ITEM
1. FINANCIAL STATEMENTS
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
|
|
(unaudited)
|
|
|
|
|
|
|
Sep 30,
|
|
|
Dec 31,
|
|
|
|
2020
|
|
|
2019
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
75
|
|
|
$
|
572
|
|
Accounts
receivable, net of allowance for doubtful accounts of $27 as of both September 30, 2020 and December 31, 2019, respectively
|
|
|
2,009
|
|
|
|
2,505
|
|
Inventories
|
|
|
5,239
|
|
|
|
8,484
|
|
Prepaid
benefit costs
|
|
|
89
|
|
|
|
89
|
|
Prepaid
and other current assets
|
|
|
789
|
|
|
|
524
|
|
Total
current assets
|
|
|
8,201
|
|
|
|
12,174
|
|
Property,
plant and equipment, net
|
|
|
437
|
|
|
|
392
|
|
License
agreements, net
|
|
|
15
|
|
|
|
20
|
|
Intangible
assets, net
|
|
|
969
|
|
|
|
1,098
|
|
Goodwill
|
|
|
493
|
|
|
|
493
|
|
Right
of use assets, net
|
|
|
2,604
|
|
|
|
3,167
|
|
Other
assets, net
|
|
|
817
|
|
|
|
1,003
|
|
|
|
$
|
13,536
|
|
|
$
|
18,347
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Line
of credit
|
|
$
|
1,877
|
|
|
$
|
2,705
|
|
Current
portion of long-term debt
|
|
|
31
|
|
|
|
33
|
|
Current
portion of lease liability
|
|
|
790
|
|
|
|
751
|
|
Accounts
payable
|
|
|
2,719
|
|
|
|
4,313
|
|
Accrued
compensation
|
|
|
552
|
|
|
|
397
|
|
Income
taxes payable
|
|
|
17
|
|
|
|
26
|
|
Other
accrued expenses
|
|
|
219
|
|
|
|
144
|
|
Total
current liabilities
|
|
|
6,205
|
|
|
|
8,369
|
|
Subordinated
convertible debt with related parties
|
|
|
951
|
|
|
|
-
|
|
Lease
liability, net of current portion
|
|
|
1,967
|
|
|
|
2,568
|
|
Long-term
debt, net of current portion
|
|
|
1,799
|
|
|
|
47
|
|
Total
liabilities
|
|
|
10,922
|
|
|
|
10,984
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
|
-
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value; authorized 5,000 shares, no shares outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $.001 par value; authorized 25,000 shares, 9,782 and 9,766 shares issued and outstanding as of September 30, 2020 and
December 31, 2019, respectively
|
|
|
10
|
|
|
|
10
|
|
Paid-in
capital
|
|
|
28,470
|
|
|
|
28,158
|
|
Accumulated
deficit
|
|
|
(24,981
|
)
|
|
|
(19,920
|
)
|
Accumulated
other comprehensive loss
|
|
|
(885
|
)
|
|
|
(885
|
)
|
Total
stockholders’ equity
|
|
|
2,614
|
|
|
|
7,363
|
|
|
|
$
|
13,536
|
|
|
$
|
18,347
|
|
See
accompanying notes to the consolidated financial statements.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
(unaudited)
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net sales
|
|
$
|
4,171
|
|
|
$
|
5,278
|
|
|
$
|
12,052
|
|
|
$
|
14,797
|
|
Cost of goods
sold
|
|
|
3,436
|
|
|
|
3,747
|
|
|
|
9,529
|
|
|
|
10,170
|
|
Gross
profit
|
|
|
735
|
|
|
|
1,531
|
|
|
|
2,523
|
|
|
|
4,627
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
614
|
|
|
|
781
|
|
|
|
1,916
|
|
|
|
2,253
|
|
General and administrative
|
|
|
1,203
|
|
|
|
1,185
|
|
|
|
3,551
|
|
|
|
3,978
|
|
Research
and development
|
|
|
600
|
|
|
|
848
|
|
|
|
1,865
|
|
|
|
2,291
|
|
|
|
|
2,417
|
|
|
|
2,814
|
|
|
|
7,332
|
|
|
|
8,522
|
|
Gain on building
sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,175
|
|
(Loss) earnings from operations
|
|
|
(1,682
|
)
|
|
|
(1,283
|
)
|
|
|
(4,809
|
)
|
|
|
3,280
|
|
Other Expense
- net
|
|
|
(105
|
)
|
|
|
(51
|
)
|
|
|
(252
|
)
|
|
|
(180
|
)
|
(Loss) earnings before income taxes
|
|
|
(1,787
|
)
|
|
|
(1,334
|
)
|
|
|
(5,061
|
)
|
|
|
3,100
|
|
Provision for
income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net (loss) earnings
|
|
$
|
(1,787
|
)
|
|
$
|
(1,334
|
)
|
|
$
|
(5,061
|
)
|
|
$
|
3,100
|
|
Basic net (loss)
earnings per share
|
|
$
|
(0.18
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
0.32
|
|
Diluted net (loss)
earnings per share
|
|
$
|
(0.18
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
0.31
|
|
Basic weighted averages shares outstanding
|
|
|
9,771
|
|
|
|
9,631
|
|
|
|
9,767
|
|
|
|
9,583
|
|
Diluted weighted averages shares
outstanding
|
|
|
9,771
|
|
|
|
9,631
|
|
|
|
9,767
|
|
|
|
9,971
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In
thousands)
(unaudited)
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Accumulated
Other Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Stock
|
|
|
Total
|
|
Balance
at January 1, 2020
|
|
|
9,766
|
|
|
$
|
10
|
|
|
$
|
28,158
|
|
|
$
|
(19,920
|
)
|
|
$
|
(885
|
)
|
|
$
|
-
|
|
|
$
|
7,363
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,080
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,080
|
)
|
Stock-based
Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
118
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
118
|
|
Balance at March
31, 2020
|
|
|
9,766
|
|
|
|
10
|
|
|
|
28,276
|
|
|
|
(22,000
|
)
|
|
|
(885
|
)
|
|
|
-
|
|
|
|
5,401
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,194
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,194
|
)
|
Stock-based
Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
93
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
93
|
|
Balance at June
30, 2020
|
|
|
9,766
|
|
|
|
10
|
|
|
|
28,369
|
|
|
|
(23,194
|
)
|
|
|
(885
|
)
|
|
|
-
|
|
|
|
4,300
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,787
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,787
|
)
|
Exercise of stock
options
|
|
|
16
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Stock-based
Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
Balance at September
30, 2020
|
|
|
9,782
|
|
|
$
|
10
|
|
|
$
|
28,470
|
|
|
$
|
(24,981
|
)
|
|
$
|
(885
|
)
|
|
|
-
|
|
|
$
|
2,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January
1, 2019
|
|
|
9,508
|
|
|
$
|
9
|
|
|
$
|
27,910
|
|
|
$
|
(19,178
|
)
|
|
$
|
(832
|
)
|
|
$
|
(742
|
)
|
|
$
|
7,167
|
|
Net
earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,325
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,325
|
|
Conversion
of subordinated convertible debt
|
|
|
260
|
|
|
|
-
|
|
|
|
140
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
140
|
|
Stock-based
Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
149
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
149
|
|
Balance at March
31, 2019
|
|
|
9,768
|
|
|
|
9
|
|
|
|
28,199
|
|
|
|
(13,853
|
)
|
|
|
(832
|
)
|
|
|
(742
|
)
|
|
|
12,781
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(891
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(891
|
)
|
Shares
issued from treasury stock
|
|
|
(45
|
)
|
|
|
-
|
|
|
|
(196
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
258
|
|
|
|
62
|
|
Stock-based
Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
168
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
168
|
|
Balance at June
30, 2019
|
|
|
9,723
|
|
|
|
9
|
|
|
|
28,171
|
|
|
|
(14,744
|
)
|
|
$
|
(832
|
)
|
|
|
(484
|
)
|
|
|
12,120
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,334
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,334
|
)
|
Shares
issued from treasury stock
|
|
|
(67
|
)
|
|
|
1
|
|
|
|
(310
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
378
|
|
|
|
69
|
|
Stock-based
Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
162
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
162
|
|
Balance at September
30, 2019
|
|
|
9,656
|
|
|
$
|
10
|
|
|
$
|
28,023
|
|
|
$
|
(16,078
|
)
|
|
$
|
(832
|
)
|
|
$
|
(106
|
)
|
|
$
|
11,017
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(unaudited)
|
|
Nine
Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(5,061
|
)
|
|
$
|
3,100
|
|
Adjustments to
reconcile net (loss) earnings to cash used in operating activities:
|
|
|
|
|
|
|
|
|
Gain on building
sale
|
|
|
-
|
|
|
|
(7,175
|
)
|
Stock based compensation
expense
|
|
|
309
|
|
|
|
479
|
|
Depreciation
|
|
|
103
|
|
|
|
133
|
|
Amortization
|
|
|
159
|
|
|
|
158
|
|
Recovery of bad
debt expense
