UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172020
Commission file number 1-2257
(Exact name of registrant as specified in its charter)
| ||
Delaware | 13-1394750 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
| 10022 | |
(Address of principal executive offices) | (Zip code) | |
(800) 243-5544 | ||
(Registrant's telephone number, including area code) | ||
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 X No
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to file and post such files). Yes X 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. (check one)
Large accelerated filer ___ | Accelerated filer ___ | |
Non-accelerated filer | Emerging growth company ___ | Smaller reporting company X |
If an emerging growth company, indicate 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 X
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
Date Class Shares Outstanding
11/8/17 �� Common Stock - $0.001 Par Value 1,710,671
Date | Class | Shares Outstanding | ||
11/5/20 | Common Stock - $0.001 Par Value | 13,474,116 |
TRANS-LUX CORPORATIONAND SUBSIDIARIES
1
3
4
TRANS-LUX CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, (unaudited)
Note 1 – Basis of Presentation
As used in this report, “Trans-Lux,” the “Company,” “we,” “us,” and “our” refer to Trans-Lux Corporation and its subsidiaries.
Financial information included herein is unaudited, however, such information reflects all adjustments (of a normal and recurring nature), which are, in the opinion of management, necessary for the fair presentation of the Condensed Consolidated Financial Statements for the interim periods. The results for the interim periods are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”) and therefore do not include all information and footnote disclosures required under accounting principles generally accepted in the United States of America (“GAAP”). The Condensed Consolidated Financial Statements included herein should be read in conjunction with the Consolidated Financial Statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31,
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other (Topic 350). ASU 2017-04 simplifies the test for goodwill impairment. As required by this standard, the Company adopted ASU 2018-07 on January 1, 2020. The adoption of this standard did not have a material effect on the Company’s consolidated financial position and results of operations. Other than the foregoing changes, there have been no material changes in our significant accounting policies during the nine months ended September 30,
In
5
Note 2 – Going Concern
A fundamental principle of the preparation of financial statements in accordance with GAAP is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business. This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent. In accordance with this requirement, the Company has prepared its accompanying Condensed Consolidated Financial Statements assuming the Company will continue as a going concern.
The Company is dependent on future operating performance in order to generate sufficient cash flows in order to continue to run its businesses. Future operating performance is dependent on general economic conditions, as well as financial, competitive and other factors beyond our control, including the impact of the current economic environment, the spread of major epidemics (including coronavirus) and other related uncertainties such as government imposed travel restrictions, interruptions to supply chains and extended shut down of businesses. In order to more effectively manage its cash resources, the Company had, from time to time, increased the timetable of its payment of some of its payables, which delayed certain product deliveries from our vendors, which in turn delayed certain deliveries to our customers. There is substantial doubt as to whether we will have adequate liquidity, including access to the debt and equity capital markets, to operate our
6 Note 3 – Revenue Recognition Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of this standard, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of this standard, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Sales tax, value added tax and other taxes collected on behalf of third parties are excluded from revenue. Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of September 30, 2020. We recognize revenue in accordance with two different accounting standards: 1) Topic 606 and 2) Topic 842. Under Topic 606, revenue from contracts with customers is measured based on the consideration specified in the contract with the customer, and excludes any sales incentives and amounts collected on behalf of third parties. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account under Topic 606. Our contracts with customers generally do not include multiple performance obligations. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for such products or services. 7 Disaggregated Revenues The following table represents a disaggregation of revenue from contracts with customers for the three and nine months ended September 30, 2020 and 2019, along with the reportable segment for each category:
Performance Obligations The Company has two primary revenue streams which are Digital product sales and Digital product lease and maintenance. The Company recognizes net revenue on digital product sales to its distribution partners and to end users related to digital display solutions and fixed digit scoreboards. For the Company’s catalog products, revenue is generally recognized when the customer obtains control of the Company’s product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. For the Company’s customized products, revenue is either recognized at a point in time or over time depending on the size of the contract. For those customized product contracts that are smaller in size, revenue is generally recognized when the customer obtains control of the Company’s product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. For those customized product contracts that are larger in size, revenue is recognized over time based on incurred costs as compared to projected costs using the input method, as this best reflects the Company’s progress in transferring control of the customized product to the customer. The Company may also contract with a customer to perform installation services of digital display products. Similar to the larger customized products, the Company recognizes the revenue associated with installation services using the input method, whereby the basis is the total contract costs incurred to date compared to the total expected costs to be incurred. 8 Revenue on sales to distribution partners are recorded net of prompt-pay discounts, if offered, and other deductions. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method to which the Company expects to be entitled. In the case of prompt-pay discounts, there are only two possible outcomes: either the customer pays on-time or does not. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available. The Company believes that the estimates it has established are reasonable based upon current facts and circumstances. Applying different judgments to the same facts and circumstances could result in the estimated amounts to vary. The Company offers an assurance-type warranty that the digital display products will conform to the published specifications. Returns may only be made subject to this warranty and not for convenience. Digital Product Lease and Maintenance Digital product lease revenues represent revenues from leasing equipment that we own. We do not generally provide an option for the lessee to purchase the rented equipment at the end of the lease and do not generate material revenue from sales of equipment under such options. Our lease revenues do not include material amounts of variable payments. Digital product maintenance revenues represent revenues from maintenance agreements for equipment that we do not own. Lease and maintenance contracts generally run for periods of one month to 10 years. A contract entered into by the Company with a customer may contain both lease and maintenance services (either or both services may be agreed upon based on the individual customer contract). Maintenance services may consist of providing labor, parts and software maintenance as may be required to maintain the customer’s equipment in proper operating condition at the customer’s service location. The Company concluded the lease and maintenance services represent a series of distinct services and the most representative method for measuring progress towards satisfying the performance obligation of these services is the input method. Additionally, maintenance services require the Company to “stand ready” to provide support to the customer when and if needed. As there is no discernable pattern of efforts other than evenly over the lease and maintenance terms, the Company will recognize revenue straight-line over the lease and maintenance terms of service. The Company has an enforceable right to payment for performance completed to date, as evidenced by the requirement that the customer pay upfront for each month of services. Lease and maintenance service amounts billed ahead of revenue recognition are recorded in deferred revenue and are included in accrued liabilities in the Condensed Consolidated Financial Statements. Revenues from equipment lease and maintenance contracts are recognized during the term of the respective agreements. At September 30, 2020, the future minimum lease payments due to the Company under operating leases that expire at varying dates through 2030 for its rental equipment and maintenance contracts, assuming no renewals of existing leases or any new leases, aggregating $1,820,000 are as follows: $135,000 – remainder of 2020, $496,000 – 2021, $320,000 – 2022, $249,000 – 2023, $177,000 – 2024 and $443,000 thereafter. 9 Contract Balances with Customers Contract assets primarily relate to rights to consideration for goods or services transferred to the customer when the right is conditional on something other than the passage of time. The contract assets are transferred to the receivables when the rights become unconditional. As of September 30, 2020 and December 31, 2019, the Company had no contract assets. The contract liabilities primarily relate to the advance consideration received from customers for contracts prior to the transfer of control to the customer and therefore revenue is recognized on completion of delivery. Contract liabilities are classified as deferred revenue by the Company and are included in customer deposits and accrued liabilities in the Condensed Consolidated Balance Sheets. The following table presents the balances in the Company’s receivables and contract liabilities with customers:
During the three and nine months ended September 30, 2020 and 2019, the Company recognized the following revenues as a result of changes in the contract asset and the contract liability balances in the respective periods:
Transaction Price Allocated to Future Performance Obligations – alternative more qualitative presentation Remaining performance obligations represents the transaction price of contracts for which work has not been performed (or has been partially performed). The guidance provides certain practical expedients that limit this requirement and, therefore, the Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed. As of September 30, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations for digital product sales was $2.2 million and digital product lease and maintenance was $1.8 million. 10 Costs to Obtain or Fulfill a Customer Contract The Company capitalizes incremental costs of obtaining customer contracts. Capitalized commissions are amortized based on the transfer of the products or services to which the assets relate. Applying the practical expedient in paragraph 340-40-25-4, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in General and administrative expenses. The Company accounts for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. When shipping and handling costs are incurred after a customer obtains control of the products, the Company also has elected to account for these as costs to fulfill the promise and not as a separate performance obligation. Shipping and handling costs associated with the distribution of finished products to customers are recorded in costs of goods sold and are recognized when the related finished product is shipped to the customer.
