Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
No ☒
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
No ☒
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 (§ 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 definition of “accelerated filer,” “large accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
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
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
If securities are registered pursuant to Section 12(b)
of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of
an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
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Indicate by check mark whether the registrant
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No ☒
The aggregate market value of voting stock held by non-affiliates of
the registrant as of June 30, 2022: $1,440,913
Number of shares of common stock, par value $.001,
outstanding as of April 14, 2023: 13,368,538
Documents incorporated by reference: Portions
of the registrant's Proxy Statement for the 2023 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this
Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission
within 120 days of the registrant's fiscal year ended December 31, 2022.
In addition to historical
information, this Annual Report on Form 10-K of Blonder Tongue Laboratories, Inc., a Delaware Corporation (“Blonder Tongue”
or the “Company”), 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 sections
entitled 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. 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 of our future financial performance, our anticipated trends in our business and other characterizations of future
events or circumstances 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, except as may be required under applicable law. Readers
should carefully review the risk factors described herein and in other documents the Company files from time to time with the Securities
and Exchange Commission.
PART I
ITEM 1. BUSINESS
Introduction
Blonder Tongue, with its subsidiary
R. L. Drake Holdings, LLC (“Drake”), is a technology research and development (“R&D”) company
with U.S.-based manufacturing, that delivers a wide range of products and services to major telecommunications, cable and fiber optic
service delivery operators, as well as broadcasters and media production companies. For over 70 years, Blonder Tongue Labs and Drake Digital
products have provided the latest technology for telecom company Central Offices (COs), cable operator headends, broadcaster studios (together
“Telecom”), as well as to lodging/hospitality, multi-dwelling units/apartments (“MDU”) and a range
of business to business (“B-B”) customers at a wide range of locations including university campuses, healthcare/hospitals,
fitness centers, government facilities, military bases, prisons, airports, sports stadiums/arenas, entertainment venues/casinos, retail
stores, and other small-medium businesses. These applications are also variously described as small and medium sized businesses in commercial,
institutional, or enterprise environments, and will be referred to herein collectively as “SMB”. The customers we serve
also include business entities distributing and installing private data delivery, broadband and video networks in these environments,
including the world’s largest cable television operators, telecommunications providers and satellite providers, as well as integrators,
architects, engineers of the next generation of Internet Protocol Television (“IPTV”) streaming video service providers.
The Company continues to be
focused on the needs of an expanding group of customers, providing high quality, ultra-high reliability technology products to meet their
needs and supporting those products following deployment. For over 70 years Blonder Tongue has provided innovative solutions based on
continually advancing technology. Since its founding, Blonder Tongue has continued to keep abreast of evolving technologies, from analog
to digital television, Hybrid-Fiber Coax (“HFC”) networks with Quadrature Amplitude Modulation (“QAM”)
edge devices, High Definition (“HD”) and Ultra HD (“4K”) and (“UHD”) video encoding
and transcoding, IPTV processing and distribution, and most recently with the introduction of multiscreen Adaptive Bit Rate (“ABR”)
technologies and high-speed data delivery and reception technologies.
The cable and telecommunications
markets have reacted quickly to consumer demands for additional services by integrating multiple technologies into existing networks,
providing consumers with high-speed internet access in addition to enhanced video offerings. Today, video offerings have expanded from
traditional broadcast linear delivery to the living room TV to live streaming to any device in your home or on the go. Traditional TV
content is now available in any format to be viewed on tablets, mobile phones, computers or gaming consoles. SMB and IPTV service providers
are migrating their video-on-demand (“VOD”) architecture to IPTV, and a multiscreen ecosystem. Service operators and
SMB businesses are upgrading their networks to have the capability to deliver 4K video resolution content to TVs and adding the capability
of IPTV streaming to additional, normally small screens, thereby expanding viewer access to HD content on any IP-connected devices. The
infrastructure requirements to enable IP streaming with a wide variety of resolutions and ABR bit rates provides the Company with an opportunity
to market and sell its expanded IP streaming encoders and digital product lines.
Both the IPTV and SMB markets
are forecast to grow over the next few years. The IPTV market was valued at $59.7 billion in 2021 and is expected to reach $146.2 billion
by 2031; a CAGR of 9.5% from 2022 to 2031. The SMB market segments that the Company serves have been focused on the migration from HFC
to IPTV networks. The Company has expanded its video product line portfolio to address the growth of IP streaming. The Company has collaborated
with large telecommunications operators and with leading cable television (“CATV”) Multiple System Operators (“MSOs”)
to produce new cost-effective video encoder and transcoder products for IP support of both traditional broadcast and Public, Education
and Government (“PEG”) video content. The company has also been involved recently in initiatives for regional content
acquisition for backhaul, ingest and redistribution from centralized facilities using modern IP, IPTV and CDN video distribution architectures,
these technologies taken together are referred to as Over The Top or “OTT”. In 2018, the Company introduced the NeXgen Gateway
(“NXG”) digital video signal processing platform to specifically address the service provider challenges of migrating
from traditional CATV HFC based topologies and technologies to Internet Protocol (“IP”) and IPTV based topologies and
technologies. As the industry has begun to adopt UHD, 4K, and High Efficiency Video Coding (“HEVC”) encoding, the Company
has begun to produce products to support these emerging requirements. IPTV growth worldwide is projected to result in 398 million subscribers
by 2026. NXG sales were $2,709,000 in 2022 and $1,924,000 in 2021, respectively.
In January 2020, the Company
began implementing a strategic plan to improve operating results and increase shareholder value. This plan consists of:
| ● | Rationalizing operating expenses
to anticipated revenue and income levels |
| ● | Focusing R&D on short-term
high-confidence opportunities with compelling ROI |
| ● | Expanding sales and marketing
efforts directly to service operators |
| ● | Streamlining manufacturing operations
and simplifying product offerings, and |
| ● | Increasing gross margins. |
In April 2023, the Company
has further decided to revise its strategic plan in order to achieve profitability, which may include but is not limited to:
| ● | Scaling down certain less profitable operations; and |
| ● | Reduction in work force. |
The Company has entered into
and/or renewed several agreements through which it has acquired rights to use and incorporate certain proprietary technologies in its
digital encoder, transcoder and NXG lines of products, including:
| 1. | Widevine / Google LLC, DRM License
Agreement for content partners and OEMs (Google LLC). |
| 2. | Verimatrix ViewRight IPTV and
ViewRight IPTV Professional License to Distribute, License to Integrate and Client Integration Agreement. |
| 3. | Implementation and System License
Agreement with Dolby Laboratories Licensing Corporation (“Dolby Labs”) for Dolby Digital Plus Professional Encoder,
5.1 and 2 channel licensed technology. |
| 4. | License Agreement with LG Electronics
as a Pro:Idiom content Protection System Manufacturer. |
| 5. | Ownership from the Motion Picture
Experts Group of an MPEG-2 4:2:2 Profile High Level Video Encoder IP core. |
The Widevine / Google LLC
License Agreement grants the Company the right to manufacture, label and sell professional Digital Rights Management (“DRM”)
enabled products that include certain Widevine DRM technologies.
The Verimatrix ViewRight IPTV,
ViewRight IPTV Professional License to Distribute, License to Integrate and Client Integration Agreement grants the Company the right
to integrate the Company’s products with Verimatrix ViewRight IPTV and ViewRight IPTV Professional DRM technologies and to sell
and distribute the resulting integrated products to Service Operator customers that hold Verimatrix licenses to deploy the associated
DRM technologies.
The Dolby® Labs License
Agreement grants the Company the right to manufacture, label and sell professional digital encoder products and consumer digital decoder
products and to use the Dolby trademarks. This technology has a number of improvements aimed at increasing quality at a given bit rate
compared with legacy Dolby Digital (AC-3). Most notably, it offers increased bit rates, support for more audio channels, improved coding
techniques to reduce compression artifacts, and backward compatibility with existing AC-3 hardware.
The LG Electronics license
agreement provides the Company with certain technology necessary for the provision of Pro:Idiom encryption and decryption devices for
the hospitality industry. Almost all of the high value content owners require that service providers protect the content by employing
this technology. Consequently, content can be transferred through and among these devices only if incorporating this technology.
The Pro:Idiom digital technology
platform provides the hospitality market with a robust, secure DRM system, ensuring rapid, broad deployment of HD television (“HDTV”)
and other high-value digital content to licensed users in the lodging industry. Lodging industry leaders such as World Cinema Inc. have
licensed the Pro:Idiom DRM system. A growing number of content providers have demonstrated their acceptance of Pro:Idiom by licensing
their HD content for delivery by Pro:Idiom licensees.
The MPEG-2 Encoder IP core
has a unique compression engine capable of creating HD MPEG-2 real-time encoding of a single channel of 1080i/720p/480i video. The use
of this real-time encoding technique enables the Company to provide broadcast MPEG-2 HD and SD encoding. MPEG-2 is widely used as the
format of digital television signals that are broadcast by terrestrial (over-the-air), cable, and direct broadcast satellite TV systems.
The H.264/AVC is a video compression
standard that enables a compelling solution for growing IP video services. The H.264 HD Encoder core has the capability to cut the bandwidth
requirement for digital video delivery in half when compared against MPEG-2 encoders. This essentially facilitates the transmission of
twice the number of programs in a given bandwidth. The use of this H.264 encoding technology enables the Company to provide high quality
video at higher resolutions like 720p, 1080i and 1080p. H.264 is a widely used format for transmitting high quality digital television
signals over IP and Wi-Fi networks. The Company started shipping the H.264 capable encoders in 2012.
The H.265/HEVC technology
is a video compression standard that enables IP and IPTV video services to be better prepared for transmission and streaming over even
narrower and less robust networks as compared to both MPEG-2 and H.264 technologies. HEVC is and is expected to be primarily used by current
and future internet based and private IP based over-the-top video streaming services and in the near future for satellite and terrestrial
transmissions. The Company began to ship HEVC capable encoders and transcoders in 2020.
Secure Reliable Transport
(“SRT”) technology is a video and IP network oriented forward error correction (“FEC”), security and reliability
application level protocol designed to allow for high confidence transmission of compressed video and audio content over the open internet
or over privately owned IP networks. SRT has been standardized by the SRT Alliance, consisting of a group of international participating
companies. The Company completed its implementation of SRT and began shipping SRT capable products supporting video encoder, transcoder
and IP network interfaces in 2021.
The Advanced Encryption Standard
(“AES”) technology is a US National Institute of Standards and Technology (“NIST”) standard for the protection
of electronic data, including data based content such as digitized audio and video transmissions. Blonder Tongue Laboratories has broadened
the use of and implementations of AES technology across a wide range of product lines and use cases over the course of 2020 and 2021.
MPEG-DASH and HLS are the
two primary Adaptive Bit-Rate (“ABR”) technologies used in internet, IPTV and Wi-Fi based video delivery in the world today,
enabling multi-screen delivery and optimization of video quality to the available bandwidth of an internet connection to television, phone,
tablet or other viewing locations. The Company completed initial ABR technology and product implementations in 2021.
In 2019, the Company initiated a consumer premise equipment (“CPE”)
sales initiative. The products were primarily comprised of Android-based IPTV set top boxes targeted to the Tier 2 and Tier 3 telecommunications
and fiber optics based service providers. Total CPE product sales, including product accessories and replacement parts, were $29,000 in
2022 and $1,120,000 in 2021.
The Company’s manufacturing
is located primarily in its facility in Old Bridge, New Jersey (the “Old Bridge Facility”) with a small portion of
overall product production supported by key contract manufacturers located in Ohio, Taiwan, South Korea and the People’s Republic
of China (“PRC”). The Company currently manufactures the large majority of its digital products, including the latest
NXG, Clearview, Aircaster and Drake series product lines, as well as other digital signal processing product models at its Old Bridge,
New Jersey Facility. Since 2007 the Company has been manufacturing certain high- volume, labor intensive products, including certain 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. The Company does not currently
anticipate the transfer of any additional products to the PRC for manufacture. Since 2019 the Company also has been manufacturing certain
high-volume, labor intensive products in Taiwan and South Korea. This product mix represents a small percentage of the Company’s
revenue but allows the Company to benefit from relatively favorable tariff policies. Since 2021, the Company has begun outsourcing a small
percentage of product-specific manufacturing to a contract manufacturer in Ohio. Manufacturing products at the Company’s Old Bridge
Facility and in Ohio, the PRC, Taiwan and South Korea enables the Company to realize cost reductions and, with regard to Ohio, Taiwan
and South Korea, favorable tariff treatment while maintaining a competitive position and time-to-market advantages.
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.
The address of the Company’s principal executive offices is One Jake Brown Road, Old Bridge, New Jersey 08857, and its telephone
number at that location is (732) 679-4000.
Strategy
Telecom
The primary end locations
of the Company’s products have evolved to focus on Telco COs, cable operator headends, and local content ingest locations for Telco,
cable and fiber optic based service operators. We provide a wide range of products to meet the special needs of these applications, and
we serve many types of customers, from large Telco and cable companies to distribution channels, integrators and private contractors.
We sell to companies installing or distributing video and data delivery products including:
| ● | Telephone and fiber optics telecommunications
operators (both large and small) that design, package, install and in most cases operate, upgrade and maintain the systems they build;
cable system operators (both large and small) that design, package, install and in most instances operate, upgrade and maintain the systems
they build; |
| ● | Television broadcasters and
video production facilities that create signals for redistribution and require digital encoding, transcoding, transmission and encryption/security
technology; |
| ● | Telephone, fiber optics, and
cable-based telecommunications operators who deploy their services in the Lodging, Hospitality and Assisted Living Markets; and |
| ● | SMB system operators that operate,
upgrade, and maintain the systems that are in their facilities, or contractors that install, upgrade and maintain these systems in a
wide variety of applications. |
The key to proactively responding
to the evolving needs of the foregoing Telecom environment is to build a suite of product solutions that are optimized for the operator’s
existing infrastructure, as well as future strategy. Operators look for the following features when selecting technology:
| ● | Versatility for Now,
providing multiple source inputs and different output formats, including simultaneous IPTV, QAM, and NTSC analog television capability.
OTT technology support, off-air local program ingest, locally generated content, and national broadcasts can all be viewed on televisions
via coax, as well as on desktops, phones and tablets, and other connected devices via an IP network. This allows operators to expand
the reach of their video without having to run additional wiring throughout a facility and optimize the use of existing infrastructures. |
| ● | Flexibility for the Future,
recognizing that even if an operator is not utilizing IPTV, QAM and NTSC analog outputs today, these features may be needed tomorrow.
Operators seek to choose scalable technology that can keep up with advances in system architecture and allow them to best leverage existing
data and Wi-Fi infrastructure, without overburdening it. This includes considerations for TV Everywhere (bring your own content/device)
as well as Ultra-HD and 4K resolution television. |
| ● | Affordability, identifying
high-quality, cost-effective, innovative solutions with a strong performance-to-cost ratio, is the key to ensure that the service provider
can offer a competitively priced package to their residential, business and enterprise customers by focusing on the features required
and its management, including remote setup, monitoring and diagnostics through an IP interface and potentially providing a hot spare,
hot swap or automatic failover capability. |
The functions and features
of the Blonder Tongue NXG, Clearview, Aircaster and Drake series product lines are specifically targeted to deliver comprehensive and
cost-effective solutions to all the market needs described in the forgoing paragraphs.
A key component of the Company’s
growth strategy is to leverage its reputation across a comprehensive product line, offering one-stop-shop convenience to the telco, cable,
fiber optic, broadcast and professional markets and deliver products having a high performance-to-cost ratio. The Company has historically
enjoyed, and continues to enjoy, a leading position in specific portions of the Telecom market segments that it serves.
SMB
The ongoing evolution of the
Company’s product lines for the SMB marketplace and for service operators and integrators serving the SMB marketplace focus on the
increased needs created in digital technology by digital video, IPTV, HDTV and 4K signals, and the transport of these signals over state-of-the-art
broadband, ethernet, Wi-Fi and fiber optic networks. The Company has begun to renew R&D and new product efforts in this market segment
recently as the SMB markets have begun recovery.
