms are net 30 days. From time to time, when circumstances warrant, such as a commitment to a large
blanket purchase order, the Company will selectively extend payment terms beyond its standard payment terms to 60 days.
The Company has several
marketing programs to support the sale and distribution of its products. Blonder Tongue participates in industry trade shows and
conferences and also maintains a robust website and direct on-line sales portal. The Company publishes technical articles in trade
and technical journals, distributes sales and product literature and has an active public relations plan to ensure complete coverage
of Blonder Tongue’s products and technology by editors of trade journals. The Company provides system design engineering
for its customers, maintains extensive ongoing communications with many original equipment manufacturer customers and provides
one-on-one demonstrations and technical seminars to potential new customers. Blonder Tongue supplies sales and applications support,
product literature and training to its sales representatives and distributors. The management of the Company travels extensively,
identifying customer needs and meeting potential customers.
Customers
Blonder Tongue has
a diverse customer base, which in 2019 consisted of approximately 163 active accounts. Approximately 49% and 54% of the Company’s
revenues in 2019 and 2018, respectively, were derived from sales of products to the Company’s five largest customers. World
Cinema, Inc., Blue Stream Communications, LLC and Toner Cable Equipment, Inc. accounted for approximately 12%, 12% and 11%, respectively,
of the Company’s revenues in 2019 and approximately 23%, zero and 14%, respectively, of the Company’s revenues in 2018.
None of these customers are obligated to purchase a material amount of products or to provide the Company with a material level
of binding forecasts of product purchases for any future period. There can be no assurance that sales to these entities, individually
or as a group, will reach or exceed historical levels in any future period; however, the Company currently anticipates that Toner
Cable Equipment, Inc. and World Cinema, Inc. will continue to account for a significant portion of the Company’s revenues
in future periods. Blue Stream Communications first became a customer of the Company in 2019 and, as such, the Company is not certain
whether it will continue to account for a significant portion of the Company’s revenues in 2020 and beyond. See disclosure
below in “Risk Factors – Any substantial decrease in sales to our largest customers may adversely affect our results
of operations or financial condition” for further details.
Since 2010, the Company
has held multi-year contracts with key distributors in its Premier Distributor Program. This program, which began in 2007, has
been quite successful for the Company. Many of the Company’s smaller business customers, with whom the Company had formerly
dealt on a direct basis, now purchase the Company’s products from these BT Premier Distributors.
In the Company’s
direct sales to system integrators, the complement of leading customers tends to vary over time as the most efficient and better
financed integrators grow more rapidly than others. Any substantial decrease or delay in sales to one or more of the Company’s
leading customers, the financial failure of any of these entities, or the Company’s inability to develop and maintain solid
relationships with the integrators that may replace the present leading customers, would have a material adverse effect on the
Company’s results of operations and financial condition.
The Company’s
revenues are derived primarily from customers in the continental United States; however, the Company also derives some revenues
from customers in other geographical markets, primarily Canada and to a much more limited extent, in developing countries. Sales
to customers outside of the United States represented approximately 5% and 4% of the Company’s revenues in 2019 and 2018,
respectively. All of the Company’s transactions with customers located outside of the United States have historically been
denominated in U.S. dollars. As such, the Company has had no material foreign currency transactions from which it derives revenues.
However, the Company derived certain relatively limited sales from customers located in Canada during 2018 and 2017 denominated
in Canadian Dollars. Transactions denominated in foreign currencies have certain inherent risks associated with them due to currency
fluctuations. See “Risk Factors” below for more detail on the risks associated with foreign currency transactions.
Manufacturing and Suppliers
Blonder Tongue’s
primary manufacturing operations are presently located at the Old Bridge Facility, which also serves as the Company’s headquarters.
The Company has developed, implemented and maintains a Quality Management System, that has been certified as conforming to all
requirements of the ISO 9001:2015 international standard. The Company’s manufacturing operations are vertically integrated
and consist principally of the programming, assembly, and testing of electronic assemblies built from fabricated parts, printed
circuit boards and electronic devices and the fabrication from raw sheet metal, of chassis and cabinets for such assemblies. Management
continues to implement improvements to the manufacturing process to increase production volume and reduce product cost, including
logistics modifications on the factory floor to accommodate increasingly fine pitch surface mount electronic components. The Company
is capable of manufacturing assemblies of 16-layer printed circuit boards with thousands of components, including placement of
0.030x0.030mil ball grid arrays and 0201 packaged sized components, utilizing its advanced state-of-the-art automatic placement
equipment as well as automated optical inspection and testing systems. Investments by the Company in these advanced manufacturing
technologies is consistent with and part of the Company’s strategy to provide its customers with high performance-to-cost
ratio products. The Company also maintains a small engineering facility in Springboro, Ohio and maintains a small engineering facility
in Ft. Wayne, Indiana.
Since 2007, the Company
has been manufacturing certain high volume, labor intensive products, including many of the Company’s analog products overseas,
a portion of such products are produced in the PRC. A key contract manufacturer in the PRC produces these products (all of which
are proprietary Blonder Tongue designs) as may be requested by the Company from time to time (in the Company’s discretion)
through the submission of purchase orders, the terms of which are governed by a manufacturing agreement. 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. In connection with the Company’s initiatives in the PRC, the Company
may have foreign currency transactions and may be subject to various currency exchange control programs related to its PRC operations.
Since 2019, the Company has been manufacturing certain high volume, labor intensive products in South Korea and Taiwan. Several
manufacturers produce Blonder Tongue proprietary products, as may be requested by the Company from time to time (in the Company’s
discretion) through the submission of purchase orders, the terms of which are governed by purchase and IP agreements. Products
produced on behalf of the Company in Taiwan and South Korea are transacted in US Dollars and carry limited foreign exchange risk.
See “Risk Factors” below for more detail on the risk of foreign operations.
Outside contractors
supply standard components, printed circuit boards and electronic subassemblies to the Company’s specifications. While the
Company generally purchases electronic parts that do not have a unique source, certain electronic component parts used within the
Company’s products are available from a limited number of suppliers and may be subject to temporary shortages because of
general economic conditions and the demand and supply for such component parts. If the Company were to experience a temporary shortage
of any given electronic part, the Company believes that alternative parts could be obtained, or system design changes implemented.
In such situations, however, the Company may experience temporary reductions in its ability to ship products affected by the component
shortage. On an as-needed basis, the Company purchases several products from sole suppliers for which alternative sources are not
available. An inability to timely obtain sufficient quantities of certain of these components could have a material adverse effect
on the Company’s operating results. The Company does not have an agreement with any sole source supplier requiring the supplier
to sell a specified volume of components to the Company. See “Risk Factors” below for more detail on the risk associated
with sole supplier products.
Blonder Tongue maintains
a quality assurance program which monitors and controls manufacturing processes, and extensively tests samples throughout the process.
Samples of component parts purchased are tested, as well as its finished products, on an ongoing basis. The Company also tests
component and sub-assemblies throughout the manufacturing process using commercially available and in-house built testing systems
that incorporate proprietary procedures. The highest level of quality assurance is maintained throughout all aspects of the design
and manufacturing process. The extensive in-house calibration program assures test equipment integrity, correlation and calibration.
This program ensures that all test and measurement equipment that is used in the manufacturing process is calibrated to the same
in-house reference standard on a consistent basis. When all test and measurement devices are calibrated in this manner, discrepancies
are eliminated between the engineering, manufacturing and quality control departments, thus increasing operational efficiency and
ensuring a high level of product quality. Blonder Tongue performs final product tests prior to shipment to customers. In 2008,
the Company was certified to perform Underwriters Laboratories (UL) witness testing of products to UL International Standard 60950.
Competition
All aspects of the
Company’s business are highly competitive. The Company competes with international, national, regional and local manufacturers
and distributors, including companies larger than Blonder Tongue that have substantially greater resources. Various manufacturers
who are suppliers to the Company sell directly as well as through distributors into the franchise and private cable marketplaces.
Because of the convergence of the cable, telecommunications and computer industries and rapid technological developments, new competitors
may seek to enter the principal markets served by the Company. Many of these potential competitors have significantly greater financial,
technical, manufacturing, marketing, sales and other resources than Blonder Tongue. The Company expects that direct and indirect
competition will increase in the future. Additional competition could result in price reductions, loss of market share and delays
in the timing of customer orders. The principal methods of competition are product differentiation, product reputation, performance,
quality, price, terms, service, technical support and administrative support. The Company believes it is a leader in many of the
markets that it serves and differentiates itself from competitors by consistently offering innovative products, providing excellent
technical service support and delivering extremely high reliability products and high performance-to-cost ratio products.
Intellectual Property
The Company currently
holds several United States and foreign patents, none of which are considered material to the Company’s present operations,
since they do not relate to high volume applications. Because of the rapidly evolving nature of the cable television industry,
the Company believes that its market position as a supplier to the telco industry and cable television integrators derives primarily
from its ability to timely develop a consistent stream of new products that are designed to meet its customers’ needs and
that have a high performance-to-cost ratio.
The Company owns a
United States trademark registration for the word mark “Blonder Tongue®” and also on a “BT®” logo.
Drake owns a United States trademark registration for the word mark “DRAKE®”.
Since 2008, the Company
has obtained and renewed licenses for a variety of technologies in concert with its digital encoder line of products. The licenses
are from a number of companies including LG Electronics (expires December 2020). These standard licenses are all non-exclusive
and require payment of royalties based upon the unit sales of the licensed products. With regard to the licenses expiring in 2020,
the Company expects to renew these standard licenses on similar terms to those presently in force. For additional information regarding
these licenses, see “Introduction” starting on page 2.
The Company relies
on a combination of patents, contractual rights and trade secret laws to protect its proprietary technologies and know-how. There
can be no assurance that the Company will be able to protect its technologies and know-how or that third parties will not be able
to develop similar technologies and know-how independently. Therefore, existing and potential competitors may be able to develop
products that are competitive with the Company’s products and such competition could adversely affect the prices for the
Company’s products or the Company’s market share. The Company also believes that factors such as the technological
and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable product
maintenance are essential to establishing and maintaining its competitive position. The industries in which the Company competes
are subject to constant development of new technologies and evolution of existing technologies, many of which are the subject of
existing third-party patents and new patents are issued frequently.
Regulation
Private cable, while
in some cases subject to certain Federal Communications Commission (“FCC”) licensing requirements, is not presently
burdened with extensive government regulations. The Telecommunications Act of 1996 deregulated many aspects of franchise cable
system operation and opened the door to competition among cable operators and telephone companies in each of their respective industries.
Environmental Regulations
The Company is subject
to a variety of Federal, state and local governmental regulations related to the storage, use, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in its manufacturing processes. The Company did not incur in 2019 and does not anticipate
incurring in 2020, material capital expenditures for compliance with Federal, state and local environmental laws and regulations.
There can be no assurance, however, that changes in environmental regulations will not result in the need for additional capital
expenditures or otherwise impose additional financial burdens on the Company. Further, such regulations could restrict the Company’s
ability to expand its operations. Any failure by the Company to obtain required permits for, control the use of, or adequately
restrict the discharge of, hazardous substances under present or future regulations could subject the Company to substantial liability
or could cause its manufacturing operations to be suspended.
