Notes To Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Trans-Lux Corporation is a leading designer and manufacturer of digital signage display solutions. The Company sells and leases its digital signage display solutions.
Principles of consolidation: The Consolidated Financial Statements include the accounts of Trans-Lux Corporation, a Delaware corporation, and all wholly-owned subsidiaries (collectively, the Company). Intercompany balances and transactions have been eliminated in consolidation.
Use of estimates: The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America (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. Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the financial statements in the period in which the change is determined. Estimates are used when accounting for such items as costs of long-term sales contracts, allowance for uncollectible accounts, inventory valuation allowances, depreciation and amortization, valuation of pension obligations, valuation of warrants, income taxes, warranty reserve, managements assessment of going concern, contingencies and litigation.
Cash and cash equivalents: The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company has deposits in United States financial institutions that maintain Federal Deposit Insurance Corporation (FDIC) deposit insurance on all interest and non-interest-bearing accounts, collectively, with an aggregate coverage up to $250,000 per depositor per financial institution. At times, the amount of the deposits exceeds the FDIC limits. The portion of the deposits in excess of FDIC limits represents a credit risk of the Company.
Accounts receivable, net: Accounts receivable are carried at net realizable value. Credit is extended based on an evaluation of each customers financial condition; collateral is generally not required. Reserves for uncollectible accounts receivable are provided based on historical experience and current trends. The Company evaluates the adequacy of these reserves regularly.
The following is a summary of the allowance for uncollectible accounts at December 31:
In thousands
|
2019
|
|
2018
|
Balance at beginning of year
|
$
|
1,797
|
|
$
|
235
|
Provisions
|
|
(97)
|
|
|
1,562
|
Write-offs
|
|
(957)
|
|
|
-
|
Balance at end of year
|
$
|
743
|
|
$
|
1,797
|
Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers, the relatively small account balances within the majority of the Companys customer base and their dispersion across different businesses. At December 31, 2019, two customers accounted for 39.8% of the balance in Accounts receivable, net. In 2019, no customers accounted for at least 10% of our total revenues. At December 31, 2018, one customer accounted for 18.0% of the balance in Accounts receivable, net. In 2018, no customers accounted for at least 10% of our total revenues.
Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Valuation allowances for slow-moving and obsolete inventories are provided based on historical experience and demand for servicing of the displays. The Company evaluates the adequacy of these valuation allowances regularly.
Rental equipment and property, plant and equipment, net: Rental equipment and property, plant and equipment are stated at cost and depreciated over their respective useful lives using the straight-line method. Leaseholds and improvements are amortized over the lesser of the useful lives or term of the lease. Repairs and maintenance costs related to rental equipment and property, plant and equipment are expensed in the period incurred.
The estimated useful lives are as follows:
|
Years
|
Indoor rental equipment
|
10
|
Outdoor rental equipment
|
15
|
Machinery, fixtures and equipment
|
5 15
|
Leaseholds and improvements
|
7
|
When rental equipment and property, plant and equipment are fully depreciated, retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the accounts. Any gains or losses on disposals are recorded in the period incurred.
Goodwill: Goodwill represents the excess of purchase price over the estimated fair value of net assets acquired. The goodwill of $744,000 relates to the Digital product sales segment.
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The Company annually evaluates the value of its goodwill on October 1 and determines if it is impaired by comparing the carrying value of goodwill to its estimated fair value. Changes in the assumptions used could materially impact the fair value estimates. Assumptions critical to our fair value estimates are: (i) discount rate used to derive the present value factors used in determining the fair value of the reporting unit, (ii) projected average revenue growth rates used in the reporting unit models and (iii) projected long-term growth rates used in the derivation of terminal year values. These and other assumptions are impacted by economic conditions and expectations of management and will change in the future based on period-specific facts and circumstances. The Company uses the income and the market approach when testing for goodwill impairment. The Company weighs these approaches by using a 67% factor for the income approach and a 33% factor for the market approach. Together these two factors estimate the fair value of the reporting unit. The Company uses a discounted cash flow model to determine the fair value under the income approach which contemplates a conservative overall weighted average revenue growth rate. If the Company were to reduce its revenue projections on the reporting unit by 5.5% within the income approach, the fair value of the reporting unit would be below carrying value. The gross profit margins used are consistent with historical margins achieved by the Company during previous years. If there is a margin decline of 6.7% or more, the model would yield results of a fair value less than carrying amount. The Company uses a market multiple approach based on revenue to determine the fair value under the market approach which includes a selection of and market price of a group of comparable companies and the performance of the guidelines of the comparable companies and of the reporting unit. The impairment test for goodwill is a two-step process. The first step of the goodwill impairment test compares the fair value of the reporting unit with its carrying amount. If the carrying amount of the reporting unit exceeds its fair value, a second step is performed to calculate the implied fair value of the goodwill of the reporting unit by deducting the fair value of all of the individual assets and liabilities of the reporting unit from the respective fair values of the reporting unit as a whole. To the extent the calculated implied fair value of the goodwill is less than the recorded goodwill, an impairment charge is recorded for the difference. Fair value is determined using cash flow and other valuation models (generally Level 3 inputs in the fair value hierarchy described in Note 4 Fair Value). There was no impairment of goodwill in 2019 or 2018.
Impairment or disposal of long-lived assets: The Company evaluates whether there has been an impairment in value of its long-lived assets if certain circumstances indicate that a possible impairment may exist. An impairment in value may exist when the carrying value of a long-lived asset exceeds its undiscounted cash flows. If it is determined that an impairment in value has occurred, the carrying value is written down to its fair value as determined by a discounted cash flow model. There were no impairments of long-lived assets in 2019 or 2018.
Restricted cash: The Company classifies cash as restricted when the cash is unavailable for withdrawal or usage for general operations. Restrictions may include legally restricted deposits, contracts entered into with others, or the Companys statements of intention with regard to particular deposits. The Company had Restricted cash in 2019 and 2018 for letters of credit in connection with the forgivable loan ($650,000 in 2019 and 2018) and security deposits ($200,000 in 2019 and $250,000 in 2018). During 2019, a security deposit was reduced by $50,000. The Company has presented these funds in Restricted cash in the Consolidated Balance Sheets since the use of the funds under the letters of credit is restricted.
Shipping Costs: The costs of shipping product to our customers of $436,000 and $487,000 in 2019 and 2018, respectively, are included in Cost of digital product sales.
Advertising/Marketing Costs: The Company expenses the costs of advertising and marketing at the time that the related advertising takes place. Advertising and marketing costs of $43,000 and $174,000 in 2019 and 2018, respectively, are included in General and administrative expenses.
Revenue recognition: See Note 3 Revenue Recognition.
Warranty reserve: The Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company engages in product quality programs and processes, including evaluating the quality of the component suppliers, the warranty obligation is affected by product failure rates. Should actual product failure rates differ from the Companys estimates, revisions to increase or decrease the estimated warranty liability may be required.
Taxes on income: Deferred income tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of the Companys assets and liabilities at tax rates expected to be in effect when such temporary differences are expected to reverse and for operating loss carryforwards. The temporary differences are primarily attributable to operating loss carryforwards, depreciation and the pension plan. The Company records a valuation allowance against net deferred income tax assets if, based upon the available evidence, it is more-likely-than-not that the deferred income tax assets will not be realized.
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The Company considers whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. The Companys policy is to classify interest and penalties related to uncertain tax positions in income tax expense. To date, there have been no interest or penalties charged to the Company in relation to the underpayment of income taxes. The Companys determinations regarding uncertain income tax positions may be subject to review and adjustment at a later date based upon factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof.