CPE
In 2019, the Company initiated a consumer premise equipment (“CPE”)
sales initiative, comprised primarily of Android-based IPTV set top boxes to the Tier 2 and Tier 3 cable and telecommunications service
providers. This strategic initiative was designed to secure direct relationships with a wide range of service providers, and increase
sales of the Company’s Telecom and SMB products by the BT Premier Distributors to those same service providers, during. In 2021,
the Company determined to de-emphasize CPE products and strategy due to the initiative’s low gross margin. Total CPE product sales,
including product accessories and replacement parts, were $29,000 in 2022 and $1,120,000 in 2021 and accounted for approximately 0% and
7% of the Company’s 2022 and 2021 revenues, respectively. CPE related contribution to net income has not had a material impact on
the Company’s performance.
Markets Overview
For the last 40 years, the
television industry has been dominated by traditional cable operators, who subsequently expanded into high-speed internet, telephony,
and wireless services and are currently estimated to have 46.5 million video subscribers in the U.S. market. The penetration of wireless
and direct-broadcast satellite (“DBS”) (such as DIRECTV® and DISH Network®) in the video
market, while reduced, still has a combined subscriber count of approximately 17.5 million. Telephone companies (i.e. Verizon) also compete
with cable operators for services on a national level, delivering video, high-speed internet and telephony services direct to the home
or to the curb with an estimate of over 6.5 million video subscribers.
With IPTV technology comes
additional market pressures and opportunities. First, there is the matter of alternative TV services riding OTT on existing high-speed
data infrastructures, where the delivered video is not part of the service provider’s own video content or service. Examples include
Web-delivered video such as Netflix, Hulu, Prime Video and Apple TV. Cable, satellite and telco service providers have been innovating
to provide additional service offerings to compete with lower cost OTT television providers (subscribers exceeding 300 million globally).
In addition, content providers such as Disney, NBC, HBO, SHOWTIME and CBS have deployed their own streaming services, without requiring
a cable TV subscription. Streaming service subscribers are now larger in count than cable, DBS and telco TV subscribers. With the advent
of “TV Everywhere”, where video is displayed not only on the traditional television, but also on personal computers and mobile
devices, service providers are trying to tackle not only technological challenges associated with these offerings, but also content management
and customer authentication. The idea that the consumer is at the center, and not the hardware or the network, is revolutionizing how
video (and media) content is delivered.
The long-term implications
of these developments are increased competition for the provision of services and a trend toward delivery of these services using IP technologies
over the open internet, and IPTV technologies over private networks. This continuing major market transition has resulted in changing
consumer expectations, placing the residential video delivery networks, business-to-business, lodging and institutional markets under
pressure to install new infrastructure and upgrade existing networks. Each sub-market mentioned above has different network upgrade cycles,
but to remain competitive the Company has been and must continue to increase its product offerings for digital television, IP and IPTV
technologies, encoding, decoding and transcoding, and support of a wider range of digital media delivery applications.
Cable Television
Most cable operators, large
and small, have built networks with various combinations of fiber optic and coax cable to deliver television, internet and telephone services
on one drop cable. Cable television deployment of fiber optic trunk has been completed in all deployed cable systems. The HFC network
architecture is employed to provide digital video, OTT, HDTV, IPTV, high speed internet, and digital telephone service. With the adoption
of new technology developed by a newly combined SCTE and CableLabs® standards organization, the cable industry is using “edge”
devices, node splitting and digital video switching to increase both services and subscriber capacity from each existing node as well
as lowering the cost to create new nodes in their deployment architectures, to accommodate IPTV offerings in both residential and B-B
market deployments. Further, the Company has recently announced a series of products and product derivatives tailored to aid a subset
of cable service providers, running specific security technologies on their networks, to expand their IP television deployments to service
their business customers as well as residential customers. All of these networks are potential users of our product offerings.
Assisted Living/MDU/Hospitality
Historically, in response
to various privately-owned video distribution network property owners seeking additional revenue streams and their tenants and guests
demanding increased in-room technology enabled services, telco and cable operators serving the hospitality market sought to provide more
programs (especially in HD), and enhanced interactivity. Initially installed in higher-end properties and hospitality properties, HD conversion
is continuing today to complete all properties including older Assisted Living and Nursing Homes, Hospitals, MDUs and also now smaller
hotels and motels, all of which are being upgraded and outfitted with enhanced technology to provide a full suite of HD programs and video
streaming services.
More recently, the competition
among telco and cable providers to the Assisted Living, MDU and Hospitality industries has shifted from a previous emphasis on VOD, to
providing an ever-increasing number of HD programs and the capability of offering streaming OTT television services. The Company believes
that the demand for HD based headends that support free-to-guest service and OTT television, will continue to grow in the near term. The
rate of growth is limited by the costs associated with replacing all televisions in a property with flat screen Pro:Idiom compatible televisions,
the infrastructure required to support OTT television, authentication and system management issues. For several years, the Company has
been providing a unique system solution to the largest hotel brands worldwide through the Company’s network of hotelier approved
system integrator and operator customers. The system consists of DOCSIS 3.0 and 3.1 compliant cable modem termination systems (“CMTS”)
and cable modems (“CM”) and is unique in that it is the only system approved by that hotelier that is able to provide
a combination of the following services: linear TV, OTT, DOCSIS-based ethernet, and Wi-Fi from a common mini-CATV-type HFC-based infrastructure.
SMB-Small and Medium Sized
Businesses
The Company defines its target
SMB markets to also include educational campus environments, correctional facilities, sports stadiums and airport terminals. All of these
seemingly unrelated facilities contain private video and data distribution networks that are dependent on either locally generated or
externally sourced video and/or data content. As the advanced technologies of distance learning, HDTV and IPTV permeate the market, institutional
facilities are embracing these technologies to achieve site specific goals. The following are examples of the types of applications:
| ● | Public, Educational and Government
(“PEG”) Town Hall Meetings, Religious Broadcasts, Local Sports |
| ● | In-Office - Doctor, Dentist
and Corporate Offices |
| ● | Campus & Stadium - Redistribution
of content across large, complex properties and facilities |
| ● | Patient Education and Entertainment |
| ● | Employee Facing- Training and
Company Messaging |
| ● | Hotel Lobby Events and Advertising |
The Company traditionally
benefited from a very strong share of this market with its Analog Video Headend and Distribution Products. We anticipate that we will
continue to be a leader in this market with our digital video solutions and our evolving IP and IPTV platforms.
International
The Company has authorized
distributors and sales agents in various locations outside the United States, but the Company primarily manufactures products for sale
in the USA and North America. Historically, international sales have not materially contributed to the Company’s revenue base. In
2021 the Company began providing small quantities of video encoder and transcoder equipment to service providers in Mexico. This line
of business is not expected to have material impact on the Company’s overall performance.
Additional Considerations
The evolution of technology
with respect to video, internet and telephone services continues at a rapid pace. Cable TV’s QAM video continues to compete with
DIRECTV® and EchoStar’s DBS service and cable modems compete with digital subscriber lines and fiber-to-the-home offered by
regional telephone companies. Telephone companies are building national fiber optic networks and are delivering video, internet and telephone
services directly to the home over fiber optic cable, and digital telephone is being offered by cable companies and others in competition
with traditional phone companies. The convergence of data and video communications continues, wherein computer and television systems
merge. This merging of technologies is extending services and content delivery to mobile smart phone devices and tablet computers with
over-the-air data delivery competing with cable-delivered services.
Larger MSOs have transitioned
or are in the process of transitioning to all-digital platforms (and in most instances based upon the MPEG-4/H.264 codec technology).
Satellite DBS television, digitally compressed programming and IP delivery require headend products, set-top decoding receivers, or digital
terminal adapters, to convert the transmitted signals back to analog or HDMI format so that they may be viewed on television sets. The
split of analog and digital offerings provided to customers varies as a function of the size of the operator and their deployment strategy.
For example, the majority of private cable and other smaller service providers continue to deliver an analog television signal on standard
channels to subscribers’ television sets using headend products at some distribution point in their networks or employ set-top boxes
or digital terminal adapters at each television set.
Key Products
Blonder Tongue’s products
can be separated according to function and technology. Five key categories account for the majority of the Company’s revenue-Encoders
and Transcoders, NXG, Coax Distribution, CPE and Digital Modulation:
| ● | Encoder/Transcoder Products
are used by a system operator for encoding and transcoding of digital video. Transcoders convert video files from one codec compression
format to another to allow the video to be viewed across different platforms and devices. We offer a broad line of 4K/UHD, HD and SD,
MPEG-2, MPEG-4/H.264, and HEVC/H.265 capable encoders and transcoders optimized for Telecom customers and environments. One example is
a line of enhanced encoders optimized for the extreme demands of broadcasting live sports, another is a cost-effective MPEG-2/H.264 encoder
for IP support of PEG channels tailored to receive and groom regional content and deliver it across the open internet to centralized
locations for ingest into OTT / CDN and other distribution systems. Yet another is a new highly cost-effective bulk IP to IP digital
video Transcoder that supports 24 channels of format and rate conversion in a single Rack Unit (1RU) size and corrects digital television
compatibility issues. |
The QPSK and 8PSK
to QAM transcoders (QTM Series) are used for economically deploying or adding a satellite-based tier of digital or HDTV digital programming.
The units transcode a satellite signal’s modulation from QPSK to QAM or from 8PSK modulation format to QAM format. Since QPSK and
8PSK are optimum for satellite transmission and QAM is optimum for fiber/coax distribution, precious system bandwidth is saved while the
signal retains its digital information.
Encoders accept
various input sources (analog and/or digital) and output digitally encoded 4K, UHD, HD or SD video in various output formats such as IP,
QAM modulated, or Asynchronous Serial Interface (“ASI”). ASI is a streaming data format which carries the MPEG-2 Transport
Stream. The IP output format allows operators to stream video over private data networks with greater reliability and content security.
The QAM outputs can be used for digital video distribution over typical coax and HFC networks to serve a variety of Telecom environments
(i.e. CO’s, headends, stadiums, broadcast and cable television studios, hospitals, university campuses, etc.). As a complement to
this encoder line, Blonder Tongue also provides digital QAM multiplexers which take multiple inputs (ASI or 8VSB/QAM) and delivers a single
multiplexed QAM output, thereby optimizing the HD channel lineup by preserving bandwidth. The Company’s QAM output MPEG encoders
support low latency and superior motion optimization for content such as fast-paced sporting events, which is ideal for live events within
a stadium or arena. The Company’s new Clearview transcoder product line supports high density highly cost-effective bulk re-encoding
functions to support a wide range of service operator use-cases such as creating digital television universal reception of signals, professional
Dolby® audio encoding and format conversions, or conversion of broadcast to IPTV expected video formats. The Company’s Encoder/Transcoder
Products accounted for approximately 50% and 50% of the Company’s revenues in 2022 and 2021, respectively, with an overall increase
of $1,106,000 year-over-year.
| ● | NXG IP Digital Video Processing
and Headend Products were introduced by the Company in 2018 and were a culmination of the Company’s product development efforts
of an advanced next-generation-enterprise series of products and solutions. |
The NXG is a powerful,
two-way, forward-looking digital video signal processing platform and series of modular add-on products that are ideal for delivering
the next generation of entertainment services for residential and enterprise applications, including IPTV format conversions and simulcast
use cases and is actively deployed in education, MDU, healthcare, business parks, campuses, institutions, hospitality, cruise ships, professional
sports stadiums and government facilities. The goals of the NXG product line is to addresses the service provider challenges of (a) migrating
from traditional CATV transmission, such as fiber and coaxial cable, to fully IP-based transmission and delivery, and (b) migrating from
traditional content protection, such as Commscope/Arris DigiCipher®, Cisco PowerKEY®, Verimatrix® CAS, and LG Pro:Idiom®,
to IP-based digital rights management (“IP-DRM”) - content protection systems of the future, such as Adobe DRM®, Verimatrix-M®,
Google Widevine®, PlayReady®, and Zenith/LG IP Pro:Idiom® technologies. In order to accomplish those goals, NXG was designed
to be an anything-in to anything-out solution. Based on key customer guidance and the Company’s research and development effort,
NXG is a 100% fully modular, passive-back-plane-based product that enables the service providers to (a) easily and seamlessly accomplish
the migration described in the forgoing, and (b) cost effectively and seamlessly address what may become any future, unforeseen, prospective
transmission, and content protection migrations. Unlike many competing products, in NXG, all “active” electronic components
reside in their respective modules. There are no active components in either the rack-chassis or backplane which brings the benefits of
ultra-high reliability, flexibility and future adaptability to as yet unknown use-cases. In addition, the Company’s plan is for
the functionality of all of the standalone key signal processing products described in both the foregoing and following paragraphs are
to be, over time, migrated and subsumed as modular optional features supported by the NXG product line. In 2021 the Company released and
began producing the NXG Edge version of the NXG product line to target lower-functionality and lower-cost advanced encryption edge QAM
types of use cases. The Company’s NXG Products accounted for approximately 15% and 12% of the Company’s revenues in 2022 and
2021, respectively, with an overall increase of $784,000 year-over-year.
| ● | Coax Distribution Products
are used to transport signals from the headend to their ultimate destination in a home, apartment unit, hotel room, office or other
end-point location along a coax distribution network. Among the products offered by the Company in this category are broadband amplifiers,
directional taps, splitters and wall outlets. In cable television systems, the coax distribution products are either mounted on exterior
utility poles or encased in pedestals, vaults or other security devices. In SMB systems the distribution system is typically enclosed
within the walls of the building (if a single structure) or added to an existing structure using various techniques to hide the coax
cable and devices. The non-passive devices within this category are designed to ensure that the signal distributed from the headend is
of sufficient strength when it arrives at its final destination to provide high quality audio/video images. The Company’s Coax
Distribution Products accounted for approximately 8% and 8% of the Company’s revenues in 2022 and 2021, respectively, with an overall
increase of $224,774 year-over-year. |
| ● | CPE Products are comprised
mainly of Android-based IPTV set top boxes sold to the Tier 2 and Tier 3 cable and telecommunications service providers for use in mainstream
residential services to consumer households. The Company began selling CPE Products in 2019. The Company’s CPE Product initiative
achieved sales to over 75 different telco, municipal fiber and cable operators and accounted for approximately 0% and 7% of the Company’s
revenues in 2022 and 2021, respectively, with an overall decrease of $1,092,000 year-over-year. |
| ● | Digital Modulation Products
are used by a system operator for acquisition, processing, compression, and management of digital video. The headend is the center
of a digital television system. It is the central location where multiple programs are received and, through additional processing, allocated
to specific channels for digital distribution. Blonder Tongue continues to expand its Digital Modulation Product offerings to meet the
evolving needs of its customers, which is expected to continue for years to come. IP interfaces have been added to a wide range of products
to help in the migration to IPTV. One such example is the AQT8-B, a multichannel 8VSB/QAM-IP transmodulator that receives up to 64 programs
of off-air broadcast signals over 8 different frequencies and transmodulates them for output on both coax and IP distribution networks.
Other lines of digital products provided by Blonder Tongue and Drake include our Edge QAM devices, Satellite Quadrature Phase Shift Key
(“QPSK”) and Eight Phase Shift Key (“8PSK”) to QAM transmodulators. |
The Company’s
Aircastertm ATSC, QAM, and IP trans-modulator series of products (“AQT8”) allow the user to create
a customized line up from off-air and/or cable feeds for coax IP distribution. The customizable IP output contains multiple programs with
a combination of single and multiple transport streams, from multiple RF input sources. The unique MPEG-2 transport systems information
tables associated with each of the selected input programs are transferred to the IP outputs. This means the virtual channel numbers and
program names on the IP outputs can be the same as their RF program input sources. The Company’s AQT8 products enable the user to
modify the metadata, including PSIP parameters, such as the Program ID, Program #, Short Name, Major Ch., and Minor Ch. Information, to
provide a customized IP program delivery solution. The Aircaster AQT8 features Emergency Alert System (“EAS”) program
switching through either an ASI or IP format EAS input and terminal block contacts for triggering.
