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 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" that
precedes Item 1 above.
Overview
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 small and medium sized businesses in commercial,
institutional or enterprise environments, and will be referred to herein
collectively as "SMB". 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 SMB 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. Although this strategic initiative was designed to secure an in-home
position with the Company's product offerings, and direct relationships with a
wide range of service providers, and increase sales of the Company's Telecom and
SMB products by the BT Premier Distributors to those same service providers, it
was decided in 2021, to de-emphasize this strategy due to the low gross margin
of this initiative and global semiconductor supply chain limitations. The CPE
Product initiative achieved sales to over 75 different telco, municipal fiber
and cable operators and accounted for approximately 0% and 7% of the Company's
2022 and 2021 revenues, respectively, although its contribution to net income
has not had a material impact on the Company's performance.
Like many businesses throughout the United States and the world, the Company has
been affected by the COVID-19 pandemic. Because there are daily, weekly and
monthly 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 SMB business, we have experienced a noticeable decline in
sales. From March 2020 through Q3 of 2021 many of our customers 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 coupled with expected supply
chain constraints. During and since Q3 2021, the Company has seen our customers,
in general, begin to recover their business operations at the same time as the
Company began to see global disruptions in semiconductor supply chain, which is
a major raw material component of the products the Company designs, manufactures
and sells. 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 can reasonably forecast when our sales and product
shipments might return to historical levels. Since 2019, we have taken steps to
reduce and are currently taking additional 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.
27
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, Taiwan
and Ohio. 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, Taiwan and Ohio enables the Company
to realize cost reductions while maintaining a competitive position and
time-to-market advantage.
Results of Operations
For the year ended December 31, 2022 compared with year ended December 31, 2021,
discussion is included below.
The following table sets forth, for the fiscal periods indicated, certain
consolidated statement of earnings data as a percentage of net sales.
Year Ended
December 31,
2022 2021
Net sales 100.0 % 100.0 %
Costs of goods sold 69.8 62.8
Gross profit 30.2 37.2
Selling expenses 11.0 15.6
General and administrative expenses 21.1 23.9
Research and development expenses 9.8 16.5
Loss from operations
(11.7 ) (18.8 )
Gain on debt forgiveness 0.0 11.2
Other income 0.0 11.5
Interest expense, net 4.4 3.3
Earnings (loss) before income taxes (16.1 ) 0.6
Provision for income taxes 0.0 0.1
Net earnings (loss) (16.1 ) 0.5
2022 Compared with 2021
Net Sales. Net sales increased $2,361,000 or 15% to $18,115,000 in 2022 from
$15,754,000 in 2021. The increase was primarily attributable to an increase in
encoder/decoder products, NXG products, DOCSIS data products and coax
distribution products, offset by a decrease in sales of CPE products and analog
modulation products. Sales of CPE products were $29,000 and $1,120,000, DOCSIS
data products were $2,356,000 and $755,000, analog modulation products were
$450,000 and $790,000, coax distribution products were $1,490,000 and
$1,266,000, encoders/transcoders products were $9,140,000 and $7,863,000 and NXG
products were $2,709,000 and $1,924,000 in 2022 and 2021, respectively. The
Company experienced a reduction in CPE products during 2022 due to the
deemphasis of this product line, which the Company expects to continue into
2023. The Company experienced an increase in DOCSIS data products due to
increased demand as we went into the post pandemic era as these products are
used primarily in the hospitality and assisted-living environments. The Company
experienced a reduction in analog modulation products due to the continued
market shifting away from analog modulation solutions. The Company expects the
sales of the analog modulation and coax distribution products to continue to
decline in 2023. The Company experienced an increase in encoder/decoder products
and NXG IP video signal processing products as these product lines represent
newer products and newer technologies with higher demand from customers.
Cost of Goods Sold.Cost of goods sold increased to $12,652,000 in 2022 from
$9,896,000 in 2021 and increased as a percentage of sales to 69.8% for 2022 from
62.8% for 2021. The dollar increase and the increase as a percentage of sales
was primarily attributable to the increase in materials cost and the freight
cost on materials.
Selling Expenses.Selling expenses decreased to $1,995,000 in 2022 from
$2,459,000 in 2021 and decreased as a percentage of sales to 11% for 2022 from
15.6% for 2021. This $464,000 decrease was primarily attributable to a decrease
in salary expenses of $411,000 and a decrease in consulting expense of $60,000.
The decrease as a percentage of sales was primarily attributable to the sales
increase.