Foreign currency: The functional currency of the Companys Canadian business operation is the Canadian dollar. The assets and liabilities of such operation are translated into U.S. dollars at the year-end rate of exchange, and the operating and cash flow statements are converted at the average annual rate of exchange. The resulting translation adjustment is recorded in Accumulated other comprehensive loss in the Consolidated Balance Sheets and as a separate item in the Consolidated Statements of Comprehensive Loss. In relation to intercompany balances, these have been classified as short-term in nature and therefore the changes in the foreign currency remeasurement adjustment for intercompany balances are recorded as (Loss) gain on foreign currency remeasurement in the Consolidated Statements of Operations.
Share-based compensation: The Company measures share-based payments to employees, directors and non-employees at the grant date fair value of the instrument. The fair value is estimated on the date of grant using the Black-Scholes valuation model, which requires various assumptions including estimating stock price volatility, expected life of the instrument, estimated forfeiture rate and risk free interest rate. For details on the accounting effect of share-based compensation, see Note 16 Share-Based Compensation.
Consideration of Subsequent Events: The Company evaluated events and transactions occurring after December 31, 2019 through the date these Consolidated Financial Statements were included in this Form 10-K and filed with the SEC, to identify subsequent events which may need to be recognized or non-recognizable events which would need to be disclosed.
The following new accounting pronouncements were adopted in 2019:
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). Under ASU 2016-02, a company must recognize for all leases (with the exception of leases with terms of 12 months or less) a lease liability representing a lessee's obligation to make lease payments arising from a lease and a right of use (ROU) asset representing the lessee's right to use, or control the use of, a specified asset for the lease term. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and an ROU asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities, which the Company has so elected. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provided an additional (and optional) transition method to adopt the new leases standard whereby an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted this standard effective January 1, 2019 using the modified retrospective method in the period of adoption. The adoption of the standard had a material impact to our Consolidated Balance Sheets for the recognition of certain operating leases as ROU assets of $1,463,000, long-term lease liabilities of $1,127,000 and current lease liabilities of $368,000, but did not have a material impact on our Consolidated Statements of Operations, Comprehensive Loss, Changes in Stockholders Deficit or Cash Flows. We have analyzed our leases, implemented systems, developed processes and internal controls and updated our accounting policies to comply with the standard's adoption requirements. The Company's rental revenue agreements were accounted for under previous lease accounting standards through December 31, 2018 and are accounted for within the scope of Topic 842 following our adoption on January 1, 2019. Topic 842 does not significantly affect the timing of recognition or presentation of revenue for our rental contracts. See Note 13 Leases for further details.
In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 eliminates the separate accounting model for nonemployee share-based payment awards and generally requires companies to account for share-based payment transactions with nonemployees in the same way as share-based payment transactions with employees. The accounting remains different for attribution, which represents how the equity-based payment cost is recognized over the vesting period, and a contractual term election for valuing nonemployee equity share options. As required by this standard, the Company adopted ASU 2018-07 on January 1, 2019. The adoption of this standard did not have a material effect on the Companys consolidated financial position and results of operations.
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The following new accounting pronouncements, and related impacts on adoption, are being evaluated by the Company:
In January 2017, the FASB issued ASU 2017-04, Intangibles Goodwill and Other (Topic 350). ASU 2017-04 simplifies the test for goodwill impairment. Public business entities should apply the amendments in ASU 2017-04 for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years (i.e., January 1, 2020), early application is permitted. The Company does not expect the adoption of this standard to have a material effect on the Companys consolidated financial position and results of operations.
In August 2018, the FASB issued ASU 2018-14, Compensation Retirement Benefits Defined Benefit Plans General (Subtopic 715-20). ASU 2018-14 modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Public business entities should apply the amendments in ASU 2018-14 for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years (i.e., January 1, 2021). Early application is permitted. The Company does not expect the adoption of this standard to have a material effect on the Companys consolidated financial position and results of operations.
2. Liquidity
The Company has incurred recurring losses and has a working capital deficiency. The Company incurred a net loss of $1.4 million in 2019 and had a working capital deficiency of $3.1 million as of December 31, 2019.
The Company is dependent on future operating performance in order to generate sufficient cash flows in order to continue to run its businesses. Future operating performance is dependent on general economic conditions, as well as financial, competitive and other factors beyond our control. In order to more effectively manage its cash resources, the Company had, from time to time, increased the timetable of its payment of some of its payables, which delayed certain product deliveries from our vendors, which in turn delayed certain deliveries to our customers.
In March and April 2019, the Company received aggregate proceeds of $8.0 million from (i) a rights offering to current shareholders under which the shareholders could purchase shares of our Common Stock at an exercise price of $1.00 per share, resulting in gross proceeds of $2.5 million (the Rights Offering) and (ii) the exercise of the $5.5 million warrant (the Unilumin Warrant) issued to Unilumin North America Inc. (Unilumin) Of these proceeds, a portion was used to satisfy outstanding obligations including certain long-term debt, certain payables, certain accrued liabilities and pension obligations. On September 16, 2019, the Company entered into a Loan and Security Agreement (the Loan Agreement) with MidCap Business Credit LLC (MidCap) as lender. The Loan Agreement allows the Company to borrow up to an aggregate of $4.0 million on a revolving credit loan based on accounts receivable, inventory and equipment for general working capital purposes. A stockholder of the Company has committed to providing additional capital up to $2.0 million through December 31, 2020, to the extent necessary to fund operations.
Management believes that its current cash resources and cash provided by operations will be sufficient to fund its anticipated current and near-term cash requirements within one year from the date of issuance of this Form 10-K. The Company continually evaluates the need and availability of long-term capital in order to meet its cash requirements and fund potential new opportunities.
3. Revenue Recognition
Under the revenue recognition guidance provided by ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of this standard, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of this standard, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Sales tax, value added tax and other taxes collected on behalf of third parties are excluded from revenue.
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Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Companys contracts contained a significant financing component as of December 31, 2019.
In March 2016, the FASB issued updated lease accounting guidance ("Topic 842"), as explained further in Note 9 Leases. We adopted Topic 842 on January 1, 2019. Topic 842 is an update to Topic 840, which was the lease accounting standard in place through December 31, 2018. There were no significant changes to our revenue accounting upon adoption of Topic 842.
We recognize revenue in accordance with two different accounting standards: 1) Topic 606 and 2) Topic 842. Under Topic 606, revenue from contracts with customers is measured based on the consideration specified in the contract with the customer, and excludes any sales incentives and amounts collected on behalf of third parties. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account under Topic 606. Our contracts with customers generally do not include multiple performance obligations. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for such products or services.
Disaggregated Revenues
The following table represents a disaggregation of revenue from contracts with customers for the years ended December 31, 2019 and 2018, along with the reportable segment for each category:
In thousands
|
2019
|
|
2018
|
Digital product sales:
|
|
|
|
|
|
Catalog and small
customized products
|
$
|
13,322
|
|
$
|
10,958
|
Large customized
products
|
|
1,388
|
|
|
1,000
|
Subtotal
|
|
14,710
|
|
|
11,958
|
Digital product lease and
maintenance:
|
|
|
|
|
|
Operating leases
|
|
1,215
|
|
|
1,413
|
Maintenance agreements
|
|
1,110
|
|
|
1,028
|
Subtotal
|
|
2,325
|
|
|
2,441
|
Total
|
$
|
17,035
|
|
$
|
14,399
|
Performance Obligations
The Company has two primary revenue streams which are Digital product sales and Digital product lease and maintenance.