Stand-alone Edge
QAM devices accept Ethernet input and capture MPEG over IP transport streams, decrypt service provider conditional access or content
protection, and insert proprietary conditional access, such as Pro:Idiom, into the stream. These streams are then combined and modulated
on to QAM RF carriers, in most cases providing multiple streams on to one 6 MHz digital channel. Inputs to Edge QAM devices can come from
satellite receivers, set-top boxes, network devices or video servers. The use of these devices adds flexibility for the service provider,
in part, because all of this routing happens in one device. Scaling is accomplished via software and modules embedded inside the hardware.
Since it is a true network device, the Edge QAM can be managed over a traditional Ethernet network or over the Internet.
Digital Modulation
Product use continues in all of the Company’s primary markets, bringing
more advanced technology to consumers and operators. The Company’s Digital Video Headend Products accounted for approximately 6%
of the Company’s revenues in 2022 and 2021, with an overall increase of $102,000 year-over-year.
| ● | DOCSIS Data Products
give service providers, integrators, and premise owners a means to deliver data, video, and voice-over-coaxial in locations such as hotels
and hospitality, MDU’s, and college campuses using IP technology. Among the products offered by the Company are CMTS and cable
modems (“CM”). The Company’s DOCSIS Data Products accounted for approximately 13% and 5% of the Company’s revenues
in 2022 and 2021, respectively, with an overall increase of $1,599,000 year-over-year. |
| ● | SLA and Services includes
Service Level Agreements (“SLA”), installation and support services, contracts on equipment advanced replacement,
hands-on customer and end-user training, system design engineering, on-site field support, remote support, troubleshooting and complete
system verification testing. These SLA and Services also include after hour and 24x7x365 support contracts. The Company began programs
in 2020 and expanded in 2021 to promote and emphasize the value of services and agreements for services offering a range of service levels
tailored to various customer’s business needs. The Company’s SLA and Services products accounted for approximately 2% and
3% of the Company’s revenues in 2022 and 2021, respectively, with an overall decrease of $90,000 year-over-year. |
| ● | Other Products. There
are a variety of other products that the Company sells to a lesser degree, either to fill a customer need or where sales have reduced
due to changes in Company direction, technology, or market influences. Sales of products in these categories contributed less significantly
to the Company’s revenues in 2022 and 2021 and are expected to remain this way for 2023. These products include: |
Analog Modulation Products are
used by a system operator for signal acquisition, processing and manipulation to create an analog channel lineup for further transmission.
Among the products offered by the Company in this category are prefabricated headends to accommodate legacy analog TV systems, modulators,
demodulators, and processors.
Fiber 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 distribution network. Among the products offered by the Company in this category are fiber optic transmitters, receivers
(nodes), and couplers.
Test & Measurement instruments,
for measuring both digital and analog CATV and Broadcast TV signals, as well as capture, analyze and/ or generate MPEG ASI transport streams.
Contract Manufacturing Services, providing
manufacturing, research and development and product support services for other companies’ products.
Miscellaneous products and services,
filling customers’ needs for receiving off-air broadcast television and satellite transmissions prior to headend processing,
satellite distribution, repair, and parts.
The Company will modify its
products to meet specific customer requirements. Typically, these modifications are minor and do not materially alter either the product
functionality or the ability to sell such altered products to other customers.
Research and Product Development
The markets served by Blonder Tongue are characterized by technological
change, new product introductions, and evolving industry standards. To compete effectively in this environment, the Company must engage
in ongoing research and development in order to (i) create new products, (ii) expand features of existing products to accommodate customer
demand for greater capability, (iii) license new technologies, (iv) acquire products incorporating technology that could not otherwise
be developed quickly enough using internal resources and (v) acquire complementary products incorporating technology from third parties
allowing internal resources to focus on higher-value strategic areas of research and development. Research and development projects are
often initially undertaken at the request of or in an effort to address the particular needs of the Company’s customers and customer
prospects, with the expectation or promise of substantial future orders. Projects may also result from new technologies that become available,
or new market applications of existing technology. In the new product development process, the vast experience of the Company’s
engineering group is leveraged to ensure the highest level of suitability and widest acceptance in the marketplace. Products tend to be
developed in a functional building block approach that allows for different combinations of blocks to generate new relevant products.
Additional research and development efforts are also continuously underway for the purpose of enhancing product quality and lowering production
costs. This building block philosophy of research and development was expanded on in the fourth quarter of 2018 with several new hardware
designs each yielding a wide range of product derivative models based on a single common design, yielding the Company improved engineering
cost efficiencies. For the acquisition of new technologies, the Company may rely upon technology licenses from third parties or customized
derivative product development. The Company will also license technology if it can obtain technology more quickly, or more cost-effectively
from third parties than it could otherwise develop on its own, or if the desired technology is proprietary to a third party. There were
10 employees involved in the technical product definition, technology systems architecture and research and development departments of
the Company at December 31, 2022, distributed among the Company’s operating locations.
Marketing and Sales
Blonder Tongue markets and
sells its products for use in a wide range of IPTV and other Telecom and SMB markets, including with municipal fiber optic operators,
traditional cable television, telco, MDU, lodging/hospitality, and institutional settings (schools, hospitals and prisons). The Company
also sells into a multitude of niche SMB markets such as sports arenas and the cruise ship industry. Sales are made directly to customers
by the Company’s internal sales force, as well as through Blonder Tongue Premier Distributors. The Company instituted its Premier
Distributor Program in 2007, through which a limited group of larger distributors who stock a significant amount of the Company’s
products in their inventory are given access to a special purchase incentive program allowing them to achieve volume price concessions
measured on a year-to-year basis. Sales to the Company’s Premier Distributors accounted for approximately 25% and 27% of the Company’s
revenues for 2022 and 2021, respectively. These Premier Distributors serve multiple markets. Direct sales to telco operators, municipal
fiber operators, cable operators and system integrators accounted for approximately 31% and 39% of the Company’s revenues for 2022
and 2021, respectively.
The Company’s sales
and marketing function is performed by its internal sales and marketing associates working in partnership and conjunction its Premier
Distributors, as well as its smaller company integrator and distributor network. Should it be deemed necessary, the Company may retain
independent sales representatives in particular geographic areas or targeted to specific customer prospects or target market opportunities.
Sales and marketing made up 19% of the Company’s overall workforce at December 31, 2022, divided into central and regional coverage
in Old Bridge, New Jersey, in Ohio and Florida, as well as Pennsylvania, the Chicago and Atlanta areas.
The Company’s standard
customer payment terms are net 30 days. From time to time, when circumstances warrant, such as a commitment to a large blanket purchase
order, the Company will selectively extend payment terms beyond its standard payment terms to 60 days.
The Company has several marketing
programs to support the sale and distribution of its products. Blonder Tongue participates in industry trade shows and conferences and
also maintains a robust website and direct on-line sales portal. The Company publishes technical articles in trade and technical journals,
distributes sales and product literature and has an active public relations plan to ensure complete coverage of Blonder Tongue’s
products and technology by editors of trade journals. The Company provides system design engineering services for its customers, maintains
extensive ongoing communications with many original equipment manufacturer customers and provides one-on-one demonstrations and technical
seminars to potential new customers. Blonder Tongue supplies sales and applications support, product literature and training to its sales
representatives and distributors. Before the COVID pandemic began in March of 2020, the management and sales staff of the Company traveled
extensively, identifying customer needs and meeting existing and potential customers. The Company anticipates resuming these activities
at pre-pandemic levels as U.S. CDC guidelines allow.
Customers
Blonder Tongue has a diverse
customer base, which in 2022 consisted of approximately 70 active accounts. Approximately 38% and 47% of the Company’s revenues
in 2022 and 2021, respectively, were derived from sales of products to the Company’s three largest customers. North American Cable,
Stellar Private Cable and World Cinema accounted for approximately 14%, 13% and 11%, respectively, of the Company’s revenues in
2022, and Stellar Private Cable, Advanced Media Technologies and North American Cable Equipment accounted for approximately 20%, 14% and
13%, respectively, of the Company’s revenues in 2021. None of these customers are obligated to purchase a material amount of products
or to provide the Company with a material level of binding forecasts of product purchases for any future period. There can be no assurance
that sales to these entities, individually or as a group, will reach or exceed historical levels in any future period; however, the Company
currently anticipates that the three customers mentioned above will continue to account for a significant portion of the Company’s
revenues in future periods. See disclosure below in “Risk Factors - Any substantial decrease in sales to our largest customers may
adversely affect our results of operations or financial condition” for further details.
Since 2010, the Company has
held multi-year contracts with key distributors in its Premier Distributor Program. Many of the Company’s smaller business customers,
with whom the Company had formerly dealt on a direct basis, now purchase the Company’s products from our Premier Distributors.
In the Company’s direct
sales to system integrators, the complement of our significant customers tends to vary over time as the most efficient and better financed
integrators grow more rapidly than others. Any substantial decrease or delay in sales to one or more of the Company’s significant
customers, the financial failure of any of these entities, or the Company’s inability to develop and maintain solid relationships
with the integrators that may replace the present significant customers, would have a material adverse effect on the Company’s results
of operations and financial condition.
The Company’s revenues
are derived primarily from customers in the continental United States; however, the Company also derives some revenues from customers
in other geographical markets, primarily Canada and to a more limited extent, in developing countries. Sales to customers outside of the
United States represented approximately 1% and 4% of the Company’s revenues in 2022 and 2021, respectively. All of the Company’s
transactions with customers located outside of the United States have historically been denominated in U.S. dollars. As such, the Company
has had no foreign currency transactions from which it derives revenues. Transactions denominated in foreign currencies have certain inherent
risks associated with them due to currency fluctuations. See “Risk Factors” below for more detail on the risks associated
with foreign currency transactions.
Manufacturing and Suppliers
Blonder Tongue’s primary
manufacturing operations are presently located at the Old Bridge, New Jersey Facility, which also serves as the Company’s headquarters.
The Company has developed, implemented and maintains a Quality Management System, that has been certified as conforming to all requirements
of the ISO 9001:2015 international standard. The Company recently completed an audit and renewed its ISO 9001:2015 certification
in December 2021. The Company’s manufacturing operations are vertically integrated and consist principally of the programming, assembly,
and testing of electronic assemblies built from fabricated parts, printed circuit boards and electronic devices and the fabrication from
raw sheet metal, of chassis and cabinets for such assemblies. Management continues to implement improvements to the manufacturing process
to increase production volume and reduce product cost, including logistics modifications on the factory floor to accommodate increasingly
fine pitch surface mount electronic components. The Company is capable of manufacturing assemblies of 16-layer printed circuit boards
with thousands of components, including placement of 0.030x0.030mil ball grid arrays and 0201 packaged sized components, utilizing its
advanced state-of-the-art automatic placement equipment as well as automated optical inspection and testing systems. Investments by the
Company in these advanced manufacturing technologies is consistent with and part of the Company’s strategy to provide its customers
with high performance-to-cost ratio products. The Company also maintains engineering and technical support staff in Ohio, Ft. Wayne, Indiana,
Florida and in the Atlanta, GA area.
Since 2007, the Company has
been manufacturing certain high volume, labor intensive products, including a portion of the Company’s analog products overseas
in the PRC, and since 2019 in Korea and Taiwan. A key contract manufacturer in the PRC produces a portion of these products (all of which
are proprietary Blonder Tongue designs) as may be requested by the Company from time to time (in the Company’s discretion) through
the submission of purchase orders, the terms of which are governed by a manufacturing agreement. Although the Company does not currently
anticipate the transfer of any additional products to overseas companies for manufacture, the Company may do so if business and market
conditions make it advantageous to do so. In connection with the Company’s initiatives in Korea, Taiwan and the PRC, the Company
may have limited foreign currency transactions and may be subject to limited various currency exchange control programs related to its
overseas operations.
Outside contractors supply
standard components, printed circuit boards and electronic subassemblies to the Company’s specifications. The Company purchases
electronic parts that it classifies into three groups: (i) products which do not have a unique source, (ii) products that have a limited
number of suppliers and (iii) products which have a sole source. Products which do not have a unique source are generally available with
limited supply disruptions. Products that are available from a limited number of suppliers may be subject to temporary shortages because
of general economic conditions and the demand and supply for such component parts. Products which have a sole source are subject to longer
term shortages and in some cases not available at all in the short term, with certain deliveries not expected until 2023. If the Company
were to experience a temporary shortage of any given electronic part, the Company believes that alternative parts could be obtained, or
system design changes implemented. There can be no assurances that obtaining alternative parts or system design changes can be done successfully
or on a cost-effective basis. An inability to timely obtain sufficient quantities of certain of these components could have a material
adverse effect on the Company’s operating results. The Company does not have an agreement with any sole source supplier requiring
the supplier to sell a specified volume of components to the Company. See “Risk Factors” below for more detail on the risk
associated with sole supplier products.
Blonder Tongue maintains a
quality assurance program which monitors and controls manufacturing processes, and extensively tests samples throughout the process. Samples
of component parts purchased are tested, as well as its finished products, on an ongoing basis. The Company also tests component and sub-assemblies
throughout the manufacturing process using commercially available and in-house built testing systems that incorporate proprietary procedures.
The highest level of quality assurance is maintained throughout all aspects of the design and manufacturing process. The extensive in-house
calibration program assures test equipment integrity, correlation and calibration. This program ensures that all test and measurement
equipment that is used in the manufacturing process is calibrated to the same in-house reference standard on a consistent basis. When
all test and measurement devices are calibrated in this manner, discrepancies are eliminated between the engineering, manufacturing and
quality control departments, thus increasing operational efficiency and ensuring a high level of product quality. Blonder Tongue performs
final product tests prior to shipment to customers. In 2008, the Company was certified to perform Underwriters Laboratories (UL) witness
testing of products to UL International Standard 60950.
Competition
All aspects of the Company’s
business are highly competitive. The Company competes with international, national, regional and local manufacturers and distributors,
including companies larger than Blonder Tongue that have substantially greater resources. A small subset of manufacturers who are suppliers
to the Company sell directly as well as through distributors into the franchise and private cable marketplaces. Because of the convergence
of the cable, telecommunications and computer industries and rapid technological developments, new competitors may seek to enter the principal
markets served by the Company. Many of these potential competitors have significantly greater financial, technical, manufacturing, marketing,
sales and other resources than Blonder Tongue. The Company expects that direct and indirect competition may increase in the future. Additional
competition could result in price reductions, loss of market share and delays in the timing of customer orders. The principal methods
of competition are product differentiation, product reputation, performance, quality, price, terms, service, technical support and administrative
support. The Company is a major competitor in many of the markets that it serves and differentiates itself from other companies by consistently
offering innovative products, providing excellent technical service support and delivering extremely high reliability products and high
performance-to-cost ratio (high value) products.
Intellectual Property
The Company currently holds
several United States and foreign patents, including certain technologies within the NXG platform and certain technologies within its
DOCSIS data products. No other patents are considered material to the Company’s present operations, since they do not relate to
high volume applications. Because of the rapidly evolving nature of the telecommunications and cable television industry, the Company
believes that its market position as a technology supplier derives primarily from its ability to timely develop a consistent stream of
new products that are designed to meet its customers’ needs and that have a high performance-to-cost ratio.
The Company owns a United
States trademark registration for the word mark “Blonder Tongue®” and “Aircaster®” and also on a “BT®”
logo. Drake owns a United States trademark registration for the word mark “DRAKE®”.
Since 2008, the Company has
obtained and renewed licenses for a variety of technologies in concert with its digital encoder line of products. The licenses are from
a number of companies including from Zenith, a subsidiary of LG Electronics (expires December 2023). These standard licenses are all non-exclusive
and many require payment of royalties based upon the unit sales of the licensed products. With regard to the licenses expiring in 2023,
the Company expects to renew these standard licenses on similar terms to those presently in force. For additional information regarding
these licenses, see “Introduction” starting on page 1.
The Company relies on a combination
of patents, contractual rights and trade secret laws to protect its proprietary technologies and know-how. There can be no assurance that
the Company will be able to protect its technologies and know-how or that third parties will not be able to develop similar technologies
and know-how independently. Therefore, existing and potential competitors may be able to develop products that are competitive with the
Company’s products and such competition could adversely affect the prices for the Company’s products or the Company’s
market share. The Company also believes that factors such as the technological and creative skills of its personnel, new product developments,
frequent product enhancements, name recognition and reliable product maintenance are essential to establishing and maintaining its competitive
position. The industries in which the Company competes are subject to constant development of new technologies and evolution of existing
technologies, many of which are the subject of existing third-party patents and new patents are issued frequently.
