UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020.

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM                    TO                  .

 

Commission file number 1-14120

 

BLONDER TONGUE LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		52-1611421
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
One Jake Brown Road, Old Bridge, New Jersey		08857
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code: (732) 679-4000

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading symbol(s)		Name of each exchange on which registered
Common Stock, par value $.001		BDR		NYSE American

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒     No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes ☒     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

 

If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐     No ☒

 

Number of shares of common stock, par value $.001, outstanding as of November 7, 2020: 10,125,180

 

 

 

PART I – FINANCIAL INFORMATION

 

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.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable to smaller reporting companies.

 

ITEM 4. CONTROLS AND PROCEDURES

 

The Company maintains a system of disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of management, including the principal executive officer and principal financial officer, of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective at September 30, 2020.

 

During the quarter ended September 30, 2020, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company is a party to certain proceedings incidental to the ordinary course of its business, none of which, in the current opinion of management, is likely to have a material adverse effect on the Company’s business, financial condition, results of operations, or cash flows.

 

ITEM 1A. RISK FACTORS

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Risk Factors” included in the Company’s Form 10-K for the year ended December 31, 2019. The below is a material change from the risk factors included in Form 10-K for the year ended December 31, 2019.

 

We are subject to the continued listing requirements of the NYSE American. If we are unable to comply with such requirements, our common stock would be delisted from the NYSE American, which would limit investors’ ability to effect transactions in our common stock and subject us to additional trading restrictions.

 

Our common stock is currently listed on NYSE American. In order to maintain our listing, we must maintain certain share prices, financial and share distribution targets, including maintaining a minimum amount of stockholders’ equity and a minimum number of public shareholders. In addition to these objective standards, NYSE American may delist the securities of any issuer for other reasons involving the judgment of NYSE American. On June 10, 2020 we received written notification from NYSE American that we are not in compliance with the continued listing standard under Section 1003(a)(iii) of the NYSE American Company Guide (“Company Guide”), which requires a listed company to have stockholders’ equity of at least $6 million if it has reported losses from continuing operations and/or net losses in its five most recent fiscal years. In accordance with NYSE American requirements, we have submitted a plan addressing how we intend to regain compliance with Section 1003(a)(iii) by December 10, 2021, the deadline for us to regain compliance.

 

On August 27, 2020, we received notice that our plan to regain compliance with Section 1003(a)(iii) of the Company Guide had been accepted and that we had been granted a plan period through December 10, 2021. As a result, the listing of our common stock on NYSE American is being continued during the plan period pursuant to an extension. However, during the plan period we will be subject to periodic review by NYSE Regulation staff, including quarterly monitoring, to determine if we are making progress consistent with the plan. If we are not in compliance with the continued listing standards by December 10, 2021, or if NYSE Regulation determines that we are not making sufficient progress consistent with our plan, delisting proceedings will be instituted against us, as appropriate.

 

Due largely to the continuing effects of the COVID-19 pandemic, we did not meet certain elements of the near-term milestones we had included as part of the compliance plan we submitted to the NYSE American. As a result, it is possible that NYSE Regulation will determine that we are not making sufficient progress consistent with our plan and may request that we submit a revised plan or may initiate delisting proceedings against us. We cannot assure you that we will make sufficient progress to regain compliance with Section 1003(a)(iii) by December 10, 2021 under our initial plan or any revision we make to such plan or that NYSE Regulation will accept any revisions we propose to make to our initial plan, or that delisting proceedings may not be instituted against us based on our not meeting certain elements of the near-term milestones we had included as part of the compliance plan we submitted. If delisting proceedings are instituted against us, we would have the right to appeal any delisting determination.

 

If NYSE American delists our common stock from trading on the exchange and we are not able to list our securities on another national securities exchange, we expect our common stock would qualify to be quoted on an over-the-counter market. If this were to occur, we could experience a number of adverse consequences, including:

  

●

limited availability of market quotations for the common stock;

 

●

reduced liquidity for our securities;

 

●

our common stock being categorized as a “penny stock,” which requires brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our common stock; and

 

●

decreased ability to issue additional securities or obtain additional financing in the future.

