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, 2018.

 

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

 

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 6, 2018: 9,284,436

 

The Exhibit Index appears on page 18.

 

 

 

 

 

 

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)        
    September 30,     December 31,  
    2018     2017  
Assets                
Current assets:                
Cash   $ 96     $ 168  
Accounts receivable, net of allowance for doubtful accounts of $53 and $180 as of September 30, 2018 and December 31,2017, respectively     2,708       2,621  
Inventories, current     5,763       5,496  
Prepaid benefit costs     314       314  
Prepaid and other current assets     666       351  
Total current assets     9,547       8,950  
Inventories, net non-current     855       850  
Property, plant and equipment, net     2,958       3,106  
License agreements, net     18       29  
Intangible assets, net     1,312       1,441  
Goodwill     493       493  
Other assets, net     195       305  
    $ 15,378     $ 15,174  
Liabilities and Stockholders’ Equity                
Current liabilities:                
Line of credit   $ 2,582     $ 2,487  
Current portion of long-term debt     254       249  
Accounts payable     1,187       700  
Accrued compensation     202       307  
Other accrued expenses     251       196  
Subordinated convertible debt with related parties     202       -  
Total current liabilities     4,678       3,939  
                 
Subordinated convertible debt with related parties     -       624  
Long-term debt, net of current portion     2,915       3,094  
Deferred income taxes     104       104  
Total liabilities     7,697       7,761  
Commitments and contingencies     -       -  
Stockholders’ equity:                
Preferred stock, $.001 par value; authorized 5,000 shares; no shares outstanding as of September 30, 2018 and December 31, 2017     -       -  
Common stock, $.001 par value; authorized 25,000 shares, 9,914 and 8,465 shares issued, 9,684 and 8,211 shares outstanding as of September 30, 2018 and December 31, 2017, respectively     9       8  
Paid-in capital     27,768       26,920  
Accumulated deficit     (18,418 )     (17,821 )
Accumulated other comprehensive loss     (854 )     (854 )
Treasury stock, at cost, 229 and 253 shares as of September 30, 2018 and December 31, 2017, respectively     (824 )     (840 )
Total stockholders’ equity     7,681       7,413  
    $ 15,378     $ 15,174  

 

See accompanying notes to unaudited condensed consolidated financial statements

 

- 1 -

 

 

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, 		 
    2018     2017     2018     2017  
Net sales   $ 5,626     $ 5,576     $ 16,266     $ 17,713  
Cost of goods sold     3,213       3,399       9,439       11,010  
Gross profit     2,413       2,177       6,827       6,703  
Operating expenses:                                
Selling     683       631       1,894       1,941  
General and administrative     1,102       956       3,135       2,802  
Research and development     672       605       1,972       1,877  
      2,457       2,192       7,001       6,620  
(Loss) earnings from operations     (44 )     (15 )     (174 )     83  
Other expense - net     (155 )     (138 )     (423 )     (581 )
Change in derivative liability     -       -       -       (142 )
Loss before income taxes     (199 )     (153 )     (597 )     (640 )
Provision for income taxes     -       -       -       -  
Net loss   $ (199 )   $ (153 )   $ (597 )   $ (640 )
Basic and diluted net loss per share   $ (0.02 )   $ (0.02 )   $ (0.07 )   $ (0.08 )
Basic and diluted weighted averages shares outstanding     9,270       8,212       8,836       8,181  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

    Nine Months Ended
September 30, 		 
    2018     2017  
Cash Flows From Operating Activities:                
Net loss   $ (597 )   $ (640 )
Adjustments to reconcile net loss to cash provided by (used in) operating activities:                
Stock compensation expense     393       292  
Depreciation     235       242  
Amortization     160       264  
Recovery of bad debt expense     (126 )     -  
Amortization of loan fees     108       105  
Non cash interest expense     32       229  
Change in derivative liability     -       142  
Changes in operating assets and liabilities:                
Accounts receivable     39       (353 )
Inventories     (272 )     (454 )
Prepaid and other current assets     (315 )     (59 )
Other assets     2       (23 )
Accounts payable, accrued compensation and other accrued expenses     437       5  
Net cash provided by (used in) operating activities     96       (250 )
Cash Flows From Investing Activities:                
Purchases of property and equipment     (72 )     (100 )
Acquisition of licenses     (20 )     (60 )
Net cash used in investing activities     (92 )     (160 )
Cash Flows From Financing Activities:                
Net borrowings of line of credit     95       307  
Repayments of long-term debt     (189 )     (166 )
Proceeds from exercise of stock options     18       -  
Net cash (used in) provided by financing activities     (76 )     141  
Net decrease in cash     (72 )     (269 )
Cash, beginning of period     168       468  
Cash, end of period   $ 96     $ 199  
Supplemental Cash Flow Information:                
Cash paid for interest   $ 273     $ 218  
Non cash investing and financing activities:                
Capital expenditures financed by notes payable   $ 15     $ 10  
Conversion of subordinated convertible debt to common stock   $ 455     $ -  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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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 accounts and transactions have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements as of September 30, 2018 and for the three and nine months then ended 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 ”) and on the same basis as the Company prepares its annual audited consolidated financial statements. The accompanying unaudited condensed consolidated 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 and cash flows for the periods presented. The condensed consolidated balance sheet at December 31, 2017 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 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2017, and notes thereto included in the Company’s annual report on Form 10-K, which was filed with the SEC on April 2, 2018. The results of the three and nine months ended September 30, 2018 are not necessarily indicative of results to be expected for the year ending December 31, 2018 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 compensation and reserves related to accounts receivable, inventories and deferred tax assets. Actual results could differ from those estimates.