Regulation
Private cable, while in some
cases subject to certain Federal Communications Commission (“FCC”) licensing requirements, is not presently burdened
with extensive government regulations. The Telecommunications Act of 1996 deregulated many aspects of franchise cable system operation
and opened the door to competition among cable operators and telephone companies in each of their respective industries.
Environmental Regulations
The Company is subject to
a variety of Federal, State and local governmental regulations related to the storage, use, discharge and disposal of toxic, volatile
or otherwise hazardous chemicals if and when used in its manufacturing processes. The Company did not incur in 2022 and does not anticipate
incurring in 2023, material capital expenditures for compliance with Federal, State and local environmental laws and regulations. There
can be no assurance, however, that changes in environmental regulations will not result in the need for additional capital expenditures
or otherwise impose additional financial burdens on the Company. Further, such regulations could restrict the Company’s ability
to expand its operations. Any failure by the Company to obtain required permits for, control the use of, or adequately restrict the discharge
of, hazardous substances under present or future regulations could subject the Company to substantial liability or could cause its manufacturing
operations to be suspended.
The Company has authorization
to discharge wastewater under the New Jersey Pollution Discharge Elimination System/Discharge to Surface Waters General Industrial Stormwater
Permit, Permit No. NJ0088315. This permit will expire June 30, 2023 and is automatically renewed upon payment of the annual fee. The Company
intends to renew this permit.
Employees
As of February 28, 2023, the
Company employed approximately 67 people, including 36 in manufacturing, 8 in research and development, 3 in quality assurance, 13 in
sales and marketing, and 7 in a general and administrative capacity. Substantially all of these employees are full-time employees. 19
of the Company’s employees are members of the International Brotherhood of Electrical Workers Union, Local 2066, which has a labor
agreement with the Company that is scheduled to expire in February 2027.
ITEM 1A RISK FACTORS
The Company’s business
operates in a rapidly changing technology and economic environment that involves numerous risks, some of which are beyond the Company’s
control. The following “Risk Factors” highlight some of these risks. Additional risks not currently known to the Company or
that the Company now deems immaterial may also affect the Company and the value of its common stock. The risks described below, together
with all of the other information included in this report, should be carefully considered in evaluating our business and prospects. The
occurrence of any of the following risks could harm the Company’s business, financial condition or results of operations.
Commercial Risks
Any substantial decrease in sales to our largest
customers may adversely affect our results of operations or financial condition.
Approximately 56% and 58%
of our revenues in 2022 and 2021, respectively, were derived from sales of products to the Company’s five largest customers. None
of these customers are obligated to purchase a material amount of products or to provide the Company with a material level of binding
forecasts of product purchases for any future period. Accordingly, there can be no assurance that sales to these entities, individually
or as a group, will reach or exceed historical levels in any future period. In addition, while the COVID-19 outbreak has affected and
is continuing to affect the operations of our suppliers, and of our customers and our sales to them, uncertainty as to the effects on
the economy generally and our semiconductor suppliers and customers in particular makes it impossible for us to predict the short term
and long term effects the COVID-19 outbreak and related developments will have on our customers and their ongoing businesses and how those
effects may impact our sales to them.
With respect to our direct
sales to system integrators, the complement of our significant customers tends to vary over time as the most efficient and better-financed
integrators tend to grow more rapidly than others. Our success with those customers will depend in part on:
| ● | the viability of those customers; |
| ● | our ability to identify those
customers with the greatest growth and growth prospects; and |
| ● | our ability to maintain our
position in the overall marketplace by shifting our emphasis to such customers. |
In addition, three of our customers accounted for approximately 57% and
62% of our outstanding trade accounts receivable at December 31, 2022 and 2021, respectively. Any substantial decrease or delay in sales
to one or more of our significant customers, the financial failure of any of these entities, their inability to pay their trade accounts
owing to us in a timely manner or at all, or our inability to develop solid relationships with integrators that may replace the present
significant customers, could have a material adverse effect on our results of operations and financial condition. If the negative effects
of the COVID-19 outbreak and related developments lead to financial difficulties or even the failure of one or more of our significant
customers, or a combination of our smaller customers, our ability to collect payment in full and on a timely basis, or at all, may be
adversely affected, and our working capital resources may be significantly diminished.
An inability to develop, or acquire the rights
to technology, products or applications in response to changes in industry standards or customer needs may reduce our sales and profitability.
Both the private cable and
franchised cable industries are characterized by the continuing advancement of technology, evolving industry standards and changing customer
needs. To be successful, we must anticipate the evolution of industry standards and changes in customer needs, through the timely development
and introduction of new products, enhancement of existing products and licensing of new technology from third parties. This is particularly
true at this time as the Company must develop and market new digital products to offset the continuing decline in demand for, and therefore
sales of, analog products. Although we depend primarily on our own research and development efforts to develop new products and enhancements
to our existing products, we have and may continue to seek licenses for new technology from third parties when we believe that we can
obtain such technology more quickly and/or cost-effectively from such third parties than we could otherwise develop on our own, or when
the desired technology has already been patented by a third party. There can, however, be no assurance that new technology or such licenses
will be available on terms acceptable to us. There can be no assurance that:
| ● | we will be able to anticipate
the evolution of industry standards in the telecommunications, cable television or the communications industry generally; |
| ● | we will be able to anticipate
changes in the market and customer needs; |
| ● | technologies and applications
under development by us will be successfully developed; or |
| ● | successfully developed technologies
and applications will achieve market acceptance. |
If we are unable for technological
or other reasons to develop and introduce products and applications or to obtain licenses for new technologies from third parties in a
timely manner in response to changing market conditions or customer requirements, our results of operations and financial condition could
be materially adversely affected.
Anticipated increases in direct and indirect
competition with us may have an adverse effect on our results of operations and financial condition.
All aspects of our business
are highly competitive. We compete with international, national, regional and local manufacturers and distributors, including companies
larger than us, which have substantially greater resources. Various manufacturers who are suppliers to us sell directly as well as through
distributors into the cable television marketplace. Because of the convergence of the cable, telecommunications and computer industries
and rapid technological development, new competitors may seek to enter the principal markets served by us. Many of these potential competitors
have significantly greater financial, technical, manufacturing, marketing, sales and other resources than we have. We expect that direct
and indirect competition will increase in the future. Additional competition could have a material adverse effect on our results of operations
and financial condition through:
| ● | delays in the timing of customer
orders; and |
| ● | an inability to increase our
penetration into the cable television market. |
Our sales and profitability may suffer due
to any substantial decrease or delay in capital spending by the telecommunications and cable infrastructure operators that we serve, as
well as in the MDU, assisted living, lodging and institutional cable or telecommunications markets.
The vast majority of our revenues
in 2022 and 2021 came from sales of our products for use by fiber, telco and cable infrastructure operators. Demand for our products depends
to a large extent upon capital spending by telcos, cable operators and other entities on private cable systems and specifically by private
cable operators for constructing, rebuilding, maintaining or upgrading their systems. Capital spending by private cable operators and,
therefore, our sales and profitability, are dependent on a variety of factors, including:
| ● | access by private cable operators
to financing for capital expenditures; |
| ● | demand for their cable services; |
| ● | availability of alternative
video delivery technologies; and |
| ● | general economic conditions. |
In addition, our sales and
profitability may in the future be more dependent on capital spending by traditional franchise cable system operators as well as by new
entrants to this market planning to over-build existing cable system infrastructures, or constructing, rebuilding, maintaining and upgrading
their systems. There can be no assurance that system operators in private cable or franchise cable will continue capital spending for
constructing, rebuilding, maintaining, or upgrading their systems. Any substantial decrease or delay in capital spending by private cable
or franchise cable operators would have a material adverse effect on our results of operations and financial condition.
Competitors may develop products that are similar
to, and compete with, our products due to our limited proprietary protection.
We possess limited patent
or registered intellectual property rights with respect to the majority of our technology. We rely on a combination of patents, contractual
rights and trade secret laws to protect our proprietary technology and know-how. There can be no assurance that we will be able to protect
our technology and know-how or that third parties will not be able to develop similar technology independently. Therefore, existing and
potential competitors may be able to develop similar products which compete with our products. Such competition could adversely affect
the prices for our products or our market share and could have a material adverse effect upon our results of operations and financial
condition.
Patent infringement claims against us or our
customers, whether or not successful, may cause us to incur significant costs.
While we do not believe that
our products (including products and technologies licensed from others) infringe valid intellectual property rights of any third parties,
there can be no assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement claims) will
not be asserted against us or our customers. Damages for infringement of valid intellectual property rights of third parties could be
substantial, and if determined to be willful, can be trebled. Such an outcome could have a material adverse effect on the Company’s
financial condition and results of operation. Regardless of the validity or the successful assertion of any such claims, we could incur
significant costs and diversion of resources with respect to the defense thereof which could have a material adverse effect on our financial
condition and results of operations. If we are unsuccessful in defending any claims or actions that are asserted against us or our customers,
we could seek to obtain a license under a third party’s intellectual property rights. There can be no assurance, however, that under
such circumstances, a license would be available under reasonable terms or at all. The failure to obtain a license to a third party’s
intellectual property rights on commercially reasonable terms could have a material adverse effect on our results of operations and financial
condition.
Financial Risks
Our audited consolidated financial statements
for the year ended December 31, 2022 included herein contain a “going concern” explanatory paragraph, expressing substantial
doubt about our ability to continue as a going concern.
During the year ended December
31, 2022, we experienced a decline in net sales, a loss from operations and a significant amount of cash used in operating activities,
which was funded in large part from the proceeds we received from sales of our common stock and the proceeds from the Subordinated Loan
Facility. Our ability to continue as a going concern is dependent upon our becoming profitable in the future and having access to sufficient
capital to execute our business plan and to meet our payment obligations on our debt financing arrangements and other financial obligations
when they become due. We recently have been successful in obtaining additional capital through our Subordinated Loan Facility and the
issuance of shares of our common stock. Although we believe that improvements in our sales and efforts to reduce expenses will increase
the possibility that we will become profitable, and we have recently obtained the additional Subordinated Loan Facility and equity financing,
we cannot provide any assurances that we will be successful in improving our performance, that the additional financing obtained to date
will be sufficient, or that we will be successful in securing additional financing on reasonable terms, or at all. These factors, and
possibly others, raise substantial doubt regarding our ability to continue as a going concern. Our audited consolidated financial statements
do not include any adjustments that might result if we are unable to continue as a going concern. As a result, you should not rely on
our consolidated balance sheet as an indication of the amount of proceeds that would be available to satisfy claims of creditors and potentially
be available for distribution to stockholders in the event of liquidation.
The terms of our credit facility with MidCap
Business Credit may restrict our current and future operating and financial flexibility and could adversely affect our financial and operational
results.
On October 25, 2019, the Company, entered into a new credit facility
with MidCap Business Credit (“MidCap”), which was amended on April 7, 2020, January 8, 2021, June 14, 2021, July 30,
2021, August 26, 2021, December 16, 2021, February 11, 2022, March 3, 2022, April 5, 2022, May 5, 2022, June 14, 2022, July 1, 2022, October
25, 2022, and October 28, 2022. The Loan and Security Agreement between the Company and MidCap, as amended (the “MidCap Agreement”)
includes a number of non-financial covenants that, among other things, may restrict our ability to:
| ● | engage in mergers, consolidations,
asset dispositions or similar fundamental changes; |
| ● | redeem or repurchase shares
of Company stock; |
| ● | create, incur, assume or guarantee
additional indebtedness; |
| ● | create, incur or permit liens
on our assets; |
| ● | make loans or investments; |
| ● | pay cash dividends or make similar
distributions; and |
| ● | change the nature of our business. |
These restrictions in the
MidCap Agreement may limit our ability to engage in certain transactions that could be beneficial to us and our stockholders. In the event
of a default, MidCap could elect to declare all borrowings, accrued and unpaid interest and other fees outstanding, due and payable and
require us to use available cash to repay these borrowings, which could have a material adverse effect on our operations and financial
condition. If MidCap terminates the MidCap Agreement or further limits our ability to borrow under the MidCap Agreement as a result of
any failures to comply with any covenants, we would seek new debt financing arrangements. We cannot assure you that new debt financing
will be available to us on acceptable terms or at all. In addition, new debt financing, if available, could impose payment obligations,
covenants and operating restrictions that are more onerous than under the MidCap Agreement, which could adversely affect our operations
and financial condition.
Rising interest rates can be a risk factor.
Borrowings under our MidCap
line of credit are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations
on the variable rate indebtedness will increase even though the amount borrowed remains the same, and our net income and cash flows, including
cash available for servicing our indebtedness, would correspondingly decrease.
We may face risks relating to currency fluctuations
and currency exchange.
Historically the Company has
had limited exposure to currency fluctuations since transactions with customers located outside the United States have generally been
denominated in U.S. Dollars. In addition, the Company incurs certain expenses denominated in RMB in connection with its contract manufacturing
activities in the PRC. The Company’s functional currency is the U.S. Dollar. Accordingly, any expense denominated in Canadian Dollars
or RMB needs to be translated into U.S. Dollars at the applicable currency exchange rate for inclusion in our consolidated financial statements.
Exchange rates between the RMB and U.S. Dollar in recent years have fluctuated significantly and may do so in the future. We do not engage
in currency hedging activities to limit the risks of currency fluctuations. Currency fluctuations could adversely impact our results of
operations, cash flows and financial position.
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 not 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 New
Jersey 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.
Operational Risks
Our financial condition and results of operations
have been and may continue to be adversely affected by health events such as the recent Coronavirus or COVID-19 outbreak.
Our business has been materially
and adversely affected by the outbreak of the Coronavirus or COVID-19 and may in the future be materially and adversely affected by other
epidemics and pandemic outbreaks. COVID-19, which has been declared by the World Health Organization to be a “pandemic,” has
spread to many countries, including the United States, and has impacted and continues to impact domestic and worldwide economic activity.
A public health epidemic or pandemic, including COVID-19, poses the risk that the Company or its employees, customers, suppliers and other
business partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that
may be requested or mandated by governmental authorities. Since being declared a “pandemic”, COVID-19 has interfered with
our ability to meet with certain customers, has impacted and may continue to impact many of our customers and has disrupted and may continue
to disrupt global supply chains. There are developments regarding the COVID-19 outbreak on a daily basis that may impact our customers,
employees and business partners. As a result, it is not possible at this time to estimate the duration or the scope of the impact COVID-19
could have on the Company’s business. However, the continued spread of COVID-19 and actions taken by our customers, suppliers and
business partners, actions we take to protect the health and welfare of our employees, and measures taken by governmental authorities
in response to COVID-19 could disrupt our manufacturing activities, the shipment of our products, the supply chain and purchasing decisions
of our customers. The Company experienced a significant reduction in sales as a result of the decreased business activities of our customers
related to the COVID-19 outbreak, and although we have experienced some increases in customer orders of our products, it remains unclear
when or whether our customers will resume their activities at a level where our sales to them will return to historical levels. In addition,
disruption of the global supply chain has had and continues to have an adverse impact on our ability to meet the demands or our customers,
and it is unclear when these supply chains issues will be resolved. These uncertainties may have a material adverse impact on our business.
An inability to reduce expenses or increase
revenues may cause continued net losses.
We have had losses each year
since 2010, with net loss of $2,920,000 for the year ended December 31, 2022. While management believes its ongoing efforts to increase
revenues should, and its ongoing efforts and demonstrated progress in reducing expenses may create future profitability, there can be
no assurance that these actions will be successful. Failure to increase revenues or ability to maintain or reduce expense levels could
have a material adverse effect on our results of operations and financial condition. In addition, in order to address issues relating
to our reduced sales and recent impacts in the predictability of global semiconductor supply chain as a result of the COVID-19 pandemic,
we have implemented operating expense cost reductions and may need to implement additional cost reductions in the near term. If necessary
additional reductions cannot be implemented in a timely manner or prove to be insufficient in offsetting or significantly mitigating reduced
revenues, our ability to continue to operate as a going concern may be materially adversely affected.