|
|
|
-
|
|
|
|
(26
|
)
|
Amortization of
deferred loan costs
|
|
|
45
|
|
|
|
109
|
|
Non cash interest
expense
|
|
|
51
|
|
|
|
1
|
|
Amortization of
right of use assets
|
|
|
563
|
|
|
|
342
|
|
Equity based directors’
fees and other non cash compensation
|
|
|
|
|
|
|
-
|
|
Changes in operating
assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
496
|
|
|
|
408
|
|
Inventories
|
|
|
3,245
|
|
|
|
(1,739
|
)
|
Prepaid and other
current assets
|
|
|
(265
|
)
|
|
|
(93
|
)
|
Other assets
|
|
|
141
|
|
|
|
(806
|
)
|
Change in lease
liability
|
|
|
(562
|
)
|
|
|
(389
|
)
|
Income taxes payable
|
|
|
(9
|
)
|
|
|
(17
|
)
|
Accounts payable,
accrued compensation and other accrued expenses
|
|
|
(1,364
|
)
|
|
|
512
|
|
Net cash used
in operating activities
|
|
|
(2,149
|
)
|
|
|
(5,003
|
)
|
Cash Flows From Investing
Activities:
|
|
|
|
|
|
|
|
|
Purchases of property
and equipment
|
|
|
(138
|
)
|
|
|
(205
|
)
|
Proceeds on sale
of building
|
|
|
-
|
|
|
|
9,765
|
|
Acquisition of
licenses
|
|
|
(25
|
)
|
|
|
(41
|
)
|
Net cash (used
in) provided by investing activities
|
|
|
(163
|
)
|
|
|
9,519
|
|
Cash Flows From Financing
Activities:
|
|
|
|
|
|
|
|
|
Net repayments
of line of credit
|
|
|
(828
|
)
|
|
|
(1,800
|
)
|
Proceeds from
long-term debt
|
|
|
1,769
|
|
|
|
-
|
|
Proceeds from
subordinated convertible debt
|
|
|
900
|
|
|
|
-
|
|
Repayments of
long-term debt
|
|
|
(29
|
)
|
|
|
(3,037
|
)
|
Proceeds
from exercise of stock options
|
|
|
3
|
|
|
|
131
|
|
Net
cash provided by (used in) financing activities
|
|
|
1,815
|
|
|
|
(4,706
|
)
|
Net decrease in cash
|
|
|
(497
|
)
|
|
|
(190
|
)
|
Cash, beginning of period
|
|
|
572
|
|
|
|
559
|
|
Cash, end of period
|
|
$
|
75
|
|
|
$
|
369
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for
interest
|
|
$
|
169
|
|
|
$
|
100
|
|
Non cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
financed by notes payable
|
|
$
|
10
|
|
|
$
|
5
|
|
Conversion of
subordinated convertible debt to common stock
|
|
|
|
|
|
$
|
140
|
|
Right of uses
assets obtained by lease obligations
|
|
|
|
|
|
$
|
3,917
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
(unaudited)
Note
1 – Company and Basis of Consolidation
Blonder
Tongue Laboratories, Inc. (together with its consolidated subsidiaries, the “Company”) is a technology-development
and manufacturing company that delivers television signal encoding, transcoding, digital transport, and broadband product solutions
to the cable markets the Company serves, including the multi-dwelling unit market, the lodging/hospitality market and the institutional
market, including hospitals, prisons and schools, primarily throughout the United States and Canada. The consolidated financial
statements include the accounts of Blonder Tongue Laboratories, Inc. and its wholly-owned subsidiaries. Significant intercompany
balances and transactions have been eliminated in consolidation.
The
accompanying unaudited condensed consolidated interim financial statements as of September 30, 2020 and for the three and
nine months ended September 30, 2020 and 2019 have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”) for interim financial information and pursuant to the
instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission
(“SEC”). The accompanying unaudited condensed consolidated interim financial statements include all
adjustments, consisting primarily of normal recurring adjustments, which the Company considers necessary for a fair
presentation of the condensed consolidated financial position, operating results, changes in stockholders’ equity and
cash flows for the periods presented. The condensed consolidated balance sheet at December 31, 2019 has been derived from
audited consolidated financial statements. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP for complete financial statements have been condensed or omitted pursuant to SEC
rules and regulations. The accompanying unaudited condensed consolidated interim financial statements should be read in
conjunction with the consolidated financial statements for the year ended December 31, 2019 and notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on April 13,
2020. The results of the three and nine months ended September 30, 2020 are not necessarily indicative of results to be
expected for the year ending December 31, 2020 or for any future interim period.
Note
2 – Summary of Significant Accounting Policies
(a) Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. The Company’s significant estimates
include stock-based compensation and reserves related to accounts receivable, inventories and deferred tax assets. Actual results
could differ from those estimates.
(b) Earnings
(loss) Per Share
Earnings
(loss) per share is calculated in accordance with Accounting Standards Codification (“ASC”) Topic 260
“Earnings Per Share,” which provides for the calculation of “basic” and “diluted”
earnings (loss) per share. Basic earnings (loss) per share includes no dilution and is computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflect,
in periods in which they have a dilutive effect, the effect of potential issuances of common shares.
The
following table shows the calculation of diluted shares using the treasury stock method:
|
|
Three
months ended
September 30
|
|
|
Nine
months ended
September 30
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Weighted
average shares used in computation of basic earnings (loss) per shares
|
|
|
9,771
|
|
|
|
9,631
|
|
|
|
9,767
|
|
|
|
9,583
|
|
Total
dilutive effect of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
388
|
|
Weighted
average shares used in computation of diluted earnings (loss) per share
|
|
|
9,771
|
|
|
|
9,631
|
|
|
|
9,767
|
|
|
|
9,971
|
|
The
diluted share base excludes the following potential common shares due to their antidilutive effect:
|
|
Three
months ended
September 30
|
|
|
Nine
months ended
September 30
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Stock options
|
|
|
1,157
|
|
|
|
3,021
|
|
|
|
1,264
|
|
|
|
2,544
|
|
|
|
|
1,157
|
|
|
|
3,021
|
|
|
|
1,264
|
|
|
|
2,544
|
|
If
the convertible debt as described in Note 6 below had been converted as of September 30, 2020, an additional 1,632 shares would
be outstanding.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
(unaudited)
(c) Adoption
of Recent Accounting Pronouncements
In
January 2017, the Financial Accounting Standards Board (“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 adoption of this new standard did not have a material impact on the
Company’s 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 adoption of this new standard did not have a material impact on the
Company’s financial position, results of operations or financial statement disclosure
(d) Accounting
Pronouncements Issued But Not Yet Effective
In
December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (“Topic
740”). The list of changes is comprehensive; however the changes will not significantly impact the Company due to
the full valuation allowance that is recorded against the Company’s deferred tax assets. Early adoption of ASU 2019-12
is permitted, including adoption in any interim period for public business entities for periods for which financial
statements have not yet been issued. An entity that elects to early adopt the amendments in an interim period should reflect
any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that
elects early adoption must adopt all the amendments in the same period. The Company will adopt ASU 2019-12 in 2021. The
adoption of this standard is not expected to have a material impact on the Company’s financial position, results of
operations or financial statement disclosure.