 

(b) Derivative Financial Instruments

 

The Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for in accordance with Topic 815 of the Financial Accounting Standards Board (“ FASB ”) Accounting Standards Codification ( “ASC ”). The accounting treatment of derivative financial instruments requires that the Company record the embedded conversion option at its fair value as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.

 

The Black-Scholes Model (which approximates the Binomial Lattice Model) was used to estimate the fair value of the conversion options that is classified as a derivative liability on the condensed consolidated balance sheets. See Note 6 of the Notes to Condensed Consolidated Financial Statements. The model includes subjective input assumptions that can materially affect the fair value estimates. The expected volatility is estimated based on the most recent historical period of time equal to the weighted average life of the conversion options.

 

Conversion options are recorded as a discount to the host instrument and are amortized as interest expense over the life of the underlying instrument.

 

- 4 -

 

  

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

 

(c) Fair Value of Financial Instruments

 

The Company measures fair value of its financial assets on a three-tier value hierarchy, which prioritizes the inputs, used in the valuation methodologies in measuring fair value:

 

  ● Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
     
  ● Level 2 – Other inputs that are directly or indirectly observable in the marketplace.
     
  ● Level 3 – Unobservable inputs which are supported by little or no market activity.

 

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

(d) Earnings (loss) Per Share

 

Earnings (loss) per share is calculated in accordance with ASC Topic 260 “Earnings Per Share,” which provides for the calculation of “basic” and “diluted” earnings (loss) per share. Basic earnings (loss) per share includes no dilution and is computed by dividing net earnings (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 diluted share base excludes incremental shares related to stock options, restricted stock and convertible debt of 1,527 and 3,174 for the three-month periods ended September 30, 2018 and 2017, respectively and 1,406 and 2,983 for the nine-month periods ended September 30, 2018 and 2017, respectively. These shares were excluded due to their antidilutive effect.

 

(e) Adoption of Recent Accounting Pronouncements

 

On January 1, 2018, the Company adopted Accounting Standards Update (“ ASU ”) No. 2014-09, Revenue from Contracts with Customers (“Topic 606” ) using the modified retrospective method. Under the modified retrospective method, the Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. This adjustment did not have a material impact on the Company’s Condensed Consolidated Financial Statements. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under Revenue Recognition (“ Topic 605 ”). The adoption of Topic 606 did not have a material impact on the Company’s Condensed Consolidated Statements of Operations and Condensed Consolidated Balance Sheets.

 

(f) Accounting Pronouncements Issued But Not Yet Effective

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (“ Topic 718” ): Improvements to Nonemployee Share-Based Payment Accounting . The guidance in this ASU expands the scope of ASC Topic 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. This amendment will be effective for annual and interim periods beginning after December 31, 2018. The Company does not believe the adoption of ASU 2018-07 will have a material effect on its financial position, results of operations or financial statement disclosure. 

 

In February 2016, the FASB issued ASU 2016-02, Leases (“ Topic 842” ). This update requires a lessee to recognize on the balance sheet the right-of-use assets and lease liabilities for leases with a lease term of more than twelve months. This update also requires additional disclosures about the amount, timing, and uncertainty of cash flows arising from leases. This ASU is effective for interim and annual periods beginning after December 15, 2018 and requires a modified retrospective approach to adoption for leases existing at, or entered into after the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Under prior GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease for us as a lessee depend primarily on the lease’s classification as a finance or operating lease. For both types of leases, we will recognize a right-of-use asset and a lease liability. For capital or finance leases, we will recognize amortization of the right-of-use asset separately from interest expense on the lease liability.

 

- 5 -

 

 

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

 

In July 2018, the FASB issued ASU 2018-11, Leases (“ Topic 842 ”) - Targeted Improvements , which provides another transition method that allows entities to apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This transition method option is in addition to the existing transition method of using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating which transition method it will use.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (“ Topic 350 ”) Simplifying the Test for Goodwill Impairment . This standard simplifies the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The revised guidance will be applied prospectively and is effective for calendar year-end SEC filers for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the effect this new standard will have on its financial position, results of operations or financial statement disclosure.

 

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (“ Topic 220 ”) : Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (" ASU 2018-02 "). ASU 2018-02 provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform (or portion thereof) is recorded. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted for any interim period for which financial statements have not been issued. The Company does not believe that the adoption of this guidance will have a material impact on the Company's consolidated financial statements due the presence of a full valuation allowance. The Company does not believe this new guidance will have a material effect on its financial position, results of operations or financial statement disclosures.

 

Note 3 – Revenue Recognition

 

The adoption of Topic 606 represents a change in accounting principle that will provide financial statement readers with enhanced revenue recognition disclosures. In accordance with Topic 606, the Company recognizes revenue when goods or services are transferred to customers in an amount that reflects the consideration which it expects to receive in exchange for those goods or services. In determining when and how revenue is recognized from contracts with customers, the Company performs the following five-step analysis: (i) identification of contract with customer; (ii) determination of performance obligations; (iii) measurement of the transaction price; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

 

The Company generates revenue through the sale of products and services. Revenue from the sale of products and services is recorded when the performance obligation is fulfilled, usually at the time of shipment or when the service is provided, at the net sales price (transaction price). Estimates of variable consideration, such as volume discounts and rebates, are reviewed and revised periodically by management. The Company elected to present revenue net of sales tax and other similar taxes and account for shipping and handling activities as fulfillment costs rather than separate performance obligations. Payments are typically due in 30 days, following delivery of products or completion of services.

 

- 6 -

 

 

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

 

Disaggregation of Revenue

 

The following table presents the Company’s disaggregated revenues by revenue source:

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2018     2017     2018     2017  
Digital video headend products   $ 2,814     $ 2,100     $ 7,899     $ 7,330  
Data products     1,112       1,782       3,566       5,168  
HFC distribution products     843       838       2,345       2,545  
Analog video headend products     411       324       1,234       1,360  
Contract manufactured products     227       244       606       599  
Other     219       288       616       711  
    $ 5,626     $ 5,576     $ 16,266     $ 17,713  

 

All of the Company’s sales are to customers located in North America.