Inventory reserves for excess or obsolete inventories
may adversely affect our results of operations and financial condition.
We continually analyze our
excess or obsolete inventories. Based on historical and projected sales volumes and anticipated selling prices, we establish reserves.
If we do not meet our sales expectations, these reserves are increased. Products that are determined to be obsolete are written down to
net realizable value. Although we believe reserves are adequate and inventories are reflected at net realizable value, there can be no
assurance that we will not have to record additional inventory reserves in the future. Significant increases to inventory reserves could
have a material adverse effect on our results of operations and financial condition.
Any significant casualty to our facility in
Old Bridge, New Jersey may cause a lengthy interruption to our business operations.
We primarily operate out of
one manufacturing facility in Old Bridge, New Jersey (the “Old Bridge Facility”). While we maintain a limited amount
of business interruption insurance, a casualty that results in a lengthy interruption of our ability to manufacture at, or otherwise use,
the Old Bridge Facility could have a material adverse effect on our results of operations and financial condition.
Our dependence on certain third-party suppliers
could create an inability for us to obtain component products not otherwise available or to do so only at increased prices.
We purchase several products
from sole suppliers for which alternative sources are not available. Our results of operations and financial condition could be materially
adversely affected by:
| ● | an inability to obtain sufficient
quantities of these components; |
| ● | an inability to obtain sufficient
quantities of these components within specific timeframes; |
| ● | our receipt of a significant
number of defective components; |
| ● | an increase in component prices;
or |
| ● | our inability to obtain lower
component prices in response to competitive pressures on the pricing of our products. |
In addition, the COVID-19
pandemic has affected the supply chain for many types of products and materials, particularly those being manufactured in China, Taiwan,
Singapore, Malaysia, Japan, and other countries where the outbreak has resulted in significant disruptions to ongoing business activities.
Beginning in the second quarter of 2021 and continuing into the first quarter of 2023, the Company has experienced material disruption
in our supply chain as it relates to the procurement of certain sole source and other multiple source components utilized in a material
portion of a number of the Company’s product lines. We believe this disruption may continue beyond 2023. If these or any similar
types of supply disruptions continue, it is possible that we will be unable to complete sales of any affected products to our customers
on requested schedules.
Our manufacturing activities in the PRC, South
Korea and Taiwan may subject us to the risks of unfavorable political, regulatory, legal and other developments in those countries.
Some of our products are manufactured
and assembled in the PRC, South Korea and Taiwan under contractual and purchasing arrangements with businesses in those countries. Our
future operations and earnings may be adversely affected by the risks related to, or any other problems arising from, having our products
manufactured and assembled in these countries:
| ● | political, economic and labor
instability; |
| ● | changes in foreign or United
States government laws and regulations, including exchange control regulations; |
| ● | infringement of our intellectual
property rights; and |
| ● | difficulties in managing foreign
manufacturing operations. |
In addition, because the Company
incurs certain expenses denominated in Renminbi (“RMB”) rather than U.S. Dollars in connection with contract manufacturing
activities in the PRC, we may experience increased costs related to fluctuation in foreign currency exchange rates. Although these countries
have modern industrial economies, their potential economic, political, legal and labor developments could entail uncertainties and risks.
In the event of any changes that adversely affect our ability to manufacture in the PRC, South Korea and/or Taiwan, our business could
suffer.
Shifting our operations between regions may
entail considerable expense.
Over time we may shift additional
portions of our manufacturing operations to outside third-party suppliers both within the US, North America, Europe, and/or Asian territories
in order to maximize manufacturing and operational efficiency. This could result in reducing our domestic operations in the future, which
in turn could entail significant one-time earnings charges to account for severance, equipment write-offs or write downs and moving expenses.
Any increase in governmental regulation of
the markets that we serve, including the cable television system, MDU, lodging and institutional markets, may have an adverse effect on
our results of operations and financial condition.
The telecommunications, cable
television, fiber optic, MDU, lodging and institutional markets within the cable industry, which represents the vast majority of our business,
while in some cases subject to certain FCC licensing requirements, is not presently burdened with extensive government regulations. It
is possible, however, that regulations could be adopted in the future which impose burdensome restrictions on these markets resulting
in, among other things, barriers to the entry of new competitors or limitations on capital expenditures. Any such regulations, if adopted,
could have a material adverse effect on our results of operations and financial condition.
Private cable system operation
is not presently burdened with significant government regulation, other than, in some cases, certain FCC licensing and signal leakage
requirements. The Telecommunications Act of 1996 deregulated many aspects of franchise cable system operation and opened the door to competition
among cable operators and telephone companies in each of their respective industries. It is possible, however, that regulations could
be adopted which would re-impose burdensome restrictions on franchise cable operators resulting in, among other things, the grant of exclusive
rights or franchises within certain geographical areas. Any increased regulation of franchise cable could have a material adverse effect
on our results of operations and financial condition.
Any increase in governmental environmental
regulations or our inability or failure to comply with existing environmental regulations may cause an adverse effect on our results of
operations or financial condition.
We are subject to a variety
of federal, state and local governmental regulations related to the storage, use, discharge and disposal of toxic, volatile or otherwise
hazardous chemicals used in our manufacturing processes. We do not anticipate material capital expenditures during 2023 for compliance
with federal, state and local environmental laws and regulations. There can be no assurance, however, that changes in environmental regulations
will not result in the need for additional capital expenditures or otherwise impose additional financial burdens on us. Further, such
regulations could restrict our ability to expand our operations. Any failure by us to obtain required permits for, control the use of,
or adequately restrict the discharge of, hazardous substances under present or future regulations could subject us to substantial liability
or could cause our manufacturing operations to be suspended. Such liability or suspension of manufacturing operations could have a material
adverse effect on our results of operations and financial condition.
Our business and operations could suffer in
the event of security breaches.
Attempts by others to gain
unauthorized access to information technology systems are becoming more sophisticated. Our systems are designed to detect security incidents
and to prevent their recurrence, but, in some cases, we might be unaware of an incident or its magnitude and effects. While we have not
identified any material incidents of unauthorized access to date, the theft, unauthorized use or publication of our intellectual property,
confidential business or personal information could harm our competitive position, reduce the value of our investment in research and
development and other strategic initiatives, damage our reputation or otherwise adversely affect our business. In addition, to the extent
that any future security breach results in inappropriate disclosure of our employees’, licensees’, or customers’ confidential
and /or personal information, we may incur liability or additional costs to remedy any damages caused by such breach. We could also be
impacted by existing and proposed laws and regulations, as well as government policies and practices related to cybersecurity, privacy
and data protection.
Macroeconomic Risks
Adverse changes in economic conditions could
adversely affect our business, results of operations and financial condition.
Our business and earnings
are affected by general business, economic and financial markets conditions in the United States and elsewhere. We continue to operate
in a challenging and uncertain economic environment, which has been exacerbated by the COVID-19 outbreak and related events. Any return
to recessionary conditions or prolonged stagnant or deteriorating economic conditions, whether related to the COVID-19 outbreak or otherwise,
could significantly affect the markets in which we do business, the demand for our products, the ability of our customers to make payments
to us in a timely fashion or at all, our ability and the ability of our customers to obtain adequate financing to maintain operations
and other potential events that could have a material adverse effect on our business, financial condition and results of operations. Moreover,
our stock price could remain depressed or decrease if investors have concerns that our business, financial condition or results of operations
will be negatively impacted by a worldwide economic downturn. Other uncertainties, including the potential effect of United States’
tariffs on imported steel and aluminum, which are important materials for the production of many of our products, could also have a material
adverse effect on our business, financial condition and results of operations. Additionally, beginning in early 2022 our business began
to experience inflationary price increases in certain of our components. Although to date we have been successful in passing on these
increases to our customers, there can be no assurances that we will continue to be able to do so. The inability to pass on these or future
component cost increases could have material adverse effect on our business, financial condition and results of operations.
Human Capital Risks
Losing the services of our executive officers
or our other highly qualified and experienced employees, or our inability to continue to attract and retain highly qualified and experienced
employees, could adversely affect our business.
Our future success depends
in large part on the continued service of our key executives and technical and management personnel. Our future success also depends on
our ability to continue to attract and retain highly skilled engineering, manufacturing, marketing and managerial personnel. The competition
for such personnel is intense, and the loss of key employees, in particular the principal members of our management and technical staff,
could have a material adverse effect on our results of operations and financial condition.
Delays or difficulties in negotiating a labor
agreement or other difficulties in our relationship with our union employees may cause an adverse effect on our manufacturing and business
operations.
All of our direct labor employees
located at the Old Bridge, New Jersey facility are members of the International Brotherhood of Electrical Workers Union, Local 2066 (the
“Union”), under a collective bargaining agreement, which expires in February 2027. In connection with any renewal or
renegotiation of the labor agreement upon its termination, there can be no assurance that work stoppages will not occur or that we will
be able to agree upon terms for future agreements with the Union. Any work stoppages could have a material adverse effect on our business
operations, results of operations and financial condition.
Other Risks
Additional issuances of shares of our common
stock in the future could adversely affect the value or voting power of our outstanding common stock.
Over the past two years we
have issued a substantial number of shares of common stock and other securities convertible into, or exercisable for, a substantial number
of additional shares of common stock. Although we cannot predict whether the holders of our securities that are convertible into, or exercisable
for, shares of our common stock will convert and/or exercise those securities, or in what amounts, the actual or anticipated issuances
or sales of substantial amounts of our common stock in the future could cause the value of our common stock to decline and make it more
difficult for us to sell equity or equity-related securities in the future at a time and on terms that we deem appropriate. The issuance
of any shares of our common stock in the future also would, and equity-related securities could, dilute the percentage ownership interest
and voting power held by stockholders prior to such issuance. We have also entered arrangements with certain of our officers and our directors
pursuant to which they have agreed to receive shares of our common stock in the future in lieu of current cash compensation. Although
those arrangements help the Company preserve cash for operations, the issuances of the shares to those officers and directors also will
have the effect of diluting the percentage ownership interest and voting power held by stockholders prior to such issuances.
Our organizational documents and Delaware state
law contain provisions that could discourage or prevent a potential takeover or change in control of our company or prevent our stockholders
from receiving a premium for their shares of our common stock.
Our board of directors has
the authority to issue up to 5,000,000 shares of undesignated Preferred Stock, to determine the powers, preferences and rights and the
qualifications, limitations or restrictions granted to or imposed upon any unissued series of undesignated Preferred Stock and to fix
the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders.
The Preferred Stock could be issued with voting, liquidation, dividend and other rights superior to the rights of the common stock. Furthermore,
such Preferred Stock may have other rights, including economic rights, senior to the common stock, and as a result, the issuance of such
stock could have a material adverse effect on the market value of the common stock. In addition, our Restated Certificate of Incorporation:
| ● | eliminates the right of our
stockholders to act without a meeting; |
| ● | does not provide cumulative
voting for the election of directors; |
| ● | does not provide our stockholders
with the right to call special meetings; |
| ● | provides for a classified board
of directors; and |
| ● | imposes various procedural requirements
which could make it difficult for our stockholders to effect certain corporate actions. |
These provisions and the Board’s
ability to issue Preferred Stock may have the effect of deterring hostile takeovers or offers from third parties to acquire the Company,
preventing our stockholders from receiving a premium for their shares of our common stock, or delaying or preventing changes in control
or management of the Company. We are also afforded the protection of Section 203 of the Delaware General Corporation Law, which could:
| ● | delay or prevent a change in
control of the Company; |
| ● | impede a merger, consolidation
or other business combination involving us; or |
| ● | discourage a potential acquirer
from making a tender offer or otherwise attempting to obtain control of the Company. |
Any of these provisions which
may have the effect of delaying or preventing a change in control of the Company, could have a material adverse effect on the market value
of our common stock.
It is unlikely that we will pay dividends on
our common stock.
We currently intend to retain
all earnings to finance the growth of our business and therefore do not intend to pay dividends on our common stock in the foreseeable
future. Moreover, the MidCap Agreement prohibits the payment of cash dividends by us on our common stock.
Our common stock is thinly traded and subject
to volatility, which may adversely affect the market price for our common stock.
Although our common stock
is currently traded on the OTCQB, it may at times be relatively illiquid, or “thinly traded,” which can increase share price
volatility and make it difficult for investors to buy or sell shares in the public market without materially affecting the quoted share
price. Investors may be unable to buy or sell a certain quantity of our shares in the public market within one or more trading days. If
limited trading in our stock occurs, it may be difficult for holders to sell their shares in the public market at any given time at prevailing
prices.
The prevailing market price
of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including the
following:
| ● | announcements of technological
innovations or new products by us, our competitors or third parties; |
| ● | quarterly variations in our
actual or anticipated results of operations; |
| ● | failure of revenues or earnings
in any quarter to meet the investment community’s expectations; |
| ● | market conditions for cable
industry stocks in general; |
| ● | broader market trends unrelated
to our performance; and |
| ● | sales of significant amounts
of our common stock by our officers and directors or the perception that such shares may occur. |
The uncertainties we face
relating to our liquidity and ability to generate sufficient cash flows from operations and to continue to operate our business as a going
concern also contributes to the volatility of our stock price, and any investment in our common stock could suffer a significant decline
or total loss in value. Furthermore, we may not be able to maintain compliance with the continued listing standards of the OTCQB or any
other national securities exchange or over-the-counter market on which our common stock is then traded, which may also adversely affect
the trading price of our common stock.
Our common stock has been thinly traded and
we cannot predict the extent to which a trading market will develop.
Our common stock is quoted
on the OTBQB-tier of OTC Markets. Our common stock is thinly-traded compared to larger more widely known companies. Thinly traded common
stock can be more volatile than common stock trading in an active public market. We cannot predict the extent to which an active public
market for our common stock will develop or be sustained.
Our common stock has a limited trading market,
which could affect your ability to sell shares of our common stock and the price you may receive for our common stock.
Our common stock is currently
traded in the over-the-counter market and “bid” and “asked” quotations regularly appear on OTC Markets under the
symbol “BDRL”. There is only limited trading activity in our securities. We have a relatively small public float compared
to the number of our shares outstanding. Accordingly, we cannot predict the extent to which investors’ interest in our common stock
will provide an active and liquid trading market. Due to our limited public float, we may be vulnerable to investors taking a “short
position” in our common stock, which would likely have a depressing effect on the price of our common stock and add increased volatility
to our trading market. The volatility of the market for our common stock could have a materially adverse effect on our business, results
of operations and financial condition. There cannot be any guarantee that an active trading market for our securities will develop or,
if such a market does develop, will be sustained. Accordingly, investors must be able to bear the financial risk of losing their entire
investment in our common stock.
Our common stock is quoted only on OTC Markets,
which may have an unfavorable impact on our stock price and liquidity. In addition, our shareholders may experience substantial difficulty
in locating a brokerage firm to deposit shares of our Company for sale into the public marketplace.
Our common stock is quoted
on OTC Markets under the ticker symbol “BDRL”. OTC Markets is a significantly more limited market than the New York Stock
Exchange or the NASDAQ Stock Market. The quotation of our shares on OTC Markets may result in a less liquid market available for existing
and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock, and could have a
long-term adverse impact on our ability to raise capital in the future. Additionally, since we are a “penny stock” quoted
over-the-counter and not on a national exchange, our shareholders may experience substantial difficulty in finding a brokerage firm willing
to deposit our common stock into a brokerage account for sale into the public marketplace and/or the fees may be substantially higher
for transactions involving our common stock compared to companies that are traded on a national exchange like the New York Stock Exchange
or the NASDAQ Stock Market.
Because we are subject to the “penny
stock” rules, the level of trading activity in our stock may be reduced.
Our common stock is traded
on the OTC Markets. Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain penny
stock rules adopted by the Securities and Exchange Commission. Penny stocks, like shares of our common stock, generally are equity securities
with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on NASDAQ. The penny
stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact
and the broker-dealer's presumed control over the market, and monthly account statements showing the market value of each penny stock
held in the customer's account. In addition, broker-dealers who sell these securities to persons other than established customers and
“accredited investors” must make a special written determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. Consequently, these requirements may have the effect of reducing the
level of trading activity, if any, in the secondary market for a security subject to the penny stock rules, and investors in our common
stock may find it difficult to sell their shares.