(e) Liquidity
and Ability to Continue as a Going Concern
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 continue to negatively impact its results of operations, cash flows and
financial position, the related impact cannot be reasonably estimated at this time.
As
disclosed in the Company’s most recent Annual Report on Form 10-K, the Company experienced a decline in sales, a reduction
in working capital, a loss from operations and net cash used in operating activities, in conjunction with liquidity constraints.
The above factors raised substantial doubt about the Company’s ability to continue as a going concern. As of September 30,
2020, the above factors still exist. Accordingly, there still exists 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 prior fiscal year, the Company
implemented a multi-phase cost-reduction program during 2019 which reduced annualized expenses, including a decrease in workforce
and a decrease in other operating expenses.
The
Company’s primary sources of liquidity are its existing cash balances and the amounts available under the MidCap Facility
(as defined in Note 5 below). As of September 30, 2020, the Company had approximately $1,877 outstanding under the MidCap Facility and
$1,403 of additional availability for borrowing under the MidCap Facility.
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.
Note
3 – Revenue Recognition
The
Company recognizes revenue when it satisfies a performance obligation by transferring the product or service to the customer,
typically at a point in time.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
(unaudited)
Disaggregation
of Revenue
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 provide 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. Transcoders convert video files from one format to another to allow the video to
be viewed across different platforms and devices. The Company also provides technical services, including hands-on training, system
design engineering, on-site field support and complete system verification testing.
The
following table presents the Company’s disaggregated revenues by revenue source:
|
|
Three
months ended
September 30
|
|
|
Nine
months ended
September 30
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Digital video headend products
|
|
$
|
801
|
|
|
$
|
1,292
|
|
|
|
2,603
|
|
|
$
|
5,482
|
|
CPE
|
|
|
1,379
|
|
|
|
1,498
|
|
|
|
3,051
|
|
|
|
2,691
|
|
DOCSIS data products
|
|
|
235
|
|
|
|
884
|
|
|
|
1,807
|
|
|
|
1,989
|
|
HFC distribution products
|
|
|
599
|
|
|
|
645
|
|
|
|
1,769
|
|
|
|
1,872
|
|
Analog video headend products
|
|
|
323
|
|
|
|
366
|
|
|
|
838
|
|
|
|
1,249
|
|
NXG
|
|
|
89
|
|
|
|
91
|
|
|
|
570
|
|
|
|
535
|
|
Contract manufactured products
|
|
|
28
|
|
|
|
319
|
|
|
|
101
|
|
|
|
393
|
|
Transcoders
|
|
|
543
|
|
|
|
-
|
|
|
|
937
|
|
|
|
33
|
|
Other
|
|
|
174
|
|
|
|
183
|
|
|
|
376
|
|
|
|
553
|
|
|
|
$
|
4,171
|
|
|
$
|
5,278
|
|
|
$
|
12,052
|
|
|
$
|
14,797
|
|
All
of the Company’s sales are to customers located primarily throughout the United States and Canada.
Note
4 – Inventories
Inventories
are summarized as follows:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Raw Materials
|
|
$
|
1,544
|
|
|
$
|
2,891
|
|
Work in process
|
|
|
1,840
|
|
|
|
1,252
|
|
Finished Goods
|
|
|
1,855
|
|
|
|
4,341
|
|
|
|
$
|
5,239
|
|
|
$
|
8,484
|
|
Inventories
are stated at the lower of cost, determined by the first-in, first-out (“FIFO”) method, or net realizable value.
The
Company periodically analyzes anticipated product sales based on historical results, current backlog and marketing plans. Based
on these analyses, the Company anticipates that certain products will not be sold during the next twelve months. Inventories that
are not anticipated to be sold in the next twelve months have been written down to net realizable value.
The
Company recorded a provision to reduce the carrying amounts of inventories to their net realizable value in the amount of $91
and $133 and $346 and $863 during the three months ended September 30, 2020 and 2019 and the nine months ended September 30, 2020
and 2019, respectively.
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 on 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% (5.00% as of September 30, 2020) 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.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
(unaudited)
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 receipt by the Company of $600 of loans under the Subordinated Loan Facility (See Note 6).
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.
On
April 10, 2020, the Company received loan proceeds of approximately $1,769 (“PPP Loan”) 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 the average monthly
payroll expenses of the qualifying business. The PPP Loan and accrued interest are forgivable after twenty-four 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
PPP Loan is evidenced by a promissory note, dated as of April 5, 2020 (the “Note”), between the Company, as
Borrower, and JPMorgan Chase Bank, N.A., as Lender (the “Lender”). The interest rate on the Note is 0.98% per
annum, with interest accruing on the unpaid principal balance computed on the basis of the actual number of days elapsed in a
year of 360 days. No payments of principal or interest are due during the six-month period beginning on the date of the Note (the
“Deferral Period”).
As
noted above, the principal and accrued interest under the Note evidencing the PPP Loan are forgivable after twenty-four weeks
as long the Company has used 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 Company terminates employees or reduces salaries during
the twenty-four-week period. The Company used the proceeds for purposes consistent with the PPP. In order to obtain full or partial
forgiveness of the PPP Loan, the Company must request forgiveness and must provide satisfactory documentation in accordance with
applicable Small Business Administration (“SBA”) guidelines. Interest payable on the Note may be forgiven only if
the SBA agrees to pay such interest on the forgiven principal amount of the Note. The Company will be obligated to repay any portion
of the principal amount of the Note that is not forgiven, together with interest accrued and accruing thereon at the rate set
forth above, until such unforgiven portion is paid in full.
Beginning
one month following expiration of the Deferral Period, and continuing monthly until 24 months from the date of the Note (the “Maturity
Date”), the Company is obligated to make monthly payments of principal and interest to the Lender with respect to any
unforgiven portion of the Note, in such equal amounts required to fully amortize the principal amount outstanding on the Note
as of the last day of the Deferral Period by the Maturity Date. The Company is permitted to prepay the Note at any time without
payment of any premium.
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 “2016 Subordinated Lenders”) entered into a
certain Amended and Restated Senior Subordinated Convertible Loan and Security Agreement (the “2016 Subordinated Loan
Agreement”), pursuant to which the 2016 Subordinated Lenders agreed to provide the Company with a delayed draw term
loan facility of up to $750 (“2016 Subordinated Loan Facility”), under which individual advances in amounts
not less than $50 may have been drawn by the Company. Interest on the outstanding balance under the 2016 Subordinated Loan Facility
from time to time, accrued at 12% per annum (subject to increase under certain circumstances) and was payable monthly in-kind
by the automatic increase of the principal amount of the loan on each monthly interest payment date, by the amount of the accrued
interest payable at that time (“PIK Interest”); provided, however, that at the option of the Company, it could
have paid interest in cash on any interest payment date, in lieu of PIK Interest. The 2016 Subordinated Lenders had the option
of converting the principal balance of the loan, in whole (unless otherwise agreed by the Company), into shares of the Company’s
common stock at a conversion price of $0.54 per share (subject to adjustment under certain circumstances). This conversion right
was subject to stockholder approval as required by the rules of the NYSE MKT, which approval was obtained on May 24, 2016 at the
Company’s annual meeting of stockholders. The obligations of the Company and Drake under the 2016 Subordinated Loan Agreement
were 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 2016 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.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
(unaudited)
In
connection with the anticipated completion of the sale of the Old Bridge Facility, 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 2016 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”).