The Company has authorization
to discharge wastewater under the New Jersey Pollution Discharge Elimination System/Discharge to Surface Waters General Industrial
Stormwater Permit, Permit No. NJ0088315. This permit will expire May 31, 2020. The Company intends to renew this permit.
Employees
As of February 29, 2020, the Company employed approximately
93 people, including 50 in manufacturing, 15 in research and development, 4 in quality assurance, 12 in sales and marketing, and
11 in a general and administrative capacity. Substantially all of these employees are full time employees. Twenty-four of the Company’s
employees are members of the International Brotherhood of Electrical Workers Union, Local 2066, which has a labor agreement with
the Company that is scheduled to expire in February 2023.
The Company’s
business operates in a rapidly changing technology and economic environment that involves numerous risks, some of which are beyond
the Company’s control. The following “Risk Factors” highlight some of these risks. Additional risks not currently
known to the Company or that the Company now deems immaterial may also affect the Company and the value of its Common Stock. The
risks described below, together with all of the other information included in this report, should be carefully considered in evaluating
our business and prospects. The occurrence of any of the following risks could harm the Company’s business, financial condition
or results of operations.
Our audited consolidated financial statements for the year
ended December 31, 2019 included herein contain a “going concern” explanatory paragraph.
During the year ended
December 31, 2019, we experienced a decline in net sales, a loss from operations and a substantial increase in cash used in operating
activities, which was funded in large part from the proceeds we received from the sale of our headquarters building. Our ability
to continue as a going concern is dependent upon our becoming profitable in the future and having access to sufficient capital
to execute our business plan and to meet our payment obligations on our debt financing arrangements and other financial obligations
when they become due. Although we believe that improvements in our sales and efforts to reduce expenses will increase the possibility
that we will become profitable and we have recently obtained additional financing, we cannot provide any assurances that we will
be successful in improving our performance, that the recently obtained additional financing will be sufficient or that we will
be successful in securing additional financing, if needed. These factors, and possibly others, raise substantial doubt regarding
our ability to continue as a going concern. Our audited consolidated financial statements do not include any adjustments that might
result if we are unable to continue as a going concern. As a result, you should not rely on our consolidated balance sheet as an
indication of the amount of proceeds that would be available to satisfy claims of creditors and potentially be available for distribution
to stockholders in the event of liquidation.
Our financial condition
and results of operations could be adversely affected by health events such as the recent Coronavirus or COVID-19 outbreak.
Our business could
be materially and adversely affected by epidemics and pandemic outbreaks, including outbreaks of the Coronavirus or COVID-19. The
recent outbreak in China of COVID-19, which has been declared by the World Health Organization to be a “pandemic,”
has spread to many countries, including the United States, and is impacting domestic and worldwide economic activity. A public
health epidemic or pandemic, including COVID-19, poses the risk that the Company or its employees, customers, suppliers and other
business partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns
that may be requested or mandated by governmental authorities. There are developments regarding the COVID-19 outbreak on a daily
basis that may impact our customers, employees and business partners. As a result, it is not possible at this time to estimate
the impact COVID-19 could have on the Company's business. However, the continued spread of COVID-19 and actions taken by our customers,
suppliers and business partners, actions we take to protect the health and welfare of our employees, and measures taken by governmental
authorities in response to COVID-19 could disrupt our manufacturing activities, the shipment of our products, the supply chain
and purchasing decisions of our customers. The Company has begun to experience what is currently expected to be a short-term, but
significant, reduction in sales as a result of the decreased business activities of our customers related to the COVID-19 outbreak,
although it remains unclear when or whether our customers will resume their activities at a level where our sales to them will
return to historical levels. In addition, government officials in our region have imposed measures that restrict “non-essential”
business activities, and although we are currently considered to be involved in an “essential” business activity, it
is possible that those measures or others may be extended to cover “essential” business activities. If such restrictions
were to be imposed, it is likely that we would not be able to continue all or a portion of our manufacturing, shipping and billing
operations. Similar restrictions affecting the places where our customers do business would likely further reduce their business
activities. These and other developments may have a material adverse impact on our business.
Any substantial decrease in sales to
our largest customers may adversely affect our results of operations or financial condition.
Approximately 49% and
54% of our revenues in 2019 and 2018, respectively, were derived from sales of products to the Company’s five largest customers.
None of these customers are obligated to purchase a material amount of products or to provide the Company with a material level
of binding forecasts of product purchases for any future period. Accordingly, there can be no assurance that sales to these entities,
individually or as a group, will reach or exceed historical levels in any future period. In addition, while the COVID-19 outbreak
is affecting the operations of our customers and our sales to them, uncertainty as to the effects on the economy generally and
our customers in particular makes it impossible for us to predict the short term and long term effects the COVID-19 outbreak and
related developments will have on our customers and their ongoing businesses and how those effects may impact our sales to them.
With respect to our
direct sales to system integrators, the complement of leading customers tends to vary over time as the most efficient and better-financed
integrators grow more rapidly than others. Our success with those customers will depend in part on:
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the viability of those customers;
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our ability to identify those customers with the greatest growth and growth prospects; and
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our ability to maintain our position in the overall marketplace by shifting our emphasis to such customers.
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In addition, three
of our customers accounted for approximately 47% of our outstanding trade accounts receivable at both December 31, 2019 and 2018,
respectively. Any substantial decrease or delay in sales to one or more of our leading customers, the financial failure of any
of these entities, their inability to pay their trade accounts owing to us, or our inability to develop solid relationships with
integrators that may replace the present leading customers, could have a material adverse effect on our results of operations and
financial condition. If the negative effects of the COVID-19 outbreak and related developments lead to financial difficulties or
even the failure of one or more of our significant customers, or a combination of our smaller customers, our ability to collect
payment in full and on a timely basis, or at all, may be adversely effected, and our working capital resources may be significantly
diminished.
An inability to reduce
expenses or increase revenues may cause continued net losses.
We have had losses
each year since 2010, including a net loss of $742,000 for the year ended December 31, 2019. While management believes its ongoing
efforts to reduce expenses and increase revenues will improve profitability, there can be no assurance that these actions will
be successful. Failure to reduce expenses or increase revenues could have a material adverse effect on our results of operations
and financial condition. In addition, in order to address issues relating to our reduced sales as a result of the COVID-19 outbreak,
we are undertaking additional rapidly implemented operating expense cost reductions. If these reductions cannot be implemented
in a timely manner or prove to be insufficient in offsetting or significantly mitigating our reduced revenues, our ability to continue
to operate as a going concern may be materially affected.
Inventory reserves for excess or obsolete
inventories may adversely affect our results of operations and financial condition.
We continually analyze
our excess or obsolete inventories. Based on historical and projected sales volumes and anticipated selling prices, we establish
reserves. If we do not meet our sales expectations, these reserves are increased. Products that are determined to be obsolete are
written down to net realizable value. Although we believe reserves are adequate and inventories are reflected at net realizable
value, there can be no assurance that we will not have to record additional inventory reserves in the future. Significant increases
to inventory reserves could have a material adverse effect on our results of operations and financial condition.
An inability to develop, or acquire
the rights to technology, products or applications in response to changes in industry standards or customer needs may reduce our
sales and profitability.
Both the private cable
and franchised cable industries are characterized by the continuing advancement of technology, evolving industry standards and
changing customer needs. To be successful, we must anticipate the evolution of industry standards and changes in customer needs,
through the timely development and introduction of new products, enhancement of existing products and licensing of new technology
from third parties. This is particularly true at this time as the Company must develop and market new digital products to offset
the continuing decline in demand for, and therefore sales of, analog products. Although we depend primarily on our own research
and development efforts to develop new products and enhancements to our existing products, we have and may continue to seek licenses
for new technology from third parties when we believe that we can obtain such technology more quickly and/or cost-effectively from
such third parties than we could otherwise develop on our own, or when the desired technology has already been patented by a third
party. There can, however, be no assurance that new technology or such licenses will be available on terms acceptable to us. There
can be no assurance that:
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we will be able to anticipate the evolution of industry standards in the cable television or the communications industry generally;
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we will be able to anticipate changes in the market and customer needs;
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technologies and applications under development by us will be successfully developed; or
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successfully developed technologies and applications will achieve market acceptance.
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If we are unable for
technological or other reasons to develop and introduce products and applications or to obtain licenses for new technologies from
third parties in a timely manner in response to changing market conditions or customer requirements, our results of operations
and financial condition could be materially adversely affected.
Anticipated increases in direct and
indirect competition with us may have an adverse effect on our results of operations and financial condition.
All aspects of our
business are highly competitive. We compete with international, national, regional and local manufacturers and distributors, including
companies larger than us, which have substantially greater resources. Various manufacturers who are suppliers to us sell directly
as well as through distributors into the cable television marketplace. Because of the convergence of the cable, telecommunications
and computer industries and rapid technological development, new competitors may seek to enter the principal markets served by
us. Many of these potential competitors have significantly greater financial, technical, manufacturing, marketing, sales and other
resources than we have. We expect that direct and indirect competition will increase in the future. Additional competition could
have a material adverse effect on our results of operations and financial condition through:
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delays in the timing of customer orders; and
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an inability to increase our penetration into the cable television market.
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Our sales and profitability may suffer
due to any substantial decrease or delay in capital spending by the cable infrastructure operators that we serve in the MDU, assisted
living, lodging and institutional cable markets.
The vast majority of
our revenues in 2019 and 2018 came from sales of our products for use by cable infrastructure operators. Demand for our products
depends to a large extent upon capital spending by telcos, cable operators and other entities on private cable systems and specifically
by private cable operators for constructing, rebuilding, maintaining or upgrading their systems. Capital spending by private cable
operators and, therefore, our sales and profitability, are dependent on a variety of factors, including:
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access by private cable operators to financing for capital expenditures;
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demand for their cable services;
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availability of alternative video delivery technologies; and
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general economic conditions.
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In addition, our sales
and profitability may in the future be more dependent on capital spending by traditional franchise cable system operators as well
as by new entrants to this market planning to over-build existing cable system infrastructures, or constructing, rebuilding, maintaining
and upgrading their systems. There can be no assurance that system operators in private cable or franchise cable will continue
capital spending for constructing, rebuilding, maintaining, or upgrading their systems. Any substantial decrease or delay in capital
spending by private cable or franchise cable operators would have a material adverse effect on our results of operations and financial
condition.
Adverse changes in economic conditions could adversely affect
our business, results of operations and financial condition.
Our business and earnings
are affected by general business, economic and financial markets conditions in the United States and elsewhere. We continue to
operate in a challenging and uncertain economic environment, which has been exacerbated by the COVID-19 outbreak and related events.
Any return to recessionary conditions or prolonged stagnant or deteriorating economic conditions, whether related to the COVID-19
outbreak or otherwise, could significantly affect the markets in which we do business, the demand for our products, the ability
of our customers to make payments to us in a timely fashion or at all, our ability and the ability of our customers to obtain adequate
financing to maintain operations and other potential events that could have a material adverse effect on our business, financial
condition and results of operations. Moreover, our stock price could remain depressed or decrease if investors have concerns that
our business, financial condition or results of operations will be negatively impacted by a worldwide economic downturn. Other
uncertainties, including the potential effect of United States’ tariffs on imported steel and aluminum, which are important
materials for the production of many of our products, could also have a material adverse effect on our business, financial condition
and results of operations.