 

The Company is a technology-development and manufacturing company that delivers a wide range of products and services to the cable entertainment and media industry. Digital video headend products (including encoders) are used by a system operator for acquisition, processing, compression, encoding and management of digital video. Data products give service providers, integrators, and premises owners a means to deliver data, video, and voice-over-coaxial in locations such as hospitality, MDU's, and college campuses, using IP technology. HFC distribution products are used to transport signals from the headend to their ultimate destination in a home, apartment unit, hotel room, office or other terminal location along a fiber optic, coax or HFC distribution network. Analog video headend products are used by a system operator for signal acquisition, processing and manipulation to create an analog channel lineup for further transmission. Contract-manufactured products, provides manufacturing, research and development and product support services for other companies’ products. The Company also provides technical services, including hands-on training, system design engineering, on-site field support and complete system verification testing.

 

Note 4 – Inventories

 

Inventories are summarized as follows:

 

    September 30,
2018 		    December 31,
2017 		 
Raw Materials   $ 2,370     $ 1,869  
Work in process     1,913       1,793  
Finished Goods     2,335       2,684  
      6,618       6,346  
Less current inventories     (5,763 )     (5,496 )
    $ 855     $ 850  

 

Inventories are stated at the lower of cost, determined by the first-in, first-out (“ FIFO ”) method, or net realizable value.

 

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BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

 

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.

 

Approximately 45% and 51% of the non-current inventories were comprised of finished goods at September 30, 2018 and December 31, 2017, respectively. The Company has established a program to use interchangeable parts in its various product offerings and to modify certain of its finished goods to better match customer demands. In addition, the Company has instituted additional marketing programs to dispose of the slower moving inventories.

 

The Company continually analyzes its slow-moving and excess inventories. Based on historical and projected sales volumes for finished goods, historical and projected usage of raw materials and anticipated selling prices, the Company writes down inventory to net realizable value. 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.

 

Note 5 – Debt

 

On December 28, 2016, the Company entered into a Loan and Security Agreement (the “ Sterling Agreement ”) with Sterling National Bank (“ Sterling ”). The Sterling Agreement provides the Company with a credit facility in an aggregate amount of $8,500 (the “ Sterling Facility ”), consisting of a $5,000 asset-based revolving line of credit (the “ Revolver ”) and a $3,500 amortizing term loan (the “ Term Loan ”). The Sterling Facility expires in December 2019. Interest on the Revolver is variable, based upon the 30-day LIBOR rate (2.26% at September 30, 2018) plus a margin of 4.00%. Interest on the Term Loan also is variable, based upon the 30-day LIBOR rate (2.26% at September 30, 2018) plus a margin of 4.50%. The Term Loan will amortize at the rate of $19 per month. On March 30, 2017, the Company and Sterling entered into a certain First Amendment to Loan and Security Agreement (the “ First Amendment ”), pursuant to which, among other things, the parties amended the definitions of certain items used in the calculation of the fixed charge coverage ratio, deferred the first measurement period of the financial covenants contemplated by the Sterling Agreement, until January 31, 2017, and modified certain terms relating to permitted investments by the Company. At September 30, 2018 and December 31, 2017, the outstanding balances under the Revolver and the Term Loan were $2,582 and $3,111 and $2,487 and $3,286, respectively. All outstanding indebtedness under the Sterling Agreement is secured by all of the assets of the Company and its subsidiaries.

 

The Sterling Agreement contains customary covenants, including restrictions on the incurrence of additional indebtedness, encumbrances on the Company’s assets, the payment of cash dividends or similar distributions, the repayment of any subordinated indebtedness and the sale or other disposition of the Company’s assets. In addition, the Company must maintain (i) a fixed charge coverage ratio of not less than 1.1 to 1.0 for any fiscal month (determined as of the last day of each fiscal month on a rolling twelve-month basis, as calculated for the Company and its consolidated subsidiaries) and (ii) a leverage ratio of not more than 2.0 to 1.0 for any fiscal month (determined as of the last day of each fiscal month, as calculated for the Company and its consolidated subsidiaries. At September 30, 2018, the Company was in compliance with all financial covenants under the Sterling Agreement.

 

Note 6 – Subordinated Convertible Debt with Related Parties

 

On March 28, 2016, the Company and its wholly-owned subsidiary, R.L. Drake Holdings, LLC ( “Drake” ), as borrowers and Robert J. Pallé, as agent (in such capacity “ Agent ”) and as a lender, together with Carol M. Pallé, Steven Shea and James H. Williams as lenders (collectively, the “ Subordinated Lenders ”) entered into a certain Amended and Restated Senior Subordinated Convertible Loan and Security Agreement (the “ Subordinated Loan Agreement ”), pursuant to which the Subordinated Lenders agreed to provide the Company with a delayed draw term loan facility of up to $750 (“ Subordinated Loan Facility ”), under which individual advances in amounts not less than $50 may be drawn by the Company. Interest on the outstanding balance under the Subordinated Loan Facility from time to time, accrues at 12% per annum (subject to increase under certain circumstances) and is payable monthly in-kind by the automatic increase of the principal amount of the loan on each monthly interest payment date, by the amount of the accrued interest payable at that time (“ PIK Interest ”); provided, however, that at the option of the Company, it may pay interest in cash on any interest payment date, in lieu of PIK Interest. The Subordinated Lenders have the option of converting the principal balance of the loan, in whole (unless otherwise agreed by the Company), into shares of the Company’s common stock at a conversion price of $0.54 per share (subject to adjustment under certain circumstances). This conversion right was subject to stockholder approval as required by the rules of the NYSE MKT, which approval was obtained on May 24, 2016 at the Company’s annual meeting of stockholders. The obligations of the Company and Drake under the Subordinated Loan Agreement are secured by substantially all of the Company’s and Drake’s assets, including by a mortgage against the Old Bridge Facility (the “ Subordinated Mortgage” ). The Subordinated Loan Agreement terminates 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, will be due and payable in full.