Note
Inventories consist of the following:
Note
Rental equipment
Depreciation expense for rental equipment for the nine months ended September 30, 11 Note
Property, plant and equipment
Machinery, fixtures and equipment having a net book value of $2.3 million at September 30,
Depreciation expense for property, plant and equipment for the nine months ended September 30,
Note
Long-term debt consists of the following:
On
12 On April 23, 2020, the Company entered into a loan note (the “Loan Note”) with Enterprise Bank and Trust (“Lender”) as lender under the CARES Act of the Small Business Administration of the United States of America (“SBA”), dated as of April 20, 2020. Under the Loan Note, the Company borrowed $810,800 from Lender under the Payment Protection Program (“PPP”) included in the SBA’s CARES Act, all of which is outstanding as of September 30, 2020. As of September 30, 2020, the Company had accrued $4,000 of interest related to
The Company has a $500,000 loan from Carlisle Investments Inc. (“Carlisle”) at a fixed interest rate of 12.00%, which matured on April 27, 2019 with a bullet payment of all principal due at such time. Interest is payable monthly. Carlisle has agreed to not demand payment on the loan through at least December 31, 2020. As of September 30, 2020, the entire amount was outstanding The Company has an additional $500,000 loan from Carlisle at a fixed interest rate of 12.00%, which matured on December 10, 2017 with a bullet payment of all principal due at such time (the “Second Carlisle Agreement”). Interest is payable monthly. Carlisle has agreed to not demand payment on the loan through at least December 31, 2020. As of September 30, 2020, the entire amount was outstanding and is included in current portion of long-term debt Consolidated Balance Sheets. As of September 30, 2020 and December 31, 2019, the Company had accrued $165,000 and $120,000, respectively, of interest related to this loan, which are included in accrued liabilities in the Condensed Consolidated Balance Sheets. Under the Second Carlisle Agreement, the Company granted a security interest to Carlisle in accounts receivable, materials and intangibles relating to a certain purchase order for equipment issued in April 2017. 13 As of September 30, 2020 and December 31, 2019, the Company had outstanding $352,000 of Notes. The Notes matured as of March 1, 2012 and are currently in default. As of September 30,
Note
As of December 31, 2003, the benefit service under the pension plan had been frozen and, accordingly, there is no service cost. As of April 30, 2009, the compensation increments had been frozen and, accordingly, no additional benefits are being accrued under the pension plan.
The following table presents the components of net periodic pension
As of September 30,
Note The Company leases administrative and manufacturing facilities through operating lease agreements. The Company has no finance leases as of September 30, 2020. Our leases include both lease (e.g., fixed payments including rent) and non-lease components (e.g., common area or other maintenance costs). The facility leases include one or more options to renew. The exercise of lease renewal options is typically at our sole discretion, therefore, the renewals to extend the lease terms are not included in our right of use (“ROU”) assets or lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and, when they are reasonably certain of exercise, we include the renewal period in our lease term. Operating leases result in the recognition of ROU assets and lease liabilities on the Condensed Consolidated Balance Sheets. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate at the commencement date to determine the present value of lease payments. Most real estate leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 5 years or more. Lease expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the Condensed Consolidated Balance Sheets. The primary leases we enter into with initial terms of 12 months or less are for equipment. Supplemental information regarding leases:
15 Supplemental cash flow information regarding leases:
Total operating lease expense and short-term lease expense was $289,000 and $56,000, respectively, for the nine months ended September 30, 2020. Total operating lease expense and short-term lease expense was $94,000 and $20,000, respectively, for the three months ended September 30, 2020. Total operating lease expense and short-term lease expense was $374,000 and $98,000, respectively, for the nine months ended September 30, 2019. Total operating lease expense and short-term lease expense was $125,000 and $34,000, respectively, for the three months ended September 30, 2019. Note 10 – Stockholders’ Deficit and Loss
The following table presents the calculation of
Basic
At September 30,
As of September 30, 2020 and 2019, the Company had no shares of SBCPS outstanding. For each holder of the 15,864 shares of SBCPS that converted their shares into Common Stock in March 2019, the Company declared a
As of September 30,
Note 11 – Contingencies
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
Three months ended |
| Nine months ended | ||||||||||||||||||||
In thousands | 2017 |
| 2016 |
| 2017 |
| 2016 | 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Digital product sales | $ | 9,676 | $ | 5,135 | $ | 15,616 | $ | 13,133 | $ | 2,405 | $ | 3,951 | $ | 5,257 | $ | 10,155 | ||||||
Digital product lease and maintenance |
| 650 |
|
| 720 |
|
| 1,765 |
| 2,333 |
| 491 |
|
| 521 |
|
| 1,601 |
|
| 1,663 | |
Total revenues | $ | 10,326 |
| $ | 5,855 |
| $ | 17,381 |
| $ | 15,466 | $ | 2,896 |
| $ | 4,472 |
| $ | 6,858 |
| $ | 11,818 |
Operating income (loss): |
|
|
|
|
|
|
|
|
|
| ||||||||||||
Operating (loss) income: |
|
|
|
|
|
|
| |||||||||||||||
Digital product sales | $ | 697 | $ | 351 | $ | (291) | $ | 602 | $ | (1,008) | $ | 220 | $ | (2,902) | $ | 584 | ||||||
Digital product lease and maintenance |
| 227 |
|
| 160 |
|
| 485 |
| 651 |
| 346 |
|
| 296 |
|
| 1,074 |
|
| 969 | |
Corporate general and administrative expenses |
| (777) |
|
| (768) |
|
| (2,219) |
| (2,442) |
| (114) |
|
| (730) |
|
| (1,255) |
|
| (1,971) | |
Total operating income (loss) |
| 147 |
|
| (257) |
|
| (2,025) |
| (1,189) | ||||||||||||
Total operating loss |
| (776) |
|
| (214) |
|
| (3,083) |
|