The terms of our credit facility with MidCap Business Credit
may restrict our current and future operating and financial flexibility and could adversely affect our financial and operational
results.
On October 25, 2019,
the Company, entered into a new credit facility with MidCap Business Credit (“MidCap”), which was amended on
April 7, 2020. The Loan and Security Agreement between the Company and MidCap (the “MidCap Agreement”) includes
a number of covenants that, among other things, may restrict our ability to:
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engage in mergers, consolidations, asset dispositions or similar fundamental changes;
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redeem or repurchase shares of Company stock;
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create, incur, assume or guarantee additional indebtedness;
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create, incur or permit liens on our assets;
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make loans or investments;
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pay cash dividends or make similar distributions; and
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change the nature of our business.
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These restrictions
in the MidCap Agreement may limit our ability to engage in certain transactions that could be beneficial to us and our stockholders.
In the event of a default, MidCap could elect to declare all borrowings, accrued and unpaid interest and other fees outstanding,
due and payable and require us to use available cash to repay these borrowings, which could have a material adverse effect on our
operations and financial condition. If MidCap terminates the MidCap Agreement or further limits our ability to borrow under the
MidCap Agreement as a result of any failures to comply with any covenants, we would seek new debt financing arrangements. We cannot
assure you that new debt financing will be available to us on acceptable terms or at all. In addition, new debt financing, if available,
could impose payment obligations, covenants and operating restrictions that are more onerous than under the MidCap Agreement, which
could adversely affect our operations and financial condition.
Any significant casualty to our facility
in Old Bridge, New Jersey may cause a lengthy interruption to our business operations.
We primarily operate
out of one manufacturing facility in Old Bridge, New Jersey (the “Old Bridge Facility”). While we maintain a
limited amount of business interruption insurance, a casualty that results in a lengthy interruption of our ability to manufacture
at, or otherwise use, the Old Bridge Facility could have a material adverse effect on our results of operations and financial condition.
Our dependence on certain third-party
suppliers could create an inability for us to obtain component products not otherwise available or to do so only at increased prices.
We purchase several
products from sole suppliers for which alternative sources are not available. Our results of operations and financial condition
could be materially adversely affected by:
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an inability to obtain sufficient quantities of these components;
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our receipt of a significant number of defective components;
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an increase in component prices; or
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our inability to obtain lower component prices in response to competitive pressures on the pricing of our products.
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In addition, the COVID-19
outbreak has affected the supply chain for many types of products and materials, particularly those being manufactured in China
and other countries where the outbreak has resulted in significant disruptions to ongoing business activities. Although we have
not experienced any material disruptions in our supply chain, it is possible that we will in the future, which could adversely
affect our ability to complete sales to our customers.
Our manufacturing activities in the
PRC, South Korea and Taiwan may subject us to the risks of unfavorable political, regulatory, legal and other developments in those
countries.
Some of our products
are manufactured and assembled in the PRC, South Korea and Taiwan under contractual and purchasing arrangements with businesses
in those countries. Our future operations and earnings may be adversely affected by the risks related to, or any other problems
arising from, having our products manufactured and assembled in these countries:
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political, economic and labor instability;
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changes in foreign or United States government laws and regulations, including exchange control regulations;
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infringement of our intellectual property rights; and
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difficulties in managing foreign manufacturing operations.
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In addition, because
the Company incurs certain expenses denominated in Renminbi (“RMB”)rather than U.S. Dollars in connection with
contract manufacturing activities in the PRC, we may experience increased costs related to fluctuation in foreign currency exchange
rates. Although these countries have modern industrial economies, their potential economic, political, legal and labor developments
could entail uncertainties and risks. In the event of any changes that adversely affect our ability to manufacture in the PRC,
South Korea and/or Taiwan, our business could suffer.
Shifting our operations between regions may entail considerable
expense.
Over time we may shift
additional portions of our manufacturing operations to outside third-party suppliers both within the US, North America and/or Asian
territories in order to maximize manufacturing and operational efficiency. This could result in reducing our domestic operations
in the future, which in turn could entail significant one-time earnings charges to account for severance, equipment write-offs
or write downs and moving expenses.
Our earnings would be reduced if our
goodwill or intangible assets recorded as part of the Drake Acquisition were to become impaired.
We recorded goodwill
and identifiable intangible assets as part of the Drake Acquisition in February 2012. Goodwill is generated when the cost of an
acquisition exceeds the fair value of the net tangible and identifiable intangible assets acquired. We also have certain intangible
assets with indefinite lives. We assess the impairment of goodwill and indefinite lived intangible assets annually or more often
if events or changes in circumstances indicate that the carrying value may not be recoverable. We assess the impairment of acquired
product rights and other finite lived intangible assets whenever events or changes in circumstances indicate that their carrying
amount may not be recoverable. If our goodwill or intangible assets recorded in connection with the Drake Acquisition were determined
to be impaired, then we would be required to recognize a charge against our earnings, which could materially and adversely affect
our results of operations during the period in which the impairment was recognized. Any potential charges for impairment related
to goodwill or intangible assets would not impact cash flow, tangible capital or liquidity.
We may face risks relating to currency fluctuations and currency
exchange.
Historically
the Company has had limited exposure to currency fluctuations since transactions with customers located outside the United States
have generally been denominated in U.S. Dollars. In addition, the Company incurs certain expenses denominated in RMB in connection
with its contract manufacturing activities in the PRC. The Company's functional currency is the U.S. Dollar. Accordingly, any expense
denominated in Canadian Dollars or RMB needs to be translated into U.S. Dollars at the applicable currency exchange rate for inclusion
in our consolidated financial statements. Exchange rates between the RMB and U.S. Dollar in recent years have fluctuated significantly
and may do so in the future. We do not engage in currency hedging activities to limit the risks of currency fluctuations. Currency
fluctuations could adversely impact our results of operations, cash flows and financial position.
Competitors may develop products that
are similar to, and compete with, our products due to our limited proprietary protection.
We possess limited
patent or registered intellectual property rights with respect to the majority of our technology. We rely on a combination of patents,
contractual rights and trade secret laws to protect our proprietary technology and know-how. There can be no assurance that we
will be able to protect our technology and know-how or that third parties will not be able to develop similar technology independently.
Therefore, existing and potential competitors may be able to develop similar products which compete with our products. Such competition
could adversely affect the prices for our products or our market share and could have a material adverse effect upon our results
of operations and financial condition.
Patent infringement claims against us
or our customers, whether or not successful, may cause us to incur significant costs.
While we do not believe
that our products (including products and technologies licensed from others) infringe valid intellectual property rights of any
third parties, there can be no assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement
claims) will not be asserted against us or our customers. Damages for infringement of valid intellectual property rights of third
parties could be substantial, and if determined to be willful, can be trebled. Such an outcome could have a material adverse effect
on the Company’s financial condition and results of operation. Regardless of the validity or the successful assertion of
any such claims, we could incur significant costs and diversion of resources with respect to the defense thereof which could have
a material adverse effect on our financial condition and results of operations. If we are unsuccessful in defending any claims
or actions that are asserted against us or our customers, we could seek to obtain a license under a third party’s intellectual
property rights. There can be no assurance, however, that under such circumstances, a license would be available under reasonable
terms or at all. The failure to obtain a license to a third party’s intellectual property rights on commercially reasonable
terms could have a material adverse effect on our results of operations and financial condition.
Any increase in governmental regulation
of the markets that we serve, including the cable television system, MDU, lodging and institutional markets, may have an adverse
effect on our results of operations and financial condition.
The cable television,
MDU, lodging and institutional markets within the cable industry, which represents the vast majority of our business, while in
some cases subject to certain FCC licensing requirements, is not presently burdened with extensive government regulations. It is
possible, however, that regulations could be adopted in the future which impose burdensome restrictions on these markets resulting
in, among other things, barriers to the entry of new competitors or limitations on capital expenditures. Any such regulations,
if adopted, could have a material adverse effect on our results of operations and financial condition.
Private cable system
operation is not presently burdened with significant government regulation, other than, in some cases, certain FCC licensing and
signal leakage requirements. The Telecommunications Act of 1996 deregulated many aspects of franchise cable system operation and
opened the door to competition among cable operators and telephone companies in each of their respective industries. It is possible,
however, that regulations could be adopted which would re-impose burdensome restrictions on franchise cable operators resulting
in, among other things, the grant of exclusive rights or franchises within certain geographical areas. Any increased regulation
of franchise cable could have a material adverse effect on our results of operations and financial condition.
Any increase in governmental environmental
regulations or our inability or failure to comply with existing environmental regulations may cause an adverse effect on our results
of operations or financial condition.
We are subject to a
variety of federal, state and local governmental regulations related to the storage, use, discharge and disposal of toxic, volatile
or otherwise hazardous chemicals used in our manufacturing processes. We do not anticipate material capital expenditures during
2020 for compliance with federal, state and local environmental laws and regulations. There can be no assurance, however, that
changes in environmental regulations will not result in the need for additional capital expenditures or otherwise impose additional
financial burdens on us. Further, such regulations could restrict our ability to expand our operations. Any failure by us to obtain
required permits for, control the use of, or adequately restrict the discharge of, hazardous substances under present or future
regulations could subject us to substantial liability or could cause our manufacturing operations to be suspended. Such liability
or suspension of manufacturing operations could have a material adverse effect on our results of operations and financial condition.
Losing the services of our executive
officers or our other highly qualified and experienced employees, or our inability to continue to attract and retain highly qualified
and experienced employees, could adversely affect our business.
Our future success
depends in large part on the continued service of our key executives and technical and management personnel. Our future success
also depends on our ability to continue to attract and retain highly skilled engineering, manufacturing, marketing and managerial
personnel. The competition for such personnel is intense, and the loss of key employees, in particular the principal members of
our management and technical staff, could have a material adverse effect on our results of operations and financial condition.
Our organizational documents and Delaware
state law contain provisions that could discourage or prevent a potential takeover or change in control of our company or prevent
our stockholders from receiving a premium for their shares of our Common Stock.
Our board of directors
has the authority to issue up to 5,000,000 shares of undesignated Preferred Stock, to determine the powers, preferences and rights
and the qualifications, limitations or restrictions granted to or imposed upon any unissued series of undesignated Preferred Stock
and to fix the number of shares constituting any series and the designation of such series, without any further vote or action
by our stockholders. The Preferred Stock could be issued with voting, liquidation, dividend and other rights superior to the rights
of the Common Stock. Furthermore, such Preferred Stock may have other rights, including economic rights, senior to the Common Stock,
and as a result, the issuance of such stock could have a material adverse effect on the market value of the Common Stock. In addition,
our Restated Certificate of Incorporation:
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eliminates the right of our stockholders to act without a meeting;
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does not provide cumulative voting for the election of directors;
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does not provide our stockholders with the right to call special meetings;
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provides for a classified board of directors; and
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imposes various procedural requirements which could make it difficult for our stockholders to effect certain corporate actions.