 

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BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

 

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.

 

In connection with the Subordinated Loan Agreement, the Company, Drake, the Subordinated Lenders and Sterling entered into a Subordination Agreement (the “ Subordination Agreement ”), pursuant to which the rights of the Subordinated Lenders under the Subordinated Loan Agreement and the Subordinated Mortgage are subordinate to the rights of Sterling under the Sterling 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 Sterling.

 

As of both September 30, 2018 and December 31, 2017, the Subordinated Lenders had advanced $500 to the Company. In addition, $157 and $124 of PIK interest was accrued as of September 30, 2018 and December 31, 2017, respectively. As noted above, in April 2018, $455 under the Subordinated Loan Facility was converted by certain Subordinated Lenders. The Company evaluated the conversion option embedded in the Subordinated Loan Agreement issued in December 2016 in accordance with the provisions of ASC Topic 815, Derivatives and Hedging , and determined that the conversion option had all of the characteristics of a derivative in its entirety and did not qualify for an exception to the derivative accounting rules. Specifically, prior to the adoption of the First Sub-Debt Amendment, pursuant to Section 4.4(e)(ii) of the Subordinated Debt Agreement, the exercise price of the conversion option entitled the Subordinated Lenders to an adjustment of the exercise price in the event that the Company subsequently issued equity securities or equity linked securities at prices more favorable to a new investor than the exercise price of the conversion option embedded in the Subordinated Loan Agreement (the “ Price Protection Provision ”). Accordingly, the conversion option was not indexed to the Company’s own stock. Due to the derivative treatment of the conversion option, the Company recorded $260 derivative liability at December 31, 2016. On March 21, 2017, the Company, Drake, and the Subordinated Lenders entered into a certain First Amendment to Amended and Restated Convertible Loan and Security Agreement (the “ First Sub-Debt Amendmen t”), pursuant to which the Subordinated Loan Agreement was amended to eliminate the Price Protection Provision, effective as of such date. The First Sub-Debt Amendment also eliminated certain defined terms related to the Price Protection Provision. As a result of the First Sub-Debt Amendment, during the first quarter of 2017, the Company recorded a change in the derivative liability (expense) of $142, the fair value of the liability at the date of the modification and reclassed the aggregate value of the derivative liability at the date of modification in the amount of $402 additional paid-in capital. In addition, during the three months and nine months ended September 30, 2018 and 2017, the Company incurred interest of $6 and $33 and $ 18 and $52, respectively, related to these loans.

 

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BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

 

Note 7 – Issuance of Restricted Common Stock

 

In connection with the hiring of the Company’s new Executive Vice President and Chief Operating Officer (the “ COO ”), on April 23, 2018, the Company granted the COO 400 shares of restricted common stock at $1.05 per share, with 100 shares vesting on each of the first four one-year anniversaries of his first day of employment with the Company. On August 20, 2018, the COO notified the Company that he was resigning from his position, effective on September 14, 2018, resulting in the 400 shares of restricted stock being forfeited.

 

Note 8 – 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- and nine-month periods ended September 30, 2018 and 2017, this law firm billed the Company approximately $225, $601, $156 and $290, respectively for legal services provided by this firm. Included in accounts payable on the accompanying balance sheets at September 30, 2018 and December 31, 2017, is approximately $156 and $25, respectively, owed to this law firm.

 

Note 9 – Concentration of Credit Risk

 

During the three and nine months ended September 30, 2018, one customer represented approximately 23% and 25% and one customer represented approximately 11% and 13% of the Company’s net sales, respectively. During the three and nine months ended September 30, 2017, one customer represented approximately 33% and 34% and one customer represented approximately 10% and 13% of the Company’s net sales, respectively. At September 30, 2018, one customer represented approximately 24%, one customer represented approximately 13% and one customer represented approximately 10% of the Company’s net accounts receivable. At December 31, 2017, one customer represented approximately 26%, one customer represented approximately 19% and two customers each represented approximately 10% of the Company’s net accounts receivable.

 

Note 10 – Legal Proceedings

 

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

 

Note 11 – Subsequent Events

 

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.

 

On August 3, 2018, the Company entered into an Agreement of Sale (the “ Sale Agreement” ) with Jake Brown Road LLC (“ Jake Brown ”), providing for the sale of the Old Bridge Facility, pursuant to which Jake Brown has agreed to pay the Company $10,500 at closing, subject to certain adjustments as provided in the Sale Agreement. Completion of the transactions contemplated by the Sale Agreement is subject to a number of closing conditions, including Jake Brown’s satisfactory completion of certain due diligence matters. In addition, in connection with the closing, the Company (as tenant) and the Jake Brown (as Landlord) will enter 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 will have an initial term of five years and allows the Company to extend the term for an additional five years following the initial term. The Company is obligated to pay base rent of $837 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. On September 20, 2018, the parties agreed to an extension of the due diligence period under the Sale Agreement, and on October 8, 2018 the parties entered into a further amendment of the Sale Agreement to, among other things, extend the closing date for completion of the transactions contemplated by the Sale Agreement to no later than the January 10, 2019, unless on or before the close of business on January 4, 2019, Jake Brown notifies the Company that it requires up to an additional twenty calendar days to close and provides an additional extension deposit.