Digital Product Sales
The Company recognizes net revenue on digital product sales to its distribution partners and to end users related to digital display solutions and fixed digit scoreboards. For the Companys catalog products, revenue is generally recognized when the customer obtains control of the Companys product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. For the Companys customized products, revenue is either recognized at a point in time or over time depending on the size of the contract. For those customized product contracts that are smaller in size, revenue is generally recognized when the customer obtains control of the Companys product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. For those customized product contracts that are larger in size, revenue is recognized over time based on incurred costs as compared to projected costs using the input method, as this best reflects the Companys progress in transferring control of the customized product to the customer. The Company may also contract with a customer to perform installation services of digital display products. Similar to the larger customized products, the Company recognizes the revenue associated with installation services using the input method, whereby the basis is the total contract costs incurred to date compared to the total expected costs to be incurred.
Revenue on sales to distribution partners are recorded net of prompt-pay discounts, if offered, and other deductions. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method to which the Company expects to be entitled. In the case of prompt-pay discounts, there are only two possible outcomes: either the customer pays on-time or does not. Variable consideration is included in the transaction price if, in the Companys judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Companys anticipated performance and all information (historical, current and forecasted) that is reasonably available. The Company believes that the estimates it has established are reasonable based upon current facts and circumstances. Applying different judgments to the same facts and circumstances could result in the estimated amounts to vary. The Company offers an assurance-type warranty that the digital display products will conform to the published specifications. Returns may only be made subject to this warranty and not for convenience.
Digital Product Lease and Maintenance
Lease and maintenance contracts generally run for periods of one month to 10 years. A contract entered into by the Company with a customer may contain both lease and maintenance services (either or both services may be agreed upon based on the individual customer contract). Maintenance services may consist of providing labor, parts and software maintenance as may be required to maintain the customers equipment in proper operating condition at the customers service location. The Company concluded the lease and maintenance services represent a series of distinct services and the most representative method for measuring progress towards satisfying the performance obligation of these services is the input method. Additionally, maintenance services require the Company to stand ready to provide support to the customer when and if needed. As there is no discernable pattern of efforts other than evenly over the lease and maintenance terms, the Company will recognize revenue straight-line over the lease and maintenance terms of service.
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The Company has an enforceable right to payment for performance completed to date, as evidenced by the requirement that the customer pay upfront for each month of services. Lease and maintenance service amounts billed ahead of revenue recognition are recorded in deferred revenue and are included in Accrued liabilities in the Consolidated Balance Sheets.
Contract Balances with Customers
Contract assets primarily relate to rights to consideration for goods or services transferred to the customer when the right is conditional on something other than the passage of time. The contract assets are transferred to the receivables when the rights become unconditional. As of December 31, 2019 and 2018, the Company had no contract assets. The contract liabilities primarily relate to the advance consideration received from customers for contracts prior to the transfer of control to the customer and therefore revenue is recognized on completion of delivery. Contract liabilities are classified as deferred revenue and included in Accrued liabilities in the Consolidated Balance Sheets.
The following table presents the balances in the Companys receivables and contract liabilities with customers as of December 31, 2019 and 2018:
In thousands
|
|
2019
|
|
|
2018
|
Gross receivables
|
$
|
3,124
|
|
$
|
4,067
|
Allowance for bad debts
|
|
743
|
|
|
1,796
|
Net receivables
|
|
2,381
|
|
|
2,271
|
Contract liabilities
|
|
230
|
|
|
465
|
During the years ended December 31, 2019 and 2018, the Company recognized bad debt recovery (expense) of $97,000 and ($1.6 million), respectively.
During the years ended December 31, 2019 and 2018, the Company recognized the following revenues as a result of changes in the contract asset and the contract liability balances in the period:
In thousands
|
|
2019
|
|
2018
|
Revenue recognized in the period from:
|
|
|
|
|
Amounts included in the contract liability
at the beginning of the period
|
$
|
392
|
$
|
891
|
Performance obligations satisfied in
previous periods (for example, due to
changes in transaction price)
|
|
-
|
|
-
|
Transaction Price Allocated to Future Performance Obligations alternative more qualitative presentation
Remaining performance obligations represents the transaction price of contracts for which work has not been performed (or has been partially performed). The guidance provides certain practical expedients that limit this requirement and, therefore, the Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed. As of December 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations for digital product sales was $843,000 and digital product lease and maintenance was $3.3 million.
The Company expects to recognize revenue on approximately 59%, 20% and 21% of the remaining performance obligations over the next 12 months, 13 to 36 months and 37 or more months, respectively.
Costs to Obtain or Fulfill a Customer Contract
Prior to the adoption of ASU 2014-9, the Company expensed incremental commissions paid to sales representatives for obtaining customer contracts. Under ASU 2014-9, the Company currently capitalizes these incremental costs of obtaining customer contracts. Capitalized commissions are amortized based on the transfer of the products or services to which the assets relate. Applying the practical expedient in paragraph 340-40-25-4, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in General and administrative expenses.
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Table of Contents
The Company accounts for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. When shipping and handling costs are incurred after a customer obtains control of the products, the Company also has elected to account for these as costs to fulfill the promise and not as a separate performance obligation. Shipping and handling costs associated with the distribution of finished products to customers are recorded in costs of goods sold and are recognized when the related finished product is shipped to the customer.
4. Fair Value
The Company carries the cash surrender value of life insurance related to its deferred compensation arrangements at fair value. Under ASC 820, the fair value of all assets and liabilities is determined using a three-tier fair value hierarchy.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
-
Level 1 Inputs to the valuation methodology based on unadjusted quoted market prices in active markets that are accessible at the measurement date.
-
Level 2 Inputs to the valuation methodology that include quoted market prices that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly.
-
Level 3 Inputs to the valuation methodology that are unobservable and significant to the fair value measurement.
Based on this hierarchy, the Company determined the fair value of the cash surrender value of life insurance, a Level 2 based on observable inputs primarily from the counter party. The Companys cash surrender value of life insurance had a carrying amount of $55,000 at December 31, 2019 and 2018, and is included in Other assets in the Consolidated Balance Sheets. The carrying amounts of cash equivalents, receivables and accounts payable approximate fair value due to the short maturities of these items. The fair value of the Companys 8¼% Limited convertible senior subordinated notes due 2012 (the Notes), using observable inputs, was $70,000 at December 31, 2019 and $77,000 at December 31, 2018. The fair value of the Companys 9½% Subordinated debentures due 2012 (the Debentures), using observable inputs, was $44,000 at December 31, 2019 and 2018. The fair value of the Companys remaining long-term debt including current portion approximates its carrying value of $1.7 million at December 31, 2019 and $4.7 million at December 31, 2018.
5. Inventories
Inventories consist of the following:
In thousands
|
2019
|
|
2018
|
Raw materials
|
$
|
1,393
|
|
$
|
1,178
|
Work-in-progress
|
|
512
|
|
|
626
|
Finished goods
|
|
277
|
|
|
397
|
Total inventory
|
$
|
2,182
|
|
$
|
2,201
|
6. Rental Equipment, net
Rental equipment consists of the following:
In thousands
|
2019
|
|
2018
|
Rental equipment
|
$
|
4,291
|
|
$
|
7,109
|
Less accumulated depreciation
|
|
3,364
|
|
|
5,799
|
Net rental equipment
|
$
|
927
|
|
$
|
1,310
|
During 2019, $2.9 million of fully depreciated rental equipment was written off. Depreciation expense for rental equipment for the years ended December 31, 2019 and 2018 was $427,000 and $706,000, respectively.