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These provisions and
the Board’s ability to issue Preferred Stock may have the effect of deterring hostile takeovers or offers from third parties
to acquire the Company, preventing our stockholders from receiving a premium for their shares of our Common Stock, or delaying
or preventing changes in control or management of the Company. We are also afforded the protection of Section 203 of the Delaware
General Corporation Law, which could:
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delay or prevent a change in control of the Company;
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impede a merger, consolidation or other business combination involving us; or
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discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company.
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Any of these provisions
which may have the effect of delaying or preventing a change in control of the Company, could have a material adverse effect on
the market value of our Common Stock.
It is unlikely that we will pay dividends on our Common Stock.
We currently intend
to retain all earnings to finance the growth of our business and therefore do not intend to pay dividends on our Common Stock in
the foreseeable future. Moreover, the MidCap Agreement prohibits the payment of cash dividends by us on our Common Stock.
Our Common Stock is thinly traded and
subject to volatility, which may adversely affect the market price for our Common Stock.
Although our Common
Stock is traded on the NYSE American, it may remain relatively illiquid, or “thinly traded,” which can increase share
price volatility and make it difficult for investors to buy or sell shares in the public market without materially affecting the
quoted share price. Investors may be unable to buy or sell a certain quantity of our shares in the public market within one or
more trading days. If limited trading in our stock continues, it may be difficult for holders to sell their shares in the public
market at any given time at prevailing prices.
The prevailing market
price of our Common Stock may fluctuate significantly in response to a number of factors, some of which are beyond our control,
including the following:
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announcements of technological innovations or new products by us, our competitors or third parties;
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quarterly variations in our actual or anticipated results of operations;
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failure of revenues or earnings in any quarter to meet the investment community’s expectations;
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market conditions for cable industry stocks in general;
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broader market trends unrelated to our performance; and
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sales of significant amounts of our Common Stock by our officers and directors or the perception that such shares may occur.
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The uncertainties we
face relating to our liquidity and ability to generate sufficient cash flows from operations and to continue to operate our business
as a going concern also contributes to the volatility of our stock price, and any investment in our Common Stock could suffer a
significant decline or total loss in value. Furthermore, we may not be able to maintain compliance with the continued listing standards
of the NYSE American LLC or any other national securities exchange or over-the-counter market on which our Common Stock is then
traded, which may also adversely affect the trading price of our Common Stock.
Our share ownership
is highly concentrated.
Our directors and officers
beneficially own, or have the right to vote, in the aggregate, approximately 60% of our Common Stock and will continue to have
significant influence over the outcome of all matters submitted to the stockholders for approval, including the election of our
directors. In addition, certain of our directors and officers will have the right to acquire additional shares of our common stock
upon exercise of conversion rights with respect to certain indebtedness that they hold. See Note 17—Subsequent Events in
the Notes to our Consolidated Financial Statements.
Delays or difficulties in negotiating
a labor agreement or other difficulties in our relationship with our union employees may cause an adverse effect on our manufacturing
and business operations.
All of our direct labor
employees located at the Old Bridge, New Jersey facility are members of the International Brotherhood of Electrical Workers Union,
Local 2066 (the “Union”), under a collective bargaining agreement, which expires in February 2023. In connection
with any renewal or renegotiation of the labor agreement upon its termination, there can be no assurance that work stoppages will
not occur or that we will be able to agree upon terms for future agreements with the Union. Any work stoppages could have a material
adverse effect on our business operations, results of operations and financial condition.
Our business and operations could suffer
in the event of security breaches.
Attempts by others
to gain unauthorized access to information technology systems are becoming more sophisticated. Our systems are designed to detect
security incidents and to prevent their recurrence, but, in some cases, we might be unaware of an incident or its magnitude and
effects. While we have not identified any material incidents of unauthorized access to date, the theft, unauthorized use or publication
of our intellectual property, confidential business or personal information could harm our competitive position, reduce the value
of our investment in research and development and other strategic initiatives, damage our reputation or otherwise adversely affect
our business. In addition, to the extent that any future security breach results in inappropriate disclosure of our employees’,
licensees’, or customers’ confidential and /or personal information, we may incur liability or additional costs to
remedy any damages caused by such breach. We could also be impacted by existing and proposed laws and regulations, as well as government
policies and practices related to cybersecurity, privacy and data protection.
Increased tariffs or other trade actions
could adversely affect our business.
There is currently
significant uncertainty about the future relationship between the United States and China with respect to trade policies and tariffs.
We source a variety of finished products and component parts from China. Although we currently believe that most of those products
are not subject to tariffs, we cannot assure you that governmental authorities will agree with that position or that future actions
may not be taken by the United States or China to impose tariffs on those products and components or otherwise affect our ability
to source those products and components, which could have an adverse effect on our future operations. In addition, certain of the
products we obtain from China are currently subject to tariffs. Although we do not expect that the currently-applicable tariffs
will have an adverse effect on our results of operations, we have raised prices on certain products to attempt to offset the effect
of those tariffs, and we are also considering alternative sources of supply from manufacturers in other countries and moving certain
manufacturing activities to our Old Bridge Facility as additional ways to mitigate the effect of those tariffs. If our expectations
regarding the effect of the currently applicable tariffs prove to be incorrect and we are unable to offset or mitigate the effects
of those tariffs, our future operating results may be adversely affected.
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ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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Not applicable to smaller
reporting companies.
The Company’s
principal manufacturing, engineering, sales and administrative facilities consist of one building totaling approximately 130,000
square feet located on approximately 20 acres of land in Old Bridge, New Jersey (the “Old Bridge Facility”)
which was owned but currently is leased by the Company. On February 1, 2019, the Company completed the sale of the Old Bridge Facility
to Jake Brown Road, LLC (the “Buyer”). In addition, in connection with the completion of the sale, the Company
and the Buyer (as landlord) entered into a lease (the “Lease”), pursuant to which the Company will continue
to occupy, and continue to conduct its manufacturing, engineering, sales and administrative functions in the Old Bridge Facility.
The sale of the Old
Bridge Facility was made pursuant to an Agreement of Sale dated as of August 3, 2018 (the “Initial Sale Agreement”),
as amended by an Extension Letter Agreement dated as of September 20, 2018, the Second Amendment to Agreement of Sale dated as
of October 8, 2018 and the Third Amendment to Agreement of Sale dated as of January 30, 2019 (the Initial Sale Agreement together
with the Extension Letter Agreement, Second Amendment to Agreement of Sale and Third Amendment to Agreement of Sale, collectively,
the “Sale Agreement”). Pursuant to the Sale Agreement, at closing, the Buyer paid the Company $10,500,000. In
addition, at closing, the Company advanced to the Buyer the sum of $130,000, representing a preliminary estimate of the Company’s
share (as a tenant of the Old Bridge Facility following closing) of property repairs, as contemplated by the Sale Agreement. The
Company recognized a gain of $7,175,000 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 $856,000 in 2020, with the amount of the base rent adjusted for each subsequent
year to equal 102.5% of the preceding year’s base rent.
In addition, the Company
leases an engineering and sales facility consisting of one building totaling approximately 5,250 square feet in Springboro, Ohio.
The lease for this facility expires in October, 2021. The total lease obligation for the Springboro, Ohio facility will be approximately
$36,000 during 2020. Further, the Company leases an engineering facility consisting of one building totaling approximately 2,400
square feet in Fort Wayne, Indiana. The lease for this facility expires in May, 2020. The Company may extend the lease, find alternative
space or let the lease expire. The total lease obligation for the Fort Wayne, Indiana facility will be approximately $16,000 during
2020.
Management believes
that these facilities are adequate to support the Company’s anticipated needs in 2020.
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ITEM 3.
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LEGAL PROCEEDINGS
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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.
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ITEM 4.
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MINE SAFETY DISCLOSURES
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Not applicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 1 - Summary of Significant Accounting
Policies
(a) The 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 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.
(b) Cash
and Cash Equivalents
The Company considers
all highly liquid debt investments with a maturity of less than three months at purchase to be cash equivalents. The Company did
not have any cash equivalents at December 31, 2019 and 2018. Cash balances at financial institutions are insured by the Federal
Deposit Insurance Corporation (“FDIC”). At times, cash and cash equivalents may be uninsured or in deposit accounts
that exceed the FDIC insurance limit. Periodically, the Company evaluates the creditworthiness of the financial institutions and
evaluates its credit exposure.
(c) Accounts
Receivable and Allowance for Doubtful accounts
Accounts receivable
are customer obligations due under normal trade terms. The Company sells its products primarily to distributors and private cable
operators. The Company performs continuing credit evaluations of its customers’ financial condition and although the Company
generally does not require collateral, letters of credit may be required from its customers in certain circumstances.
Senior management reviews
accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The Company includes
any accounts receivable balances that are determined to be uncollectible, along with a general reserve based on historical experience,
in its overall allowance for doubtful accounts.
(d) Inventories
Inventories are stated
at the lower of cost, determined by the first-in, first-out (“FIFO”) method, or net realizable value.
The Company periodically
analyzes anticipated product sales based on historical results, current backlog and marketing plans. Based on these analyses, the
Company anticipates that certain products will not be sold during the next twelve months. Inventories that are not anticipated
to be sold in the next twelve months, have been classified as non-current.
The Company continually
analyzes its slow-moving and excess inventories. Based on historical and projected sales volumes 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.
(e) Property,
Plant and Equipment, Net
Property, plant and
equipment are stated at cost less accumulated depreciation. The Company provides for depreciation generally on the straight-line
method based upon estimated useful lives of 3 to 5 years for office equipment, 5 to 7 years for furniture and fixtures, 6 to 10
years for machinery and equipment, 10 to 15 years for building improvements and 40 years for the manufacturing and administrative
office facility.
BLONDER TONGUE LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(f) Goodwill
and Other Intangible Assets
The Company accounts
for goodwill and intangible assets in accordance with Accounting Standards Codification (“ASC”) ASC 350 Intangibles
- Goodwill and Other Intangible Assets (“ASC 350”). ASC 350 requires that goodwill and other intangibles with
indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value
of an asset has decreased below its carrying value.
Goodwill represents
the excess of the purchase price over the fair value of net assets acquired in business combinations. Accounting principles generally
accepted in the United States (“GAAP”) requires that goodwill be tested for impairment at the reporting unit
level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances
indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test
requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning
goodwill to reporting units, and determining the fair value. Significant judgment is required to estimate the fair value of reporting
units including estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates
and assumptions could materially affect the determination of fair value and/or goodwill impairment.
The Company’s
business includes one goodwill reporting unit. The Company annually reviews goodwill for possible impairment by comparing the fair
value of the reporting unit to the carrying value of the assets. If the fair value exceeds the carrying value of the net asset,
no goodwill impairment is deemed to exist. If the fair value does not exceed the carrying value, goodwill is tested for impairment
and written down to its implied fair value if it is determined to be impaired. The Company performed its annual goodwill impairment
test on December 31, 2019. Based upon its qualitative assessment, the Company determined that goodwill was not impaired.
The Company considers
its trade name to have an indefinite life and in accordance with ASC 350, will not be amortized and will be reviewed annually for
impairment.