The
Conversion and Termination Agreement provided for (i) the full payment of the Shea Indebtedness (unless such amounts were converted
into shares of common stock prior to repayment), (ii) the termination of the Additional Commitment and (iii) the release and termination
of all liens and security interests in the collateral under the 2016 Subordinated Loan Documents, including with respect to the
Subordinated Mortgages, each to become effective as of the closing of the sale of the Old Bridge Facility. In connection with
the execution and delivery of the Conversion and Termination Agreement, Shea provided the Company with a notice of conversion,
and upon completion of the sale of the Old Bridge Facility was issued 260 shares of Company common stock in full satisfaction
of the Shea Indebtedness.
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 (Company Director and employed as Managing
Director-Strategic Accounts) , Anthony J. Bruno (Company Director), and Stephen K. Necessary (Company Director) , as lenders (collectively,
the “Initial 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 lenders from time to time party thereto may provide up to $1,500 of loans to the Company (the “Subordinated
Loan Facility”). Interest accrues on the outstanding amounts advanced under 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.
On
April 8, 2020, the Initial Lenders agreed to provide the Company with a Tranche A term loan facility of $800 of which $600
was advanced to the Company on April 8, 2020, $100 was advanced to the Company on April 17, 2020 and $100 of which remains
committed and undrawn. The Initial 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”) which was calculated at $0.593. The conversion right was subject to stockholder approval as required by the
rules of the NYSE American, which was obtained on June 11, 2020.
On
April 24, 2020, the Company, the Initial Lenders, Ronald V. Alterio (the Company’s Senior Vice President-Engineering, Chief
Technology Officer) and certain additional unaffiliated investors (the “Additional Lenders,” and, together
with the Initial Lenders, the “Lenders”) entered into the First Amendment to Senior Subordinated Convertible
Loan and Security Agreement and Joinder (the “Amendment”). The Amendment provides for the funding of $200 of
additional loans under the Subordinated Loan Facility as a Tranche B term loan established under the Subordinated Loan Agreement,
with such loans being provided by the Additional Lenders. The Amendment also sets the conversion price of $0.55 (the “Tranche
B Conversion Price”) with respect to the right of the Additional Lenders to convert the accreted principal balance of
the loans held by each of them into shares of the Company’s common stock. The terms and conditions of the conversion rights
applicable to the Initial Lenders and the Additional Lenders are otherwise identical in all material respects, including the terms
restricting conversion to an aggregate amount of shares of common stock that would not result in the Company’s non-compliance
with NYSE American rules requiring stockholder approval of issuances or potential issuances of shares in excess of the percentage
limits specified therein or in an amount that may be deemed to constitute a change of control under such rules. These restrictions
terminated as the requisite stockholder approval was obtained on June 11, 2020.
The
Subordinated Loan Agreement provides for up to $1,500 of subordinated convertible loans, with $500 to be designated as “Tranche
C” term loans thereunder, together with the Tranche A term loans of $800 and the Tranche B term loans of $200, previously
committed. Additional loans under the Subordinated Loan Agreement are in all cases subject to the mutual agreement of the Company
and the existing Lenders, and neither the Company nor the existing Lenders are obligated to make any additional loans under the
Subordinated Loan Agreement. If any 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 and the Tranche B 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 Lenders
and MidCap entered into a Subordination Agreement (the “Subordination Agreement”), pursuant to which the rights
of the 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 MidCap 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.
During the three and nine months ended September 30, 2020, the Company accrued $28 and $51, respectively of PIK Interest with
respect to the Subordinated Loan Facility.
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
(unaudited)
Note
7 – Related Party Transactions
A
director and shareholder of the Company is a partner of a law firm that serves as outside legal counsel for the Company. During
the three-month periods ended September 30, 2020 and 2019, this law firm billed the Company approximately $143 and $123, respectively
and during the nine-month periods ended September 30, 2020 and 2019, billed the Company approximately $636 and $398, respectively
for legal services provided by this firm. Included in accounts payable on the accompanying unaudited condensed balance sheet at
September 30, 2020 and December 31, 2019 is approximately $173 and zero owed to this law firm.
Note
8 – Concentration of Credit Risk
The
following table summarizes credit risk with respect to customers as percentage of sales for the three and nine month periods ended
September 30, 2020 and 2019:
|
|
Three
months ended
September 30
|
|
|
Nine
months ended
September 30
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Customer A
|
|
|
10
|
%
|
|
|
-
|
|
|
|
10
|
%
|
|
|
10
|
%
|
Customer B
|
|
|
14
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Customer C
|
|
|
-
|
|
|
|
11
|
%
|
|
|
-
|
|
|
|
12
|
%
|
Customer D
|
|
|
-
|
|
|
|
17
|
%
|
|
|
-
|
|
|
|
12
|
%
|
The
following table summarizes credit risk with respect to customers as percentage of accounts receivable:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Customer A
|
|
|
15
|
%
|
|
|
19
|
%
|
Customer B
|
|
|
16
|
%
|
|
|
-
|
|
Customer C
|
|
|
-
|
|
|
|
17
|
%
|
Customer D
|
|
|
-
|
|
|
|
-
|
|
Customer E
|
|
|
13
|
%
|
|
|
-
|
|
Customer F
|
|
|
-
|
|
|
|
11
|
%
|
The
following table summarizes credit risk with respect to vendors as percentage of purchases for the three-month and nine-month periods
ended September 30, 2020 and 2019:
|
|
Three
months ended
September 30
|
|
|
Nine
months ended
September 30
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Vendor A
|
|
|
-
|
|
|
|
37
|
%
|
|
|
27
|
%
|
|
|
21
|
%
|
Vendor B
|
|
|
10
|
%
|
|
|
16
|
%
|
|
|
18
|
%
|
|
|
13
|
%
|
Vendor C
|
|
|
21
|
%
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
21
|
%
|
The
following table summarizes credit risk with respect to vendors as percentage of accounts payable:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Vendor A
|
|
|
66
|
%
|
|
|
84
|
%
|
Note
9 – Commitments and Contingencies
Leases
The
Company leases certain real estate, factory, and office equipment under non-cancellable operating leases at various dates through
January 2024. Lease costs and cash paid for the three-month and nine-month periods ended September 30 were as follows:
|
|
Three
months ended
September 30
|
|
|
Nine
months ended
September 30
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Lease costs
|
|
$
|
186
|
|
|
$
|
161
|
|
|
$
|
563
|
|
|
$
|
342
|
|
Cash paid
|
|
$
|
187
|
|
|
$
|
160
|
|
|
$
|
562
|
|
|
$
|
389
|
|
BLONDER
TONGUE LABORATORIES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
(unaudited)
Maturities
of the lease liabilities are as follows:
For
the year ended December 31,
|
|
Amount
|
|
Amount remaining year ending
December 31, 2020
|
|
$
|
234
|
|
2021
|
|
|
939
|
|
2022
|
|
|
901
|
|
2023
|
|
|
922
|
|
2024
|
|
|
77
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
|
3,073
|
|
Less present
value discount
|
|
|
316
|
|
Total operating
lease liabilities
|
|
$
|
2,757
|
|
As
of September 30, 2020, the weighted average remaining lease term is 3.27 years and the weighted average discount rate used to
determine the operating lease liabilities was 6.5%.