General and Administrative Expenses. General and administrative expenses
increased to $3,821,000 in 2022 from $3,767,000 in 2021 and decreased as a
percentage of sales to 21.1% for 2022 from 23.9% for 2021. This $54,000 increase
was primarily the result of an increase in consulting fees of $165,000, an
increase in salary expenses of $48,000, offset by a decrease in amortization
expense of $157,000. The decrease as a percentage of sales was attributable to
the overall increase in sales.
28
Research and Development Expense. Research and development expenses decreased to
$1,778,000 in 2022 from $2,592,000 in 2021 and decreased as a percentage of
sales to 9.8% in 2022 from 16.5% in 2021. This $814,000 decrease was primarily
attributable to a decrease in salaries and fringe benefits of $609,000 due to a
decrease in head count, a decrease in supplies of $91,000, a decrease in rents
of $24,000, and a decrease in amortization of licenses in the amount of $47,000.
Operating loss. Operating loss of $2,131,000 for 2022 represents an improvement
from the operating loss of $2,960,000 for 2021. Operating loss as a percentage
of sales decreased to 11.8% in 2022 from 18.8% in 2021 for the reasons discussed
above.
Gain on debt forgiveness. Gain on debt forgiveness was $0 in 2022 versus
$1,769,000 in 2021.
Other income. Other income decreased to $0 in 2022 from $1,804,000 in 2021. The
decrease was the result of the Employee Retention Tax Credit accrued in 2021. At
December 31, 2022, the Company is still owed $299,000 in ERTC funds which it
expects to receive during the second quarter of 2023.
Interest expense net. Interest expense, net increased to $789,000 in 2022 from
$514,000 in 2021. The increase was primarily the result of higher average
borrowings and interest rates, including an increase of $10,000 of PIK interest.
Income Taxes. The provision for income taxes was $15,000 in both 2022 and 2021,
respectively. The Company records a full valuation allowance for net deferred
tax assets that are no longer considered to be realizable. The significant
negative evidence supporting the full valuation allowance includes an operating
loss for the current year, a cumulative pre-tax loss for the three years ended
December 31, 2022, the inability to carryback the net operating losses, limited
future reversals of existing temporary differences and the limited availability
of tax planning strategies. The Company expects to continue to provide a full
valuation allowance until, or unless, it can sustain a level of profitability
that demonstrates its ability to utilize these assets.
Inflation and Seasonality
Inflation and seasonality have not previously had a material impact on the
results of operations of the Company. However, beginning in early 2022, the
Company began to experience inflationary pressures related to the procurement of
certain products used in its manufacturing process and expects these pressures
to continue at least through the remainder of 2023. To date we have been
successful in passing on cost increases to our customers and will continue to
attempt to pass on increases to customers. However, there can be no assurances
that the Company will continue to be able to do so. Fourth quarter sales in 2022
as compared to other quarters were slightly impacted by fewer production days.
The Company expects sales each year in the fourth quarter to be impacted by
fewer production days.
Liquidity and Capital Resources
Unless we significantly improve revenue and significantly decrease operational
expenses we do not believe our existing liquidity and cash flows from operations
are adequate to fund our normal expected future business operations for the next
12 months. If our existing capital resources or cash flows become insufficient
to meet current business plans, projections, and existing capital requirements,
we may be required to raise additional funds, which may not be available on
favorable terms, if at all. As of December 31, 2022 and 2021, cash held in bank
accounts and loan availability were $649,000 and $366,000, respectively. Our
capital commitments over the next twelve months include (a) $3,583,000 to
satisfy December 31, 2022 accounts payable, accrued expense and lease
liabilities and (b) renegotiating an extension of the Subordinated Debt
Agreements.
We do not believe that our current cash flows from operations would be adequate
to fund our normal expected future operations for the long term unless we
improve revenue and significantly decrease operational expenses. If our existing
capital resources or cash flows become insufficient to meet anticipated business
plans and existing capital requirements, we may be required to raise additional
funds, which may not be available on favorable terms, if at all.
The Company's working capital was $(189,000) and $1,618,000 at December 31, 2022
and 2021, respectively.
The Company's net cash used in operating activities for the year ended December
31, 2022 was $1,382,000, primarily due to an increase in receivables of
$1,600,000, a decrease in lease liability of $718,000, a decrease in prepaid and
other current assets of $253,000, offset by an increase in accounts payable
accrued expenses and accrued compensation of $1,059,000 and non-cash adjustments
used in operating activities of $2,153,000, compared to net cash used in
operating activities for the year ended December 31, 2021 of $1,167,000,
primarily due to an increase in inventories of $791,000, a decrease in lease
liability of $787,000, an increase in prepaid and other current assets of
$554,000 offset by an increase in accounts payable accrued expenses and accrued
compensation of $456,000 and non-cash adjustments used in operating activities
of $416,000.