| (418) | |||||||||||
Interest expense, net | (202) | (131) | (514) | (206) | (100) | (67) | (363) | (402) | ||||||||||||||
(Loss) gain on foreign currency remeasurement |
| (101) |
|
| 47 |
|
| (192) |
| (95) |
| (49) |
|
| 29 |
|
| 64 |
|
| (78) | |
Gain on extinguishment of debt | - | 462 | - | 462 | ||||||||||||||||||
Gain on sale/leaseback transaction |
| 33 |
|
| 33 |
|
| 99 |
| 88 | ||||||||||||
Warrant expense |
| - |
|
| (7) |
|
| - |
|
| (21) | |||||||||||
(Loss) income before income taxes |
| (123) |
|
| 147 |
|
| (2,632) |
| (961) | ||||||||||||
Income tax (expense) benefit |
| - |
|
| (7) |
|
| - |
|
| 66 | |||||||||||
Net (loss) income | $ | (123) |
|
| 140 |
| $ | (2,632) |
| $ | (895) | |||||||||||
Gain (loss) on debt extinguishment | 137 | - | 137 | (193) | ||||||||||||||||||
Pension benefit (expense) |
| 37 |
|
| (18) |
|
| 110 |
|
| (55) | |||||||||||
Loss before income taxes | (751) | (270) | (3,135) | (1,146) | ||||||||||||||||||
Income tax expense |
| (7) |
|
| (7) |
|
| (19) |
|
| (19) | |||||||||||
Net loss | $ | (758) |
| $ | (277) |
| $ | (3,154) |
| $ | (1,165) | |||||||||||
September 30, 2017 | December 31, 2016 | September 30 |
| December 31 | ||||||||||||||||||
| ||||||||||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
| ||||||||||||
Assets |
|
|
| |||||||||||||||||||
Digital product sales | $ | 10,748 | $ | 8,753 | $ | 6,925 | $ | 8,204 | ||||||||||||||
Digital product lease & maintenance |
|
|
|
|
|
|
| 3,980 |
| 4,055 | ||||||||||||
Digital product lease and maintenance |
| 2,308 |
|
| 3,515 | |||||||||||||||||
Total identifiable assets | 14,728 | 12,808 | 9,233 | 11,719 | ||||||||||||||||||
General corporate |
|
|
|
|
|
|
| 503 |
| 606 |
| 31 |
|
| 535 | |||||||
Total assets |
|
|
|
|
|
| $ | 15,231 |
| $ | 13,414 | $ | 9,264 |
| $ | 12,254 | ||||||
The Company has evaluated events and transactions subsequent to September 30, 20172020 and through the date these Condensed Consolidated Financial Statements were included in this Form 10-Q and filed with the SEC.
1320
As further discussed in Note 6, subsequent to September 30, 2017, the Company entered into the Second Carlisle Agreement, pursuant to which the Company borrowed $500,000, the Fifth Amendment to the Credit Agreement and a Mutual Lien Intercreditor Agreement with Carlisle and SCM.
As further discussed in Note 6, subsequent to September 30, 2017, the Company entered into the Sixth Amendment to the Credit Agreement.
As further discussed in Note 8, subsequent to September 30, 2017, the Company declared a semi-annual dividend of $6.00 per share of Preferred Stock aggregating $99,000, which was paid on November 9, 2017.
Item 2.2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Trans-Lux is a leading supplier of LED technology for displays and lightingdisplay applications. The essential elements of these systems are the real-time, programmable digital displays and lighting fixturesproducts that we design, manufacture, distribute and service. Designed to meet the digital signage solutions for any size venue’s indoor and outdoor needs, these displays are used primarily in applications for the financial, banking, gaming, corporate, advertising, transportation, entertainment and sports markets. The Company’s LED lighting fixtures offer energy-saving lighting solutions that feature a comprehensive offering of the latest LED lighting technologies that provide facilities and public infrastructure with “green” lighting solutions that emit less heat, save energy and enable creative designs. The Company operates in two reportable segments: Digital product sales and Digital product lease and maintenance.
The Digital product sales segment includes worldwide revenues and related expenses from the sales of both indoor and outdoor digital display signage and LED lighting solutions.product signage. This segment includes the financial, government/private, gaming, scoreboards and outdoor advertising markets. The Digital product lease and maintenance segment includes worldwide revenues and related expenses from the lease and maintenance of both indoor and outdoor digital displayproduct signage. This segment includes the lease and maintenance of digital displayproduct signage across all markets.
Going Concern
We do not have adequate liquidity, including access to the debt and equity capital markets, to operate our business. As a result, our short-term business focus has been to preserve our liquidity position. Unless we are successful in obtaining additional liquidity, we believe that we will not have sufficient cash and liquid assets to fund normal operations for the next 12 months from the date of issuance of this Form 10-Q. In addition, the Company’s obligations under its defined benefit pension plan exceeded plan assets by $4.1 million at September 30, 2017, including $719,000 of minimum required contributions due over the next 12 months. The Company is in default on its Notes and Debentures, which have remaining principal balances of $387,000 and $220,000, respectively. As a result, if the Company is unable to (i) obtain additional liquidity for working capital, (ii) make the minimum required contributions to the defined benefit pension plan and/or (iii) make the required principal and interest payments on the Notes and the Debentures, there would be a significant adverse impact on the financial position and operating results of the Company.
14
Moreover, because of the uncertainty surrounding our ability to obtain additional liquidity and the potential of the noteholders and/or trustees to give notice to the Company of a default on either the Debentures or the Notes, our independent registered public accounting firm has issued an opinion on our December 31, 2016 Consolidated Financial Statements that states that the Consolidated Financial Statements were prepared assuming we will continue as a going concern and further states that the uncertainty regarding the ability to make the required principal and interest payments on the Notes and the Debentures, in addition to the significant amount due to the Company’s defined benefit pension plan over the next 12 months, net losses and working capital deficiencies, raises substantial doubt about our ability to continue as a going concern. See Note 2 to the Condensed Consolidated Financial Statements – Going Concern.