Litigation
The
Company from time to time is a party to certain proceedings incidental to the ordinary course of its business, none of which,
in the opinion of management, is likely to have a material adverse effect on the Company’s business, financial condition,
results of operations, or cash flows.
Note
10 – Building Sale and Leaseback
On
February 1, 2019, the Company completed the sale of the Old Bridge Facility to Jake Brown Road, LLC (the “Buyer”).
In 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 continues to occupy and 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 on February 1, 2019, the Buyer paid the Company
$10,500. In addition, at closing, the Company advanced to the Buyer the sum of $130, representing a preliminary estimate of the
Company’s share (as a tenant of the Old Bridge Facility following closing) of property repairs, as contemplated by the Sale
Agreement. The Company recognized a gain of approximately $7,175 in connection with the sale.
The
Lease has an initial term of five years and allows the Company to extend the term for an additional five years following the initial
term. The Company is obligated to pay base rent of approximately $837 for the first year of the Lease with the amount of base
rent adjusted for each subsequent year to equal 102.5% of the preceding year’s base rent. The Lease was accounted for under
ASU 2018-11, Leases (“Topic 842”) as a sale and leaseback.
Note
11 – Subsequent Events
On October 29, 2020,
the unaffiliated Additional Investors as described in Note 6, submitted irrevocable notices of conversion under the Tranche B Term
Loan. As a result, $175 of original principal and $11 of PIK interest outstanding under the Tranche B Term Loan were converted
into 338 shares of Company common stock in full satisfaction of their indebtedness.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of the Company’s historical results of operations and liquidity and capital resources
should be read in conjunction with the unaudited consolidated financial statements of the Company and notes thereto appearing
elsewhere herein. The following discussion and analysis also contains forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors.
See “Forward Looking Statements,” below.
Forward-Looking
Statements
In
addition to historical information this Quarterly Report contains forward-looking statements regarding future events relating
to such matters as anticipated financial performance, business prospects, technological developments, new products, research and
development activities and similar matters. The Private Securities Litigation Reform Act of 1995, the Securities Act of 1933 and
the Securities Exchange Act of 1934 provide safe harbors for forward-looking statements. In order to comply with the terms of
these safe harbors, the Company notes that a variety of factors could cause the Company’s actual results and experience
to differ materially and adversely from the anticipated results or other expectations expressed in the Company’s forward-looking
statements. The risks and uncertainties that may affect the operation, performance, development and results of the Company’s
business include, but are not limited to, those matters discussed herein in the section entitled Item 2 - Management’s Discussion
and Analysis of Financial Condition and Results of Operations. The words “believe,” “expect,” “anticipate,”
“project,” “target,” “intend,” “plan,” “seek,” “estimate,”
“endeavor,” “should,” “could,” “may” and similar expressions are intended to identify
forward-looking statements. In addition, any statements that refer to projections for our future financial performance, our anticipated
growth trends in our business and other characterizations of future events or circumstance are forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only
as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents
the Company files from time to time with the Securities and Exchange Commission, including without limitation, the Company’s
Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on April 13,
2020 (See Item 1 – Business; Item 1A – Risk Factors; Item 3 – Legal Proceedings and Item 7 – Management’s
Discussion and Analysis of Financial Condition and Results of Operations).
General
The
Company was incorporated in November 1988, under the laws of Delaware as GPS Acquisition Corp. for the purpose of acquiring the
business of Blonder-Tongue Laboratories, Inc., a New Jersey corporation, which was founded in 1950 by Ben H. Tongue and Isaac
S. Blonder to design, manufacture and supply a line of electronics and systems equipment principally for the private cable industry.
Following the acquisition, the Company changed its name to Blonder Tongue Laboratories, Inc. The Company completed the initial
public offering of its shares of Common Stock in December 1995.
Today,
the Company is a technology-development and manufacturing company that delivers a wide range of products and services to the telecommunications,
cable entertainment and media industry. For 70 years, Blonder Tongue/Drake products have been deployed in a long list of locations,
including lodging/hospitality, multi-dwelling units/apartments, broadcast studios/networks, universities/schools, healthcare/hospitals,
fitness centers, government facilities/offices, prisons, airports, sports stadiums/arenas, entertainment venues/casinos, retail
stores, and small-medium businesses. These applications are variously described as commercial, institutional and/or enterprise
environments and will be referred to herein collectively as “CIE”. The customers we serve include business
entities installing private video and data networks in these environments, whether they are the largest cable television operators,
telco or satellite providers, integrators, architects, engineers or the next generation of Internet Protocol Television (“IPTV”)
streaming video providers. The technology requirements of these markets change rapidly, and the Company’s research and
development team is continually delivering high performance, lower cost solutions to meet customers’ needs.
The
Company’s strategy is focused on providing a wide range of products to meet the needs of the CIE environments described
above, including lodging/hospitality, multi-dwelling units/apartments, broadcast studios/networks, universities/schools, healthcare/hospitals,
fitness centers, government facilities/offices, prisons, airports, sports stadiums/arenas, entertainment venues/casinos, retail
stores, and small-medium businesses, and to provide offerings that are optimized for an operator’s existing infrastructure,
as well as the operator’s future strategy. A key component of this growth strategy is to provide products that deliver the
latest technologies (such as IPTV and digital 4K, UHD, HD and SD video content) and have a high performance-to-cost ratio.
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
strategic initiative is 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 Company’s 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. Sales of
CPE products were $1,379,000 and $1,498,000 in the third three months of 2020 and 2019 and $3,051,000 and $2,691,000 in the first
nine months of 2020 and 2019, respectively.
The
Company has seen a continuing shift in product mix from analog products to digital products and expects this shift to continue.
Accordingly, any substantial decrease in sales of analog products without a related increase in digital products or other products
could have a material adverse effect on the Company’s results of operations, financial condition and cash flows. Sales of
digital video headend products were $801,000 and $1,292,000 and sales of analog video headend products were $323,000 and $366,000
in third three months of 2020 and 2019, respectively. Sales of digital video headend products were $2,603,000 and $5,482,000 and
sales of analog video headend products were $838,000 and $1,249,000 in the first nine months of 2020 and 2019, respectively.
Like
many businesses throughout the United States and the world, we have been affected by the COVID-19 outbreak. Because there are
daily developments regarding the outbreak, we are continually assessing the current and anticipated future effects on our business,
including how these developments are impacting or may impact our customers, employees and business partners. In our core CIE business,
we have experienced a noticeable decline in sales, as many of our customers have significantly reduced their business operations.
In our CPE business we have experienced a more substantial reduction in sales, again as a result of our customers’ significant
decrease in their business activities. With uncertainties surrounding the extent to which the COVID-19 outbreak will affect the
economy generally, and our customers and business partners in particular, it is impossible for us to predict when conditions will
improve to the point that we may reasonably forecast when our sales might return to historical levels. However, we are currently
taking steps to significantly reduce our expenses, including adjustments in our staffing (in the form of furloughs) and reductions
in manufacturing activities, which we believe will improve our ability to continue our operations at current levels and meet our
obligations to our customers.