The components of intangible
assets that are carried at cost less accumulated amortization at December 31, 2019 are as follows:
|
Description
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Net Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
1,365
|
|
|
$
|
1,081
|
|
|
$
|
284
|
|
|
Proprietary technology
|
|
|
349
|
|
|
|
276
|
|
|
|
73
|
|
|
Non-compete agreements
|
|
|
248
|
|
|
|
248
|
|
|
|
-
|
|
|
Amortized intangible assets
|
|
|
1,962
|
|
|
|
1,605
|
|
|
|
357
|
|
|
Non-Amortized Trade name
|
|
|
741
|
|
|
|
-
|
|
|
|
741
|
|
|
Total
|
|
$
|
2,703
|
|
|
$
|
1,605
|
|
|
$
|
1,098
|
|
The components of intangible
assets that are carried at cost less accumulated amortization at December 31, 2018 are as follows:
|
Description
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Net Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
1,365
|
|
|
$
|
944
|
|
|
$
|
421
|
|
|
Proprietary technology
|
|
|
349
|
|
|
|
242
|
|
|
|
107
|
|
|
Non-compete agreements
|
|
|
248
|
|
|
|
248
|
|
|
|
-
|
|
|
Amortized intangible assets
|
|
|
1,962
|
|
|
|
1,434
|
|
|
|
528
|
|
|
Non-Amortized Trade name
|
|
|
741
|
|
|
|
-
|
|
|
|
741
|
|
|
Total
|
|
$
|
2,703
|
|
|
$
|
1,434
|
|
|
$
|
1,269
|
|
Amortization is computed
utilizing the straight-line method over the estimated useful lives of 10 years for customer relationships, 10 years for proprietary
technology, and 3 years for non-compete agreements. Amortization expense for intangible assets was $171 for both years ended December
31, 2019 and 2018, respectively. Intangible asset amortization is projected to be approximately $171 per year in 2020 and 2021,
respectively and $15 in 2022.
BLONDER TONGUE LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(g) Long-Lived
Assets
The Company continually
monitors events and changes in circumstances that could indicate carrying amounts of the long-lived assets, including intangible
assets may not be recoverable. When such events or changes in circumstances occur, the Company assesses recoverability by determining
whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future
undiscounted cash flows are less than the carrying amount of these assets, an impairment loss is recognized based on the excess
of the carrying amount over the fair value of the assets. The Company did not recognize any intangible asset impairment charges
in 2019 and 2018.
(h) Treasury
Stock
Treasury Stock is
recorded at cost. Gains and losses on subsequent reissuance are recorded as increases or decreases to additional paid-in
capital with losses in excess of previously recorded gains charged directly to retained earnings. During 2019 and 2018, 173
shares and 81 shares, respectively of common stock were reissued from treasury.
(i) 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 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.
(j) Royalty
and License Expense
The Company records
royalty expense, as applicable, when the related products are sold. Royalty expense is recorded as a component of selling expenses.
Royalty expense was $25 and $45 for the years ended December 31, 2019 and 2018, respectively. The Company amortizes license fees
over the life of the relevant contract.
The components of intangible
assets consisting of license agreements that are carried at cost less accumulated amortization are as follows:
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
License agreements
|
|
$
|
6,058
|
|
|
$
|
6,005
|
|
|
Accumulated amortization
|
|
|
(6,038
|
)
|
|
|
(5,993
|
)
|
|
|
|
$
|
20
|
|
|
$
|
12
|
|
Amortization of license
fees is computed utilizing the straight-line method over the estimated useful life of 1 to 2 years. Amortization expense for license
fees was $45 and $38 in the years ended December 31, 2019 and 2018, respectively. Amortization expense for license fees is projected
to be approximately $20 in the year ending December 31, 2020.
(k) Foreign
Exchange
The Company uses
the United States dollar as its functional and reporting currency since the majority of the Company’s revenues,
expenses, assets and liabilities are in the United States and the focus of the Company’s operations is in that country.
Assets and liabilities in foreign currencies are translated using the exchange rate at the balance sheet date. Revenues and
expenses are translated at average rates of exchange during the year. Gains and losses from foreign currency transactions and
translation for the years ended December 31, 2019 and 2018 and cumulative translation gains and losses as of December 31,
2019 and 2018 were not material to the financial statements taken as a whole.
BLONDER TONGUE LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(l) Research
and Development
Research and development
expenditures for the Company’s projects are expensed as incurred.
(m) Revenue
Recognition
The Company generates
revenue through the sale of products and services.
Revenue is recognized
based on the following steps: (i) identification of contract with customer; (ii) determination of performance obligations;
(iii) measurement of the transaction price; (iv) allocation of the transaction price to the performance obligations;
and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
Revenue from the sale
of products and services is recorded when the performance obligation is fulfilled, usually at the time of shipment or when the
service is provided, at the net sales price (transaction price). Estimates of variable consideration, such as volume discounts
and rebates, are reviewed and revised periodically by management. The Company elected to present revenue net of sales tax and other
similar taxes and account for shipping and handling activities as fulfillment costs rather than separate performance obligations.
Payments are typically due in 30 days, following delivery of products or completion of services. The Company provides a three-year
warranty on most products. Warranty expense was de minimis in the two years ended December 31, 2019.
(n) Stock-based
compensation
The Company computes
stock-based compensation in accordance with authoritative guidance. The Company uses the Black-Scholes-Merton option pricing model
to determine the fair value of its stock options. The Black-Scholes-Merton option-pricing model includes various assumptions, including
the fair market value of the common stock of the Company, expected life of stock options, the expected volatility and the expected
risk-free interest rate, among others. These assumptions reflect the Company’s best estimates, but they involve inherent
uncertainties based on market conditions generally outside the control of the Company. Forfeitures are recorded when they occur.
(o) Income
Taxes
The Company accounts
for income taxes under the provisions of the Financial Accounting Standards Board (“FASB”) ASC Topic 740 “Income
Taxes” (“ASC Topic 740”). Deferred income taxes are provided for temporary differences in the recognition
of certain income and expenses for financial and tax reporting purposes. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
The Company will classify
as income tax expense any interest and penalties recognized in accordance with ASC Topic 740. The Company files income tax returns
primarily in the United States and New Jersey, along with certain other jurisdictions.
(p) Earnings
(loss) Per Share
Earnings (loss) per
share are 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 the following
potential common shares due to their antidilutive effect for the years ended December 31, 2019 and 2018:
|
|
|
2019
|
|
|
2018
|
|
|
Stock options
|
|
|
2,846
|
|
|
|
1,157
|
|
|
Warrants
|
|
|
100
|
|
|
|
100
|
|
|
Convertible debt
|
|
|
-
|
|
|
|
257
|
|
|
|
|
|
2,946
|
|
|
|
1,514
|
|
BLONDER TONGUE LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(q) Other
Comprehensive Income (loss)
Comprehensive income
(loss) is a measure of income which includes both net loss and other comprehensive income (loss). Other comprehensive income (loss)
results from items deferred from recognition into the statement of operations and principally consists of unrecognized pension
losses net of taxes. Accumulated other comprehensive loss is separately presented on the Company's consolidated balance sheet as
part of stockholders’ equity.
(r) Subsequent
Events
The Company evaluates
events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation,
the Company did not identify any additional recognized or non-recognized subsequent events that would require adjustment to or
disclosure in the consolidated financial statements.
(s) 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 was 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 7. 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 a collateralized rate based on the term
of the lease based on the information available at the date of adoption of Topic 842. As of December 31, 2019, the weighted average
remaining lease term is 3.99 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 CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(t) 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 does not believe
that the adoption of this new standard will have a material impact 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 does not believe that the adoption of this new standard will have a material impact on its
financial position, results of operations or financial statement disclosure.
(u) Going Concern
The accompanying financial
statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities and commitments in the normal course of business. During the year ended December 31, 2019,
the Company experienced a decline in sales, a reduction in working capital, reported a loss from operations and net cash used in
operating activities, in conjunction with liquidity constraints. The above factors raise substantial doubt about the Company’s
ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability
of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue
as a going concern.
In response to lower
than expected sales due to a slowdown in market activities experienced during the fiscal year, the Company implemented a multi-phase
cost-reduction program which is expected to reduce annualized expenses by approximately $2,000, including a decrease in workforce
and a decrease in other operating expenses.
The Company’s
primary sources of liquidity are its existing cash balances, cash generated from operations and amounts available under the MidCap
Facility (as such terms are defined in Note 5 below). As of December 31, 2019, the Company had approximately $2,705 outstanding
under the MidCap Facility (as defined in Note 5 below) and $800 of additional availability for borrowing under the MidCap Facility.
As previously announced,
on April 7, 2020, the Company and MidCap agreed to amend the terms of the MidCap Facility to remove the $400 availability block.
Removal of the block is subject to certain conditions, including the Company securing additional debt or equity financing of at
least $500. The Company has obtained financing that meets the requirements for removal of the block. See Note 17 – Subsequent
Events for additional information regarding the amendment of the MidCap Facility and the financing.
If anticipated operating
results are not achieved and/or the Company is unable to obtain additional financing, it may be required to take additional measures
to reduce costs in order to conserve its cash in amounts sufficient to sustain operations and meet its obligations, which measures
could have a material adverse effect on the Company’s ability to achieve its intended business objectives and may be insufficient
to enable the Company to continue as a going concern.
BLONDER TONGUE LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 2 - Revenue
The Company recognized
revenue when it satisfies a performance obligation by transferring the product or service to the customer, typically at a point
in time.
Disaggregation of
Revenue
The following table
presents the Company’s disaggregated revenues by revenue source:
|
|
|
Years ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Digital video headend products
|
|
$
|
6,714
|
|
|
$
|
10,308
|
|
|
DOCSIS data products
|
|
|
2,817
|
|
|
|
4,583
|
|
|
CPE products
|
|
|
3,977
|
|
|
|
-
|
|
|
NXG products
|
|
|
913
|
|
|
|
186
|
|
|
HFC distribution products
|
|
|
2,509
|
|
|
|
3,217
|
|
|
Analog video headend products
|
|
|
1,532
|
|
|
|
1,661
|
|
|
Contract manufactured products
|
|
|
602
|
|
|
|
791
|
|
|
Other
|
|
|
778
|
|
|
|
961
|
|
|
|
|
$
|
19,842
|
|
|
$
|
21,707
|
|
All of the Company’s sales are to
customers located in North America.
The Company is a technology-development
and manufacturing company that delivers a wide range of products and services to the cable entertainment and media industry. Digital
video headend products (including encoders) are used by a system operator for acquisition, processing, compression, encoding and
management of digital video. DOCSIS 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. CPE
products are used by cable operators to provide video delivery to customers using IP technology. 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
also provides technical services, including hands-on training, system design engineering, on-site field support and complete system
verification testing.
Note 3 - Inventories
Inventories, net of reserves, are summarized as follows:
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Raw materials
|
|
$
|
2,891
|
|
|
$
|
2,581
|
|
|
Work in process
|
|
|
1,252
|
|
|
|
1,573
|
|
|
Finished goods
|
|
|
4,341
|
|
|
|
2,569
|
|
|
|
|
|
8,484
|
|
|
|
6,723
|
|
|
Less current inventory
|
|
|
(8,484
|
)
|
|
|
(6,172
|
)
|
|
|
|
$
|
-
|
|
|
$
|
551
|
|
The Company recorded a provision to reduce the carrying amount
of inventories to their net realizable value in the amount of $3,877 and $2,614 at December 31, 2019 and 2018, respectively.