Cash used in investing activities for the year ended December 31, 2022 was
$55,000, which was attributable primarily to capital expenditures of $48,000 and
the acquisition of licenses of $7,000. Cash used in investing activities for
the year ended December 31, 2021 was $86,000, which was attributable primarily
to capital expenditures of $31,000 and the acquisition of licenses of $55,000.
Cash provided by financing activities was $1,242,000 for the year ended December
31, 2022, comprised primarily of net borrowings of line of credit of $1,987,000,
offset by repayments of debt of $67,000 and repayment of promissory notes of
$678,000. Cash provided by financing activities was $1,458,000 for the year
ended December 31, 2021, comprised primarily of borrowings under the
subordinated convertible debt facility of $700,000, net borrowings of line of
credit of $255,000, the net proceeds of stock issuances of $492,000, the
proceeds of the exercise of stock options of $11,000 and the proceeds of the
exercise of stock warrants of $61,000 offset by repayments of debt of $61,000.
29
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
Consolidated Financial Statements.
The Company's primary sources of liquidity have been its existing cash balances,
cash generated from operations, amounts available under the MidCap Facility,
amounts available under the Subordinated Loan Facility and cash generated from
sales of its common stock, as well as funds made available to the Company
through participation in several federal government financial assistance
programs implemented pursuant to the Coronavirus Aid, Relief, and Economic
Security Act, including the Paycheck Protection Program and the Employee
Retention Tax Credit. On a going-forward basis, the Company expects its primary
sources of liquidity will be its existing cash balances, cash generated from
operations and amounts available under the MidCap Facility. The Company also may
seek to raise additional capital through the issuance of shares of common stock
or other securities convertible into, or exercisable for, shares of common
stock, although the Company cannot provide any assurances that this type of
additional financing will be available on reasonable terms, or at all. The
Company had approximately $570,000 and approximately $51,000 availability for
borrowing under the MidCap Facility, as of December 31, 2022 and April 10, 2023,
respectively.
As discussed in Item 2 - Properties, on February 1, 2019, the Company completed
the sale of the Old Bridge Facility to Jake Brown Road, LLC (the "Buyer"). In
addition, in connection with the completion of the sale, the Company and the
Buyer (as landlord) entered into a lease (the "Lease"), pursuant to which the
Company will continue to occupy, and continue to conduct its manufacturing,
engineering, sales and administrative functions in the Old Bridge Facility.
The 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 was
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 $837,000.00 would offset, in part, the anticipated 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 an
initial security deposit in an amount equal to eight months of base rent, which
could be reduced to not lower than three months of base rent, upon certain
benchmarks being met during the Lease term. 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. Subsequently, the Company determined in the third quarter
2020 that the applicable benchmark relevant to the six-month period ended August
1, 2020 was met and as a result, the Company notified the landlord in writing
that it would offset rent otherwise due on August 1, 2020 against the
reimbursement of a portion of the security deposit equal to one month's base
rent, leaving an aggregate security deposit held by the landlord, in an amount
equal to six months of base rent. The landlord expressed its disagreement with
the Company's interpretation of the lease and requested the provision of
financial information to support the Company's contention or in the alternative
payment of the offset amount. Subsequently, no further actions or communications
regarding the offset were made by the landlord and the Company thereafter,
beginning with September 2020, resumed timely payments of its rental obligations
under the Lease. In early 2021, the Company undertook an analysis of the common
area maintenance charges being assessed under the Lease in an effort to
reconcile those payments with the specific terms of the Lease. The Lease
provides that this reconciliation is to be accomplished by the landlord
annually, however this has not occurred. The Company's analysis indicates that
it may have been overcharged for common area maintenance expenses since the
inception of the Lease and submitted supporting data to the landlord, requesting
that the landlord review the submission against its records. The Company has
also requested that the landlord release from escrow and return to the Company,
the unexpended balance of the Repair Escrow. The landlord and the Company
anticipated resolving the reconciliation of the common area maintenance charges
and Repair Escrow release request during the month of February 2021 and with the
prior oral approval of the landlord, the Company refrained from paying February
2021 rent, expecting that the reconciliation would be completed prior to the end
of that month. Inasmuch as the disputed amounts, in the opinion of the Company,
exceed three months' rent and common area maintenance expenses, the Company
refrained from the payment of base rent and common area maintenance charges for
the months of February 2021 and March 2021, it being the expectation of the
parties that these amounts will be credited against the amount finally
determined to be reimbursed to the Company. Without prejudice to the Company's
positions regarding these matters, and without creating any inference that the
Company agrees with any of the landlord's claims or waiving any rights available
to the Company under the Lease or otherwise, on May 5, 2021, the Company made
payment to the landlord of $140,000, representing all amounts that the landlord
then claimed were due. Notwithstanding the continuing disagreements with the
landlord's monthly payment demands, the Company is meeting these demands on a
current basis, but continues to reserve its rights regarding the same. The
Company has not recently held discussions with the landlord regarding the
foregoing areas of disagreement, however its position regarding amounts due back
to the Company has not changed. At the appropriate time, the Company anticipates
engaging in further discussion of these matters with the landlord in an attempt
to negotiate a resolution of these disagreements. The Company, however, cannot
assure you that these matters will be resolved in a manner that is favorable to
the Company or that litigation might not result if a negotiated resolution not
forthcoming.