The
Company’s manufacturing is allocated primarily between its facility in Old Bridge, New Jersey (“Old Bridge Facility”)
and key contract manufacturing located in the People’s Republic of China (“PRC”) as well as South Korea
and Taiwan. The Company currently manufactures most of its digital products, including the NXG product line and latest encoder,
transcoder and EdgeQAM collections at the Old Bridge Facility. Since 2007 the Company has transitioned and continues to manufacture
certain high volume, labor intensive products, including many of the Company’s analog and other products, in the PRC, pursuant
to manufacturing agreements that govern 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 or other countries for manufacture, the Company may do so if business and market conditions make it advantageous
to do so. Manufacturing products both at the Company’s Old Bridge Facility as well as in the PRC, South Korea and Taiwan
enables the Company to realize cost reductions while maintaining a competitive position and time-to-market advantage.
The
Company may, from time to time, provide manufacturing, research and development and product support services for other companies’
products. In 2015, the Company entered into an agreement with VBrick Systems, Inc. (“VBrick”) to provide procurement,
manufacturing, warehousing and fulfillment support to VBrick for a line of high-end encoder products and sub-assemblies. Sales
to VBrick of encoder products were approximately $28,000 and $319,000 in the third three months of 2020 and 2019 and $101,000
and $393,000 in the first nine months of 2020 and 2019, respectively. Sales to VBrick for sub-assemblies were not material in
the three months and nine months ended September 30, 2020 or 2019, respectively.
Results
of Operations
Third
three months of 2020 Compared with third three months of 2019
Net
Sales. Net sales decreased $1,107,000, or 21.0%, to $4,171,000 in the third three months of 2020 from $5,278,000 in the third
three months of 2019. The decrease is primarily attributable to a decrease in sales of digital video headend products, DOCSIS
data products and contract manufacturing products offset by an increase in transcoder products. Sales of digital video headend
products were $801,000 and $1,292,000, DOCSIS data products were $235,000 and $884,000, contract manufacturing products were $28,000
and $319,000 and transcoder products were $543,000 and zero in the third three months of 2020 and 2019, respectively.
Cost
of Goods Sold. Cost of goods sold decreased to $3,436,000 for the third three months of 2020 from $3,747,000 for the third
three months of 2019 but increased as a percentage of sales to 82.4% from 71.0%. The dollar decrease is primarily attributable
to lower sales. The increase as a percentage of sales is primarily attributable to sales of lower margin products as part of the
Company’s product mix.
Selling
Expenses. Selling expenses decreased to $614,000 for the third three months of 2020 from $781,000 in the third three months
of 2019 and decreased as percentage of sales to 14.7% for the third three months of 2020 from 14.8% for the third three months
of 2019. The $167,000 decrease was primarily the result of a decrease in salaries and fringe benefits due to a decrease in head
count of $92,000 and a decrease in advertising and trade show expenses of $60,000.
General
and Administrative Expenses. General and administrative expenses increased to $1,203,000 for the third three months of 2020
from $1,185,000 for the third three months of 2019 and increased as a percentage of sales to 28.8% for the third three months
of 2020 from 22.5% for the third three months of 2019. The $18,000 increase was primarily the result of an increase in director
fees of $68,000 and an increase in legal fees of $60,000 offset by a decrease in salaries and fringe benefits due to a decrease
in compensation of $85,000.
Research
and Development Expenses. Research and development expenses decreased to $600,000 in the third three months of 2020 from $848,000
in the third three months of 2019 and decreased as a percentage of sales to 14.4% for the third three months of 2020 from 16.1%
for the third three months of 2019. This $248,000 decrease is primarily the result of a decrease in consulting fees of $110,000,
a decrease in department supplies of $51,000 and a decrease in occupancy costs of $41,000.
Operating
(Loss) Earnings. Operating loss of $(1,682,000) for the third three months of 2020 represents an increase from the operating
loss of $(1,283,000) for the third three months of 2019. Operating (loss) earnings as a percentage of sales was (40.3)% in the
third three months of 2020 compared to (24.3)% in the third three months of 2019.
Other
Expense, net. Other expense increased to $105,000 in the third three months of 2020 from $51,000 in the third three months
of 2019. The increase is primarily the result of higher interest expense due to higher average borrowing on the MidCap Facility
and PIK Interest on the Subordinated Loan Facility.
First
nine months of 2020 Compared with first nine months of 2019
Net
Sales. Net sales decreased $2,745,000, or 18.6%, to $12,052,000 in the first nine months of 2020 from $14,797,000 in the first
nine months of 2019. The decrease is primarily attributable to a decrease in sales of digital video headend products, contract
manufacturing products and analog video headend products offset by an increase in sales of transcoder products and CPE products.
Sales of digital video headend products were $2,603,000 and $5,482,000, contract manufactured products were $101,000 and $393,000,
analog video products were $838,000 and $1,249,000, transcoder products were $937,000 and $33,000 and CPE products were $3,051,000
and $2,691,000 in the first nine months of 2020 and 2019, respectively.
Cost
of Goods Sold. Cost of goods sold decreased to $9,529,000 for the first nine months of 2020 from $10,170,000 for the first
nine months of 2019 but increased as a percentage of sales to 79.1% from 68.7% The dollar decrease is primarily attributable to
reduced sales as well as lower margins relating to CPE products as the Company continued to implement its strategic CPE Product
initiative, described above under “General,” which began late in the first quarter of 2019. The increase as a percentage
of sales is also attributable to sales of CPE products as part of the CPE Product initiative, as those products have a higher
cost of goods sold than the Company’s other products.
Selling
Expenses. Selling expenses decreased to $1,916,000 for the first nine months of 2020 from $2,253,000 in the first nine months
of 2019 but increased as percentage of sales to 15.9% for the first nine months of 2020 from 15.2% for the first nine months of
2019. The $337,000 decrease was primarily the result of a decrease in salaries and fringe benefits due to a decrease in head count
of $277,000, a decrease in department supplies of $130,000 and a decrease in advertising and trade show expenses of $80,000 offset
by an increase in occupancy costs of $233,000.
General
and Administrative Expenses. General and administrative expenses decreased to $3,551,000 for the first nine months of 2020
from $3,978,000 for the first nine months of 2019, but increased as a percentage of sales to 29.5% for the first nine months of
2020 from 26.9% for the first nine months of 2019. The $427,000 decrease was primarily the result of a decrease in salaries and
fringe benefits due to a decrease in compensation of $343,000, a decrease of travel and entertainment of $156,000, and a decrease
in consulting fees of $189,000 related to IT outsourcing, offset by an increase in occupancy costs of $88,000 and an increase
in legal costs of $113,000.
Research
and Development Expenses. Research and development expenses decreased to $1,865,000 in the first nine months of 2020 from
$2,291,000 in the first nine months of 2019, but remained constant as a percentage of sales of 15.5% for the first nine months
of 2020 and 2019, respectively. This $426,000 decrease is primarily the result of a decrease in salaries and fringe benefits due
to reduced head count and a decrease in compensation of $169,000, a decrease in consulting fees of $159,000 and a decrease in
occupancy costs of $105,000.
Operating
(Loss) Earnings. Operating loss of $(4,809,000) for the first nine months of 2020 represents a decrease from the operating
income of $3,280,000 for the first nine months of 2019. Operating loss represents an increase of $914,000 for the first nine months
of 2020 from the first nine months of 2019, before giving effect to the gain reported on the building sale of $7,175,000 during
the first quarter of 2019. Operating (loss) earnings as a percentage of sales was (39.9)% in the first nine months of 2020 compared
to 22.2% in the first nine months of 2019.
Other
Expense, net. Other expense increased to $252,000 in the first nine months of 2020 from $180,000 in the first nine months
of 2019. The increase is primarily the result of higher interest expense due to higher average borrowing on the MidCap Facility
and PIK Interest on the Subordinated Loan Facility.
Liquidity
and Capital Resources
As
of September 30, 2020 and December 31, 2019, the Company’s working capital was $1,996,000 and $3,805,000, respectively.