Results of Operations
Nine Months Ended September 30, 20172020 Compared to Nine Months Ended September 30, 20162019
The following table presents our Statements of Operations data, expressed as a percentage of revenue for the nine months ended September 30, 20172020 and 2016:2019:
Nine months ended September 30, | |||||||||||
In thousands, except percentages | 2017 |
| 2016 | ||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
Digital product sales | $ | 15,616 | 89.8 | % | $ | 13,133 | 84.9 | % | |||
Digital product lease and maintenance |
| 1,765 |
| 10.2 | % |
|
| 2,333 |
| 15.1 | % |
Total revenues |
| 17,381 |
| 100.0 | % |
|
| 15,466 |
| 100.0 | % |
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
Cost of digital product sales | 13,929 | 80.1 | % | 9,885 | 63.9 | % | |||||
Cost of digital product lease and maintenance |
| 1,123 |
| 6.5 | % |
|
| 1,540 |
| 10.0 | % |
Total cost of revenues |
| 15,052 |
| 86.6 | % |
|
| 11,425 |
| 73.9 | % |
Gross profit |
| 2,329 |
| 13.4 | % |
|
| 4,041 |
| 26.1 | % |
General and administrative expenses |
| (4,354) |
| (25.1) | % |
|
| (5,230) |
| (33.8) | % |
Operating loss |
| (2,025) |
| (11.7) | % |
|
| (1,189) |
| (7.7) | % |
Interest expense, net | (514) | (3.0) | % | (206) | (1.3) | % | |||||
Loss on foreign currency remeasurement |
| (192) |
| (1.1) | % |
|
| (95) |
| (0.6) | % |
Gain on extinguishment of debt | - | 462 | 3.0 | % | |||||||
Gain on sale/leaseback transaction |
| 99 |
| 0.5 | % |
|
| 88 |
| 0.5 | % |
Warrant expense |
| - |
| - | % |
|
| (21) |
| (0.1) | % |
Loss before income taxes |
| (2,632) |
| (15.1) | % |
|
| (961) |
| (6.2) | % |
Income tax benefit |
| - |
| - | % |
|
| 66 |
| 0.4 | % |
Net loss | $ | (2,632) |
| (15.1) | % |
| $ | (895) |
| (5.8) | % |
| Nine months ended | ||||||||||
In thousands, except percentages | 2020 |
| 2019 | ||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
Digital product sales | $ | 5,257 | 76.7 | % | $ | 10,155 | 85.9 | % | |||
Digital product lease and maintenance |
| 1,601 |
| 23.3 | % |
|
| 1,663 |
| 14.1 | % |
Total revenues |
| 6,858 |
| 100.0 | % |
|
| 11,818 |
| 100.0 | % |
Cost of revenues: |
|
|
|
|
|
|
| ||||
Cost of digital product sales | 6,528 | 95.2 | % | 7,919 | 67.0 | % | |||||
Cost of digital product lease and maintenance |
| 471 |
| 6.9 | % |
|
| 584 |
| 4.9 | % |
Total cost of revenues |
| 6,999 |
| 102.1 | % |
|
| 8,503 |
| 71.9 | % |
Gross (loss) profit |
| (141) |
| (2.1) | % |
|
| 3,315 |
| 28.1 | % |
General and administrative and restructuring expenses |
| (2,942) |
| (42.9) | % |
|
| (3,733) |
| (31.6) | % |
Operating loss |
| (3,083) |
| (45.0) | % |
|
| (418) |
| (3.5) | % |
Interest expense, net | (363) | (5.3) | % | (402) | (3.4) | % | |||||
Gain (loss) on foreign currency remeasurement |
| 64 |
| 1.0 | % |
|
| (78) |
| (0.7) | % |
Loss on extinguishment of debt |
| 137 |
| 2.0 | % |
|
| (193) |
| (1.6) | % |
Pension benefit (expense) |
| 110 |
| 1.6 | % |
|
| (55) |
| (0.5) | % |
Loss before income taxes | (3,135) | (45.7) | % | (1,146) | (9.7) | % | |||||
Income tax expense |
| (19) |
| (0.3) | % |
|
| (19) |
| (0.2) | % |
Net loss | $ | (3,154) |
| (46.0) | % |
| $ | (1,165) |
| (9.9) | % |
Total revenues for the nine months ended September 30, 2017 increased $1.92020 decreased $4.9 million or 12.4%42.0% to $17.4$6.9 million from $15.5$11.8 million for the nine months ended September 30, 2016,2019, primarily due to an increasedecreases in Digital product sales, partially offset by a decrease in Digital product lease and maintenance.sales.
1521
Digital product sales revenues increased $2.5decreased $4.9 million or 18.9%,48.2% for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to a single large scoreboard customer sale, offsetdecrease in shipments as we completed the consolidation of our manufacturing facilities, followed by delays in shipments from suppliers due to the onset of the coronavirus in Asia, followed by a reductionbrief shutdown of our manufacturing facility at the onset of the coronavirus in other sales to the scoreboard and lighting markets.United States.
Digital product lease and maintenance revenues decreased $568,000$62,000 or 24.3%,3.7% for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to the continued expected revenue decline in the older outdoor display equipment rental and maintenance bases acquired in the early 1990s.1990s, partially offset by an increase in display equipment maintenance agreements. The financial services market continues to be negatively impacted by the current investment climate resulting in consolidation within that industry and the wider use of flat-panel screens for smaller applications.
Total operating loss for the nine months ended September 30, 20172020 increased $836,000 or 70.3%$2.7 million to $2.0$3.1 million from $1.2$418,000 for the nine months ended September 30, 2019, principally due to the decrease in revenues and an increase in the cost of revenues as a percentage of revenues.
Digital product sales operating income (loss) decreased $3.5 million to a loss of $2.9 million for the nine months ended September 30, 2016, principally due2020 compared to the increase in costincome of sales related to the single large scoreboard customer revenues, partially offset by a reduction in general and administrative expenses.
Digital product sales operating income decreased $893,000 to a loss of $291,000$584,000 for the nine months ended September 30, 20172019, primarily due to the decrease in revenues. The cost of Digital product sales decreased $1.4 million or 17.6%, primarily due to the reduction in revenues and the completion of the consolidation of our manufacturing facilities. The cost of Digital product sales represented 124.2% of related revenues in 2020 compared to 78.0% in 2019. This increase as a percentage of revenues is primarily due to the lack of reduction of fixed manufacturing costs despite the reduction in revenues, as well as the completion of the consolidation of our manufacturing facilities. General and administrative expenses for Digital product sales decreased $21,000 or 1.3%, primarily due to a decrease in bad debt expenses and employees’ expenses, partially offset by an increase in marketing expenses.
Digital product lease and maintenance operating income of $602,000increased $105,000 or 10.8% for the nine months ended September 30, 2016, primarily due2020 compared to the increasenine months ended September 30, 2019, primarily as a result of a decrease in the cost of sales related to the single large scoreboard customer revenues, partially offset by the increase in revenues from the single large scoreboard customerDigital product lease and maintenance and a reductiondecrease in general and administrative expenses. The cost of Digital product sales increased $4.0 million or 40.9%, primarily due to the single large scoreboard customer. The cost of Digital product sales represented 89.2% of related revenues in 2017 compared to 75.3% in 2016. The cost of Digital product sales in 2017 includes additional expenses and depreciation related to our new manufacturing facility and equipment which are not being fully absorbed since the facility and equipment are not yet being utilized to full capacity. Digital product sales general and administrative expenses decreased $668,000 or 25.2%, primarily due to a decrease in payroll and benefits.