7. Property, Plant and Equipment, net
Property, plant and equipment consists of the following:
In thousands
|
2019
|
|
2018
|
Machinery, fixtures and equipment
|
$
|
2,884
|
|
$
|
2,691
|
Leaseholds and improvements
|
|
23
|
|
|
12
|
|
|
2,907
|
|
|
2,703
|
Less accumulated depreciation
|
|
623
|
|
|
523
|
Net property, plant and equipment
|
$
|
2,284
|
|
$
|
2,180
|
Equipment having net book values of $2.3 million and $2.2 million at December 31, 2019 and 2018, respectively, are pledged as collateral under various financing agreements.
During 2019 and 2018, $76,000 and $421,000, respectively, of fully depreciated property, plant and equipment was written off. Depreciation expense for property, plant and equipment for the years ended December 31, 2019 and 2018 was $241,000 and $246,000, respectively.
8. Other Assets
Other assets consist of the following:
In thousands
|
2019
|
|
2018
|
Refundable AMT credits
|
$
|
275
|
|
$
|
592
|
Prepaids
|
|
55
|
|
|
55
|
Deposits
|
|
73
|
|
|
73
|
Total other assets
|
$
|
403
|
|
$
|
720
|
26
Table of Contents
9. Taxes on Income
The components of income tax expense are as follows:
In thousands
|
2019
|
|
2018
|
Current:
|
|
|
|
| |
Federal
|
$
|
-
|
|
$
|
-
|
State and local
|
|
25
|
|
|
25
|
Foreign
|
|
16
|
|
|
22
|
|
$
|
41
|
|
$
|
47
|
Deferred:
|
|
|
|
| |
Federal
|
$
|
-
|
|
$
|
-
|
State and local
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Income tax expense
|
$
|
41
|
|
$
|
47
|
Loss before income taxes from the United States operations was $1.2 million and $4.5 million for the years ended December 31, 2019 and 2018, respectively. Loss before income taxes from Canada was $0.2 million and $0.1 million for the years ended December 31, 2019 and 2018, respectively.
The effective income tax rate differed from the expected federal statutory income tax benefit rate of 21.0% as follows:
|
2019
|
|
2018
|
Statutory federal income tax benefit rate
|
|
21.0 %
|
|
|
21.0 %
|
State income taxes, net of federal benefit
|
|
2.5
|
|
|
4.2
|
Deemed dividend tax of deferred foreign income
|
|
-
|
|
|
0.5
|
Foreign income taxed at different rates
|
|
(3.6)
|
|
|
(1.1)
|
Deferred tax asset valuation allowance
|
|
285.5
|
|
|
(22.6)
|
Section 382 adjustment to deferred net operating loss
|
|
(309.3)
|
|
|
-
|
Other
|
|
0.9
|
|
|
(3.0)
|
Effective income tax benefit (expense) rate
|
|
(3.0) %
|
|
|
(1.0)%
|
Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred income tax assets and liabilities are as follows:
In thousands
|
2019
|
|
2018
|
Deferred income tax asset:
|
|
|
|
|
|
Tax credit carryforwards
|
$
|
-
|
|
$
|
30
|
Operating loss carryforwards
|
|
1,487
|
|
|
5,347
|
Net pension costs
|
|
2,210
|
|
|
2,357
|
Accruals
|
|
-
|
|
|
(3)
|
Allowance for bad debts
|
|
182
|
|
|
467
|
Other
|
|
148
|
|
|
302
|
Valuation allowance
|
|
(3,563)
|
|
|
(7,447)
|
|
|
464
|
|
|
1,053
|
Deferred income tax liability:
|
|
|
|
| |
Depreciation
|
|
345
|
|
|
425
|
Other
|
|
119
|
|
|
628
|
|
|
464
|
|
|
1,053
|
Net deferred income taxes
|
$
|
-
|
|
$
|
-
|
Operating tax loss carryforwards primarily relate to U.S. federal net operating loss carryforwards of approximately $4.9 million, which began to expire in 2019. The operating loss carryforwards have been limited by changes in ownership of the Company in 2012 and 2019 as defined under Section 382 of the Internal Revenue Code. The change in ownership as of June 26, 2012 limited our operating loss carryforwards at that time to $295,000 per year aggregating $5.9 million. The change in ownership as of April 10, 2019 limited our operating loss carryforwards at that time to $148,000 per year aggregating $3.0 million. Subsequent losses in 2019 have increased the operating loss carryforwards.
A valuation allowance has been established for the amount of deferred income tax assets as management has concluded that it is more-likely-than-not that the benefits from such assets will not be realized.
The Companys determinations regarding uncertain income tax positions may be subject to review and adjustment at a later date based upon factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof. The Company does not have any material uncertain tax positions in 2019 and 2018.
The Company is subject to U.S. federal income tax as well as income tax in multiple state and local jurisdictions and Canadian federal and provincial income tax. Currently, no federal, state or provincial income tax returns are under examination.
27
Table of Contents
10. Accrued Liabilities
Accrued liabilities consist of the following:
In thousands
|
2019
|
|
2018
|
Directors fees
|
$
|
1,202
|
|
$
|
1,148
|
Taxes payable
|
|
1,114
|
|
|
1,083
|
Interest payable
|
|
875
|
|
|
731
|
Deferred revenues
|
|
787
|
|
|
1,000
|
Current portion of pension liability
(see Note 15 Pension Plan)
|
|
641
|
|
|
623
|
Warranty reserve
|
|
430
|
|
|
405
|
Compensation and employee benefits
|
|
336
|
|
|
636
|
Audit fees
|
|
122
|
|
|
148
|
Other
|
|
539
|
|
|
558
|
|
$
|
6,046
|
|
$
|
6,332
|
A summary of the warranty reserve for the years ended December 31, 2019 and 2018 is as follows:
In thousands
|
2019
|
|
2018
|
Balance at beginning of year
|
$
|
405
|
|
$
|
322
|
Provisions
|
|
176
|
|
|
307
|
Deductions
|
|
(151)
|
|
|
(224)
|
Balance at end of year
|
$
|
430
|
|
$
|
405
|
11. Warrant Issuances
In connection with a Securities Purchase Agreement (SPA) with Unilumin, the Company issued the Unilumin Warrant to purchase 5,670,103 shares of the Companys Common Stock at an exercise price of $0.97 per share. In 2019, Unilumin fully exercised the Unilumin Warrant, aggregating $5.5 million. The Company received cash of $5.3 million after fees related to the exercise of this warrant.
On June 11, 2018, in connection with a Subordinated Secured Promissory Note (the SMI Note), the Company issued SM Investors, L.P. (SMI) a three-year warrant to purchase 82,500 shares of Common Stock at an exercise price of $0.01 per share. The Company utilized the Black-Scholes method to calculate the fair value of this warrant at the time of issuance, which was $95,000, and was treated as a debt discount. This warrant has not yet been exercised.
On June 11, 2018, in connection with a Subordinated Secured Promissory Note (the SMII Note) with SM Investors II, L.P. (SMII), the Company issued SMII a three-year warrant to purchase 167,500 shares of Common Stock at an exercise price of $0.01 per share. The Company utilized the Black-Scholes method to calculate the fair value of this warrant at the time of issuance, which was $192,000, and was treated as a debt discount. This warrant has not yet been exercised.
On April 23, 2015, the Company entered into a credit agreement with BFI Capital Fund II, LLC (BFI) for a $1.5 million credit line, which was repaid in full prior to 2016. In connection with the agreement, the Company also issued BFI a warrant to purchase 10,000 shares of Common Stock at an exercise price of $12.00 per share, which expires on April 23, 2020. This warrant has not yet been exercised.