30
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")
which commenced on March 1, 2020, the rental proceeds from which inure to the
benefit of the Company. The sublease also provides for a one-year renewal
option, which was exercised in January 2022. The sublease provides rental income
approximately $284,000 in the first year, approximately $293,000 in the second
year and approximately $301,000 in the third year of the sublease.
In connection with the fulfillment of certain of the Company's purchase orders,
the Company was financing expediting fees charged in connection with the
purchase orders by delivering a promissory note (the "Note") to the supplier of
the goods, in the principal amount of approximately $630,000. The Note was
unsecured and has an interest rate of 12% per annum. The Company was obligated
to repay the principal balance of the note beginning in September 2021 and
continuing thereafter for an additional five consecutive monthly installments on
the 15thday of each successive calendar month, as follows: September 2021,
$100,000, October 2021, $100,000, November 2021, $100,000, December 2021,
$100,000, January 2022, $100,000 and February 2022, $140,000. Accrued interest
was paid concurrently with each principal installment. The note was satisfied in
March 2022.
During 2021, the Company continued to experience a decline in sales, 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. 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.
While management of the Company believes that the Company will be successful in
its planned operating activities, there can be no assurance that the Company
will be successful in generating sufficient revenues and reduced expenses to
sustain the operations of the Company. 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 for at least twelve months from the date
these financial statements are made available to be issued.
Beginning in the middle of 2019, the Company experienced a significant decline
in its net sales of core or legacy products, which while not recovering to
historical norms, stabilized during the early part of the first quarter of 2020.
Beginning in February 2020, however, as the prospects of an ever-worsening
outbreak of COVID-19 took hold, the Company began to experience adverse impacts
to revenues across all of its product lines. Sales of the Company's products did
not return to historical norms during 2021 or 2022. The Company still does not
anticipate that sales will recover to historical norms during 2023, due
primarily to supply chain shortages impacting the Company's ability to source
raw materials used in the manufacturing process. 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.
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 (the
"MidCap First Amendment") to Loan Agreement and Loan Documents with Midcap (the
"MidCap Loan Agreement"), 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 consummation by the Company of the transactions contemplated by
the Subordinated Loan Facility (defined below).
31
On April 5, 2022, the Company entered into a Ninth Amendment to the MidCap Loan
Agreement (the "MidCap Ninth Amendment"). Among other things, the amendment
modified the MidCap Loan Agreement's definition of "Borrowing Base" so as to
provide for an over-advance facility (the "2022 Over-Advance Facility") in an
aggregate amount of up to $1,000,000. MidCap's agreement to enter into the
MidCap Ninth Amendment was conditioned, in part, on the entry into a
participation agreement between MidCap and Robert J. Palle, a Director, and an
affiliate of Mr. Palle (the "Palle Parties"). The terms of the MidCap Ninth
Amendment and the participation agreement contemplate that any advances made by
Midcap pursuant to the 2022 Over-Advance Facility would be funded by the Palle
Parties under the participation agreement. Advances under the 2022 Over-Advance
Facility are subject to the discretion of MidCap and the Palle Parties. On April
5, 2022, pursuant to the 2022 Over-Advance Facility and the participation
agreement, the Palle Parties funded an initial advance of $200,000 that was
provided to the Company. From April 5, 2022 to December 23, 2022, a total of
$975,000 was made by Midcap to the Company, which was funded by the Palle
Parties. Further advances may be made to the Company upon its request, subject
to the discretion of MidCap and the Palle Parties, in minimum amounts of not
less than $100,000 per tranche, unless a lesser amount is agreed to by the
parties. The amount advanced in each tranche will bear an interest rate of 1%
per month.