Digital product lease and maintenance operating income decreased $166,000 or 25.5%, primarily as a result of the decrease in revenues and an increase in general and administrative expenses, partially offset by a decrease in the cost of Digital product lease and maintenance. The cost of Digital product lease and maintenance decreased $417,000$113,000 or 27.1%19.3%, primarily due to a decrease in depreciation expense. The cost of Digital product lease and maintenance revenues represented 63.6%29.4% of related revenues in 20172020 compared to 66.0%35.1% in 2016.2019. The cost of Digital product lease and maintenance includes field service expenses, plant repair costs, maintenance and depreciation. General and administrative expenses for Digital product lease and maintenance general and administrative expenses increased $15,000decreased $54,000 or 10.6%49.1%, primarily due to an increasea reduction in the allowance for bad debts and an increase in payroll and benefits.employees’ expenses.
Corporate general and administrative expenses decreased $223,000$716,000 or 9.1%,36.3% for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to a decreasereduction in insurancerelocation, employee, rent, legal and directors’ expenses, and a decreasepartially offset by an increase in payroll and benefits.warrant expense.
22
Net interest expense increased $308,000,decreased $39,000 or 9.7% for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to an increasedecreases in interest rates and the average outstanding long-term debt, primarily due to the Credit Agreement.decrease in the balance owed under revolving credit loans and term loans, partially offset by the increase in the balance owed under the PPP loan.
Warrant expense is attributableThe gain on extinguishment of debt for the nine months ended September 30, 2020 represented the reversal of accrued interest on the Hazelwood loan, which was terminated in July 2020. The loss on extinguishment of debt for the nine months ended September 30, 2019 represented the write-off of the remaining debt discount costs and the termination fees related to the amortization of equity warrants granted to directors in 2013.former loans from CNH and SM Investors.
The effective tax rate for the nine months ended September 30, 20172020 and 20162019 was 0.0%0.6% and a benefit of 6.9%1.7%, respectively. Both the 20172020 and 20162019 tax rates are being affected by the valuation allowance on the Company’s deferred tax assets as a result of reporting pre-tax losses. The 2016 tax rate is affected by alternative minimum tax credits from prior years in which the Company applied for allowable refunds.
16
Three Months Ended September 30, 20172020 Compared to Three Months Ended September 30, 20162019
The following table presents our Statements of Operations data, expressed as a percentage of revenue for the three months ended September 30, 20172020 and 2016:2019:
Three months ended September 30 | |||||||||||
In thousands, except percentages | 2017 |
| 2016 | ||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
Digital product sales | $ | 9,676 | 93.7 | % | $ | 5,135 | 87.7 | % | |||
Digital product lease and maintenance |
| 650 |
| 6.3 | % |
|
| 720 |
| 12.3 | % |
Total revenues |
| 10,326 |
| 100.0 | % |
|
| 5,855 |
| 100.0 | % |
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
Cost of digital product sales | 8,291 | 80.3 | % | 3,745 | 63.9 | % | |||||
Cost of digital product lease and maintenance |
| 376 |
| 3.6 | % |
|
| 502 |
| 8.6 | % |
Total cost of revenues |
| 8,667 |
| 83.9 | % |
|
| 4,247 |
| 72.5 | % |
Gross profit |
| 1,659 |
| 16.1 | % |
|
| 1,608 |
| 27.5 | % |
General and administrative expenses |
| (1,512) |
| (14.6) | % |
|
| (1,865) |
| (31.9) | % |
Operating income (loss) |
| 147 |
| 1.4 | % |
|
| (257) |
| (4.4) | % |
Interest expense, net | (202) | (2.0) | % | (131) | (2.3) | % | |||||
(Loss) gain on foreign currency remeasurement |
| (101) |
| (0.9) | % |
|
| 47 |
| 0.8 | % |
Gain on extinguishment of debt | - | - | % | 462 | 7.9 | % | |||||
Gain on sale/leaseback transaction |
| 33 |
| 0.3 | % |
|
| 33 |
| 0.6 | % |
Warrant expense |
| - |
| - | % |
|
| (7) |
| (0.1) | % |
Loss (income) before income taxes |
| (123) |
| (1.2) | % |
|
| 147 |
| 2.5 | % |
Income tax expense |
| - |
| - | % |
|
| (7) |
| (0.1) | % |
Net (loss) income | $ | (123) |
| (1.2) | % |
| $ | 140 |
| 2.4 | % |
| Three months ended | ||||||||||
In thousands, except percentages | 2020 |
| 2019 | ||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
Digital product sales | $ | 2,405 | 83.0 | % | $ | 3,951 | 88.3 | % | |||
Digital product lease and maintenance |
| 491 |
| 17.0 | % |
|
| 521 |
| 11.7 | % |
Total revenues |
| 2,896 |
| 100.0 | % |
|
| 4,472 |
| 100.0 | % |
Cost of revenues: |
|
|
|
|
|
|
| ||||
Cost of digital product sales | 2,822 | 97.4 | % | 3,178 | 71.0 | % | |||||
Cost of digital product lease and maintenance |
| 146 |
| 5.1 | % |
|
| 195 |
| 4.4 | % |
Total cost of revenues |
| 2,968 |
| 102.5 | % |
|
| 3,373 |
| 75.4 | % |
Gross (loss) profit |
| (72) |
| (2.5) | % |
|
| 1,099 |
| 24.6 | % |
General and administrative and restructuring expenses |
| (704) |
| (24.3) | % |
|
| (1,313) |
| (29.4) | % |
Operating loss |
| (776) |
| (26.8) | % |
|
| (214) |
| (4.8) | % |
Interest expense, net | (100) | (3.4) | % | (67) | (1.5) | % | |||||
(Loss) gain on foreign currency remeasurement |
| (49) |
| (1.7) | % |
|
| 29 |
| 0.7 | % |
Gain on extinguishment of debt |
| 137 |
| 4.7 | % |
|
| - |
| - | % |
Pension benefit (expense) |
| 37 |
| 1.3 | % |
|
| (18) |
| (0.4) | % |
Loss before income taxes | (751) | (25.9) | % | (270) | (6.0) | % | |||||
Income tax expense |
| (7) |
| (0.3) | % |
|
| (7) |
| (0.2) | % |
Net loss | $ | (758) |
| (26.2) | % |
| $ | (277) |
| (6.2) | % |
Total revenues for the three months ended September 30, 2017 increased $4.52020 decreased $1.6 million or 76.4%35.2% to $10.3$2.9 million from $5.9$4.5 million for the three months ended September 30, 2016,2019, primarily due to an increase in Digital product sales, partially offset by a decrease in Digital product lease and maintenance.sales.
23
Digital product sales revenues increased $4.5decreased $1.5 million or 88.4%,39.1% for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily due to a single large scoreboard customer sale, offset by a reductiondecrease in other salesthe sports market, principally due to the scoreboard and lighting markets.coronavirus concerns.