In November 2012, the Board of Directors approved the issuance to two board members, George W. Schiele and Salvatore J. Zizza, of warrants to purchase 20,000 shares of Common Stock at an exercise price of $12.50 per share. In April 2013, the Board of Directors approved the issuance to one board member, Jean Firstenberg, of warrants to purchase 2,000 shares of Common Stock at an exercise price of $12.50 per share. These warrants became fully vested on October 2, 2016 and expired on October 2, 2018. No expense was recorded in 2019 or 2018 related to these warrants. These warrants did not include a potential adjustment of the strike price if the Company sold or granted any options or warrants at a price per share less than the strike price of the warrants, so they were considered indexed to the Companys Common Stock and were accounted for as equity at the time of the grant.
12. Long-Term Debt
Long-term debt consists of the following:
In thousands
|
2019
|
|
2018
|
8¼% Limited convertible senior
subordinated notes due 2012
|
$
|
352
|
|
$
|
387
|
9½% Subordinated debentures
due 2012
|
|
220
|
|
|
220
|
Revolving credit line
|
|
-
|
|
|
1,440
|
Term loans
|
|
1,000
|
|
|
1,590
|
Term loans related party
|
|
-
|
|
|
1,000
|
Forgivable loan
|
|
650
|
|
|
650
|
Total debt
|
|
2,222
|
|
|
5,287
|
Less deferred financing costs and debt
discount
|
|
-
|
|
|
257
|
Net debt
|
|
2,222
|
|
|
5,030
|
Less portion due within one year
|
|
1,572
|
|
|
3,584
|
Net long-term debt
|
$
|
650
|
|
$
|
1,446
|
Payments of long-term debt due for the next five years are:
In thousands
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
|
$
|
1,572
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
28
Table of Contents
On September 16, 2019, the Company entered into the Loan Agreement with MidCap. The Loan Agreement has a term of three years, unless earlier terminated by the parties in accordance with the termination provisions of the Loan Agreement. The Loan Agreement allows the Company to borrow up to an aggregate of $4.0 million at an interest rate of the 3-month LIBOR interest rate plus 4.75% (6.66% at December 31, 2019) on a revolving credit loan based on accounts receivable, inventory and equipment for general working capital purposes. As of December 31, 2019, there is no balance outstanding under this Loan Agreement. The Loan Agreement also requires the payment of certain fees, including a facility fee, an unused credit line fee and a collateral monitoring charge. The Loan Agreement contains financial and other covenant requirements, including financial covenants that require the Borrowers to attain certain EBITDA amounts for certain periods, the first of which is for the three months ended December 31, 2019. As of December 31, 2019, the Company satisfied this covenant. The Loan Agreement is secured by substantially all of the Borrowers assets.
The Company has a $500,000 loan from Carlisle Investments Inc. (Carlisle) at a fixed interest rate of 12.00%, which matured on April 27, 2019 with a bullet payment of all principal due at such time. Interest is payable monthly. Carlisle has agreed to not demand payment on the loan through at least December 31, 2020. As of December 31, 2019, the entire amount was outstanding and is included in current portion of long-term debt in the Consolidated Balance Sheets. As of December 31, 2019 and 2018, the Company had accrued $120,000 and $60,000, respectively, of interest related to this loan, which are included in accrued liabilities in the Consolidated Balance Sheets. Marco Elser, a former director of the Company, exercises voting and dispositive power as investment manager of Carlisle.
The Company has an additional $500,000 loan from Carlisle at a fixed interest rate of 12.00%, which matured on December 10, 2017 with a bullet payment of all principal due at such time (the Second Carlisle Agreement). Interest is payable monthly. Carlisle has agreed to not demand payment on the loan through at least December 31, 2020. As of December 31, 2019, the entire amount was outstanding and is included in current portion of long-term debt Consolidated Balance Sheets. As of December 31, 2019 and 2018, the Company had accrued $120,000 and $60,000, respectively, of interest related to this loan, which are included in accrued liabilities in the Consolidated Balance Sheets. Under the Second Carlisle Agreement, the Company granted a security interest to Carlisle in accounts receivable, materials and intangibles relating to a certain purchase order for equipment issued in April 2017.
As of December 31, 2019 and 2018, the Company had outstanding $352,000 and $387,000, respectively, of Notes. The Notes matured as of March 1, 2012 and are currently in default. As of December 31, 2019 and 2018, the Company had accrued $300,000 and $298,000, respectively, of interest related to the Notes, which is included in Accrued liabilities in the Consolidated Balance Sheets. The trustee, by notice to the Company, or the holders of 25% of the principal amount of the Notes outstanding, by notice to the Company and the trustee, may declare the outstanding principal plus interest due and payable immediately. On February 15, 2019, holders of $35,000 of the Notes accepted the Companys offer to exchange each $1,000 of principal, forgiving any related interest, for $200 in cash, for an aggregate payment by the Company of $7,000. As a result of the transaction, the Company recorded a gain on the extinguishment of debt, net of expenses, of $52,000 in 2019.
As of December 31, 2019 and 2018, the Company had outstanding $220,000 of Debentures. The Debentures matured as of December 1, 2012 and are currently in default. As of December 31, 2019 and 2018, the Company had accrued $211,000 and $190,000, respectively, of interest related to the Debentures, which is included in Accrued liabilities in the Consolidated Balance Sheets. The trustee, by notice to the Company, or the holders of 25% of the principal amount of the Debentures outstanding, by notice to the Company and the trustee, may declare the outstanding principal plus interest due and payable immediately.
The Company has a $650,000 forgivable loan from the City of Hazelwood, Missouri. The loan will be forgiven on a pro-rata basis if predetermined employment levels are attained and would expire on April 1, 2025. If the Company attains the employment levels required by the agreement, there is no interest due, otherwise interest accrues at a rate of prime plus 2.00% (6.75% at December 31, 2019). As of December 31, 2019 and 2018, the Company had accrued $118,000 and $71,000, respectively, of interest related to this loan, which is included in accrued liabilities in the Consolidated Balance Sheets.
On July 12, 2016, the Company entered into a credit agreement, as subsequently amended on various dates, the latest being March 1, 2019 (collectively, the Credit Agreement) with CNH Finance Fund I, L.P. (CNH) as lender. Under the Credit Agreement, the Company was able to borrow up to an aggregate of $4.0 million, which included (i) up to $3.0 million of a revolving loan and (ii) a $1.0 million term loan. On April 10, 2019, the Company satisfied the Credit Agreement in full and the Credit Agreement was terminated. The termination fee of $60,000 and the remaining debt discount of $23,000 were written off and included in loss on extinguishment of debt on the Consolidated Statements of Operations.
29
Table of Contents
On June 11, 2018, the Company entered into a Subordinated Secured Promissory Note (the SMI Note) with SM Investors, L.P. (SMI), pursuant to which the Company borrowed $330,000 from SMI. On April 17, 2019, the Company satisfied the SMI Note in full and the remaining debt discount of $53,000 was written off and included in loss on extinguishment of debt on the Consolidated Statements of Operations.
On June 11, 2018, the Company entered into another Subordinated Secured Promissory Note (the SMII Note) with SM Investors II, L.P. (SMII), pursuant to which the Company borrowed $670,000 from SMII. On April 17, 2019, the Company satisfied the SMII Note in full and the remaining debt discount of $109,000 was written off and included in loss on extinguishment of debt on the Consolidated Statements of Operations.