On May 5, 2022, the Company entered into a Tenth Amendment to MidCap Loan
Agreement (the "MidCap Tenth Amendment"), to, among other things, modify the
MidCap Loan Agreement's definition of "Minimum EBITDA Covenant Trigger Event."
The MidCap Tenth Amendment amends the definition, retroactive to and as of
January 1, 2022. All other substantive terms of the MidCap Loan Agreement
continue in full force and effect.
On June 14, 2022, the Company entered into an Eleventh Amendment to MidCap Loan
Agreement (the "MidCap Eleventh Amendment"), to, among other things, (i) modify
the MidCap Loan Agreement's definition of "Borrowing Base" to extend the
Company's WIP advance and the amortization of the Company's overadvance facility
until July 1, 2022, and (ii) delete in its entirety from the MidCap Loan
Agreement the Company's minimum EBITDA covenant. All other substantive terms of
the Loan Agreement continue in full force and effect.
On July 1, 2022, the Company entered into a Twelfth Amendment to MidCap Loan
Agreement (the "Twelfth Amendment"), to, among other things, modify the Loan
Agreement's definition of "Borrowing Base" to extend the Company's WIP advance
and the amortization of the Company's overadvance facility until July 15, 2022.
All other substantive terms of the Loan Agreement continue in full force and
effect.
On October 25, 2022, the Company entered into a Thirteenth Amendment to MidCap
Loan Agreement (the "Thirteenth Amendment"), to, among other things, extend the
expiration date of the Loan Agreement to October 28, 2022.
On October 28, 2022, the Company entered into a Fourteenth Amendment to MidCap
Loan Agreement (the "Fourteenth Amendment"), to, among other things, extend the
expiration date of the Loan Agreement to June 30, 2023, modify the definition of
"Borrowing Base" to extend the Company's WIP advance and the amortization of the
Company's overadvance facility until December 1, 2022 and increase the 2022
overadvance facility to $1,500,000. As of April 4, 2023 a total of $1,175,000
was made by MidCap to the Company, which was funded by the Palle Parties. All
other substantive terms of the Loan Agreement continue in full force and effect.
On April 8, 2020, the Company, as borrower, together with Livewire Ventures, LLC
(wholly owned by the Company's former 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 was advanced to the Company on January 12, 2021. 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.
32
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.
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"), provided 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 (the "Covered
Period") 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 would be reduced if the borrower
terminated employees or reduced salaries during the eight-week period.
The PPP Loan was 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 was 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 were due during the ten-month period beginning after the Covered Period
(the "Deferral Period").
On June 22, 2021, the Company applied to the SBA for full forgiveness of the PPP
Loan. On June 30, 2021, the Company received notification that the forgiveness
was granted. The Company recorded the $1,769,000 forgiveness as a gain on debt
forgiveness during the year ended December 31, 2021.
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, approximately $175,000 of original principal and $11,000 of PIK
interest outstanding under the Tranche B Term Loan were converted into 338,272
shares of Company common stock in full satisfaction of the underlying
indebtedness.
On December 14, 2020, the Company entered into a Securities Purchase Agreement
(the "Purchase Agreement") with certain accredited investors (the "Purchasers")
for the sale and issuance by the Company to the Purchasers of (i) an aggregate
of 1,429,000 shares (the "Shares") of the Company's common stock and (ii)
warrants (the "Purchaser Warrants") to purchase an aggregate of up to 714,000
shares of common stock (the "Purchaser Warrant Shares"), for aggregate gross
proceeds to the Company of $1,000, before deducting placement agent fees and
offering expenses payable by the Company. The Company also agreed to issue to
the placement agents and certain persons affiliated with the placement agents,
as additional compensation, (a) fully-vested warrants (the "Placement Agent
Warrants") to purchase an aggregate of up to 100,000 shares (the "Placement
Agent Warrant Shares") of common stock and (b) contingent warrants (the
"Placement Agent Contingent Warrants") to purchase an aggregate of up to an
additional 50,000 shares (the "Placement Agent Contingent Warrant Shares") of
common stock. The transaction closed on December 15, 2020.