Digital product lease and maintenance revenues decreased $70,000$30,000 or 9.7%,5.8% for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily due to the continued expected revenue decline in the older outdoor display equipment rental and maintenance bases acquired in the early 1990s.The financial services market continues to be negatively impacted by the current investment climate resulting in consolidation within that industry and the wider use of flat-panel screens for smaller applications.
Total operating income (loss)loss for the three months ended September 30, 20172020 increased $404,000$562,000 to income of $147,000$776,000 from a loss of $257,000$214,000 for the three months ended September 30, 2016,2019, principally due to the increasedecrease in revenues and a reduction in general and administrative expenses, partially offset by thean increase in the cost of sales related to the single large scoreboard customerrevenues as a percentage of revenues.
17
Digital product sales operating income increased $346,000(loss) decreased $1.2 million to $697,000a loss of $1.0 million for the three months ended September 30, 20172020 compared to $351,000income of $220,000 for the three months ended September 30, 2016,2019, primarily due to the increasedecrease in revenues and a decrease in general and administrative expenses, partially offset by an increase in the cost of sales related to the single large scoreboard customer.revenue as a percentage of revenues. The cost of Digital product sales increased $4.5 milliondecreased $356,000 or 121.4%11.2%, primarily due to the increasedecrease in revenues. The cost of Digital product sales represented 85.7%117.3% of related revenues in 20172020 compared to 72.9%80.4% in 2016. The cost2019. This increase as a percentage of revenues is primarily due to the lack of reduction of fixed manufacturing costs despite the reduction in revenues. General and administrative expenses for Digital product sales in 2017 includes additional expenses and depreciation related to our new manufacturing facility and equipment which are not being fully absorbed since the facility and equipment are not yet being utilized to full capacity. Digital product sales general and administrative expenses decreased $351,000increased $38,000 or 33.8%6.9%, primarily due to an increase in bad debt expenses, partially offset by a decrease in payroll and benefits.employees’ expenses.
Digital product lease and maintenance operating income increased $67,000$50,000 or 41.9%,16.9% for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily as a result of a decrease in the cost of Digital product lease and maintenance and a decrease in general and administrative expenses, partially offset by the decrease in revenues. The cost of Digital product lease and maintenance decreased $126,000$49,000 or 25.1%, primarily due to a decrease in depreciation expense. The cost of Digital product lease and maintenance revenues represented 57.8%29.7% of related revenues in 20172020 compared to 69.7%37.4% in 2016.2019. The cost of Digital product lease and maintenance includes field service expenses, plant repair costs, maintenance and depreciation. General and administrative expenses for Digital product lease and maintenance general and administrative expenses decreased $11,000$31,000 or 19.0%103.3%, primarily due to a decreasereduction in payrollemployees’ expenses and benefits.bad debt expenses.
Corporate general and administrative expenses increased $9,000decreased $616,000 or 1.2%,84.4% for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily due to an increasea reduction in professional services.employee, rent, legal and directors’ expenses.
Net interest expense increased $71,000,$33,000 or 49.3% for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily due to an increase in the average outstanding long-term debt, primarily due to an increase in the Credit Agreement.balance owed under revolving credit loans and term loans including the PPP loan, partially offset by decreases in interest rates.
Warrant expense is attributable to24
The gain on extinguishment of debt for the amortizationthree months ended September 30, 2020 represented the reversal of equity warrants granted to directorsaccrued interest on the Hazelwood loan, which was terminated in 2013.July 2020.
The effective tax rate for the three months ended September 30, 20172020 and 20162019 was an expense of 0.0%0.9% and 4.8%2.6%, respectively. Both the 20172020 and 20162019 tax rates are being affected by the valuation allowance on the Company’s deferred tax assets as a result of reporting pre-tax losses.
Liquidity and Capital Resources
Current Liquidity
The Company has incurred significant recurring losses and continues to have a significant working capital deficiency. The Company incurred a net loss of $2.6$3.2 million in the nine months ended September 30, 20172020 and had a working capital deficiency of $5.6$5.9 million as of September 30, 2017.2020. As of December 31, 2016,2019, the Company had a working capital deficiency of $4.0$3.1 million. The increase in the working capital deficiency is primarily due to increases in the current portion of long-term debt, customer deposits and accounts payableaccrued liabilities, as well as decreases in receivables, cash, inventories and a reduction in accounts receivable,prepaids and other assets, partially offset by increasesa decrease in prepaids and inventory.accounts payable.
18
The Company is dependent on future operating performance in order to generate sufficient cash flows in order to continue to run its businesses. Future operating performance is dependent on general economic conditions, as well as financial, competitive and other factors beyond our control. As a result, we have experienced a decline in our lease and maintenance bases. The cash flowscontrol, including the impact of the Company are constrained,current economic environment, the spread of major epidemics (including coronavirus) and inother related uncertainties such as government imposed travel restrictions, interruptions to supply chains and extended shut down of businesses. In order to more effectively manage its cash resources, the Company has,had, from time to time, increased the timetable of its payment of some of its payables. payables, which delayed certain product deliveries from our vendors, which in turn delayed certain deliveries to our customers.
There can be no assurance thatis substantial doubt as to whether we will meethave adequate liquidity, including access to the debt and equity capital markets, to operate our anticipated current and near term cash requirements. Management believes that its current cash resources and cash provided by operations would not be sufficientbusiness over the next 12 months from the date of issuance of this Form 10-Q. A stockholder of the Company has committed to providing additional capital up to $2.0 million, to the extent necessary to fund its anticipated current and near term cash requirements and is seeking additional financing in order to execute our operating plan. We cannot predict whether future financing, if any, will be in the form of equity, debt or a combination of both. We may not be able to obtain additional funds on a timely basis, on acceptable terms or at all. The Company has no agreements, commitments or understandings with respect to any such additional financing.operations. The Company continually evaluates the need and availability of long-term capital in order to meet its cash requirements and fund potential new opportunities.
The Company used cash of $294,000 for$2.0 million and $4.8 million from operating activities for the nine months ended September 30, 2017, primarily due to an increase in Prepaids2020 and other assets of $2.1 million, partially offset by an increase in Customer deposits of $1.6 million both due to two large customer orders currently in process, and used cash of $1.8 million for the nine months ended September 30, 20162019, respectively. The Company has implemented several initiatives to improve operational results and cash flows over future periods, including reducing head count, reorganizing its sales department and outsourcing certain manufacturing and administrative functions. The Company continues to explore ways to reduce operational and overhead costs. The Company periodically takes steps to reduce the cost to maintain the digital products on lease and maintenance agreements.