The decrease in working capital was primarily due to the reduction in inventories and accounts receivable offset by a decrease
in accounts payable and the line of credit.
The
Company’s net cash used in operating activities for the nine-month period ended September 30, 2020 was $2,149,000 primarily
due to a net loss of $5,061,000 offset by a decrease in inventories of $3,245,000. The Company’s net cash used in operating
activities for the nine-month period ended September 30, 2019 was $5,003,000, primarily due to non-cash adjustments of $(5,979,000)
and an increase in inventories of $1,739,000, offset by net earnings of $3,100,000.
Cash
used in investing activities for the nine-month period ended September 30, 2020 was $163,000, of which $138,000 was attributable
to capital expenditures and $25,000 was attributable to additional license fees. Cash provided by investing activities for the
nine-month period ended September 30, 2019 was $9,519,000, of which $9,765,000 was attributable to proceeds on the sale of the
Old Bridge Facility, offset by $41,000 attributable to additional license fees and $205,000 attributable to capital expenditures.
Cash
provided by financing activities was $1,815,000 for the first nine months of 2020, which was comprised of proceeds from long term
debt of $1,769,000, proceeds from the Subordinated Loan Facility (as described below) of $900,000 and proceeds from the exercise
of stock options of $3,000 offset by net repayments of the line of credit of $828,000 and repayments of debt of $29,000. Cash
used in financing activities was $4,706,000 for the first nine months of 2019, which was comprised of net repayments of borrowings
on the Revolver under the Sterling Facility of $1,800,000, repayments of long-term debt of $3,037,000 offset by proceeds from
the exercise of stock options of $131,000.
For
a full description of the Company’s senior secured indebtedness under the MidCap Facility and its effect upon the Company’s
consolidated financial position and results of operations, see Note 5 – Debt of the Notes to Condensed Consolidated Financial
Statements.
The
Company’s primary sources of liquidity have been its existing cash balances and amounts available under the MidCap Facility.
At September 30, 2020, the Company had approximately $1,403,000 available under the MidCap Facility.
On
February 1, 2019, the Company completed the sale of the Old Bridge Facility to Jake Brown Road, LLC (the “Buyer”).
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 continues to occupy and conduct its manufacturing, engineering, sales and administrative functions
in the Old Bridge Facility.
The
Lease has an initial term of five years and allows the Company to extend the term for an additional five years following the initial
term. The Company is obligated to pay base rent of approximately $837,000 for the first year of the Lease, with the amount of
the base rent adjusted for each subsequent year to equal 102.5% of the preceding year’s base rent. Without regard to any
reduction in the Company’s lease expense derived from its sublease to a third party of the Sublease Space (defined below),
for the first year of the Lease, the base rent of approximately $837,000 was offset, in part, by the annualized saving of interest
and depreciation expense of approximately $469,000 and the cash debt service of approximately $562,000. The Lease further provides
for a security deposit in an amount equal to eight months of base rent, which may be reduced to three months of base rent upon
certain benchmarks being met. It was determined in the first quarter 2020 that the applicable benchmark relevant to the six-month
period ended August 1, 2019 was met and as a result the landlord released a portion of the security deposit equal to one month’s
base rent to the Company, leaving an aggregate security deposit held by the landlord, in an amount equal to seven months of base
rent. The landlord may, once during the lease term or any renewal thereof, require the Company to relocate to another facility
made available by the landlord that meets the Company’s specifications for a replacement facility within a defined geographical
area, by providing notice which confirms that all of the Company’s specifications for a replacement facility will be met,
that all costs relating to such relocation will be paid by the landlord, and that security for the repayment of those relocation
costs has been established. The Company will also be provided a six month overlap period (the “Overlap Period”)
during which the Company may operate in the Old Bridge Facility with rent therein being abated, but with rent being paid at the
replacement facility, to mitigate interruptions of the Company’s on-going business while the move occurs. If the Company
declines to be relocated to the facility proposed by the landlord, the Lease will terminate 18 months from the date of the landlord’s
notice, but the Company will continue to be entitled to receive the same benefits in terms of reimbursement of its relocation
costs and an Overlap Period during which no rent will be due at the Old Bridge Facility, while the Company moves its operations
to an alternative facility that it has identified.
On
December 31, 2019, the Company entered into a two-year sublease to a third party for 32,500 square feet of the Old Bridge Facility
(the “Sublease Space”) commencing on March 1, 2020, the rental proceeds from which will inure to the benefit
of the Company. The sublease also provides for a one-year renewal option. The sublease provides rental income approximately $284,000
in the first year and approximately $293,000 in the second year of the sublease.
As
disclosed in the Company’s most recent Annual Report on Form 10-K, the Company experienced a decline in sales, a reduction
in working capital, a loss from operations and net cash used in operating activities, in conjunction with liquidity constraints.
These factors raised substantial doubt about the Company’s ability to continue as a going concern. As of September 30, 2020,
the above factors still exist. Accordingly, there still exists 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.
Beginning
in the middle of 2019, the Company experienced a significant decline in its net sales of core or legacy products, which have not
recovered to historical norms, but which have stabilized at reduced levels. The Company does not anticipate that sales will recover
to historical norms during 2020. In light of these developments and as detailed below, the Company has taken significant steps
during the past year, implemented in several phases, in order to manage operations through what has been a period of diminished
sales levels.
During
the past year, the Company has focused on implementing a turnaround strategy, under which since August 2019 it has been implementing
operational and financial processes to improve liquidity, cash flow and profitability.
As
part of its efforts to improve liquidity and provide operating capital, 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 $400,000 availability block, subject to the same being re-imposed
at the rate of approximately $7,000 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 receipt by the Company of
$600,000 of loans under 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 “Initial 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 lenders from time to time party thereto may provide up
to $1,500,000 of loans to the Company (the “Subordinated Loan Facility”). Interest accrues on the outstanding
amounts advanced under 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.
On
April 8, 2020, the Initial Lenders agreed to provide the Company with a Tranche A term loan facility of $800,000, of which $600,000
was advanced to the Company on April 8, 2020, $100,000 was advanced to the Company on April 17, 2020 and $100,000 remains committed
and undrawn. The Initial 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”) which was calculated
at $0.593. The conversion right was subject to stockholder approval as required by the rules of the NYSE American, and was obtained
on June 11, 2020 at the Company’s annual meeting of stockholders.
On
April 24, 2020, the Company, the Initial Lenders and Ronald V. Alterio (the Company’s Senior Vice President-Engineering,
Chief Technology Officer) and certain additional unaffiliated investors (the “Additional Lenders,” and, together
with the Initial Lenders, the “Lenders”) entered into the First Amendment to Senior Subordinated Convertible
Loan and Security Agreement and Joinder (the “Amendment”). The Amendment provides for the funding of $200,000
of additional loans as a Tranche B term loan under the Subordinated Loan Facility established under the Subordinated Loan Agreement,
with such loans being provided by the Additional Lenders. The Amendment also sets the conversion price of $0.55 (the “Tranche
B Conversion Price”) with respect to the right of the Additional Lenders to convert the accreted principal balance of
the loans held by each of them into shares of the Company’s common stock. The terms and conditions of the conversion rights
applicable to the Initial Lenders and the Additional Lenders are otherwise identical in all material respects, including the terms
restricting conversion to an aggregate amount of shares of common stock that would not result in the Company’s non-compliance
with NYSE American rules requiring stockholder approval of issuances or potential issuances of shares in excess of the percentage
limits specified therein or in an amount that may be deemed to constitute a change of control under such rules. These restrictions
terminated as the requisite stockholder approval was obtained on June 11, 2020 at the Company’s annual meeting of stockholders.