The Purchase Agreement also includes terms that give the Purchasers certain
price protections, providing for adjustments of the number of shares of common
stock held by them in the event of certain future dilutive securities issuances
by the Company for a period not to exceed 18 months following the closing of the
private placement, or such earlier date on which all of the Purchaser Warrants
have been exercised. In addition, the Purchase Agreement provides the Purchasers
with a right to participate in certain future Company financings, up to 30% of
the amount of such financings, for a period of 24 months following the closing
of the private placement. The Purchase Agreement also required the Company to
register the resale of the Shares and the Purchaser Warrant Shares pursuant to
the terms of a Registration Rights Agreement between the Company and the
Purchasers, dated as of December 14, 2020, as further described below. The
Company filed a registration statement with the SEC on January 14, 2021 to
register the resale of the Shares and the Purchaser Warrant Shares, which
registration statement was declared effective by the SEC on January 21, 2021.
The Purchaser Warrants have an exercise price of $1.25 per share, are
exercisable beginning on December 15, 2020, and have a term of three years. The
exercise price and the number of shares of common stock issuable upon exercise
of each Purchaser Warrant is subject to appropriate adjustments in the event of
certain stock dividends and distributions, stock splits, stock combinations,
reclassifications or similar events affecting the common stock. The fair value
of the Purchaser Warrants is $643,000.
33
In certain circumstances, upon the occurrence of a fundamental transaction, a
holder of Purchaser Warrants is entitled to receive, upon any subsequent
exercise of the Purchaser Warrant, for each Purchaser Warrant Share that would
have been issuable upon such exercise of the Purchaser Warrant immediately prior
to the fundamental transaction, at the option of the holder, the number of
shares of common stock of the successor or acquiring corporation or of the
Company, if it is the surviving corporation, and any additional consideration
receivable as a result of the fundamental transaction by a holder of the number
of shares of common stock of the Company for which the Purchaser Warrant is
exercisable immediately prior to the fundamental transaction. If holders of the
Company's common stock are given any choice as to the securities, cash or
property to be received in a fundamental transaction, then the Holder shall be
given the choice as to the additional consideration it receives upon any
exercise of the Purchaser Warrant following the fundamental transaction.
The Placement Agent Warrants have an exercise price of $0.70 per share, a term
of five years from December 14, 2020, and became exercisable upon the Company
obtaining the stockholder approval described above. The exercise price and the
number of shares of common stock issuable upon exercise of each Placement Agent
Warrant is subject to appropriate adjustments in the event of certain stock
dividends and distributions, stock splits, stock combinations, reclassifications
or similar events affecting the common stock. The Placement Agent Warrants also
provide the holders with certain "piggyback" registration rights, permitting the
holders to request that the Company include the Placement Agent Warrant Shares
for sale in certain registration statements filed by the Company. The fair value
of the Placement Agent Warrants is $121,000. During June and July 2021, the
Company received approximately $61,000 as 87,500 of Placement Agent Warrants
were exercised.
The Placement Agent Contingent Warrants have an exercise price of $1.25 per
share, a term of five years from December 14, 2020, and become exercisable if,
and to the extent, holders of the Purchaser Warrants exercise such Purchaser
Warrants. In no event, however, will the Placement Agent Contingent Warrants
become exercisable unless and until Stockholder Approval has been obtained. The
exercise price and the number of shares of common stock issuable upon exercise
of each Placement Agent Contingent Warrant is subject to appropriate adjustments
in the event of certain stock dividends and distributions, stock splits, stock
combinations, reclassifications or similar events affecting the common stock.
The Placement Agent Contingent Warrants also provide the holders with certain
"piggyback" registration rights, permitting the holders to request that the
Company include the Placement Agent Contingent Warrant Shares for sale in
certain registration statements filed by the Company. The fair value of the
Placement Agent Contingent Warrants is $56,000.
On January 28, 2021, the Company entered into the Third Amendment to Senior
Subordinated Convertible Loan and Security Agreement and Joinder (the "LSA Third
Amendment") with the Tranche A Parties, the Tranche B Parties (that had not
previously converted the loans attributable to each of them into shares of
common stock), the Agent and certain other investors (the "Tranche C Parties").