 

In October 2018, in connection with the hiring of the Company’s new Executive Vice President and COO, the Company granted the COO options to purchase 500 shares of the Company’s common stock, with 100 options vesting on each of the first two one-year anniversaries of his first day of employment with the Company and an additional 150 options vesting on each of the third and fourth year anniversaries of his first day of employment with the Company.

 

Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would require adjustment to or disclosure in the condensed consolidated financial statements.

 

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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 ability to extend or refinance our debt obligations, 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, 2017, filed with the Securities and Exchange Commission on April 2, 2018 (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 cable entertainment and media industry. For 65 years, Blonder Tongue/Drake products have been deployed in a long list of locations, including lodging/hospitality, multi-dwelling units/apartments, broadcast studios/networks, education 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 (e.g., hotels, hospitals, prisons, schools, etc.), 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 SD and HD video content) and have a high performance-to-cost ratio.

 

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The Company has seen a continuing long-term shift in product mix from analog products to digital products and expects this shift to continue. Sales of digital video headend products were $2,814,000 and $2,100,000 in the third three months of 2018 and 2017, respectively and $7,899,000 and $7,330,000 in the first nine months of 2018 and 2017, respectively. Sales of analog video headend products were $411,000 and $324,000 in the third three months of 2018 and 2017, respectively and $1,234,000 and $1,360,000 in the first nine months of 2018 and 2017, respectively. Any substantial decrease in sales of analog products without a related increase in digital products could have a material adverse effect on the Company’s results of operations, financial condition and cash flows.

 

The Company’s manufacturing is allocated primarily between its facility in Old Bridge, New Jersey the (“ Old Bridge Facility ”) and a key contract manufacturer located in the People’s Republic of China (“ PRC ”). The Company currently manufactures most of its digital products, including the latest encoder and EdgeQAM collections at the Old Bridge Facility. Since 2007 the Company has been manufacturing certain high volume, labor intensive products, including many of the Company’s analog products, in the PRC, pursuant to a manufacturing agreement that governs the production of products that may from time to time be the subject of purchase orders submitted by (and in the discretion of) the Company. Although the Company does not currently anticipate the transfer of any additional products to the PRC for manufacture, the Company may do so if business and market conditions make it advantageous to do so. Manufacturing products both at the Company’s Old Bridge Facility as well as in the PRC, 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 $227,000 and $244,000 in the third three months of 2018 and 2017, respectively and $606,000 and $599,000 in the first nine months of 2018 and 2017, respectively. Sales to VBrick for sub-assemblies were not material in the third three months or first nine months of 2018 or 2017.

 

Results of Operations

 

Third three months of 2018 Compared with third three months of 2017

 

Net Sales. Net sales increased $50,000, or 0.9%, to $5,626,000 in the third three months of 2018 from $5,576,000 in the third three months of 2017. The increase is primarily attributed to an increase in sales of digital video headend products offset in part by a decrease in sales of data products. Sales of digital video headend products were $2,814,000 and $2,100,000, and data products were $1,112,000 and $1,782,000 in the third three months of 2018 and 2017, respectively.

 

Cost of Goods Sold. Cost of goods sold decreased to $3,213,000 for the third three months of 2018 from $3,399,000 for the third three months of 2017 and decreased as a percentage of sales to 57.1% from 61.0%. The decrease was primarily due to a more favorable product mix. The decrease as a percentage of sales was primarily attributed to an overall reduction in manufacturing overhead, as well as a more favorable product mix.

 

Selling Expenses. Selling expenses increased to $683,000 for the third three months of 2018 from $631,000 in the third three months of 2017 and increased as percentage of sales to 12.1% for the third three months of 2018 from 11.3% for the third three months of 2017. The $52,000 increase was primarily the result of an increase in department supplies of $56,000 and salaries and fringe benefits of $24,000.

 

General and Administrative Expenses. General and administrative expenses increased to $1,102,000 for the third three months of 2018 from $956,000 for the third three months of 2017 and increased as a percentage of sales to 19.6% for the third three months of 2018 from 17.1% for the third three months of 2017. The $146,000 increase was primarily the result of an increase in salaries and fringe benefits of $114,000 due to an increase in headcount and an increase in professional fees of $95,000.

 

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Research and Development Expenses. Research and development expenses increased to $672,000 in the third three months of 2018 from $605,000 in the third three months of 2017 and increased as a percentage of sales to 11.9% for the third three months of 2018 from 10.9% for the third three months of 2017. This $67,000 increase is primarily the result of an increase in salaries and fringe benefits of $93,000 due to an increase in headcount, offset, in part, by a decrease in department supplies of $33,000.

 

Operating Loss. Operating loss of $44,000 for the third three months of 2018 represents a decrease from the operating loss of $15,000 for the third three months of 2017. Operating loss as a percentage of sales was (0.8)% in the third three months of 2018 compared to (0.3)% in the third three months of 2017.

 

Interest Expense. Interest expense increased to $155,000 in the third three months of 2018 from $138,000 in the third three months of 2017. The increase is primarily the result of higher interest rates and higher average borrowing.

 

First nine months of 2018 Compared with first nine months of 2017

 

Net Sales. Net sales decreased $1,447,000, or 8.2%, to $16,266,000 in the first nine months of 2018 from $17,713,000 in the first nine months of 2017. The decrease is primarily attributed to a decrease in sales of data products, analog video head products and HFC distribution products offset in part by an increase in digital video headend products. Sales of data products were $3,566,000 and $5,168,000, analog video headend products were $1,234,000 and $1,360,000, HFC distribution products were $2,345,000 and $2,545,000 and digital video headend products were $7,899,000 and $7,330,000, in the first nine months of 2018 and 2017, respectively.