Our share ownership is highly concentrated.
Our directors and officers
beneficially own, or have the right to vote, in the aggregate, approximately 43% of our common stock and will continue to have significant
influence over the outcome of all matters submitted to the stockholders for approval, including the election of our directors. In addition,
certain of our directors and officers will have the right to acquire additional shares of our common stock upon exercise of conversion
rights with respect to certain indebtedness that acquire additional shares of common stock upon exercise of conversion rights with respect
to certain indebtedness that they hold. See Note 6-Subordinated Convertible Debt with Related Parties in the Notes to our Consolidated
Financial Statements.
Our common stock has experienced and may continue
to experience price and volume fluctuations, which could cause you to lose a significant portion of your investment.
Stock markets are subject
to significant price and volume fluctuations that may be unrelated to the operating performance of particular companies, and accordingly
the market price of our common stock may frequently and meaningfully change. The market prices and trading volume of our common stock
have recently experienced, and may continue to experience, significant fluctuations, which could cause purchasers of our common stock
to incur substantial losses. For example, during 2022 and through April 10, 2023, the closing market price of our common stock has fluctuated
from a low of $0.12 per share on July 8, 2022 to a high of $0.70 on March 30, 2022 with an intraday high of $0.93 per share on March 1,
2022 and an intraday low of $0.10 per share on June 27, 2022. The last reported sale price of our common stock on the OTCQB on April 10,
2023 was $0.21 per share. The daily trading volume in shares of our common stock has also experienced significant fluctuation. During
2022 and through April 10, 2023, daily trading volume ranged from approximately 0 shares to 17,529,500 shares. We have not had any
recent change in our financial condition or results of operations that we believe are consistent with recent fluctuations in our stock
price or trading volume. Although we believe that the recent fluctuations in our stock price and trading volume reflect market and trading
dynamics that appear to be unrelated to our underlying business, or to macro or industry fundamentals, we cannot be certain of the reasons
for these fluctuations, nor can we predict how long these dynamics will last. These factors heighten the risk of an investment in our
common stock, and the timing of your purchase of our common stock relative to fluctuations in its trading price may result in you losing
all or a significant portion of your investment.
Significant fluctuations in
the market price of our common stock may be the result of strong and substantially increased retail investor interest, including on social
media and online forums. The market price and trading volume fluctuations and trading patterns we have experienced create several risks
for investors, including the following:
| ● | increases or decreases in the
market price of our common stock may be unrelated to our operating performance or prospects, or macro or industry fundamentals, and inconsistent
with the risks and uncertainties that we face; |
| ● | factors in the volume of trading
our common stock and the price at which the stock trades may include retail investors’ sentiment (including opinions expressed
on financial trading and other social media sites and online forums), the direct access of retail investors to broadly available trading
platforms, the amount and status of short interest in our securities, access to margin debt, trading in options and other derivatives
on our common stock and any related hedging and other trading factors; and |
| ● | based on the higher trading
prices our shares have experienced recently, our market capitalization has recently reflected, and currently reflects, valuations that
diverge significantly from those seen prior to these recent fluctuations, and to the extent these valuations reflect trading dynamics
unrelated to our financial performance, prospects or the risks and uncertainties we face, purchasers of our common stock could incur
substantial losses if there are declines in market prices driven by a return to earlier valuation levels. |
We may continue to experience
rapid and significant changes in our stock price and/or trading volume in the foreseeable future that may not coincide in timing with
our disclosure of news or developments affecting us and our business. Accordingly, the market price of our shares of common stock may
fluctuate dramatically, and may decline rapidly, regardless of any developments in our business. If the market price of our common stock
declines and or trading volume is reduced, you may be unable to resell your shares at or above the price at which you acquired them.
There are also a variety of
other factors, some of which are beyond our control, that could negatively affect the market price of our common stock or result in fluctuations
in the price or trading volume of our common stock, including:
| ● | overall performance of the equity
markets and the economy as a whole; |
| ● | actual or anticipated changes
in our growth rate relative to that of our competitors; |
| ● | announcements of technological
innovations or new products by us, our competitors or third parties; |
| ● | changes in the anticipated size
or growth rate of our addressable markets; |
| ● | announcements of acquisitions,
strategic partnerships, joint ventures or capital-raising activities or commitments, by us or by our competitors; |
| ● | quarterly variations in our
actual or anticipated results of operations; |
| ● | failure of revenues or earnings
in any quarter to meet the investment community’s expectations; |
| ● | market conditions for telecommunications
or cable industry stocks in general; |
| ● | new laws or regulations or new
interpretations of existing laws or regulations applicable to us or our customers; |
| ● | sales of significant amounts
of our common stock by our officers and directors or the perception that such sales may occur; |
| ● | sales of significant amounts
of our common stock by us or the perception that such sales may occur; |
| ● | health epidemics, such as the
COVID-19 pandemic, influenza, and other highly communicable diseases; and |
| ● | other events or factors, including
those resulting from war, incidents of terrorism (including cyberterrorism), or responses to these events |
In the past, following periods
of volatility in the market price of a company’s stock, class action securities litigation has often been instituted against such
companies. Litigation may arise out of facts and circumstances, or disclosure relating thereto, that we do not currently regard as material.
Such volatility may entice stockholders to challenge our disclosure, whether or not they are correct. Any litigation, if instituted against
us, could result in substantial costs and diversion of management’s attention and resources, which would interfere with our ability
to execute our business plan and otherwise materially adversely affect our business, financial condition and operating results.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable to smaller
reporting companies.
ITEM 2. PROPERTIES
The Company’s principal
manufacturing, engineering, sales and administrative facilities consist of one building totaling approximately 130,000 square feet located
on approximately 20 acres of land in Old Bridge, New Jersey (the “Old Bridge Facility”) which was owned but currently
is leased by the Company. On February 1, 2019, the Company completed the sale of the Old Bridge Facility to Jake Brown Road, LLC (the
“Buyer”). In addition, in connection with the completion of the sale, the Company and the Buyer (as landlord) entered
into a lease (the “Lease”), pursuant to which the Company will continue to occupy, and continue to conduct its manufacturing,
engineering, sales and administrative functions in the Old Bridge Facility.
The sale of the Old Bridge
Facility was made pursuant to an Agreement of Sale dated as of August 3, 2018 (the “Initial Sale Agreement”), as amended
by an Extension Letter Agreement dated as of September 20, 2018, the Second Amendment to Agreement of Sale dated as of October 8, 2018
and the Third Amendment to Agreement of Sale dated as of January 30, 2019 (the Initial Sale Agreement together with the Extension Letter
Agreement, Second Amendment to Agreement of Sale and Third Amendment to Agreement of Sale, collectively, the “Sale Agreement”).
Pursuant to the Sale Agreement, at closing, the Buyer paid the Company $10,500,000. In addition, at closing, the Company advanced to the
Buyer the sum of $130,000, representing a preliminary estimate of the Company’s share (as a tenant of the Old Bridge Facility following
closing) of property repairs, as contemplated by the Sale Agreement (the “Repair Escrow”). The Company recognized a
gain of $7,175,000 in connection with the sale.
The Lease has an initial term
of five years and allows the Company to extend the term for an additional five years following the initial term. The Company is obligated
to pay base rent of approximately $922,000 in 2023, with the amount of the base rent adjusted for each subsequent year to equal 102.5%
of the preceding year’s base rent.
The Company leases an engineering
facility consisting of one building totaling approximately 1,141 square feet in Fort Wayne, Indiana. The lease for this facility expires
in May 2023. The Company may extend the lease, find alternative space or let the lease expire. The total lease obligation for the Fort
Wayne, Indiana facility will be approximately $5,000 during 2023.
Management believes that these
facilities are adequate to support the Company’s anticipated needs in 2023.
ITEM 3. 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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
See accompanying notes to the consolidated financial
statements.
See accompanying notes to the consolidated financial
statements.
See accompanying notes to the consolidated financial
statements.
Note 1 - Summary of Significant Accounting
Policies
(a) The 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 markets the Company serves,
including the telecommunications, fiber optic and cable service provider markets, MDU market, the lodging/hospitality market and the institutional
market, including campuses, 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.
(b) Cash and Cash
Equivalents
The Company considers all
highly liquid investments with a maturity of less than three months at purchase to be cash equivalents. The Company did not have any cash
equivalents at December 31, 2022 and 2021. Cash balances at financial institutions are insured by the Federal Deposit Insurance Corporation
(“FDIC”). At times, cash and cash equivalents may be uninsured or in deposit accounts that exceed the FDIC insurance
limit. Periodically, the Company evaluates the creditworthiness of the financial institutions and evaluates its credit exposure.
(c) Accounts
Receivable and Allowance for Doubtful accounts
Accounts receivable are customer
obligations due under normal trade terms. The Company sells its products primarily to distributors and private cable operators. The Company
performs continuing credit evaluations of its customers’ financial condition and although the Company generally does not require
collateral, letters of credit may be required from its customers in certain circumstances.
Senior management reviews
accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The Company includes any accounts
receivable balances that are determined to be uncollectible, along with a general reserve based on historical experience, in its overall
allowance for doubtful accounts.
(d) Inventories
Inventories are stated at
the lower of cost, determined by the first-in, first-out (“FIFO”) method, or net realizable value.
The Company periodically analyzes
anticipated product sales based on historical results, current backlog and marketing plans. Based on these analyses, the Company anticipates
that certain products will not be sold during the next twelve months. Inventories that are not anticipated to be sold in the next twelve
months, have been classified as non-current.
The Company continually analyzes
its slow-moving and excess inventories. Based on historical and projected sales volumes and anticipated selling prices, the Company establishes
reserves. Inventory that is in excess of current and projected use is reduced by an allowance to a level that approximates its estimate
of future demand. Products that are determined to be obsolete are written down to net realizable value.
(e) Property, Plant
and Equipment, Net
Property, plant and equipment
are stated at cost less accumulated depreciation. The Company provides for depreciation generally on the straight-line method based upon
estimated useful lives of 3 to 5 years for office equipment, 5 to 7 years for furniture and fixtures, 10 years for building improvements
and 6 to 10 years for machinery and equipment.
(f) Goodwill and
Other Intangible Assets
The Company accounts for goodwill
and intangible assets in accordance with Accounting Standards Codification (“ASC”) ASC 350 Intangibles - Goodwill and
Other Intangible Assets (“ASC 350”). ASC 350 requires that goodwill and other intangibles with indefinite lives be
tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased
below its carrying value.
Goodwill represents the excess
of the purchase price over the fair value of net assets acquired in business combinations. Accounting principles generally accepted in
the United States (“GAAP”) requires that goodwill be tested for impairment at the reporting unit level (operating segment
or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability
of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification
of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair
value. Significant judgment is required to estimate the fair value of reporting units including estimating future cash flows, determining
appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination
of fair value and/or goodwill impairment.
The Company’s business
includes one goodwill reporting unit. The Company annually reviews goodwill for possible impairment by comparing the fair value of the
reporting unit to the carrying value of the assets. If the fair value exceeds the carrying value of the net asset, no goodwill impairment
is deemed to exist. If the fair value does not exceed the carrying value, goodwill is tested for impairment and written down to its implied
fair value if it is determined to be impaired. The Company performed its annual goodwill impairment test on December 31, 2022. Based upon
its qualitative assessment, the Company determined that goodwill was not impaired.
The Company considers its
trade name to have an indefinite life and in accordance with ASC 350, will not be amortized and will be reviewed annually for impairment.
(g) Long-Lived Assets
The Company continually monitors
events and changes in circumstances that could indicate carrying amounts of the long-lived assets, including intangible assets may not
be recoverable. When such events or changes in circumstances occur, the Company assesses recoverability by determining whether the carrying
value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are
less than the carrying amount of these assets, an impairment loss is recognized based on the excess of the carrying amount over the fair
value of the assets. The Company did not recognize any intangible asset impairment charges in 2022 and 2021.
(h) 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 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, inventory and deferred tax assets. Actual results could differ from those estimates.
(i) Royalty
and License Expense
The Company records royalty
expense, as applicable, when the related products are sold. Royalty expense is recorded as a component of selling expenses. Royalty expense
was $20 and $18 for the years ended December 31, 2022 and 2021, respectively. The Company amortizes license fees over the life of the
relevant contract.
License agreements are carried
at cost less accumulated amortization as follows:
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| | |
| | |
| |
| License agreements | |
$ | 6,146 | | |
$ | 6,139 | |
| Accumulated amortization | |
| (6,143 | ) | |
| (6,132 | ) |
| | |
$ | 3 | | |
$ | 7 | |
Amortization of license fees
is computed utilizing the straight-line method over the estimated useful life of 1 to 2 years. Amortization expense for license fees was
$11 and $58 in the years ended December 31, 2022 and 2021, respectively. Amortization expense for license fees is projected to be approximately
$7 in the year ending December 31, 2023.
(j) Foreign
Exchange
The Company uses the United
States dollar as its functional and reporting currency since the majority of the Company’s revenues, expenses, assets and liabilities
are in the United States and the focus of the Company’s operations is in that country. Assets and liabilities in foreign currencies
are translated using the exchange rate at the balance sheet date. Revenues and expenses are translated at average rates of exchange during
the year. Gains and losses from foreign currency transactions and translation for the years ended December 31, 2022 and 2021 and cumulative
translation gains and losses as of December 31, 2022 and 2021 were not material to the financial statements taken as a whole.
(k) Research and
Development
Research and development expenditures
for the Company’s projects are expensed as incurred. Research and development expenses include payroll, employee benefits, stock-based
compensation expense, and other headcount-related expenses associated with product development.
(l) Revenue Recognition
The Company generates revenue
through the sale of products and services.
Revenue is recognized based
on the following steps: (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.
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. The Company provides a three-year warranty on most products. Warranty expense was de
minimis in the two years ended December 31, 2022.
(m) Stock-based
compensation
The Company computes stock-based
compensation in accordance with authoritative guidance. The Company uses the Black-Scholes-Merton option pricing model to determine the
fair value of its stock options. The Black-Scholes-Merton option-pricing model includes various assumptions, including the fair market
value of the common stock of the Company, expected life of stock options, the expected volatility and the expected risk-free interest
rate, among others. These assumptions reflect the Company’s best estimates, but they involve inherent uncertainties based on market
conditions generally outside the control of the Company. Forfeitures are recorded when they occur.
(n) Income Taxes
The Company accounts for income
taxes under the provisions of the Financial Accounting Standards Board (“FASB”) ASC Topic 740 “Income Taxes”
(“ASC Topic 740”). Deferred income taxes are provided for temporary differences in the recognition of certain income
and expenses for financial and tax reporting purposes. Valuation allowances are established when necessary to reduce deferred tax assets
to the amount expected to be realized.
The Company will classify
as income tax expense any interest and penalties recognized in accordance with ASC Topic 740. The Company files income tax returns primarily
in the United States and New Jersey, along with certain other jurisdictions.
(o) Net Earnings (loss) Per Share
Net earnings (loss) per share
is calculated in accordance with Accounting Standards Codification (“ASC”) ASC Topic 260 “Earnings Per Share,”
which provides for the calculation of “basic” and “diluted” net earnings (loss) per share. Basic net 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 net earnings (loss) per share reflect, in periods in which they have a dilutive effect, the effect
of potential issuances of common shares. The Company calculates diluted net earnings per share using the treasury stock method for warrants
and options and the if converted method for convertible debt.