BLONDER TONGUE LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 4 - Property, Plant and Equipment
Property, plant and
equipment are summarized as follows:
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Land
|
|
$
|
-
|
|
|
$
|
1,000
|
|
|
Building
|
|
|
-
|
|
|
|
3,361
|
|
|
Machinery and equipment
|
|
|
10,620
|
|
|
|
10,636
|
|
|
Furniture and fixtures
|
|
|
440
|
|
|
|
440
|
|
|
Office equipment
|
|
|
2,456
|
|
|
|
2,401
|
|
|
Building improvements
|
|
|
103
|
|
|
|
1,458
|
|
|
|
|
|
13,619
|
|
|
|
19,296
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(13,227
|
)
|
|
|
(16,406
|
)
|
|
|
|
$
|
392
|
|
|
$
|
2,890
|
|
Depreciation expense amounted to approximately $171 and $312
during the years ended December 31, 2019 and 2018, respectively.
On February 1, 2019,
the Company completed the sale of the Old Bridge Facility to Jake Brown Road, LLC (the “Buyer”). In addition,
in connection with the completion of the sale, the Company and the Buyer (as landlord) entered into a lease (the “Lease”),
pursuant to which the Company will continue to occupy, and continue to conduct its manufacturing, engineering, sales and administrative
functions in the Old Bridge Facility.
The sale of the Old
Bridge Facility was made pursuant to an Agreement of Sale dated as of August 3, 2018 as amended and extended (collectively, the
“Sale Agreement”). Pursuant to the Sale Agreement, at closing, Buyer paid the Company $10,500. In addition,
at closing, the Company advanced to the Buyer the sum of $130, representing a preliminary estimate of the Company’s share
(as a tenant of the Old Bridge Facility following closing) of property repairs, as contemplated by the Sale Agreement. The
Company recognized a gain of $7,175 in connection with the sale.
The Lease will have
an initial term of five years and allows the Company to extend the term for an additional five years following the initial term.
The Company is obligated to pay base rent of approximately $837 for the first year of the lease with the amount of base rent adjusted
for each subsequent year to equal 102.5% of the preceding year’s base rent. The Lease will be accounted for under Topic 842
as described in Note 1.
Note 5 – Debt
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 was initially required to maintain minimum availability of $500, with the minimum availability to be reduced
to $400 upon the deliverance of an inventory appraisal satisfactory to MidCap, which occurred during the fourth quarter 2019.
BLONDER TONGUE LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
The MidCap Facility
replaces the Sterling Facility and the Sterling Agreement, which has been terminated.
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 a $3,500 amortizing term loan (the “Term Loan”). The
Sterling Facility would have matured in December 2019. Interest on the Revolver was variable, based upon the 30-day LIBOR
rate (2.52% at December 31, 2018 ) plus a margin of 4.00%. Interest on the Term Loan also was variable, based upon the 30-day
LIBOR rate (2.52% at December 31, 2018 ) plus a margin of 4.50%. The Term Loan amortized at the rate of $19 per month. 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 obligated 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.
In connection with
the completion of the sale of the Old Bridge Facility (see Note 4) and entry into the Lease, the Company, R. L. Drake Holdings,
LLC, a wholly-owned subsidiary of the Company (“Drake”) and Blonder Tongue Far East, LLC, a wholly-owned subsidiary
of the Company (“Far East,” and together with the Company and RLD, collectively the “Credit Parties”)
entered into a Consent Under Loan and Security Agreement (the “Consent”) with Sterling National Bank (as lender
and as administrative agent, “Sterling”). The Consent relates to the Loan and Security Agreement (the “Loan
Agreement”) entered into by the Credit Parties and Sterling on December 28, 2016. Under the terms of the Loan Agreement,
Sterling’s consent was required in order for the Company to complete the sale of the Old Bridge Facility. In addition to
providing Sterling’s consent to the sale, the Consent requires Sterling to execute and deliver a Discharge of Mortgage and
Assignment of Leases and Rents (the “Discharge”) to effect the discharge of Sterling’s interests in the
Property (as defined in the Consent) originally granted to Sterling in the Mortgage, Assignment of Leases and Rents, Security Agreement,
Fixture Filing and Financing Statement entered into in connection with the Loan Agreement. The Company paid approximately $3,014
to pay off the Term Loan in connection with the Discharge. In addition, the Company paid off the outstanding balance under the
Revolver of approximately $2,086.
Long-term debt consists
of the following:
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Term loan - repaid in full on February1, 2019
|
|
$
|
-
|
|
|
$
|
3,053
|
|
|
Financing leases (Note 7)
|
|
|
80
|
|
|
|
54
|
|
|
|
|
|
80
|
|
|
|
3,107
|
|
|
Less: Current portion
|
|
|
(33
|
)
|
|
|
(3,075
|
)
|
|
|
|
$
|
47
|
|
|
$
|
32
|
|
Annual maturities of long term debt at December 31, 2019 are
$33 in 2020, $24 in 2021, $11 in 2022, $8 in 2023 and $4 in 2024.
BLONDER TONGUE LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 6 – Subordinated Convertible Debt with Related
Parties
On March 28,
2016, the Company and its wholly-owned subsidiary, R.L. Drake Holdings, LLC (“Drake”), as borrowers and
Robert J. Pallé, as agent (in such capacity “Agent”) and as a lender, together with Carol M.
Pallé, Steven Shea and James H. Williams as lenders (collectively, the “Subordinated Lenders”)
entered into a certain Amended and Restated Senior Subordinated Convertible Loan and Security Agreement (the
“Subordinated Loan Agreement”), pursuant to which the Subordinated Lenders agreed to provide the Company
with a delayed draw term loan facility of up to $750 (“Subordinated Loan Facility”), under which
individual advances in amounts not less than $50 may be drawn by the Company. Interest on the outstanding balance under the
Subordinated Loan Facility from time to time, accrues at 12% per annum (subject to increase under certain circumstances) and
is payable monthly in-kind by the automatic increase of the principal amount of the loan on each monthly interest payment
date, by the amount of the accrued interest payable at that time (“PIK Interest”); provided, however, that
at the option of the Company, it may pay interest in cash on any interest payment date, in lieu of PIK Interest. The
Subordinated Lenders have the option of converting the principal balance of the loan, in whole (unless otherwise agreed by
the Company), into shares of the Company’s common stock at a conversion price of $0.54 per share (subject to adjustment
under certain circumstances). This conversion right was subject to stockholder approval as required by the rules of the NYSE
MKT, which approval was obtained on May 24, 2016 at the Company’s annual meeting of stockholders. The obligations of
the Company and Drake under the Subordinated Loan Agreement are secured by substantially all of the Company’s and
Drake’s assets, including by a mortgage against the Old Bridge Facility (the “Subordinated
Mortgage”). The Subordinated Loan Agreement terminated 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, was to be due
and payable in full.
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 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 subordinate 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.
As of December 31,
2018, the Subordinated Lenders had advanced $500 to the Company. In addition, $39 and of PIK interest was accrued as of December
31, 2018. As noted above, in October and April 2018, an aggregate of $522 under the Subordinated Loan Facility was converted by
certain Subordinated Lenders. In addition, during the year ended December 31, 2019 and 2018, the Company incurred interest of $1
and $37 respectively, related to these loans.
On January 24, 2019,
the Company and Drake (with the Company, collectively, the “Borrower”) entered into a Debt Conversion and Lien
Termination Agreement (the “Conversion and Termination Agreement”) with Robert J. Pallé (“RJP”)
and Carol M. Pallé (collectively, “Initial Lenders”), and Steven L. Shea and James H. Williams (collectively,
the “Supplemental Lenders,” and together with the Initial Lenders, collectively, the “Lenders”),
and Robert J. Pallé, as Agent for the Lenders (in such capacity, the “Agent”).
As 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 the Initial Lenders remained subject to a commitment to
lend Borrowers up to an additional $250 (the “Additional Commitment”).
In connection with
the anticipated completion of the sale of the Old Bridge Facility, the Borrower, the Lenders and the Agent entered into the Conversion
and Termination Agreement to provide for (i) the full payment of the Shea Indebtedness (unless such amounts were converted into
shares of common stock prior to repayment), (ii) the termination of the Additional Commitment and (iii) the release and termination
of all liens and security interests in the collateral under the Subordinated Loan Documents, including with respect to the Subordinated
Mortgages, each to become effective as of the closing of the sale of the Old Bridge Facility. In connection with the execution
and delivery of the Conversion and Termination Agreement by the Borrower, the Lenders and the Agent, Shea provided the Company
with a notice of conversion, and upon completion of the sale of the Old Bridge Facility was issued 260 shares of Company common
stock in full satisfaction of the Shea Indebtedness.
BLONDER TONGUE LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 7 – Leases
The Company recognizes
right-of-use (“ROU”) assets and lease liabilities when it obtains the right to control an asset under a leasing
arrangement with an initial term greater than twelve months. The Company leases its real estate and certain office equipment under
non-cancellable operating leases, and certain office and factory equipment under non-cancellable financing leases.
The Company evaluates
the nature of each lease at the inception of an arrangement to determine whether it is an operating or financing lease and recognizes
the ROU asset and lease liabilities based on the present value of future minimum lease payments over the expected lease term. The
Company’s leases do not generally contain an implicit interest rate and therefore the Company uses the incremental borrowing
rate it would expect to pay to borrow on a similar collateralized basis over a similar term in order to determine the present value
of its lease payments.
The following table
summarizes the Company’s operating and financing lease expense as of December 31, 2019:
|
Operating lease cost
|
|
$
|
1,155
|
|
|
Financing lease cost
|
|
|
20
|
|
|
Total
|
|
$
|
1,175
|
|
|
Weighted average remaining lease term
|
|
|
4.0
|
|
|
Weighted average discount rate-operating leases
|
|
|
6.5
|
%
|
Maturities of the Company’s
operating leases, excluding short term leases are as follows:
|
2020
|
|
$
|
944
|
|
|
2021
|
|
|
939
|
|
|
2022
|
|
|
901
|
|
|
2023
|
|
|
922
|
|
|
2024
|
|
|
77
|
|
|
Thereafter
|
|
|
-
|
|
|
Total
|
|
|
3,783
|
|
|
Less: present value discount
|
|
|
(464
|
)
|
|
Total operating lease liabilities
|
|
$
|
3,319
|
|
Note 8- Commitments and Contingencies
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 current 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 9 – Benefit
Plans
Defined Contribution Plan
The Company has a defined
contribution plan covering all full time employees qualified under Section 401(k) of the Internal Revenue Code, in which the Company
matches a portion of an employee’s salary deferral. The Company’s contributions to this plan were $170 and $155, for
the years ended December 31, 2019 and 2018, respectively.
BLONDER TONGUE LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Defined Benefit Pension Plan
At December 31, 2019,
approximately 25% of the Company’s employees were covered by a collective bargaining agreement, that is scheduled to expire
in February 2022.
Substantially all union
employees who met certain requirements of age, length of service and hours worked per year were covered by a Company sponsored
non-contributory defined benefit pension plan. Benefits paid to retirees are based upon age at retirement and years of credited
service.