Pursuant to the LSA Third Amendment, the parties agreed to increase the
aggregate loan limit under the Subordinated Loan Agreement from $1,500,000 to
$1,600,000 and the Tranche C Parties agreed to provide the Company with a
commitment for a $600,000 term loan facility, all of which was advanced to the
Company on January 29, 2021 (the "Tranche C Loans"). As is the case with the
loans provided by the Tranche A Parties and Tranche B Parties, interest on the
Tranche C Loans accrues at 12% per annum and is payable monthly in-kind, by the
automatic increase of the principal amount of the loans on each monthly interest
payment date, by the amount of the accrued interest payable at that time. The
Company, at its option, may pay any interest due on the Tranche C Loans in cash
on any interest payment date in lieu of PIK Interest. The Tranche C Parties also
have the option, following Stockholder Approval (defined below) of converting
the accreted principal balance of the Tranche C Loans attributable to each of
them into shares of the Company's common stock at a conversion price of $1.00.
Both the Purchase Agreement and the Subordinated Loan Agreement (as amended by
the LSA Third Amendment) obligated the Company to call a special meeting of its
stockholders to seek stockholder approval of the issuance of shares of its
common stock issuable in connection with the transactions contemplated by the
Securities Purchase Agreement and the LSA Third Amendment, in excess of 19.99%
of the Company's outstanding shares of common stock, in accordance with the
requirements of Section 713(a) of the NYSE American Company Guide. Stockholder
approval of the foregoing was obtained on March 4, 2021. As the stock price was
$1.31 on March 4, 2021, the Company recorded a discount of $186,000 relating to
the difference in stock price due to the beneficial conversion feature.
34
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 March 15, 2021, one of the Tranche C Parties submitted an irrevocable notice
of conversion under the Tranche C Loans. As a result, $100,000 of original
principal and $1,000 of PIK interest outstanding under the Tranche C Loans were
converted into 100,987 shares of Company common stock in partial satisfaction of
the indebtedness to that Tranche C Party.
On April 6, 2021, the same Tranche C Party submitted an irrevocable notice of
conversion under the Tranche C Loans. As a result, $50,000 of original principal
and $1,000 of PIK interest outstanding under the Tranche C Loans were converted
into 51,260 shares of Company common stock in partial satisfaction of the
indebtedness to that Tranche C Party.
On May 24, 2021, the same Tranche C Party submitted an irrevocable notice of
conversion under the Tranche C Loans. As a result, $50,000 of original principal
and $2,000 of PIK interest outstanding under the Tranche C Loans were converted
into 52,277 shares of Company common stock in complete satisfaction of their
indebtedness.
On January 21, 2022, one of the Tranche A Parties submitted an irrevocable
notice of conversion under the Tranche A Loans. As a result, $50,000 of original
principal and $12,000 of PIK interest outstanding under the Tranche A Loans were
converted into 104,399 shares of Company common stock in complete satisfaction
of their indebtedness.
On August 16, 2021, the Company entered into a Sales Agreement (the "Sales
Agreement") with Roth Capital Partners, LLC (the "Agent"). In accordance with
the terms of the Sales Agreement, the Company may offer and sell from time to
time through the Agent shares of the Company's common stock, par value $0.001
per share, having an aggregate offering price of up to $400,000. From August 16,
2021 through September 30, 2021, the Company sold an aggregate of 38,388 shares
under the Sales Agreement at prices ranging from $1.1053 to $1.1390 per share,
for aggregate proceeds, net of sales commissions, of approximately $41,000.
On August 23, 2021, the Company entered into a Stock Purchase Agreement (the
"Purchase Agreement") with an institutional investor providing for the sale by
the Company to the investor of 200,000 shares of the Company's common stock at a
purchase price of $1.08 per share, resulting in aggregate proceeds to the
Company of $216,000. The shares were offered and sold pursuant to the Company's
effective shelf registration statement on Form S-3. The Company's sale of the
Shares pursuant to the Purchase Agreement will have the effect of reducing the
amount of shares that may be sold pursuant to the Sales Agreement from $400,000
to $184,000. Taking into account sales of common stock pursuant to the Stock
Purchase Agreement and sales of common stock pursuant to the Sales Agreement to
date, the amount available to be sold under the Sales Agreement is currently
$143,000.