 

Cost of Goods Sold. Cost of goods sold decreased to $9,439,000 for the first nine months of 2018 from $11,010,000 for the first nine months of 2017 and decreased as a percentage of sales to 58.0% from 62.2%. The decrease was primarily due to a reduction in sales. The decrease as a percentage of sales was primarily attributed to an overall reduction in manufacturing overhead, as well as a more favorable product mix.

 

Selling Expenses. Selling expenses decreased to $1,894,000 for the first nine months of 2018 from $1,941,000 in the first nine months of 2017 but increased as a percentage of sales to 11.6% for the first nine months of 2018 from 11.0% for the first nine months of 2017. The $47,000 decrease was primarily the result of a decrease in freight expense of $45,000, a decrease in commissions of $50,000 and a decrease in royalties of $25,000 offset in part by an increase in salaries and fringe benefits of $38,000 and department supplies of $38,000.

 

General and Administrative Expenses. General and administrative expenses increased to $3,135,000 for the first nine months of 2018 from $2,802,000 for the first nine months of 2017 and increased as a percentage of sales to 19.3% for the first nine months of 2018 from 15.8% for the first nine months of 2017. The $333,000 increase was primarily the result of an increase in salaries and fringe benefits of $264,000 due to an increase in headcount, an increase in professional fees of $115,000 and an increase in travel and entertainment of $42,000 offset in part by a decrease in recovery of bad debts of $126,000.

 

Research and Development Expenses. Research and development expenses increased to $1,972,000 in the first nine months of 2018 from $1,877,000 in the first nine months of 2017 and increased as a percentage of sales to 12.1% for the first nine months of 2018 from 10.6% for the first nine months of 2017. This $95,000 increase is primarily the result of an increase in department supplies of $47,000, an increase in labor related to product software revisions of $27,000 and an increase in salaries and fringe benefits of $111,000 due to an increase in headcount, offset in part by a decrease in amortization expense of $105,000 relating to license fees.

 

Operating (Loss) Income. Operating loss of $(174,000) for the first nine months of 2018 represents a decrease from operating income of $83,000 for the first nine months of 2017. Operating (loss) income as a percentage of sales was (1.1)% in the first nine months of 2018 compared to 0.5% in the first nine months of 2017.

 

Interest Expense. Interest expense decreased to $423,000 in the first nine months of 2018 from $581,000 in the first nine months of 2017. The decrease is primarily the result of the accretion of the debt discount related to the former derivative liability of $177,000 in the first nine months of 2017 which does not exist in 2018, offset by higher interest rates and higher average borrowing.

 

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Liquidity and Capital Resources

 

As of September 30, 2018, and December 31, 2017, the Company’s working capital was $4,869,000 and $5,011,000, respectively. The decrease in working capital is primarily due to an increase of accounts payable of $487,000, offset by an increase in prepaid expenses of $315,000 and inventory of $267,000.

 

The Company’s net cash provided by operating activities for the nine-month period ended September 30, 2018 was $96,000 primarily due to an increase in accounts payable, accrued compensation and other accrued expenses of $437,000 offset, in part, by a net loss of $597,000. The Company’s net cash used in operating activities for the nine-month period ended September 30, 2017 was $250,000 primarily due to a net loss of $640,000, an increase of inventories of $426,000 and an increase in accounts receivable of $353,000 offset by non-cash adjustments of $1,246,000.

 

Cash used in investing activities for the nine-month period ended September 30, 2018 was $92,000, of which $72,000 was attributable to capital expenditures and $20,000 was attributable to additional license fees. Cash used in investing activities for the nine-month period ended September 30, 2017 was $160,000, of which $60,000 was attributable to additional license fees and $100,000 was attributable to capital expenditures.

 

Cash used in financing activities was $76,000 for the first nine months of 2018, which was comprised of repayments of debt of $189,000 offset by net borrowings under the line of credit of $95,000, and proceeds from the exercise of stock options of $18,000. Cash provided by financing activities was $141,000 for the first nine months of 2017, which was comprised of net borrowings on the Revolver of $307,000 offset by repayments of long-term debt of $166,000.

 

For a full description of the Company’s senior secured indebtedness under the Sterling Facility and the Company’s senior subordinated convertible indebtedness under the Subordinated Loan Facility, and their respective effects upon the Company’s condensed consolidated financial position and results of operations, see Note 5 – Debt and Note 6 – Subordinated Convertible Debt with Related Parties, of the Notes to Condensed Consolidated Financial Statements.

 

The Company’s primary sources of liquidity are its existing cash balances, cash generated from operations and amounts available under the Sterling Facility. As of September 30, 2018, the Company had approximately $2,582,000 outstanding under the Revolver and $320,000 of additional availability for borrowing under the Revolver, as well as $202,000 outstanding under the Subordinated Loan Facility.

 

On August 3, 2018, the Company entered into an Agreement of Sale (the “ Sale Agreement” ) with Jake Brown Road LLC (“ Jake Brown ”), providing for the sale of the Old Bridge Facility, pursuant to which Jake Brown has agreed to pay the Company $10,500,000 at closing, subject to certain adjustments as provided in the Sale Agreement. Completion of the transactions contemplated by the Sale Agreement is subject to a number of closing conditions, including Jake Brown’s satisfactory completion of certain due diligence matters. In addition, in connection with the closing, the Company (as tenant) and the Jake Brown (as Landlord) will enter 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 will have an initial term of five years and allows the Company to extend the term for an additional five years following the initial term. The Company is obligated to pay base rent of $836,855.50 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. On September 20, 2018, the parties agreed to an extension of the due diligence period under the Sale Agreement, and on October 8, 2018 the parties entered into a further amendment of the Sale Agreement to, among other things, extend the closing date for completion of the transactions contemplated by the Sale Agreement to no later than the January 10, 2019, unless on or before the close of business on January 4, 2019, Jake Brown notifies the Company that it requires up to an additional twenty calendar days to close and provides an additional extension deposit. Assuming the sale closes, the Company currently expects to use the net proceeds to repay outstanding amounts under the Sterling Facility and the Subordinated Loan Facility (to the extent the holders of the convertible subordinated indebtedness do not convert all or part of the indebtedness into shares of the Company’s common stock). The Company currently intends to use any remaining proceeds for working capital and other general corporate purposes.