On August 1, 2006,
the plan was frozen. The defined benefit pension plan is closed to new entrants and existing participants do not accrue any additional
benefits. The Company complies with minimum funding requirements. The total expense for this plan was $146 in 2019 and $48 in 2018,
respectively.
The Company recognizes
the funded status of its defined benefit pension plan measured as the difference between the fair value of the plan assets and
the projected benefit obligation, in the Consolidated Balance Sheets. As of December 31, 2019 and 2018, the funded status
related to the defined benefit pension plan was overfunded by $89 and $288, respectively, and is recorded in current assets.
Note 10 - 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 years ended December
31, 2019 and 2018, this law firm billed the Company approximately $544 and $752, respectively for legal services provided by this
firm. There were no amounts owed to this firm at either December 31, 2019 or 2018.
Note 11 - Concentration of Credit Risk
Financial instruments
that potentially subject the Company to significant concentrations of credit risk consist principally of cash deposits and trade
accounts receivable.
Credit risk with respect
to trade accounts receivable was concentrated with three of the Company’s customers in both 2019 and 2018, respectively.
These customers accounted for approximately 47% of the Company’s outstanding trade accounts receivable at both December 31,
2019 and 2018, respectively. The Company performs ongoing credit evaluations of its customers’ financial condition, uses
credit insurance and requires collateral, such as letters of credit, to mitigate its credit risk. The deterioration of the financial
condition of one or more of its major customers could adversely impact the Company’s operations. From time to time where
the Company determines that circumstances warrant, such as when a customer agrees to commit to a large blanket purchase order,
the Company extends payment terms beyond its standard payment terms.
The following table
summarizes credit risk with respect to customers as percentage of sales for the years ended December 31, 2019 and 2018:
|
|
|
Years ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Customer A
|
|
|
11
|
%
|
|
|
14
|
%
|
|
Customer B
|
|
|
12
|
%
|
|
|
23
|
%
|
|
Customer C
|
|
|
12
|
%
|
|
|
-
|
|
The following table
summarizes credit risk with respect to customers as percentage of accounts receivable:
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Customer A
|
|
|
19
|
%
|
|
|
14
|
%
|
|
Customer B
|
|
|
17
|
%
|
|
|
22
|
%
|
|
Customer C
|
|
|
-
|
|
|
|
-
|
|
|
Customer D
|
|
|
11
|
%
|
|
|
-
|
|
|
Customer E
|
|
|
-
|
|
|
|
11
|
%
|
BLONDER TONGUE LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
The following table
summarizes credit risk with respect to vendors as percentage of purchases for the years ended December 31, 2019 and 2018:
|
|
|
Years ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Vendor A
|
|
|
37
|
%
|
|
|
-
|
|
|
Vendor B
|
|
|
14
|
%
|
|
|
26
|
%
|
|
Vendor C
|
|
|
-
|
|
|
|
17
|
%
|
|
Vendor D
|
|
|
-
|
|
|
|
14
|
%
|
The following table
summarizes credit risk with respect to vendors as percentage of accounts payable:
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Vendor A
|
|
|
84
|
%
|
|
|
-
|
|
|
Vendor B
|
|
|
-
|
|
|
|
64
|
%
|
Note 12 – Stock Repurchase Program
On July 24, 2002, the
Company commenced a stock repurchase program to acquire up to $300 of its outstanding common stock (the “2002 Program”).
The stock repurchase was funded by a combination of the Company’s cash on hand and borrowings against its revolving line
of credit. On February 13, 2007, the Company announced a new stock repurchase program to acquire up to an additional 100 shares
of its outstanding common stock (the “2007 Program”). As of December 31, 2019, the Company can purchase up to
$72 of its common stock under the 2002 Program and up to 100 shares of its common stock under the 2007 Program. The Company may,
in its discretion, continue making purchases under the 2002 Program up to its limits, and thereafter to make purchases under the
2007 Program. During 2019 and 2018, the Company did not purchase any of its Common Stock under the 2002 Program or 2007 Program.
Note 13 – Executive Stock Purchase Plan
On June 16, 2014, the
Company’s Board of Directors adopted the Executive Stock Purchase Plan (the “Plan”). The Plan allows executive
officers of the Company to elect to purchase common stock of the Company in lieu of receiving a portion of their salary. The maximum
number of shares of common stock that can be purchased by all participants, in the aggregate, pursuant to the Plan is 250 shares.
The shares will be purchased directly from the Company at the fair market value of the Company’s common stock on the date
of purchase (based on selling prices reported on NYSE American), which is the payroll date when the salary is withheld. As of December
31, 2019, approximately 35 shares were purchased under the Plan.
Note 14 – Preferred Stock
The Company is authorized
to issue 5,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from
time to time by the Board of Directors. At December 31, 2019 and 2018, there were no outstanding preferred shares.
BLONDER TONGUE LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 15 – Equity Incentive Plans
In May 2016, the stockholders
of the Company approved the 2016 Employee Equity Incentive Plan (the “2016 Employee Plan”), which authorized
the Compensation Committee of the Board of Directors (the “Committee”) to grant a maximum of 1,000 shares of
equity based and other performance based awards to executive officers and other key employees of the Company. The term of the 2016
Employee Plan expires on February 4, 2026. In May 2017, the stockholders of the Company approved an amendment to the 2016 Employee
Plan to increase the annual individual award limits relating to stock options and stock appreciation rights from 100 to 250 shares
of Common Stock. In June 2018, the stockholders of the Company approved an amendment to the 2016 Employee Plan to increase the
maximum number of equity based and other performance awards to 3,000. The Committee determines the recipients and the terms of
the awards granted under the 2016 Employee Plan, including the type of awards, exercise price, number of shares subject to the
award and the exercisability thereof.
In May 2005, the stockholders
of the Company approved the 2005 Employee Equity Incentive Plan (the “Employee Plan”), which initially authorized
the Compensation Committee of the Board of Directors (the “Committee”) to grant a maximum of 500 shares of equity
based and other performance based awards to executive officers and other key employees of the Company. In May 2007, the stockholders
of the Company approved an amendment to the Employee Plan to increase the maximum number of equity based and other performance
awards to 1,100. In May 2010, the stockholders of the Company approved an amendment to the Employee Plan to increase the maximum
number of equity based and other performance awards to 1,600. In May 2014, the stockholders of the Company approved the amendment
and restatement of the Employee Plan to extend the term of the Employee Plan to February 7, 2024 and increase the maximum number
of equity based and other performance awards to 2,600. In June 2018, the stockholders of the Company approved an amendment to the
Employee Plan to increase the maximum number of equity based and other performance awards to 2,700. The Committee determines the
recipients and the terms of the awards granted under the Employee Plan, including the type of awards, exercise price, number of
shares subject to the award and the exercisability thereof.
In May 2016, the stockholders
of the Company approved the 2016 Director Equity Incentive Plan (the “2016 Director Plan”). The 2016 Director
Plan authorizes the Board of Directors (the “Board”) to grant a maximum of 400 shares of equity based and other
performance based awards to non-employee directors of the Company. The term of the 2016 Director Plan expires on February 4, 2026.
The Board determines the recipients and the terms of the awards granted under the 2016 Director Plan, including the type of awards,
exercise price, number of shares subject to the award and the exercisability thereof.
In May 2005, the stockholders
of the Company approved the 2005 Director Equity Incentive Plan (the “Director Plan”). The Director Plan authorizes
the Board of Directors (the “Board”) to grant a maximum of 200 shares of equity based and other performance
based awards to non-employee directors of the Company. In May 2010, the stockholders of the Company approved an amendment to the
Director Plan to increase the maximum number of equity based and other performance awards to 400. In May 2014, the stockholders
of the Company approved the amendment and restatement of the Director Plan to extend the term of the Director Plan to February
7, 2024 and increase the maximum number of equity based and other performance awards to 600. The Board determines the recipients
and the terms of the awards granted under the Director Plan, including the type of awards, exercise price, number of shares subject
to the award and the exercisability thereof.
The Company issues
performance based stock options to employees. The Company estimates the fair value of performance stock option awards using the
Black-Scholes-Merton option pricing model. Compensation expense for stock option awards is amortized on a straight-line basis over
the awards’ vesting period.
The expected term of
the stock options represents the average period the stock options are expected to remain outstanding and is based on the expected
term calculated using the approach prescribed by the Securities and Exchange Commission's Staff Accounting Bulletin No. 110 for
“plain vanilla” options. The expected stock price volatility for the Company’s stock options was determined by
using an average of the historical volatilities of the Company. The Company will continue to analyze the stock price volatility
and expected term assumptions as more data for the Company’s common stock and exercise patterns become available. The risk-free
interest rate assumption is based on the U.S. Treasury instruments whose term was consistent with the expected term of the Company’s
stock options. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts. The
Company does not estimate forfeitures based on historical experience but rather reduces compensation expense when they occur.
BLONDER TONGUE LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
The fair value of employee
stock options is being amortized on a straight-line basis over the requisite service periods of the respective awards. The fair
value of employee stock options was estimated using the following weighted-average assumptions:
|
|
|
Years ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Fair value of the company’s common stock on date of grant
|
|
$
|
1.10
|
|
|
$
|
0.95
|
|
|
Expected term
|
|
|
6.5 years
|
|
|
|
6.5 years
|
|
|
Risk free interest rate
|
|
|
2.38
|
%
|
|
|
2.92
|
%
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Volatility
|
|
|
79.0
|
%
|
|
|
79.0
|
%
|
|
Fair value of options granted
|
|
$
|
0.77
|
|
|
$
|
0.68
|
|
The following table summarizes total stock-based
compensation costs recognized for the years ended December 31, 2019 and 2018:
|
|
|
Years ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Cost of goods sold
|
|
$
|
47
|
|
|
$
|
38
|
|
|
Selling expenses
|
|
|
101
|
|
|
|
74
|
|
|
General and administrative
|
|
|
280
|
|
|
|
263
|
|
|
Research and development
|
|
|
191
|
|
|
|
118
|
|
|
Total
|
|
$
|
619
|
|
|
$
|
493
|
|
The following table
summarizes information about stock-based awards outstanding for the year ended December 31, 2019:
|
Plan
|
|
Stock Options
|
|
|
Restricted Stock
|
|
|
Total
|
|
|
2016 Employee Plan
|
|
|
1,666
|
|
|
|
-
|
|
|
|
1,666
|
|
|
2016 Director Plan
|
|
|
279
|
|
|
|
-
|
|
|
|
279
|
|
|
Other
|
|
|
500
|
|
|
|
|
|
|
|
500
|
|
|
2005 Employee Plan
|
|
|
1,174
|
|
|
|
-
|
|
|
|
1,174
|
|
|
2005 Director Plan
|
|
|
352
|
|
|
|
-
|
|
|
|
352
|
|
|
|
|
|
3,971
|
|
|
|
-
|
|
|
|
3,971
|
|
|
Stock-based awards available for grant as of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
913
|
|
BLONDER TONGUE LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Stock options award
activity for the year ended December 31, 2019 is as follows:
|
|
|
Number of shares
|
|
|
Weighted-Average Exercise Price
|
|
|
Weighted-Average Contractual Term
|
|
|
Aggregate Intrinsic Value
|
|
|
Outstanding at January 1, 2019
|
|
|
3,656
|
|
|
$
|
0.88
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
438
|
|
|
|
1.09
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(12
|
)
|
|
|
0.55
|
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(67
|
)
|
|
|
0.86
|
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(44
|
)
|
|
|
0.96
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
3,971
|
|
|
$
|
0.91
|
|
|
|
6.7
|
|
|
$
|
221
|
|
|
Exercisable at December 31, 2019
|
|
|
2,293
|
|
|
$
|
0.94
|
|
|
|
5.5
|
|
|
$
|
115
|
|
During the year ended December 31, 2019, the Company granted
options under the 2016 Employee Plan, the 2016 Director Plan and the 2005 Director Plan to purchase 438 shares of common stock
to its employees and directors. The fair value of these options was approximately $339.