 

In addition, the National Securities Markets Improvement Act of 1996 generally preempts the states from regulating the sale of “covered securities.” Our common stock qualify as “covered securities” because they are listed on NYSE American. If our common stock were no longer listed on NYSE American, our securities would not be “covered securities” and we would be subject to regulation in each state in which we offer our securities.

 

 

Our financial condition and results of operations have been and may continue to be adversely affected by health events such as the recent Coronavirus or COVID-19 outbreak.

 

Our business has been materially and adversely affected by the outbreak of the Coronavirus or COVID-19 and may in the future be materially and adversely affected by other epidemics and pandemic outbreaks. COVID-19, which has been declared by the World Health Organization to be a “pandemic,” has spread to many countries, including the United States, and is impacting domestic and worldwide economic activity. A public health epidemic or pandemic, including COVID-19, poses the risk that the Company or its employees, customers, suppliers and other business partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities. Since being declared a “pandemic”, COVID-19 has interfered with our ability to meet with certain customers and has impacted and may continue to impact many of our customers. There are developments regarding the COVID-19 outbreak on a daily basis that may impact our customers, employees and business partners. As a result, it is not possible at this time to estimate the duration or the scope of the impact COVID-19 could have on the Company’s business. However, the continued spread of COVID-19 and actions taken by our customers, suppliers and business partners, actions we take to protect the health and welfare of our employees, and measures taken by governmental authorities in response to COVID-19 could disrupt our manufacturing activities, the shipment of our products, the supply chain and purchasing decisions of our customers. The Company has experienced and is continuing to experience a significant reduction in sales as a result of the decreased business activities of our customers related to the COVID-19 outbreak and it remains unclear when or whether our customers will resume their activities at a level where our sales to them will return to historical levels. In addition, government officials in our region have imposed measures that restrict “non-essential” business activities, and although we are currently considered to be involved in an “essential” business activity, it is possible that those measures or others may be extended to cover “essential” business activities. If such restrictions were to be imposed, it is likely that we would not be able to continue all or a portion of our manufacturing, shipping and billing operations. Similar restrictions affecting the places where our customers do business would likely further reduce their business activities. These and other developments may have a material adverse impact on our business.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

The exhibits are listed in the Exhibit Index appearing at page 22 herein.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	BLONDER TONGUE LABORATORIES, INC.
Date: November 12, 2020	By:	/s/ Edward R Grauch
		Edward R. Grauch
		Chief Executive Officer
		(Principal Executive Officer)
	By:	/s/ Eric Skolnik
		Eric Skolnik
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer)

 

 

EXHIBIT INDEX

 

Exhibit #		Description		Location
3.1		Restated Certificate of Incorporation of Blonder Tongue Laboratories, Inc.		Incorporated by reference from Exhibit 3.1 to Registrant’s S-1 Registration Statement No. 33-98070 originally filed October 12, 1995, as amended.
3.2		Amended and Restated Bylaws of Blonder Tongue Laboratories, Inc.		Incorporated by reference from Exhibit 3.1 to Registrant’s Current Report on Form 8-K, filed April 20, 2018.
10.1		Form of Deferred Compensation Agreement for certain Executive Officers.		Incorporated by reference from Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed October 14, 2020.
10.2		Second Amended and Restated Executive Stock Purchase Plan.		Incorporated by reference from Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed October 14, 2020.
10.3		Amendment No. 1 to Second Amended and Restated Executive Stock Purchase Plan.		Incorporated by reference from Exhibit 10.2 to Registrant’s Current Report on Form 8-K, filed April 9, 2020.
10.4		Third Amended and Restated Director Stock Purchase Plan.		Filed herewith.
10.5		Amendment No. 1 to Third Amended and Restated Director Stock Purchase Plan.		Filed herewith.
10.6		Amendment No. 2 to 2016 Director Equity Incentive Plan.		Filed herewith.
10.7		Amendment No. 3 to 2016 Employee Equity Incentive Plan.		Filed herewith.
31.1		Certification of Edward R. Grauch pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		Filed herewith.
31.2		Certification of Eric Skolnik pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		Filed herewith.
32.1		Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002.		Filed herewith.
101.1		Interactive data files.		Filed herewith.