The following table presents the computation of
basic and diluted net income per share for the year ended December 31, 2021:
| | |
Income
(Numerator) | | |
Shares
(Denominator) | | |
Per-Share
Amount | |
| | |
| | |
| | |
| |
| Basic EPS | |
$ | 84 | | |
| 12,151 | | |
| 0.01 | |
| Effect of dilutive securities | |
| | | |
| | | |
| | |
| Convertible debt | |
| 271 | | |
| 2,142 | | |
| | |
| Warrants | |
| - | | |
| 48 | | |
| | |
| Options | |
| - | | |
| 1,109 | | |
| | |
| Diluted EPS | |
$ | 355 | | |
| 15,450 | | |
| 0.02 | |
The diluted share base excludes the following
potential common shares due to their antidilutive effect for the years ended December 31, 2022 and 2021:
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Stock options | |
| 4,718 | | |
| 712 | |
| Warrants | |
| 890 | | |
| - | |
| Convertible debt | |
| 2,297 | | |
| - | |
| | |
| 7,905 | | |
| 712 | |
(p) Other
Comprehensive loss
Comprehensive loss is a measure
of income which includes both net loss and other comprehensive loss. Other comprehensive loss results from items deferred from recognition
into the statement of operations and principally consists of unrecognized pension losses net of taxes. Accumulated other comprehensive
loss is separately presented on the Company's consolidated balance sheet as part of stockholders’ equity.
(q) Leases
The Company accounts for leases
under FASB ASU No. 2016-02, Leases (“Topic 842”). Topic 842 provides a number of optional practical expedients
and accounting policy elections. The Company elected the package of practical expedients requiring no reassessment of whether any expired
or existing contracts are or contain leases, the lease classification of any expired or existing leases, or initial direct costs for any
existing leases. Upon adoption of Topic 842, the Company recognized right of use assets and corresponding lease liabilities pertaining
to its operating leases. Operating lease liabilities are based on the net present value of the remaining lease payments over the lease
term. In determining the present value of lease payment, the Company uses a collateralized rate based on the term of the lease based on
the information available at the date of adoption of Topic 842.
(r) Subsequent
Events
The Company evaluates events
that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company
did not identify any additional recognized or non-recognized subsequent events that would require adjustment to or disclosure in the consolidated
financial statements, except as disclosed in the financial statements.
(s) Adoption of Recent
Accounting Pronouncements
In December 2019, the FASB
issued ASU 2019-12, Simplifying the Accounting for Income Taxes (“Topic 740”). The list of changes is comprehensive;
however, the changes will not significantly impact the Company due to the full valuation allowance that is recorded against the Company’s
deferred tax assets. Early adoption of ASU 2019-12 is permitted, including adoption in any interim period for public business entities
for periods for which financial statements have not yet been issued. An entity that elects to early adopt the amendments in an interim
period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity
that elects early adoption must adopt all the amendments in the same period. The Company adopted ASU 2019-12 in 2022. The adoption of
this new standard did not have a material impact on the Company’s financial position, results of operations or financial statement
disclosure.
In June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement
of Credit Losses on Financial Instruments (“ASC 326”). The standard changes how entities will measure credit losses for
most financial assets, including accounts and notes receivables. Under the new standard, an entity is required to estimate current expected
credit losses on trade receivables at inception, based on historical information, current conditions, and reasonable and supportable forecasts.
The adoption of ASU 2016-13 is not expected to have a material impact on the Company’s financial position, results of operations,
and cash flows.
(t) Going Concern and COVID-19
Our business has been materially
and adversely affected by the outbreak of the Coronavirus or COVID-19. COVID-19, which has been declared by the World Health Organization
to be a “pandemic,” has spread to many countries, including the United States, and is impacting domestic and worldwide economic
activity. Since being declared a “pandemic”, COVID-19 interfered with our ability to meet with certain customers during 2020
and continued into the first half of 2021. In addition, the COVID-19 outbreak has affected the supply chain for many types of products
and materials, particularly those being manufactured in China and other countries where the outbreak has resulted in significant disruptions
to ongoing business activities. Beginning in the second quarter of 2021 and continuing into the first quarter of 2022, we experienced
a material disruption in our supply chain as it relates to the procurement of certain sole source and other multiple source components
utilized in a material portion of several product lines. There are frequent developments regarding the COVID-19 outbreak that may impact
our customers, employees and business partners. As a result, it is not possible at this time to estimate the duration or the scope of
the impact COVID-19 could have on the Company's business. The Company has experienced and is continuing to experience a significant reduction
in sales as a result of its inability to procure parts necessary to manufacture products due to the supply chain issues related to the
COVID-19 outbreak. It remains unclear when or whether our supply chain partners will resume their activities at a level where our sales
will return to historical levels.
The accompanying financial
statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets
and satisfaction of liabilities and commitments in the normal course of business. During the year ended December 31, 2022, the Company
reported reduced revenues, a loss from operations and net cash used in operating activities, in conjunction with liquidity constraints.
The above factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability of the recorded assets or the classification of the liabilities that might
be necessary should the Company be unable to continue as a going concern.
The Company’s primary
sources of liquidity have been its existing cash balances, cash generated from operations, amounts available under the MidCap Facility
(see Note 6 below), amounts available under the Subordinated Loan Facility (see Note 7 below) and cash generated from sales of common
stock (see Note 16 below). As of December 31, 2022, the Company had approximately $4,387 outstanding under the MidCap Facility (as defined
in Note 6 below) and $570 of additional availability for borrowing under the MidCap Facility.
If anticipated operating results
are not achieved and/or the Company is unable to obtain additional financing, it may be required to take additional measures to reduce
costs in order to conserve its cash in amounts sufficient to sustain operations and meet its obligations, which measures could have a
material adverse effect on the Company’s ability to achieve its intended business objectives and may be insufficient to enable the
Company to continue as a going concern for at least twelve months from the date these financial statements are made available to be issued.
Note 2 - Revenue
The Company recognized revenue
when it satisfies a performance obligation by transferring the product or service to the customer, typically at a point in time.
Disaggregation of Revenue
The Company is a technology-development
and manufacturing company that delivers a wide range of products and services to the cable entertainment and media industry. Encoder/transcoder
products are used by a system operator for encoding and transcoding of digital video. Encoders accept various input sources (analog and/or
digital) and output digitally encoded 4K, UHD, HD or SD video in various output formats. Transcoders convert video files from one codec
compression format to another to allow the video to be viewed across different platforms and devices. NXG is a two-way forward-looking
platform that is used to deliver next-generation entertainment services in both enterprise and residential locations. Coax 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 coax distribution network. CPE products are used by cable operators to provide video delivery to customers
using IP technology. Digital modulation products are used by a system operator for acquisition, processing, compression, and management
of digital video. Analog modulation products are used by a system operator for signal acquisition, processing and manipulation to create
an analog channel lineup for further transmission. DOCSIS data products give service providers, integrators, and premises owners a means
to deliver data, video, and voice-over-coaxial in locations such as hospitality, MDU's, and college campuses, using IP technology Contract-manufactured
products provide manufacturing, research and development and product support services for other companies’ products. Service agreements
and design includes hands-on training, system design engineering, on-site field support, remote support and troubleshooting and complete
system verification testing. Fiber optic 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 distribution network.
The following table presents
the Company’s disaggregated revenues by revenue source:
| | |
Years ended December 31, | |
| | |
2022 | | |
2021 | |
| Encoder and Transcoder products | |
$ | 9,140 | | |
$ | 7,863 | |
| NXG IP video signal processing products | |
| 2,709 | | |
| 1,924 | |
| DOCSIS data products | |
| 2,356 | | |
| 755 | |
| Coax distribution products | |
| 1,490 | | |
| 1,266 | |
| Digital modulation products | |
| 1,084 | | |
| 982 | |
| Analog modulation products | |
| 450 | | |
| 790 | |
| Service agreements and design | |
| 357 | | |
| 371 | |
| Fiber optic products | |
| 381 | | |
| 329 | |
| CPE products | |
| 29 | | |
| 1,120 | |
| Other | |
| 119 | | |
| 354 | |
| | |
$ | 18,115 | | |
$ | 15,754 | |
Note 3 - Inventories
Inventories, net of reserves, are summarized as follows:
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Raw materials | |
$ | 2,052 | | |
$ | 1,824 | |
| Work in process | |
| 1,743 | | |
| 2,730 | |
| Finished goods | |
| 171 | | |
| 300 | |
| | |
$ | 3,966 | | |
$ | 4,854 | |
The Company recorded a provision to reduce the carrying amount of inventories
to their net realizable value in the amount of $3,571 and $3,226 at December 31, 2022 and 2021, respectively.
Note 4 - Property, Plant and Equipment
Property, plant and equipment
are summarized as follows:
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Machinery and equipment | |
$ | 7,898 | | |
$ | 7,860 | |
| Furniture and fixtures | |
| 442 | | |
| 442 | |
| Office equipment | |
| 2,452 | | |
| 2,442 | |
| Building improvements | |
| 121 | | |
| 121 | |
| | |
| 10,913 | | |
| 10,865 | |
| Less: Accumulated depreciation and amortization | |
| (10,675 | ) | |
| (10,575 | ) |
| | |
$ | 238 | | |
$ | 290 | |
Depreciation expense amounted to approximately $100 and $110 during
the years ended December 31, 2022 and 2021, respectively.
Note 5 – Intangible Assets
The components of intangible
assets that are carried at cost less accumulated amortization at December 31, 2022 are as follows:
| Description | |
Cost | | |
Accumulated
Amortization | | |
Net Amount | |
| | |
| | |
| | |
| |
| Customer relationships | |
$ | 1,365 | | |
$ | 1,365 | | |
$ | - | |
| Proprietary technology | |
| 349 | | |
| 349 | | |
| - | |
| Amortized intangible assets | |
| 1,714 | | |
| 1,714 | | |
| - | |
| Non-Amortized Trade name | |
| 741 | | |
| - | | |
| 741 | |
| Total | |
$ | 2,455 | | |
$ | 1,714 | | |
$ | 741 | |
The components of intangible
assets that are carried at cost less accumulated amortization at December 31, 2021 are as follows:
| Description | |
Cost | | |
Accumulated
Amortization | | |
Net Amount | |
| | |
| | |
| | |
| |
| Customer relationships | |
$ | 1,365 | | |
$ | 1,354 | | |
$ | 11 | |
| Proprietary technology | |
| 349 | | |
| 346 | | |
| 3 | |
| Amortized intangible assets | |
| 1,714 | | |
| 1,700 | | |
| 14 | |
| Non-Amortized Trade name | |
| 741 | | |
| - | | |
| 741 | |
| Total | |
$ | 2,455 | | |
$ | 1,700 | | |
$ | 755 | |
Amortization is computed utilizing
the straight-line method over the estimated useful lives of 10 years for customer relationships and 10 years for proprietary technology.
Amortization expense for intangible assets was $25 and $171 for the years ended December 31, 2022 and 2021, respectively. Intangible asset
amortization is projected to be $0 in 2023.
Note 6 – Debt
Line of Credit
On October 25, 2019, the Company
entered into a Loan and Security Agreement (All Assets) (the “Loan Agreement”) with MidCap Business Credit LLC (“MidCap”).
The Loan Agreement provides the Company with a credit facility comprising a $5,000 revolving line of credit (the “MidCap Facility”).
The MidCap Facility matures following the third anniversary of the Loan Agreement. Interest on the amounts outstanding under the Loan
Agreement is variable, based upon the three-month LIBOR rate plus a margin of 4.75% (9.53% at December 31, 2022), subject to re-set each
month. All outstanding indebtedness under the Loan Agreement is secured by all of the assets of the Company and its subsidiaries.
The Loan Agreement contains
customary covenants, including restrictions on the incurrence of additional indebtedness, the payment of cash dividends or similar distributions,
the repayment of any subordinated indebtedness and the encumbrance, sale or other disposition of assets. In addition, the Company was
initially required to maintain minimum availability of $500, with the minimum availability to be reduced to $400 upon the deliverance
of an inventory appraisal satisfactory to MidCap, which occurred during the fourth quarter 2019.
On April 7, 2020, the Company
entered into a certain Consent and Amendment to Loan Agreement and Loan Documents with Midcap (the “MidCap First Amendment”),
which amended the MidCap Facility to, among other things, remove the existing $400 availability block, subject to the same being re-imposed
at the rate of approximately $7 per month commencing June 1, 2020. The operative provisions relating to the removal of the availability
block under the MidCap First Amendment became effective on April 8, 2020, following the consummation by the Company of the transactions
contemplated by the Subordinated Loan Facility (See Note 6).
On January 8, 2021, the parties
entered into a Second Amendment to Loan Agreement (the "Second Amendment"), which amendment, revised the Loan Agreement to,
among other things, modify the Loan Agreement's definition of “Minimum EBITDA Covenant Trigger Event.” The Second Amendment
amends the definition, retroactive to and as of December 1, 2020, and also includes certain additional non-substantive changes.
On June 14, 2021, the parties
entered into a Third Amendment to Loan Agreement (the "Third Amendment"), which amendment, revised the Loan Agreement to, among
other things, modify the Loan Agreement's definition of “Minimum EBITDA Covenant Trigger Event.” The Third Amendment amends
the definition, retroactive to and as of June 1, 2021, and also includes certain additional non-substantive changes.
On July 30, 2021, the parties
entered into a Fourth Amendment to Loan Agreement (the "Fourth Amendment"), which amendment, revised the Loan Agreement to,
among other things, modify the Loan Agreement's definition of “Minimum EBITDA Covenant Trigger Event.” The Fourth Amendment
amends the definition, retroactive to and as of July 1, 2021, and also includes certain additional non-substantive changes.
On August 26, 2021, the parties
entered into a Fifth Amendment to Loan Agreement (the "Fifth Amendment"), which amendment, revised the Loan Agreement to, among
other things, (i) provide for an over-advance facility in the maximum amount of $400, (ii) defer the monthly incremental increase to the
existing availability block and (iii) modify the Loan Agreement's definition of “Minimum EBITDA Covenant Trigger Event.” The
Fifth Amendment amends the definition, retroactive to and as of August 1,
On December 16, 2021, the
parties entered into a Sixth Amendment to Loan Agreement (the “Sixth Amendment”), which amendment, revised the Loan Agreement
to, among other things modify the Loan Agreement's definition of "Borrowing Base" (with such amendment retroactive to and effective
as of December 15, 2021), and also includes certain additional non-substantive changes.
On February 11, 2022, the
parties entered into a Seventh Amendment to Loan Agreement (the “Seventh Amendment”), which amendment, revised the Loan Agreement
to, among other things modify the Loan Agreement's definition of "Borrowing Base" and “Availability Block,” and
also includes certain additional non-substantive changes.
On March 3, 2022, the parties
entered into an Eighth Amendment to Loan Agreement (the “Eighth Amendment”), which amendment, revised the Loan Agreement to,
among other things modify the Loan Agreement's definition of "Borrowing Base" and “Availability Block,” and also
includes certain additional non-substantive changes.
On April 5, 2022, the Company
entered into a Ninth Amendment to Loan Agreement (the “Ninth Amendment”). Among other things, the amendment modified
the Loan Agreement's definition of "Borrowing Base" so as to provide for an over-advance facility (the “2022 Over-Advance
Facility”) in an aggregate amount of up to $1,000. MidCap's agreement to enter into the Ninth Amendment was conditioned, in
part, on the entry into a participation agreement between MidCap and Robert J. Pallé, a Director, and an affiliate of Mr. Pallé
(the “Pallé Parties”). The terms of the Ninth Amendment and the participation agreement contemplate that any
advances made by Midcap pursuant to the 2022 Over-Advance Facility would be funded by the Pallé Parties under the participation
agreement. Advances under the 2022 Over-Advance Facility are subject to the discretion of MidCap and the Pallé Parties. On April
5, 2022, pursuant to the 2022 Over-Advance Facility and the participation agreement, the Pallé Parties funded an initial advance
of $200 that was provided to the Company. Since April 5, 2022, a total of $975 was made by Midcap to the Company, which was funded by
the Pallé Parties. Further advances may be made to the Company upon its request, subject to the discretion of MidCap and the Pallé
Parties, in minimum amounts of not less than $100 per tranche, unless a lesser amount is agreed to by the parties. The amount advanced
in each tranche will bear an interest rate of 1% per month.
On May 5, 2022, the parties
entered into a Tenth Amendment to Loan Agreement (the "Tenth Amendment"), which amendment, revised the Loan Agreement
to, among other things, modify the Loan Agreement's definition of “Minimum EBITDA Covenant Trigger Event.” The Tenth Amendment
amends the definition, retroactive to and as of January 1, 2022, and also includes certain additional non-substantive changes.