For the year ended December 31, 2021, the Company accrued payroll tax credits of
$1,804,000 through the Employee Retention Tax Credit program ("ERTC"). The
amount was recorded as other income and included in prepaid and other current
assets as of the applicable quarter end date. The Company received $577,000 of
the first quarter of 2021 ERTC in April, $115,000 towards Q2 in July, $181,000
towards Q3 in August, $219,000 towards Q3 in October and $195,000 towards Q3 in
November. The ERTC was initially established as part of the CARES Act of 2020
and subsequently amended by the Consolidated Appropriation Act ("CAA") of 2021
and the American Rescue Plan Act ("ARPA") of 2021. The CAA and ARPA amendments
to the ERTC program provide eligible employers with a tax credit in an amount
equal to 70% of qualified wages (including certain health care expenses) that
eligible employers pay their employees after January 1, 2021 through September
30, 2021. The maximum amount of qualified wages taken into account with respect
to each employee for each calendar quarter is $10,000, so that the maximum
credit that an eligible employer may claim for qualified wages paid to any
employee is $7,000 per quarter. For purposes of the amended ERTC, an eligible
employer is defined as having experienced a significant (20% or more) decline in
gross receipts during each 2021 calendar quarter when compared with the same
quarter in 2019. The credit is taken against the Company's share of Social
Security Tax when the Company's payroll provider files the applicable quarterly
tax filings on Form 941. At December 31, 2021, the Company is still owed
$517,000 in ERTC funds of which the Company received $217,000 in the second and
third quarters of 2022. At December 31, 2022 the Company is still owed $299,000
in ERTC funds.
35
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 since 2019, providing annual savings of approximately $3,475,000
per year. 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.
In addition, the COVID-19 outbreak has affected the supply chain for many types
of products and materials, particularly those being manufactured in China and
other countries where the outbreak has resulted in significant disruptions to
ongoing business activities. Beginning in the second quarter of 2021 and
continuing into the first quarter of 2023, we experienced a material disruption
in our supply chain as it relates to the procurement of certain sole source and
other multiple source components utilized in a material portion of several
product lines. We believe this disruption may continue beyond 2023. If these or
any similar types of supply disruptions continue, it is possible that we will be
unable to complete sales of any affected products to our customers on requested
schedules.
The Company has reacted to these unprecedented circumstances, as many
enterprises have had to do over the course of the pandemic, 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 and employee
furloughs.
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 $48,000 and $31,000 in the years ended
December 31, 2022 and 2021, 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
The Company prepares its financial statements in accordance with accounting
principles generally accepted in the United States. Preparing financial
statements in accordance with generally accepted accounting principles requires
the Company to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The following paragraphs include a
discussion of some critical areas where estimates are required. You should also
review Note 1 - Summary of Significant Accounting Policies in the Notes to our
Consolidated Financial Statements for further discussion of significant
accounting policies.
Inventory and Obsolescence
Inventories are stated at the lower of cost, determined by the first-in,
first-out ("FIFO") method, or net realizable value.
The Company periodically analyzes anticipated product sales based on historical
results, current backlog and marketing plans. Based on these analyses, the
Company anticipates that certain products will not be sold during the next
twelve months. Inventories that are not anticipated to be sold in the next
twelve months, have been classified as non-current.
The Company continually analyzes its slow-moving and excess inventories. Based
on historical and projected sales volumes and anticipated selling prices, the
Company establishes reserves. Inventory that is in excess of current and
projected use is reduced by an allowance to a level that approximates its
estimate of future demand. Products that are determined to be obsolete are
written down to net realizable value.
36
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are customer obligations due under normal trade terms. The
Company sells its products primarily to distributors and private cable
operators. The Company performs continuing credit evaluations of its customers'
financial condition and although the Company generally does not require
collateral, letters of credit may be required from its customers in certain
circumstances.
Senior management reviews accounts receivable on a monthly basis to determine if
any receivables will potentially be uncollectible. The Company includes any
accounts receivable balances that are determined to be uncollectible, along with
a general reserve based on historical experience, in its overall allowance for
doubtful accounts.
Long-Lived Assets
The Company continually monitors events and changes in circumstances that could
indicate carrying amounts of the long-lived assets, including intangible assets
may not be recoverable. When such events or changes in circumstances occur, the
Company assesses recoverability by determining whether the carrying value of
such assets will be recovered through the undiscounted expected future cash
flows. If the future undiscounted cash flows are less than the carrying amount
of these assets, an impairment loss is recognized based on the excess of the
carrying amount over the fair value of the assets. The Company did not recognize
any intangible asset impairment charges in 2022 and 2021, respectively.
Valuation of Deferred Tax Assets
The Company accounts for income taxes under the provisions of the FASB ASC Topic
740 "Income Taxes". Deferred income taxes are provided for temporary differences
in the recognition of certain income and expenses for financial and tax
reporting purposes. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
Recent Accounting Pronouncements
See Note 1 - Summary of Significant Accounting Policies in the Notes to our
Consolidated Financial Statements.
© Edgar Online, source Glimpses
BLONDER TONGUE LABORATORIES, INC. 