13. Leases
Certain premises are occupied under operating leases that expire at varying dates through 2023. Certain of these leases provide for the payment of real estate taxes and other occupancy costs. On June 21, 2016, the Company entered into a lease for a manufacturing facility in Hazelwood, Missouri for a seven-year lease period at an initial annual rental of $317,000. On December 23, 2019, the Company entered into a lease for office space in Urbandale, Iowa for a two-year lease period at an initial annual rental of $28,000. On February 1, 2016, the Company sold its Des Moines, Iowa facility in a sale/leaseback transaction. The lease was for a two-year lease period at an annual rental of $158,000. In 2017, the Company extended the lease through February 1, 2019 at the same rate. In 2018, the Company extended the lease for another year through February 1, 2020 at the same rate. Rent expense was $608,000 and $662,000 for the years ended December 31, 2019 and 2018, respectively.
The Company leases administrative and manufacturing facilities through operating lease agreements. The Company has no finance leases as of December 31, 2019. Our leases include both lease (e.g., fixed payments including rent) and non-lease components (e.g., common area or other maintenance costs). The facility leases include one or more options to renew. The exercise of lease renewal options is typically at our sole discretion, therefore, the renewals to extend the lease terms are not included in our ROU assets or lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and, when they are reasonably certain of exercise, we include the renewal period in our lease term.
Operating leases result in the recognition of ROU assets and lease liabilities on the Consolidated Balance Sheets. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate at the commencement date to determine the present value of lease payments. Most real estate leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 5 years or more. Lease expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets. The primary leases we enter into with initial terms of 12 months or less are for equipment.
Supplemental information regarding leases:
|
2019
|
In thousands, unless otherwise noted
|
Balance Sheet:
|
|
|
ROU assets
|
$
|
1,141
|
Current lease liabilities
|
|
284
|
Non-current lease liabilities
|
|
893
|
Total lease liabilities
|
|
1,177
|
Weighted average remaining lease term (years)
|
|
2.5
|
Weighted average discount rate
|
|
9.0%
|
Future minimum lease payments:
|
| |
2020
|
$
|
377
|
2021
|
|
370
|
2022
|
|
348
|
2023
|
|
295
|
2024
|
|
-
|
Thereafter
|
|
-
|
Total
|
|
1,390
|
Less: Imputed interest
|
|
213
|
Total lease liabilities
|
|
1,177
|
Less: Current lease liabilities
|
|
284
|
Long-term lease liabilities
|
$
|
893
|
Supplemental cash flow information regarding leases:
In thousands
|
2019
|
Operating cash flow information:
|
|
|
Cash paid for amounts included in the measurement
of lease liabilities
|
$
|
488
|
Non-cash activity:
|
|
|
ROU assets obtained in exchange for lease liabilities
|
|
212
|
Total operating lease expense and short-term lease expense was $497,000 and $111,000 for the year ended December 31, 2019.
14. Stockholders Deficit
During 2019 and 2018, the Board of Directors did not declare any quarterly cash dividends on the Companys Common Stock.
During 2019, the Company declared cash dividends aggregating $80,000 which was paid in connection with the redemption of all of the outstanding Series B Convertible Preferred Stock (SBCPS). In September 2018, the Board of Directors declared a cash dividend of $6.00 per share for each share of SBCPS (aggregating $99,000, which was paid in November 2018). In April 2018, the Board of Directors declared a stock dividend of 7.6923 shares of Common Stock for each share of SBCPS (aggregating 127,013 common shares, which were issued in May 2018). As of December 31, 2018, the Company had recorded accumulated unpaid dividends related to SBCPS of $41,000.
30
Table of Contents
The Company was authorized to issue 2,500,000 shares of preferred stock as of December 31, 2019, of which (i) 416,500 shares were designated as Series A Convertible Preferred Stock, none of which were outstanding, (ii) 51,000 shares were designated as SBCPS, none of which were outstanding, and (iii) 2,032,500 shares were not yet designated. The undesignated preferred stock would contain such rights, preferences, privileges and restrictions as may be fixed by our Board of Directors.
Shares of the Companys Common Stock reserved for future issuance in connection with convertible securities and stock option plans were 260,000 and 6,260,343 at December 31, 2019 and 2018, respectively.
During 2019 and 2018, certain board members deferred payment of their director fees. In lieu of a cash payment, certain board members and former board members have agreed to receive restricted shares of Common Stock of the Company or a combination of cash and restricted shares of Common Stock of the Company, which such restricted shares shall contain a legend under the Securities Act of 1933 and shall not be transferable unless and until registered or otherwise in accordance with applicable securities laws. No restricted stock was issued in lieu of cash payments for directors fees in 2019 or 2018.
Accumulated other comprehensive loss is comprised of approximately $6.8 million and $6.5 million of unrecognized pension costs at December 31, 2019 and 2018, respectively, and $194,000 and $76,000 of unrealized foreign currency translation gains at December 31, 2019 and 2018, respectively.
The components of accumulated other comprehensive loss are as follows:
In thousands
|
Pension plan
actuarial loss
|
|
Foreign currency
translation
gain (loss)
|
|
Total
|
Balances at January 1, 2018
|
$
|
(5,817)
|
|
$
|
281
|
|
$
|
(5,536)
|
Actuarial loss
|
|
(653)
|
|
|
-
|
|
|
(653)
|
Translation loss
|
|
-
|
|
|
(205)
|
|
|
(205)
|
Balances at December 31, 2018
|
|
(6,470)
|
|
|
76
|
|
|
(6,394)
|
Actuarial loss
|
|
(342)
|
|
|
-
|
|
|
(342)
|
Translation gain
|
|
-
|
|
|
118
|
|
|
118
|
Balances at December 31, 2019
|
$
|
(6,812)
|
|
$
|
194
|
|
$
|
(6,618)
|
15. Pension Plan
All eligible salaried employees of Trans-Lux Corporation and certain of its subsidiaries are covered by a non-contributory defined benefit pension plan. Pension benefits vest after five years of service and are based on years of service and final average salary. The Companys general funding policy is to contribute at least the required minimum amounts sufficient to satisfy regulatory funding standards, but not more than the maximum tax-deductible amount. The benefit service under the pension plan had been frozen since 2003 and, accordingly, there was no service cost for the years ended December 31, 2019 and 2018. In 2009, the compensation increments were frozen, and accordingly, no additional benefits are being accrued under the plan. For 2019 and 2018, the accrued benefit obligation of the plan exceeded the fair value of plan assets, due primarily to the plans investment performance and updates to actuarial longevity tables. The Companys obligations under its pension plan exceeded plan assets by $4.1 million at December 31, 2019.
The Company employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. The intent of this strategy is to minimize plan expenses by outperforming plan liabilities over the long run. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and corporate financial condition. The portfolio contains a diversified blend of equity and fixed income investments. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies and quarterly investment portfolio reviews.
At December 31, 2019 and 2018, the Companys pension plan weighted-average asset allocations by asset category are as follows:
|
2019
|
2018
|
Equity and index funds
|
69.3%
|
64.7%
|
Fixed income funds
|
30.7
|
35.3
|
|
100.0%
|
100.0%
|
The pension plan asset information included below is presented at fair value as established by ASC 820.