25
Cash, and cash equivalents and restricted cash decreased $103,000$1.4 million in the nine months ended September 30, 20172020 to $503,000$31,000 at September 30, 20172020 from $606,000$1.4 million at December 31, 2016.2019. The decrease is primarily attributable to net payments on the revolving loan of $298,000, the payoff of the BFI Agreement of $492,000, payments on the Penner loan of $750,000, scheduled payments of long-term debt of $140,000, investment in property and equipment of $189,000, Preferred Stock dividends of $99,000, an increase in restricted cash of $550,000 and cash used in operating activities of $294,000,$2.0 million, paydown of $650,000 on the Hazelwood loan and investments in equipment for rental, property and equipment of $190,000, partially offset by proceeds of $1.5 million received from borrowing on the Pennerrevolving loan proceeds of $600,000 received from borrowing on the term loan$686,000 and proceeds from the PPP loan of $650,000 from a forgivable loan.$811,000. The current economic environment has increased the Company’s trade receivables collection cycle, and its allowances for uncollectible accounts receivable, but collections continue to be favorable.
On November 6, 2017, the Company declared a semi-annual dividend of $6.00 per share of Preferred Stock aggregating $99,000, which was paid on November 9, 2017. On April 14, 2017, the Company declared a semi-annual dividend of $6.00 per share of Preferred Stock aggregating $99,000, which was paid on April 21, 2017.
19
Under various agreements, the Company is obligated to make future cash payments in fixed amounts. These include payments under the Company’s current and long-term debt agreements, pension plan minimum required contributions, employment agreement payments and rent payments required under operating lease agreements. The Company has both variable and fixed interest rate debt. Interest payments are projected based on actual interest payments incurred in 20172020 until the underlying debts mature.
The following table summarizes the Company’s fixed cash obligations as of September 30, 20172020 for the remainder of 20172020 and over the next four fiscal years:
In thousands |
Remainder of 2017 |
|
2018 |
|
2019 |
|
2020 |
|
2021 | Remainder of |
| 2021 |
| 2022 |
| 2023 |
| 2024 | ||||||||||
Long-term debt, including interest | $ | 3,391 |
| $ | 333 |
| $ | 1,143 |
| $ | - |
| $ | - | $ | 3,247 |
| $ | 547 |
| $ | 183 |
| $ | - |
| $ | - |
Pension plan contributions | 148 | 735 | 361 | 367 | 318 | |||||||||||||||||||||||
Pension plan payments | - | 973 | 490 | 324 | 212 | |||||||||||||||||||||||
Employment agreement obligations |
| 138 |
|
| 100 |
| - |
|
| - |
| - |
| - |
|
| - |
|
| - |
|
| - |
|
| - | ||
Estimated warranty liability | 56 | 96 | 80 | 56 | 36 | 47 | 152 | 116 | 70 | 44 | ||||||||||||||||||
Contract manufacturing agreement |
| 32 |
| - |
| - |
| - |
| - | ||||||||||||||||||
Operating lease payments |
| 158 |
|
| 342 |
| 335 |
|
| 337 |
| 342 |
| 112 |
|
| 370 |
|
| 348 |
|
| 309 |
|
| - | ||
Total | $ | 3,891 |
| $ | 1,606 |
| $ | 1,919 |
| $ | 760 |
| $ | 696 | $ | 3,438 |
| $ | 2,042 |
| $ | 1,137 |
| $ | 703 |
| $ | 256 |
OfAs of September 30, 2020, the fixed cash obligations for debt forCompany still had outstanding $352,000 of Notes which matured as of March 1, 2012. The Company also still had outstanding $220,000 of Debentures which matured on December 1, 2012. The Company continues to consider future exchanges of the remainder of 2017, $1.0 million, including interest, of Notes and Debentures, remained outstanding as of September 30, 2017 with consideration of an offer by the Company to settle for $121,000 in accordance with the Company’s offer to exchange that closed in July 2016. The Company but has no agreements, commitments or understandings with respect to any further such exchanges. As described in Note 6 to the Condensed Consolidated Financial Statements – Long-Term Debt, subsequent to September 30, 2017, theexchanges.
The Company entered into the Second Carlisle Agreement, pursuant to which the Company borrowed $500,000. In addition to the recently consummated Second Carlisle Agreement, the Company is seekingmay still seek additional financing in order to provide enough cash to cover our remaining current fixed cash obligations as well as providing working capital. However, there can be no assurance as to the amounts, if any, the Company will receive in any such financing or the terms thereof. The Company has no agreements, commitments or understandings with respect to any such financings. To the extent the Company issues additional equity securities, it could be dilutive to existing shareholders. In addition,
For a further description of the Company’s current outstandinglong-term debt, and other obligations could limit its abilitysee Note 7 to incur more debt.the Condensed Consolidated Financial Statements – Long-Term Debt.
26
Pension Plan Contributions
In March 2010, 2011 and 2013,The minimum required pension plan contribution for 2020 is expected to be $641,000, of which the Company submittedhas already contributed $85,000 as of June 30, 2020. As allowed by the CARES Act, the Company has elected to defer the Internal Revenue Service requests for waiverspayment of the 2009, 2010 and 2012 minimum funding standards for its defined benefit pension plan. As$556,000 of September 30, 2017, the Company had fully repaid the amounts deferred for the 2009 and 2010 plan years and has repaid $520,000 of the 2012 plan year waiver, leaving a balance due related to the waivers of $149,000, which is scheduled to be repaid in 2017. In 2017, the Company made $298,000 of contributions to its pension plan. At this time, we expect to make ourremaining minimum required contributions due in 2017 of $444,000; however, there is no assurance that we will be able to make any or all of such remaining payments.2020 until January 1, 2021. See Note 78 to the Condensed Consolidated Financial Statements – Pension Plan for further details.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
The Company may, from time to time, provide estimates as to future performance. These forward-looking statements will be estimates and may or may not be realized by the Company. The Company undertakes no duty to update such forward-looking statements. Many factors could cause actual results to differ from these forward-looking statements, including loss of market share through competition, introduction of competing products by others, pressure on prices from competition or purchasers of the Company’s products, interest rate and foreign exchange fluctuations, terrorist acts and war.
20
Item 3.3. Quantitative and Qualitative Disclosures about Market Risk
The Company is subject to interest rate risk on its long-term debt. The Company manages its exposure to changes in interest rates by the use of variable and fixed interest rate debt. At September 30, 2017,The fair value of the Company’s fixed rate long-term debt outstanding of $2.3 million was at variable rates ranging from 8.25%is disclosed in Note 7 to 10.25% and $1.9 million was at fixed rates ranging from 8.25% to 12.00%. A one-percentage pointthe Condensed Consolidated Financial Statements – Long-Term Debt. Every 1-percentage-point change in interest rates would result in an annual interest expense fluctuation of approximately $23,000.
The$7,000. In addition, the Company is exposed to foreign currency exchange rate risk mainly as a result of its investment in its Canadian subsidiary. A 10% change in the Canadian dollar relative to the U.S. dollar would result in a currency remeasurement expense fluctuation of approximately $273,000,$262,000, based on dealer quotes, considering current exchange rates. The Company does not enter into derivatives for trading or speculative purposes and did not hold any derivative financial instruments at September 30, 2017.2020.