The aggregate intrinsic
value of stock options is calculated as the difference between exercise price of the underlying stock options and the fair value
of the Company’s common stock or $0.76 per share at December 31, 2019.
Restricted stock award activity is as follows:
|
|
|
Number of shares
|
|
|
Weighted-Average Grant Date Fair Value per Share
|
|
|
Unvested restricted stock awards outstanding at January1, 2019
|
|
|
136
|
|
|
$
|
0.71
|
|
|
Restricted stock awards granted
|
|
|
-
|
|
|
|
-
|
|
|
Restricted stock awards vested
|
|
|
(134
|
)
|
|
|
0.71
|
|
|
Restricted stock awards forfeited
|
|
|
(2
|
)
|
|
|
0.62
|
|
|
Unvested restricted stock awards outstanding at December 31, 2019
|
|
|
-
|
|
|
|
-
|
|
During the year ended
December 31, 2019, the Company did not grant any restricted stock awards.
BLONDER TONGUE LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
The Company does not
capitalize any cost associated with stock-based compensation.
The Company issues
new shares of common stock (or reduces the amount of treasury stock) upon exercise of stock options or release of restricted stock
awards.
In August 2012, the
Company issued a 10-year warrant to purchase 100 shares of common stock of the Company to Adaptive Micro-Ware, Inc., an Indiana
corporation (“AMW”). The warrant was granted as partial consideration in connection with a commercial licensing
and manufacturing agreement between the Company and AMW. The warrant is exercisable at $1.09 per share, and the warrant vested
one-third (1/3) on May 23, 2013, one-third (1/3) on May 23, 2014 and one-third (1/3) on May 23, 2015. The fair value of the warrant
was not deemed to be material.
Note 16 - Income Taxes
The following summarizes the benefit for
income taxes for the years ended December 31, 2019 and 2018:
|
|
|
2019
|
|
|
2018
|
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
State and local
|
|
|
15
|
|
|
|
27
|
|
|
|
|
|
15
|
|
|
|
27
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(43
|
)
|
|
|
(270
|
)
|
|
State and local
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
|
|
(44
|
)
|
|
|
(273
|
)
|
|
Valuation allowance
|
|
|
44
|
|
|
|
169
|
|
|
Provision for income taxes
|
|
$
|
15
|
|
|
$
|
(77
|
)
|
The benefit for income taxes differs from
the amounts computed by applying the applicable Federal statutory rates due to the following for the years ended December 31, 2019
and 2018:
|
|
|
2019
|
|
|
2018
|
|
|
Provision (benefit) for Federal income taxes at the statutory rate
|
|
$
|
(153
|
)
|
|
$
|
(297
|
)
|
|
State and local income taxes, net of Federal benefit
|
|
|
11
|
|
|
|
(11
|
)
|
|
Permanent differences:
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
84
|
|
|
|
62
|
|
|
Change in valuation allowance
|
|
|
44
|
|
|
|
169
|
|
|
Rate differential
|
|
|
-
|
|
|
|
-
|
|
|
Other
|
|
|
29
|
|
|
|
-
|
|
|
Provision (benefit) for income taxes
|
|
$
|
15
|
|
|
$
|
(77
|
)
|
BLONDER TONGUE LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Significant components of the Company’s
deferred tax assets and liabilities are as follows:
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
6
|
|
|
$
|
11
|
|
|
Inventories
|
|
|
827
|
|
|
|
771
|
|
|
Intangible
|
|
|
122
|
|
|
|
112
|
|
|
Share based compensation
|
|
|
192
|
|
|
|
125
|
|
|
Net operating loss carry forward
|
|
|
5,940
|
|
|
|
6,109
|
|
|
Depreciation
|
|
|
11
|
|
|
|
-
|
|
|
Pension liability
|
|
|
30
|
|
|
|
-
|
|
|
Other
|
|
|
2
|
|
|
|
2
|
|
|
Total deferred tax assets
|
|
|
7,130
|
|
|
|
7,130
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
-
|
|
|
|
(60
|
)
|
|
Intangible
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
Pension liability
|
|
|
-
|
|
|
|
(1
|
)
|
|
Indefinite life intangibles
|
|
|
(139
|
)
|
|
|
(122
|
)
|
|
Total deferred tax liabilities
|
|
|
(143
|
)
|
|
|
(187
|
)
|
|
|
|
|
6,987
|
|
|
|
6,943
|
|
|
Valuation allowance
|
|
|
(6,987
|
)
|
|
|
(6,943
|
)
|
|
Net
|
|
$
|
-
|
|
|
$
|
-
|
|
For the year ended
December 31, 2019, the Company had approximately $26,295 and $15,298 of federal and state net operating loss carryovers ("NOL"),
respectively, which begin to expire in 2022. Additionally, there are federal NOL carryovers of $1,755 which do not expire.
The change in the valuation
allowance for the years ended December 31, 2019 and December 31, 2018 was $44 and $169, respectively.
In assessing the
realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income and taxing strategies in making this
assessment. The decision to record this valuation allowance was based on management evaluating all positive and negative
evidence. The significant negative evidence includes a loss for the current year, a cumulative pre-tax loss for the three
years ended December 31, 2019, the inability to carryback the net operating losses, limited future reversals of existing
temporary differences and the limited availability of tax planning strategies. The Company expects to continue to provide a
full valuation allowance until, or unless, it can sustain a level of profitability that demonstrates its ability to utilize
these assets.
The Company had no
change in its liability for uncertain tax position during 2019 and no liabilities for uncertain tax positions as of December 31,
2019. ASC 740 discusses the classification of related interest and penalties on income taxes. The Company’s policy is to
record interest and penalties incurred in connection with income taxes as a component of income tax expense. No interest or penalties
were recorded during the years ended December 31, 2019 and 2018.
The Company is required
to file U.S. federal and state income tax returns. These returns are subject to audit by tax authorities beginning with the year
ended December 31, 2016 or tax years beginning with the year ended December 31,2002 as the Company utilizes net operating losses.
BLONDER TONGUE LABORATORIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Note 17 – Subsequent Events
In March 2020, the
World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic which continues to spread throughout
the United States. On March 21, 2020 the Governor of New Jersey declared a health emergency and issued an order to close all nonessential
businesses until further notice. As a maker of telecommunication equipment, the Company is deemed to be an essential business.
Nonetheless, out of concern for our workers and pursuant to the government order, the Company has reduced the scope of its operations
and where possible, certain workers are telecommuting from their homes. While the Company expects this matter to negatively impact
its results of operations, cash flows and financial position, the related impact cannot be reasonably estimated at this time.
On April 7, 2020, the
Company entered into a certain Consent and Amendment to Loan Agreement and Loan Documents with Midcap (the “MidCap First
Amendment”), which amended the MidCap Facility to, among other things, remove the existing $400 availability block, subject
to the same being re-imposed at the rate of approximately $7 per month commencing June 1, 2020. The operative provisions relating
to the removal of the availability block under the MidCap First Amendment became effective on April 8, 2020, following the consummation
by the Company of the transactions contemplated by the Subordinated Loan Facility (defined below).
On April 8, 2020, the
Company, as borrower, together with Livewire Ventures, LLC (wholly owned by the Company’s Chief Executive Officer, Edward
R. Grauch), MidAtlantic IRA, LLC FBO Steven L. Shea IRA (an IRA account for the benefit of the Company’s Chairman of the
Board, Steven Shea), Carol M. Pallé and Robert J. Pallé, Anthony J. Bruno, and Stephen K. Necessary, as lenders (collectively,
the “Subordinated Lenders”) and Robert J. Pallé, as Agent for the Lenders (in such capacity, the “Agent”)
entered into a certain Senior Subordinated Convertible Loan and Security Agreement (the “Subordinated Loan Agreement”),
pursuant to which the Subordinated Lenders agreed to provide the Company with a “Tranche A” term loan facility of $800
(“Subordinated Loan Facility”) of which $600 was advanced to the Company on April 8, 2020 and the balance of which
is anticipated to be advanced to the Company within several days after such date. Interest will accrue on the Subordinated Loan
Facility at the rate of 12% per annum, compounded and 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 participating in the Tranche A term loan facility have the option of converting the principal
balance of the loan held by each of them, in whole (unless otherwise agreed by the Company), into shares of the Company’s
common stock at a conversion price equal to the volume weighted average price of the Common Stock as reported by the NYSE American,
during the five trading days preceding April 8, 2020 (the “Tranche A Conversion Price”). The conversion right is subject
to stockholder approval as required by the rules of the NYSE American, and is expected to be obtained on June 11, 2020 at the Company’s
annual meeting of stockholders.
The Subordinated Loan
Agreement provides for up to an additional $700 of subordinated convertible loans, to be designated as “Tranche B”
and “Tranche C” term loans thereunder, up to a maximum amount of $1,500. Additional loans under the Subordinated Loan
Agreement are in all cases subject to the mutual agreement of the Company and the existing Subordinated Lenders, and neither the
Company nor the existing Subordinated Lenders are obligated to make any additional loans under the Subordinated Loan Agreement.
If any Tranche B or Tranche C term loans are advanced under the Subordinated Loan Facility, the conversion price applicable to
such loans may be different than the Tranche A Conversion Price.
The obligations of
the Company under the Subordinated Loan Agreement are guaranteed by Drake and are secured by substantially all of the Company’s
and Drake’s assets. The Subordinated Loan Agreement has 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 MidCap
entered into a Subordination Agreement (the “Subordination Agreement”), pursuant to which the rights of the Subordinated
Lenders under the Subordinated Loan Agreement were subordinated to the rights of MidCap under the MidCap 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 Mid Cap or unless the Company is able to meet certain predefined conditions precedent
to the making of any such payments of interest (or principal), as more fully described in the Subordination Agreement.
On April 10, 2020,
the Company received loan proceeds in the amount of approximately $1,769 under the Paycheck Protection Program (“PPP”).
The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides
for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business.
The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes,
including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced
if the borrower terminates employees or reduces salaries during the eight-week period.
The unforgiven portion of the PPP loan is
payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. The Company intends
to use the proceeds for purposes consistent with the PPP. While the Company currently believes that its use of the loan proceeds
will meet the conditions for forgiveness of the loan, we cannot assure you that we will not take actions that could cause the
Company to be ineligible for forgiveness of the loan, in whole or in part.