The following table presents the pension plan assets by level within the fair value hierarchy as of December 31, 2019 and 2018:
In thousands
|
2019
|
|
2018
|
Level 1:
|
|
|
|
|
|
Equity and index funds
|
$
|
7,028
|
|
$
|
5,593
|
Fixed income funds
|
|
3,120
|
|
|
3,054
|
Total Level 1
|
|
10,148
|
|
|
8,647
|
Level 2
|
|
-
|
|
|
-
|
Level 3
|
|
-
|
|
|
-
|
Total pension plan assets
|
$
|
10,148
|
|
$
|
8,647
|
31
Table of Contents
The funded status of the plan as of December 31, 2019 and 2018 is as follows:
In thousands
|
2019
|
|
2018
|
Change in benefit obligation:
|
|
|
|
|
|
Projected benefit obligation at
beginning of year
|
$
|
12,965
|
|
$
|
14,320
|
Interest cost
|
|
501
|
|
|
455
|
Actuarial loss (gain)
|
|
1,565
|
|
|
(908)
|
Benefits paid
|
|
(773)
|
|
|
(902)
|
Projected benefit obligation at
end of year
|
|
14,258
|
|
|
12,965
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
| |
Fair value of plan assets at
beginning of year
|
|
8,647
|
|
|
10,130
|
Actual return on plan assets
|
|
1,645
|
|
|
(1,002)
|
Company contributions
|
|
629
|
|
|
421
|
Benefits paid
|
|
(773)
|
|
|
(902)
|
Fair value of plan assets at end of
year
|
|
10,148
|
|
|
8,647
|
|
|
|
|
| |
Funded status (underfunded)
|
$
|
(4,110)
|
|
$
|
(4,318)
|
|
|
|
|
| |
Amounts recognized in other
accumulated comprehensive loss:
|
|
|
|
|
|
Net actuarial loss
|
$
|
8,296
|
|
$
|
7,954
|
Weighted average assumptions as of
December 31:
|
|
|
|
|
|
Discount rate:
|
|
|
|
| |
Components of cost
|
|
4.30%
|
|
|
3.65%
|
Benefit obligations
|
|
3.20%
|
|
|
4.30%
|
Expected return on plan assets
|
|
8.00%
|
|
|
8.00%
|
Rate of compensation increase
|
|
N/A
|
|
|
N/A
|
The Company determines the long-term rate of return for plan assets by studying historical markets and the long-term relationships between equity securities and fixed income securities, with the widely-accepted capital market principal that assets with higher volatility generate higher returns over the long run. The 8.0% expected long-term rate of return on plan assets is determined based on long-term historical performance of plan assets, current asset allocation and projected long-term rates of return.
In 2020, the Company expects to amortize $281,000 of actuarial losses to pension expense. The accumulated benefit obligation at December 31, 2019 and 2018 was $14.3 million and $13.0 million, respectively. The minimum required contribution in 2020 is expected to be $641,000, which is included in Accrued liabilities in the Consolidated Balance Sheets. The long-term pension liability is $3.5 million and is included in Deferred pension liability and other in the Consolidated Balance Sheets.
In 2019, we made the $629,000 of minimum required contributions to the plan, which includes the balance of the 2018 minimum required contributions. Subsequent to December 31, 2019, we made an $85,000 contribution to the plan. At this time, the Company is expecting to make its minimum required $556,000 of contributions remaining for 2020; however, there is no assurance that the Company will be able to make any or all such remaining payments. If we are unable to fulfill our related obligations, the implementation of any such enforcement remedies would have a material adverse impact on our financial condition, results of operations, and liquidity.
The following estimated benefit payments are expected to be paid by the Companys pension plan in the next 5 years:
In thousands
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
$
|
720
|
|
$
|
1,229
|
|
$
|
731
|
|
$
|
865
|
|
$
|
956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
The following table presents the components of the net periodic pension cost for the years ended December 31, 2019 and 2018:
In thousands
|
2019
|
|
2018
|
Interest cost
|
$
|
501
|
|
$
|
455
|
Expected return on plan assets
|
|
(682)
|
|
|
(787)
|
Amortization of net actuarial loss
|
|
264
|
|
|
229
|
Net periodic pension cost (benefit)
|
$
|
83
|
|
$
|
(103)
|
The following table presents the change in unrecognized pension costs recorded in other comprehensive loss as of December 31, 2019 and 2018:
In thousands
|
2019
|
|
2018
|
Balance at beginning of year
|
$
|
7,954
|
|
$
|
7,301
|
Net actuarial loss
|
|
606
|
|
|
882
|
Recognized loss
|
|
(264)
|
|
|
(229)
|
Balance at end of year
|
$
|
8,296
|
|
$
|
7,954
|
In addition, the Company provided unfunded supplemental retirement benefits for the retired, former Chief Executive Officer. During 2009 the Company accrued $0.5 million for such benefits, which was settled in November 2019. The Company does not offer any post-retirement benefits other than the pension and supplemental retirement benefits described herein.
16. Share-Based Compensation
The Company accounts for all share-based payments to employees and directors, including grants of employee stock options, at fair value and expenses the benefit in the Consolidated Statements of Operations over the service period (generally the vesting period). The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes pricing valuation model, which requires various assumptions including estimating stock price volatility, expected life of the stock option, risk free interest rate and estimated forfeiture rate.
32
Table of Contents
On October 5, 2018, the Company granted 20,000 shares of Common Stock to the Companys Chief Executive Officer. The closing share price on the date of the grant was $0.49 and there was no vesting period. The Company recorded compensation expense of $10,000 in 2018.
The Company currently has one stock option plan. As of December 31, 2019, 800 shares of Common Stock were available for grant under the Non-Employee Director Stock Option Plan.
Changes in the stock option plan are as follows:
|
Number of Shares
|
|
Weighted
Average
Exercise
Price
|
|
Authorized
|
|
Granted
|
|
Available
|
|
Balance January 1, 2018
|
800
|
|
-
|
|
800
|
|
|
N/A
|
Authorized
|
-
|
|
-
|
|
-
|
|
| |
Expired
|
-
|
|
-
|
|
-
|
|
|
|
Granted
|
-
|
|
-
|
|
-
|
|
| |
Balance December 31, 2018
|
800
|
|
-
|
|
800
|
|
|
|
Authorized
|
-
|
|
-
|
|
-
|
|
| |
Expired
|
-
|
|
-
|
|
-
|
|
|
|
Granted
|
-
|
|
-
|
|
-
|
|
| |
Balance December 31, 2019
|
800
|
|
-
|
|
800
|
|
|
|
Under the Non-Employee Director Stock Option Plan, option prices must be at least 100% of the market value of the Common Stock at the time of grant. No option may be exercised prior to one year after the date of grant and the optionee must be a director of the Company at the time of exercise, except in certain cases as permitted by the Compensation Committee. Exercise periods are for six years from the date of grant and terminate at a stipulated period of time after an optionee ceases to be a director. At December 31, 2019, there were no outstanding options to purchase shares.
As of December 31, 2019, there was no unrecognized compensation cost related to non-vested options granted under the Plans.
17. Loss Per Share
The following table presents the calculation of loss per share for the years ended December 31, 2019 and 2018:
In thousands, except per share data
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
|
Net loss, as reported
|
$
|
(1,402)
|
|
$
|
(4,694)
|
Dividends paid on preferred shares
|
|
(80)
|
|
|
(198)
|
Change in dividends accumulated on
preferred shares
|
|
41
|
|
|
-
|
Net loss attributable to common
shares
|
$
|
(1,441)
|
|
$
|
(4,892)
|
Denominator:
|
|
|
|
|
|
Weighted average shares outstanding
|
|
11,417
|
|
|
2,603
|
Basic and diluted loss per share
|
$
|
(0.13)
|
|
$
|
(1.88)
|
At December 31, 2019, there are no dividends accumulated on the Companys SBCPS. At December 31, 2018, dividends accumulated on the Companys SBCPS totaled $41,000.