Item 4.4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this report, we have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Chief Accounting Officer (our principal executive officer and principal accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Our Chief Executive Officer and Chief Accounting Officer hashave concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management (including our Chief Executive Officer and our Chief Accounting Officer) to allow timely decisions regarding required disclosures. Based on such evaluation, our Chief Executive Officer and Chief Accounting Officer hashave concluded that these disclosure controls are effective as of September 30, 2017.2020.
27
Changes in Internal Control over Financial Reporting. There has been no change in the Company’s internal control over financial reporting that occurred in the quarter ended September 30, 2017 and2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
21
Part II – Other Information
None.The Company is subject to legal proceedings and claims which arise in the ordinary course of its business and/or which are covered by insurance. The Company has accrued reserves individually and in the aggregate for such legal proceedings. Should actual litigation results differ from the Company’s estimates, revisions to increase or decrease the accrued reserves may be required. There are no open matters that the Company deems material.
The Company is subject to a number of risks including general business and financial risk factors. Any or all of such factors could have a material adverse effect on the business, financial condition or results of operations of the Company. You should carefully consider the risk factors identified in our Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material changes to those2019.
The Company is supplementing the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 with the following risk factors.factor:
Our results of operations may be negatively impacted by the coronavirus outbreak.
We are closely monitoring the impact of the 2019 novel coronavirus, or COVID-19, on all aspects of our business. In March 2020, the World Health Organization characterized COVID-19 as a pandemic and the President of the United States declared the COVID-19 outbreak a national emergency. Since then, the COVID-19 pandemic has rapidly spread across the globe and has already resulted in significant volatility, uncertainty and economic disruption. The outbreak of COVID-19 has caused and may continue to cause travel bans or disruptions, and in some cases, prohibitions of non-essential activities, disruption and shutdown of businesses and greater uncertainty in global financial markets. The impact of COVID-19 is fluid and uncertain, but it has caused and may continue to cause various negative effects, including an inability to meet with actual or potential customers, our end customers deciding to delay or abandon their planned purchases or failing to make payments, and delays or disruptions in our or our partners’ supply chains. As a result, we may experience extended sales cycles, our ability to close transactions with new and existing customers and partners may be negatively impacted, and the efficiency and effect of those activities, may be negatively affected, and it has been and, until the COVID-19 outbreak is contained, will continue to be more difficult for us to forecast our operating results. These uncertainties have, and may continue to, put pressure on global economic conditions and overall LED display spending and may cause our end customers to modify spending priorities or delay or abandon purchasing decisions, thereby lengthening sales cycles and potentially lowering prices for our solutions, and may make it difficult for us to forecast our sales and operating results and to make decisions about future investments, any of which could materially harm our business, operating results and financial condition.
28
Further, our management team is focused on addressing the impacts of COVID-19 on our business, which has required and will continue to require, a large investment of their time and resources and may distract our management team or disrupt our 2020 operating plans. The extent to which COVID-19 ultimately impacts our results of operations, cash flow and financial position will depend on future developments, which are uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions taken by governments and authorities to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of its global economic impact, including as a result of any recession that may occur.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3.Defaults upon Senior Securities
As disclosed in Note 67 to the Condensed Consolidated Financial Statements – Long-Term Debt, the Company hashad outstanding $387,000$352,000 of Notes which are no longer convertible into common shares. The Notes matured as of March 1, 2012 and are currently in default. As of September 30, 20172020 and December 31, 2016,2019, the Company had accrued $258,000$322,000 and $234,000,$300,000, respectively, of interest related to the Notes, which is included in Accruedaccrued liabilities in the Condensed Consolidated Balance Sheets. The trustee, by notice to the Company, or the holders of 25% of the principal amount of the Notes outstanding, by notice to the Company and the trustee, may declare the outstanding principal plus interest due and payable immediately.
As disclosed in Note 67 to the Condensed Consolidated Financial Statements – Long-Term Debt, the Company has outstanding $220,000 of Debentures. The Debentures matured as of December 1, 2012 and are currently in default. As of September 30, 20172020 and December 31, 2016,2019, the Company had accrued $164,000$226,000 and $148,000,$211,000, respectively, of interest related to the Debentures, which is included in Accruedaccrued liabilities in the Condensed Consolidated Balance Sheets. The trustee, by notice to the Company, or the holders of 25% of the principal amount of the Debentures outstanding, by notice to the Company and the trustee, may declare the outstanding principal plus interest due and payable immediately.
Item 4.Mine Safety Disclosures
Not applicable.
2229
As described herein, on November 6, 2017, the Company entered into the Second Carlisle Agreement for a loan of $500,000 and entered into the Fifth Amendment to the Credit Agreement. See Note 6 to the Condensed Consolidated Financial Statements – Long-Term Debt.None.
10.1 Credit Agreement with Arnold Penner, dated31.1Certification of Nicholas J. Fazio, Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as of July 28, 2017, (incorporated by referenceadopted pursuant to Exhibit 10.1Section 302 of the Company’s Form 8-KSarbanes-Oxley Act of 2002, filed August 2, 2017).herewith.
10.2 Fourth Amendment to Credit and Security Agreement, dated as of July 28, 2017, by and among SCM Specialty Finance Opportunities Fund, L.P., Trans-Lux Corporation, Trans-Lux Display Corporation, Trans-Lux Midwest Corporation and Trans-Lux Energy Corporation (incorporated by reference to Exhibit 10.2 of Form 8-K filed August 2, 2017).
10.3 Mutual Lien Intercreditor Agreement between SCM Specialty Finance Opportunities Fund, L.P. and Arnold Penner, dated as of July 28, 2017 (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed August 2, 2017).
10.4 Fifth Amendment to Credit and Security Agreement, dated as of October 10, 2017, by and among SCM Specialty Finance Opportunities Fund, L.P., Trans-Lux Corporation, Trans-Lux Display Corporation, Trans-Lux Midwest Corporation and Trans-Lux Energy Corporation, filed herewith.
10.5 Credit Agreement with Carlisle Investments Inc., dated as of November 6, 2017, filed herewith.
10.6 Mutual Lien Intercreditor Agreement between SCM Specialty Finance Opportunities Fund, L.P. and Carlisle Investments Inc., dated as of October 10, 2017, filed herewith.
10.7 Sixth Amendment to Credit and Security Agreement, dated as of November 9, 2017, by and among SCM Specialty Finance Opportunities Fund, L.P., Trans-Lux Corporation, Trans-Lux Display Corporation, Trans-Lux Midwest Corporation and Trans-Lux Energy Corporation, filed herewith.
31 31.2Certification of Jean-Marc Allain,Todd Dupee, Senior Vice President Chief Executive Officer and Chief Accounting Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32 32.1Certification of Jean-Marc Allain, President,Nicholas J. Fazio, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.2Certification of Todd Dupee, Senior Vice President and Chief Accounting Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
23
30
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.
TRANS-LUX CORPORATION | ||
(Registrant) | ||
by | /s/ | |
| ||
| ||
| ||
by | /s/ Todd Dupee | |
Todd Dupee | ||
Senior Vice President and Chief Accounting Officer | ||
Date: November | ||
2431