The
Amendment also adds certain “piggyback” registration rights in favor of the Lenders. Pursuant to these registration
rights, the Lenders can request that the Company include for sale, in any registration statement filed by the Company under the
Securities Act of 1933, as amended (the “Securities Act”) for the offer and sale of shares of its common stock
(subject to certain exceptions), the shares of common stock issuable to the Lenders pursuant to their conversion rights under
the Subordinated Loan Agreement (including any additional shares issued as a dividend or other distribution with respect to, or
in exchange for or in replacement of, such shares). The rights of the Lenders to have their shares included in a registration
statement are subject to their agreement to the terms of any applicable underwriting agreement, in the case of an underwritten
offering (including any limitation on the amount of the Lenders’ shares to be included in the offering) and to their furnishing
to the Company such information regarding the Lenders, the shares being sold, and the Lenders’ intended method of disposition
of such shares as is necessary to effect the registration of their shares. The Company will bear the expenses of registration
pursuant to these registration rights; provided, however, that the Lenders will bear all underwriting discounts, selling commissions,
stock transfer taxes and the fees of their counsel. The right of the Lenders to request registration or inclusion of their shares
pursuant to these registration rights terminate at such time as Rule 144 under the Securities Act, or another similar exemption
under the Securities Act, is available for the sale of the Lenders’ shares.
The
Subordinated Loan Agreement provides for up to $1,500,000 of subordinated convertible loans, with $500,000 to be designated as
“Tranche C” term loans thereunder, together with the Tranche A term loans of $800,000 and the Tranche B term loans
of $200,000, previously committed. Additional loans under the Subordinated Loan Agreement are in all cases subject to the mutual
agreement of the Company and the existing Lenders, and neither the Company nor the existing Lenders are obligated to make any
additional loans under the Subordinated Loan Agreement. If any 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 and the Tranche B 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 Lenders
and MidCap entered into a Subordination Agreement (the “Subordination Agreement”), pursuant to which the rights
of the 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 MidCap 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 October 29, 2020, certain unaffiliated Additional Investors as described above, submitted irrevocable
notices of conversion under the Tranche B Term Loan. As a result, $175,000 of original principal and $11,000 of PIK interest under
the Tranche B Term Loan were converted into 338,000 shares of Company common stock in full satisfaction of their indebtedness
On
April 10, 2020, the Company received loan proceeds of approximately $1,769,000 (“PPP Loan”) 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 the average monthly
payroll expenses of the qualifying business. The PPP Loan and accrued interest are forgivable after twenty-four 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
PPP Loan is evidenced by a promissory note, dated as of April 5, 2020 (the “Note”), between the Company, as
Borrower, and JPMorgan Chase Bank, N.A., as Lender (the “Lender”). The interest rate on the Note is 0.98% per
annum, with interest accruing on the unpaid principal balance computed on the basis of the actual number of days elapsed in a
year of 360 days. No payments of principal or interest are due during the six-month period beginning on the date of the Note (the
“Deferral Period”).
As
noted above, the principal and accrued interest under the Note evidencing the PPP Loan are forgivable after twenty-four weeks
as long the Company has used 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 Company terminates employees or reduces salaries during
the eight-week period. The Company used the proceeds for purposes consistent with the PPP. While the Company currently believes
that its use of the PPP Loan proceeds will meet the conditions for forgiveness of the PPP Loan, we cannot assure you that we will
not take actions that could cause the Company to be ineligible for forgiveness of the PPP Loan, in whole or in part. In order
to obtain full or partial forgiveness of the PPP Loan, the Company must request forgiveness and must provide satisfactory documentation
in accordance with applicable Small Business Administration (“SBA”) guidelines. Interest payable on the Note
may be forgiven only if the SBA agrees to pay such interest on the forgiven principal amount of the Note. The Company will be
obligated to repay any portion of the principal amount of the Note that is not forgiven, together with interest accrued and accruing
thereon at the rate set forth above, until such unforgiven portion is paid in full.
Beginning
one month following expiration of the Deferral Period, and continuing monthly until 24 months from the date of the Note (the “Maturity
Date”), the Company is obligated to make monthly payments of principal and interest to the Lender with respect to any
unforgiven portion of the Note, in such equal amounts required to fully amortize the principal amount outstanding on the Note
as of the last day of the Deferral Period by the Maturity Date. The Company is permitted to prepay the Note at any time without
payment of any premium.
In
other efforts to alleviate the liquidity pressures and reposition the Company to generate positive cash flow at a lower level
of net sales, since August 2019, the Company has implemented a multi-phase cost-reduction program which reduced cash expenses
during 2019 by approximately $200,000 per month and which is anticipated to provide annualized cash savings of approximately $2,400,000
during 2020, compared to the Company’s costs as they existed prior to the commencement of the cost reduction program. Although
the Company believes it has made and will continue to make progress under these programs and the funding provided under the Subordinated
Loan Agreement and available as a result of the release of the availability block under the MidCap Facility, the Company operates
in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash
receipts and expenditures. Accordingly, there can be no assurance that our planned improvements will be successful.
Additionally,
beginning during the last week of February 2020 and extending currently, the Company has been experiencing specific COVID-19 associated
reductions in sales due to customers requesting to delay specific purchases and/or previously anticipated purchase orders and
shipments. A portion of the Company’s customers are either fully or partially closed or operating with reduced staffing
levels due in part to a range of government mandates or corporate policies such as shelter-in-place, the closure of non-essential
businesses, and other restrictions. This initial short-term reduction in sales began in the range of 15% to 30% week by week deviations
from expected/forecasted levels in March and then grew to a range of 45% to 55% deviations from expected/forecasted levels during
the April to August time period. One of our major customers who accounted for approximately 10% of net sales during the three-month
period ended March 31, 2020, and who previously informed the Company that pending orders for delivery in May and June were on
hold, has more recently advised the Company that a portion of those orders may remain on hold until Q4 2020. It is possible that
sales may continue to decline further in future periods during 2020 and beyond, as upticks in cases of COVID-19 continue to be
reported around the country, which may result in renewed closures and governmental mandates restricting or further delaying efforts
to return to business as usual. While the majority of the Company’s customers remain open for business and have informed
the Company of their current intentions to remain open through the current circumstances, and despite a portion of the Company’s
customers having reopened during Q3 2020, recent spikes in reported COVID-19 cases have resulted in certain customers deferring
or delaying previously planned meetings and business discussions. The Company has reacted to these unprecedented circumstances,
as many enterprises have had to do over the course of March through October 2020, with a range of actions designed to compensate
for anticipated temporary revenue shortfalls, manage the Company’s working capital and minimize the overall financial impact
of this disruption, including implementation of exceptional short-term operating expense reductions, such as temporary manufacturing
shut-downs, employee furloughs and supplier payment renegotiations. The Company has finalized several supplier renegotiations
and is still in process with other suppliers to allow for alterations of shipment and receive dates of incoming parts and inventory
in other cases.
The Company expects
to use cash generated from operations to meet its long-term debt obligations. The Company also expects to make financed and unfinanced
long-term capital expenditures from time to time in the ordinary course of business, which capital expenditures were $ 138,000
and $263,000 in the nine months ended September 30, 2020 and the year ended December 31, 2019, respectively. The Company expects
to use cash generated from operations, amounts available under the MidCap Facility, amounts available under the Subordinated Loan
Facility, and purchase-money financing to meet any anticipated long-term capital expenditures.
Critical
Accounting Estimates
See
the Notes to Condensed Consolidated Financial Statements for a description of where estimates are required.
Recent
Accounting Pronouncements
See
Notes 2(d) and (e) of the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements,
including the anticipated dates of adoption and the effects on the Company’s consolidated financial position and results
of operations.