Basic loss per common share is computed by dividing net loss attributable to common shares by the weighted average number of common shares outstanding for the period. Diluted loss per common share is computed by dividing net loss attributable to common shares, by the weighted average number of common shares outstanding, adjusted for shares that would be assumed outstanding after warrants and stock options vested under the treasury stock method.
At December 31, 2019 and 2018, outstanding warrants exercisable into 260,000 and 5,680,000 shares of Common Stock, respectively, were excluded from the calculation of diluted loss per share because their impact would have been anti-dilutive.
18. Restructuring
The Company records restructuring liabilities that represent charges in connection with consolidations of certain operations as well as headcount reduction programs. In the third quarter of 2019, the Company approved restructuring plans to consolidate the manufacturing facilities. The Company recorded restructuring costs of $306,000 for the year ended December 31, 2019, which mainly consisted of costs to relocate equipment and inventory and other costs to consolidate the manufacturing facilities. This restructuring relates to the digital product sales segment. Through December 31, 2019, the Company has paid $51,000 of costs so far to relocate equipment and inventory. Therefore, the remaining $253,000 is included in accrued liabilities in the Condensed Consolidated Balance Sheet at December 31, 2019. These remaining costs are expected to be paid in cash in the first quarter of 2020, when the consolidation of the manufacturing facilities is completed. There were no restructuring costs in the year ended December 31, 2018.
19. Commitments and Contingencies
Commitments: The Company has employment agreements with its Chief Executive Officer and its Chief Accounting Officer, which expire in October 2020. At December 31, 2019, the aggregate commitment for future salaries, excluding bonuses, was approximately $338,000. Contractual salaries expense was $450,000 and $338,000 for the years ended December 31, 2019 and 2018, respectively.
Contingencies: The Company is subject to legal proceedings and claims which arise in the ordinary course of its business and/or which are covered by insurance. The Company believes that it has accrued adequate reserves individually and in the aggregate for such legal proceedings. Should actual litigation results differ from the Companys estimates, revisions to increase or decrease the accrued reserves may be required. There are no open matters that the Company deems material.
33
Table of Contents
20. Related Party Transactions
On March 4, 2019, the Unilumin exercised $2.0 million of the Unilumin Warrant, and on April 5, 2019, Unilumin exercised the remaining $3.5 million of the Unilumin Warrant, raising an aggregate of $5.5 million for the Company. Unilumin now owns 52.0% of the Companys outstanding Common Stock. Nicholas Fazio, Yang Liu and Yantao Yu, each directors of the Company, are each directors and/or officers of Unilumin.
On April 5, 2019, the Rights Offering terminated. At the closing of the Rights Offering on April 9, 2019, the Company received gross proceeds of $2.5 million in exchange for 2,500,000 shares of Common Stock. Participants in the Rights Offering included (a) Gabelli Funds, LLC, a greater than 5% stockholder, (b) Salvatore Zizza and George Schiele, both directors of the Company, and (c) Alberto Shaio and Todd Dupee, both executive officers of the Company.
In connection with the Companys agreement with Unilumin in 2018, the Company paid $175,000 to Durkin Law, LLC in early 2019. In connection with Durkin Law, LLCs representation of the Company in regards to the Loan Agreement and certain other general corporate matters later in 2019, the Company paid $26,000 to Durkin Law, LLC. Thomas E. Durkin, principal of Durkin Law, LLC, was appointed the Companys Executive Vice President, General Counsel & Corporate Secretary on July 30, 2019.
Yaozhong Shi, a former director of the Company, is the Chairman of Transtech LED Company Limited (Transtech), which is one of our primary LED suppliers. The Company purchased $211,000 of product from Transtech in 2018. The amount payable by the Company to Transtech was $305,000 as of December 31, 2018.
As of December 31, 2019 and 2018, the Company had outstanding payables to certain executive officers aggregating $19,000 and $427,000, respectively.
21. Business Segment Data
Operating segments are based on the Companys business components about which separate financial information is available and are evaluated regularly by the Companys chief operating decision-maker in deciding how to allocate resources and in assessing performance of the business.
The Company evaluates segment performance and allocates resources based upon operating income. The Companys operations are managed in two reportable business segments: Digital product sales and Digital product lease and maintenance. Both design and produce large-scale, multi-color, real-time digital products. Both operating segments are conducted on a global basis, primarily through operations in the United States. The Company also has operations in Canada. The Digital product sales segment sells equipment and the Digital product lease and maintenance segment leases and maintains equipment. Corporate general and administrative items relate to costs that are not directly identifiable with a segment. There are no intersegment sales.
Foreign revenues represent less than 10% of the Companys revenues for 2019 and 2018. The foreign operation does not manufacture its own equipment; the domestic operation provides the equipment that the foreign operation leases or sells. The foreign operation operates similarly to the domestic operation and has similar profit margins. Foreign assets are immaterial.
34
Table of Contents
Information about the Companys operations in its two business segments for the years ended December 31, 2019 and 2018 and as of December 31, 2019 and 2018 were as follows:
In thousands
|
2019
|
|
2018
|
Revenues:
|
|
|
|
|
|
Digital product sales
|
$
|
14,710
|
|
$
|
11,958
|
Digital product lease & maintenance
|
|
2,325
|
|
|
2,441
|
Total revenues
|
$
|
17,035
|
|
$
|
14,399
|
Operating income (loss):
|
|
|
|
|
|
Digital product sales
|
$
|
183
|
|
$
|
(1,744)
|
Digital product lease & maintenance
|
|
1,752
|
|
|
1,062
|
Corporate general and
administrative expenses
|
|
(2,386)
|
|
|
(3,364)
|
Total operating loss
|
|
(451)
|
|
|
(4,046)
|
Interest expense, net
|
|
(504)
|
|
|
(940)
|
(Loss) gain on foreign currency
remeasurement
|
|
(130)
|
|
|
225
|
Loss on extinguishment of debt
|
|
(193)
|
|
|
-
|
Gain on sale/leaseback transaction
|
|
-
|
|
|
11
|
Pension (expense) benefit
|
|
(83)
|
|
|
103
|
Loss before income taxes
|
|
(1 361)
|
|
|
(4,647)
|
Income tax expense
|
|
(41)
|
|
|
(47)
|
Net loss
|
$
|
(1 402)
|
|
$
|
(4,694)
|
Assets:
|
|
|
|
|
|
Digital product sales
|
$
|
8,204
|
|
$
|
7,689
|
Digital product lease &
maintenance
|
|
3,515
|
|
|
3,054
|
Total identifiable assets
|
|
11,719
|
|
|
10,743
|
General corporate
|
|
535
|
|
|
723
|
Total assets
|
$
|
12,254
|
|
$
|
11,466
|
Depreciation and amortization:
|
|
|
|
|
|
Digital product sales
|
$
|
234
|
|
$
|
234
|
Digital product lease &
maintenance
|
|
427
|
|
|
706
|
General corporate
|
|
7
|
|
|
12
|
Total depreciation and amortization
|
$
|
668
|
|
$
|
952
|
Capital expenditures:
|
|
|
|
|
|
Digital product sales
|
$
|
376
|
|
$
|
140
|
Digital product lease &
maintenance
|
|
44
|
|
|
-
|
General corporate
|
|
1
|
|
|
-
|
Total capital expenditures
|
$
|
421
|
|
$
|
140
|
22. Subsequent Events
The Company has evaluated events and transactions subsequent to December 31, 2019 and through the date these Consolidated Financial Statements were included in this Form 10-K and filed with the SEC.