 

Even without the sale of the Old Bridge Facility as discussed above, the Company believes it has the ability to sustain its operations and satisfy its obligations in the normal course of business for at least one year from the issuance date of this filing.

 

The Company’s primary obligations are for payment of interest and principal on the Sterling Facility, which expires on December 28, 2019, and the Subordinated Loan Facility, which expires on March 28, 2019. Repayment of the Subordinated Loan Facility is subject to the prior payment, satisfaction and discharge of the Sterling Facility. 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 $72,000 and $138,000 in the nine months ended September 30, 2018 and the year ended December 31, 2017, respectively. The Company expects to use cash generated from operations, amounts available under the Sterling Facility and purchase-money financing to meet its debt obligations and any anticipated long-term capital expenditures.

 

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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(e) and (f) 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 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, 2018.

 

During the quarter ended September 30, 2018, 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.

 

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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, 2017. Other than as set forth below, there are no material changes from the risk factors included in Form 10-K for the year ended December 31, 2017.

 

Increased tariffs or other trade actions could adversely affect our business.

 

There is currently significant uncertainty about the future relationship between the United States and China with respect to trade policies and tariffs. We source a variety of finished products and component parts from China. Although we currently believe that most of those products are not subject to tariffs, we cannot assure you that governmental authorities will agree with that position or that future actions may be taken by the United States or China to impose tariffs on those products and components or otherwise affect our ability to source those products and components, which could have an adverse effect on our future operations. In addition, certain of the products we obtain from China are currently subject to tariffs. Although we do not expect that the currently-applicable tariffs will have an adverse effect on our results of operations, we have raised prices on certain products to attempt to offset the effect of those tariffs, and we are also considering alternative sources of supply from manufacturers in other countries and moving certain manufacturing activities to our Old Bridge facility as additional ways to mitigate the effect of those tariffs. If our expectations regarding the effect of the currently-applicable tariffs prove to be incorrect and we are unable to offset or mitigate the effects of those tariffs, our future operating results may be adversely affected.

 

ITEM 5. OTHER INFORMATION

 

None.

  

ITEM 6. EXHIBITS

 

The exhibits are listed in the Exhibit Index appearing at page 18 herein.

 

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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 14, 2018 By: /s/ Robert J. Pallé
    Robert J. Pallé
    Chief Executive Officer and President
    (Principal Executive Officer)
     
  By: /s/ Eric Skolnik
    Eric Skolnik
    Senior Vice President and
Chief Financial Officer
    (Principal Financial Officer)

 

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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   Letter Agreement between Blonder Tongue Laboratories, Inc. and Ronald V. Alterio.   Filed herewith.
         
10.2   Agreement of Sale dated August 3, 2018 between Blonder Tongue Laboratories, Inc. and Jake Brown Rd LLC   Incorporated by reference from Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed August 6, 2018.
         
10.3   Sale Agreement Extension dated as of September 20, 2018, between Blonder Tongue Laboratories, Inc. and Jake Brown Rd LLC   Incorporated by reference from Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed September 21, 2018.
         
31.1   Certification of Robert J. Pallé 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.

 

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Exhibit 10.1

 

One Jake Brown Road

Old Bridge, New Jersey 08857

Tel: 732-679-4000

Fax: 732-679-4353

www.blondertongue.com

 

  

June 29, 2018

 

Mr. Ronald Alterio

501 Aylesbury Lane

Delray Beach, FL 33444

 

Dear Ron:

 

This letter supersedes and replaces our prior letter to you dated June 28, 2018. On behalf of Blonder Tongue Laboratories, Inc. (the “Company”), I am pleased to offer you employment with our Company. We look forward to a successful working relationship providing the highest quality of products and services to our customers.

 

Your compensation, benefits, and other initial employment terms are summarized on the enclosed schedule.

 

On your first day of employment you should report to Bruce Gureck and bring with you evidence of your legal authorization to work in the U.S. I enclose the Company’s Proprietary Information and Inventions Agreement, which you must sign and return prior to your first day of work .

 

By signing below, you are accepting employment and agreeing to all the terms of this letter and its enclosures, which supersede any prior agreements, representations, or discussions regarding your employment.

 

We look forward to your joining our team.

 

  Sincerely,
 
  Eric Skolnik
  Senior Vice President

 

Accepted and Agreed:

 

/s/ Ronald Alterio

Ronald Alterio

 

Dated: 06/29/18

 

Enc: Schedule of Compensation, Benefits, and Other Terms
  Proprietary Information and Inventions Agreement

 

 

 

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SCHEDULE OF COMPENSATION, BENEFITS, AND OTHER TERMS

 

Expected Start Date: July 23, 2018 (“ Start Date ”)
   
Position: Vice President - Chief Technology Officer (CTO)
  Reports to COO
  Direct Reports - Engineering & Product Management
  You will be based in Old Bridge, NJ
   
Salary: $214,000 per year, less taxes and withholdings.
   
Bonus Plan: You will be eligible to participate in the Executive Officer Salary Bonus Plan, subject to the terms of the Plan, as determined by the Compensation Committee.
   
Stock Option Award: You will be granted stock options entitling you to purchase up to 150,000 shares of Common Stock (“ Stock Options ”), with the grant date being the second business day following the date on which the Company releases its earnings for the fiscal quarter ending June 30, 2018 (the “ Grant Date ”).  The Stock Options will not be “incentive stock options” as defined in Section 422 of the Internal Revenue Code of 1986, as amended (they will be “non-qualified stock options”).
   
  The exercise price of your Stock Options will be set on the Grant Date, based on the arithmetic mean of the high and low selling price of the Company’s common stock on the Grant Date, as reported by the NYSE American Exchange, consistent with the terms of the 2016 Plan.
   
  Your Stock Options will vest at the rate of 50,000 per year on each of the three one-year anniversaries of your Start Date, such that the first date on which any of the Stock Options will vest and be exercisable shall be on the first anniversary of the Start Date, all as will be more fully set forth in an Option Agreement that will be entered into with you as of the Grant Date.  Vesting will be accelerated upon a change in control of the Company.  For this purpose, “change in control of the Company” shall mean a change in control of such nature that it would be required to be reported to the Securities and Exchange Commission pursuant to Schedule 14A of Regulation 14A or any successor provision (whether or not the Company is then subject to such reporting requirements).  A change of control will be deemed to have occurred if any person, other than persons or entities who on the date hereof are the “beneficial owners” (as determined pursuant to Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company’s then outstanding securities, is or becomes the “beneficial owner” of 25% or more of the combined voting power of the outstanding securities of the Company or if during two consecutive year periods, the directors at the beginning of such periods cease for any reason during the two-year period to constitute a majority of the Board of Directors of the Company.

 

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  The Stock Options will be granted to you as an inducement award in accordance with the requirements for such awards set forth in the New York Stock Exchange Listed Company Manual, and not pursuant to any shareholder-approved plan maintained by the Company; as such the shares shall be subject to restrictions pursuant to Rule 144 under the Securities Act of 1933 as well as all other applicable securities laws as a result of your anticipated status as a person subject to Section 16 of the Securities Exchange Act of 1934.    
Relocation Expenses: You will be eligible for (i) housing rental expense reimbursement, payable in monthly increments no greater than $2,500 per month, up to a maximum aggregate amount of $15,000, and (ii) reimbursement up to a maximum of $15,000 for reasonable out-of-pocket, documented expenses associated with your relocation.  Documentation associated with these expenses must be provided to the Company prior to reimbursement of payment.  
   
Paid Time Off: You will be eligible for (i) five (5) vacation days during the remainder of calendar year 2018 and (ii) fifteen (15) vacation days per calendar year for each calendar year thereafter (or such greater number of days to which you may be entitled under the Company’s then standard employment policies) and (iii) up to six (6) sick days per year, in addition to Company-paid holidays.
   
Benefits: Eligibility to participate in the Company’s sponsored group health insurance coverage (medical, dental, vision), life insurance, and long-term disability plan commences on or about the Start Date, but in no event later than the first day of the calendar month following the Start Date.  You will be eligible to participate in the Company’s 401(k) plan after six months of employment.
   
Status: Full-time employee.  This position is not eligible for overtime as it is exempt from overtime under applicable law.  You will be employed as an at-will employee, meaning either you or the Company can end the employment relationship at any time for any reason or no reason.

 

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Work Location: You will be based in the Company’s Old Bridge, NJ office.  However, your position will involve travel time away from the Company’s office from time to time.  Any work-related injuries, even if sustained away from the office, are to be reported to the Company immediately.   You must take all necessary and reasonable steps to safeguard the security of both electronic and paper records from unauthorized disclosure or damage, whether on-site or at a remote work location, and follow any applicable information technology or security policies relating thereto.
   
Company Standards: As an employee, you will be expected to adhere to the Company’s standards of professionalism, loyalty, integrity, honesty, and reliability.  Employment is subject to all of the policies and procedures of the Company, as amended from time to time, including but not limited to the Code of Ethics, the Insider Trading Policy, and the Employee Handbook, copies of which are available upon request for your review. As an executive officer of a public company, you will also be subject to compliance with all applicable federal and state securities laws.
   
Third Party Agreements: You represent that you have provided to the Company (or the Company’s counsel) copies of any agreements with any current or former employers or other third parties that could restrict your ability to be employed or that limit the manner in which you may be employed.  You further represent that you are not subject to any agreements with any current or former employers or other third parties that prevent you from accepting employment with the Company or performing the duties of your position.  You agree not to bring to the Company or use in performing your duties for the Company any current or former employer or third-party confidential or proprietary information or trade secrets.  You also agree that you will not conduct yourself in a manner that would be violative of any such agreement with your current or former employers.

 

The Company has the right to modify the terms referenced herein at any time, consistent with any plan terms and applicable law. You acknowledge and agree that the Company has not provided you any legal or tax advice and that you have had a reasonable opportunity to consult with your own legal and tax advisors if you so choose.

 

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Exhibit 31.1

 

CERTIFICATION

 

I, Robert J. Pallé, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Blonder Tongue Laboratories, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 14, 2018 /s/ Robert J. Pallé
  Robert J. Pallé
  Chief Executive Officer and President
  (Principal Executive Officer)

 

Exhibit 31.2

 

CERTIFICATION

 

I, Eric Skolnik, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Blonder Tongue Laboratories, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 14, 2018 /s/ Eric Skolnik
  Eric Skolnik
  Senior Vice President and Chief Financial Officer
  (Principal Financial Officer)

 

Exhibit 32.1

 

CERTIFICATION

 

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

To the knowledge of each of the undersigned, this Report on Form 10-Q for the quarter ended September 30, 2018 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of Blonder Tongue Laboratories, Inc. for the applicable reporting period.

 

Date:  November 14, 2018 By: /s/ Robert J. Pallé
    Robert J. Pallé, Chief Executive Officer
     
  By: /s/ Eric Skolnik
    Eric Skolnik, Chief Financial Officer