On June 14, 2022, the parties
entered into a Eleventh Amendment to Loan Agreement (the "Eleventh Amendment"), which amendment, revised the Loan Agreement
to, among other things, (i) modify the Loan Agreement's definition of “Borrowing Base” to extend the Company’s WIP advance
and the amortization of the Company’s over advance facility until July 1, 2022, and (ii) delete in its entirety from the Loan Agreement
the Company’s minimum EBITDA covenant and also includes certain additional non-substantive changes.
On July 1, 2022, the parties
entered into a Twelfth Amendment to Loan Agreement (the "Twelfth Amendment"), which amendment, revised the Loan Agreement
to, among other things, modify the Loan Agreement's definition of “Borrowing Base” to extend the Company’s WIP advance
and the amortization of the Company’s over advance facility until July 15, 2022., and also includes certain additional non-substantive
changes.
On October 25, 2022, the parties
entered into a Thirteenth Amendment to Loan Agreement (the "Thirteenth Amendment"), which amendment, revised the Loan
Agreement to extend the mature date of the MidCap Facility to October 28, 2022.
On October 28, 2022, the parties
entered into a Fourteenth Amendment to Loan Agreement (the "Fourteenth Amendment"), which amendment, revised the Loan
Agreement to, among other things, extended the mature date of the MidCap Facility to June 30, 2023, modify the Loan Agreement's definition
of “Borrowing Base” to extend the Company’s WIP advance and the amortization of the Company’s over advance facility
until December 1, 2022, increased the 2022 Over Advance Facility to $1,500 and also includes certain additional non-substantive changes.
Long-Term Debt
Long-term debt consists of
the following:
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Financing leases (Note 8) | |
$ | 204 | | |
$ | 271 | |
| Less: Current portion | |
| (70 | ) | |
| (71 | ) |
| | |
$ | 134 | | |
$ | 200 | |
Annual maturities of long term debt at December 31, 2022 are, $65 in
2023, $61 in 2024, $59 in 2025 and $15 in 2026.
Note 7 – Subordinated Convertible Debt with Related Parties
On April 8, 2020, the Company,
as borrower, together with Livewire Ventures, LLC (wholly owned by the Company’s Chief Executive Officer, Edward R. Grauch), MidAtlantic
IRA, LLC FBO Steven L. Shea IRA (an IRA account for the benefit of the Company’s Chairman of the Board, Steven Shea), Carol M. Pallé
and Robert J. Pallé (Company Director and employed as Managing Director-Strategic Accounts) , Anthony J. Bruno (Company Director),
and Stephen K. Necessary (Company Director) , as lenders (collectively, the “Initial Lenders”) and Robert J. Pallé,
as Agent for the Lenders (in such capacity, the “Agent”) entered into a certain Senior Subordinated Convertible Loan
and Security Agreement (the “Subordinated Loan Agreement”), pursuant to which the lenders from time to time party thereto
were permitted to provide up to $1,500 of loans to the Company (the “Subordinated Loan Facility”). Interest accrues
on the outstanding amounts advanced under the Subordinated Loan Facility at the rate of 12% per annum, compounded and payable monthly,
in-kind, by the automatic increase of the principal amount of the loan on each monthly interest payment date, by the amount of the accrued
interest payable at that time (“PIK Interest”); provided, however, that at the option of the Company, it may pay interest
in cash on any interest payment date, in lieu of PIK Interest.
On April 8, 2020, the Initial
Lenders agreed to provide the Company with a Tranche A term loan facility of $800 of which $600 was advanced to the Company on April 8,
2020, $100 was advanced to the Company on April 17, 2020 and $100 was advanced to the Company on January 12, 2021. The Initial Lenders
participating in the Tranche A term loan facility have the option of converting the principal balance of the loan held by each of them,
in whole (unless otherwise agreed by the Company), into shares of the Company’s common stock at a conversion price equal to the
volume weighted average price of the common stock as reported by the NYSE American, during the five trading days preceding April 8, 2020
(the “Tranche A Conversion Price”) which was calculated at $0.593. The conversion right was subject to stockholder
approval as required by the rules of the NYSE American, which was obtained on June 11, 2020.
On April 24, 2020, the Company,
the Initial Lenders, Ronald V. Alterio (the Company’s Senior Vice President-Engineering, Chief Technology Officer) and certain additional
unaffiliated investors (the “Additional Lenders,” and, together with the Initial Lenders, the “Lenders”)
entered into the First Amendment to Senior Subordinated Convertible Loan and Security Agreement and Joinder (the “Amendment”).
The Amendment provides for the funding of $200 of additional loans under the Subordinated Loan Facility as a Tranche B term loan established
under the Subordinated Loan Agreement, with such loans being provided by the Additional Lenders. The Amendment also sets the conversion
price of $0.55 (the “Tranche B Conversion Price”) with respect to the right of the Additional Lenders to convert the
accreted principal balance of the loans held by each of them into shares of the Company’s common stock. The terms and conditions
of the conversion rights applicable to the Initial Lenders and the Additional Lenders are otherwise identical in all material respects,
including the terms restricting conversion to an aggregate amount of shares of common stock that would not result in the Company’s
non-compliance with NYSE American rules requiring stockholder approval of issuances or potential issuances of shares in excess of the
percentage limits specified therein or in an amount that may be deemed to constitute a change of control under such rules. These restrictions
were eliminated when the requisite stockholder approval was obtained on June 11, 2020.
On October 29, 2020, the additional
unaffiliated investors as described above, submitted irrevocable notices of conversion under the Tranche B Term Loan. As a result, $175
of original principal and $11 of PIK interest outstanding under the Tranche B Term Loan were converted into 338 shares of Company common
stock in full satisfaction of their indebtedness.
On January 28, 2021, the Company
entered into the Third Amendment to Senior Subordinated Convertible Loan and Security Agreement and Joinder (the “LSA Third Amendment”)
with the Tranche A Parties, the Tranche B Parties (that had not previously converted the loans attributable to each of them into shares
of common stock), the Agent and certain other investors (the “Tranche C Parties”). Pursuant to the LSA Third Amendment,
the parties agreed to increase the aggregate loan limit from $1,500 to $1,600 and the Tranche C Parties agreed to provide the Company
with a commitment for a $600 term loan facility, all of which was advanced to the Company on January 29, 2021 (the “Tranche C
Loans”). As is the case with the loans provided by the Tranche A Parties and Tranche B Parties, interest on the Tranche C Loans
accrues at 12% per annum and is payable monthly in-kind, by the automatic increase of the principal amount of the loans on each monthly
interest payment date, by the amount of the accrued interest payable at that time. The Company, at its option, may pay any interest due
on the Tranche C Loans in cash on any interest payment date in lieu of PIK Interest. The Tranche C Parties also have the option, following
the stockholder approval described in the next sentence, of converting the accreted principal balance of the Tranche C Loans attributable
to each of them into shares of the Company’s common stock at a conversion price of $1.00. The conversion rights are subject to the
terms and conditions applicable to the Tranche C Parties restricting conversion of the Tranche C Loans to an aggregate amount of shares
of common stock that would not result in the Company’s non-compliance with NYSE American rules requiring stockholder approval of
issuances or potential issuances of shares in excess of the percentage limits specified therein. These restrictions were eliminated when
the requisite stockholder approval was obtained on March 4, 2021. As the stock price was $1.31 on March 4, 2021, the Company recorded
a discount of $186 relating to the difference in stock price due to the beneficial conversion feature. The Company issued 42 warrants
at an exercise price of $1.00 to a placement agent in connection with the Tranche C Loans. The warrants have a five-year term from January
28, 2021.
On March 15, 2021, one of
the Tranche C Parties submitted an irrevocable notice of conversion under the Tranche C Loans. As a result, $100 of original principal
and $1 of PIK interest outstanding under the Tranche C Loans were converted into 101 shares of Company common stock in partial satisfaction
of their indebtedness.
On April 6, 2021, the same
Tranche C Party submitted an irrevocable notice of conversion under the Tranche C Loans. As a result, $50 of original principal and $1
of PIK interest outstanding under the Tranche C Loans were converted into 51 shares of Company common stock in partial satisfaction of
their indebtedness.
On May 24, 2021, the same
Tranche C Party submitted an irrevocable notice of conversion under the Tranche C Loans. As a result, $50 of original principal and $2
of PIK interest outstanding under the Tranche C Loans were converted into 52 shares of Company common stock in complete satisfaction of
their indebtedness.
On January 21, 2022, one of
the Tranche A Parties submitted an irrevocable notice of conversion under the Tranche A Loans. As a result, $50 of original principal
and $12 of PIK interest outstanding under the Tranche A Loans were converted into 104 shares of Company common stock in complete satisfaction
of their indebtedness.
The obligations of the Company
under the Subordinated Loan Agreement are guaranteed by Drake and are secured by substantially all of the Company’s and Drake’s
assets. The Subordinated Loan Agreement has a maturity date three years from the date of closing, at which time the accreted principal
balance of the loan (by virtue of the PIK Interest) plus any other accrued unpaid interest, would be due and payable in full. In connection
with the Subordinated Loan Agreement, the Company, Drake, the Lenders and MidCap entered into a Subordination Agreement (the “Subordination
Agreement”), pursuant to which the rights of the Lenders under the Subordinated Loan Agreement were subordinated to the rights
of MidCap under the MidCap Agreement and related security documents. The Subordination Agreement precludes the Company from making cash
payments of interest in lieu of PIK Interest, in the absence of the prior written consent of MidCap or unless the Company is able to meet
certain predefined conditions precedent to the making of any such payments of interest (or principal), as more fully described in the
Subordination Agreement. The Company accrued $176 and $163 of PIK Interest with respect to the Subordinated Loan Facility during the years
ended December 31, 2022 and 2021, respectively. The Company recorded $63 and $108 of interest expense related to the amortization of the
debt discount during the year ended December 31, 2022 and 2021 respectively.
Note 8 – Leases
The Company recognizes right-of-use
(“ROU”) assets and lease liabilities when it obtains the right to control an asset under a leasing arrangement with
an initial term greater than twelve months. The Company leases its real estate and certain office equipment under non-cancellable operating
leases, and certain office and factory equipment under non-cancellable financing leases.
The Company evaluates the
nature of each lease at the inception of an arrangement to determine whether it is an operating or financing lease and recognizes the
ROU asset and lease liabilities based on the present value of future minimum lease payments over the expected lease term. The Company’s
leases do not generally contain an implicit interest rate and therefore the Company uses the incremental borrowing rate it would expect
to pay to borrow on a similar collateralized basis over a similar term in order to determine the present value of its lease payments.
The following table summarizes
the Company’s operating and financing lease expense as of December 31, 2022 and 2021, respectively:
| | |
2022 | | |
2021 | |
| Operating lease cost | |
$ | 947 | | |
$ | 939 | |
| Financing lease cost | |
| 66 | | |
| 33 | |
| Total | |
$ | 1,013 | | |
$ | 972 | |
| Weighted average remaining lease term | |
| 6.1 | | |
| 2.3 | |
| Weighted average discount rate-operating leases | |
| 6.5 | % | |
| 6.5 | % |
Maturities of the Company’s
operating leases as of December 31, 2022, excluding short term leases are as follows:
| 2023 | |
$ | 945 | |
| 2024 | |
| 957 | |
| 2025 | |
| 971 | |
| 2026 | |
| 995 | |
| Thereafter | |
| 2,148 | |
| Total | |
| 6,016 | |
| Less: present value discount | |
| (155 | ) |
| Total operating lease liabilities | |
$ | 5,861 | |
Note 9- Commitments and Contingencies
Litigation
The Company from time to time
is a party to certain proceedings incidental to the ordinary course of its business, none of which, in the 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.
Note 10 – Benefit Plans
Defined Contribution Plan
The Company has a defined
contribution plan covering all full-time employees qualified under Section 401(k) of the Internal Revenue Code, in which the Company matches
a portion of an employee’s salary deferral. The Company’s contributions to this plan were $90 and $64, for the years ended
December 31, 2022 and 2021, respectively.
Defined Benefit Pension Plan
At December 31, 2022, approximately
28% of the Company’s employees were covered by a collective bargaining agreement, that is scheduled to expire in February 2027.
Substantially all union employees
who met certain requirements of age, length of service and hours worked per year were covered by a Company sponsored non-contributory
defined benefit pension plan. Benefits paid to retirees are based upon age at retirement and years of credited service.
On August 1, 2006, the plan
was frozen. The defined benefit pension plan is closed to new entrants and existing participants do not accrue any additional benefits.
The Company complies with minimum funding requirements. The total expense for this plan was $92 in 2022 and $20 in 2021, respectively.
The Company recognizes the
funded status of its defined benefit pension plan measured as the difference between the fair value of the plan assets and the projected
benefit obligation, in the Consolidated Balance Sheets. As of December 31, 2022 and 2021, the funded status related to the defined
benefit pension plan was underfunded by $(161) and $(16), respectively, and is recorded in current liabilities.
Note 11 - Related Party Transactions
A director and shareholder
of the Company is a partner of a law firm that served as outside legal counsel for the Company. During the years ended December 31, 2022
and 2021, this law firm billed the Company approximately $413 and $548, respectively for legal services provided by this firm. At December
31, 2022 and 2021, the Company owed $343 and $293, respectively to this firm. In May of 2022, the Company stopped using the legal services
of this firm.
Note 12 - Concentration of Credit Risk
Financial instruments that
potentially subject the Company to significant concentrations of credit risk consist principally of cash deposits and trade accounts receivable.
Credit risk with respect to
trade accounts receivable was concentrated with four of the Company’s customers in both 2022 and 2021, respectively. These customers
accounted for approximately 68% and 62% of the Company’s outstanding trade accounts receivable at December 31, 2022 and 2021, respectively.
The Company performs ongoing credit evaluations of its customers’ financial condition, uses credit insurance and requires collateral,
such as letters of credit, to mitigate its credit risk. The deterioration of the financial condition of one or more of its major customers
could adversely impact the Company’s operations. From time to time where the Company determines that circumstances warrant, such
as when a customer agrees to commit to a large blanket purchase order, the Company extends payment terms beyond its standard payment terms.
The following table summarizes
credit risk with respect to customers as percentage of sales for the years ended December 31, 2022 and 2021:
| | |
Years ended December 31, | |
| | |
2022 | | |
2021 | |
| Customer A | |
| 14 | % | |
| 20 | % |
| Customer B | |
| 13 | % | |
| 14 | % |
| Customer C | |
| 11 | % | |
| 13 | % |
The following table summarizes
credit risk with respect to customers as percentage of accounts receivable:
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Customer A | |
| 23 | % | |
| - | |
| Customer B | |
| 18 | % | |
| 24 | % |
| Customer C | |
| 16 | % | |
| 17 | % |
| Customer E | |
| 11 | % | |
| - | |
The following table summarizes
credit risk with respect to vendors as percentage of purchases for the years ended December 31, 2022 and 2021:
| | |
Years ended December 31, | |
| | |
2022 | | |
2021 | |
| Vendor A | |
| 22 | % | |
| 16 | % |
| Vendor B | |
| 19 | % | |
| 20 | % |
| Vendor C | |
| 12 | % | |
| - | |
The following table summarizes
credit risk with respect to vendors as percentage of accounts payable:
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Vendor A | |
| 19 | % | |
| 28 | % |
| Vendor B | |
| 17 | % | |
| - | |
| Vendor D | |
| - | | |
| 10 | % |
Note 13 – Stock Repurchase Program
On July 24, 2002, the Company
commenced a stock repurchase program to acquire up to $300 of its outstanding common stock (the “2002 Program”). The
stock repurchase was funded by a combination of the Company’s cash on hand and borrowings against its revolving line of credit.
On February 13, 2007, the Company announced a new stock repurchase program to acquire up to an additional 100 shares of its outstanding
common stock (the “2007 Program”). As of December 31, 2022, the Company can purchase up to $72 of its common stock
under the 2002 Program and up to 100 shares of its common stock under the 2007 Program. The Company may, in its discretion, continue making
purchases under the 2002 Program up to its limits, and thereafter to make purchases under the 2007 Program. During 2022 and 2021, the
Company did not purchase any of its common stock under the 2002 Program or 2007 Program.
Note 14 – Executive and Director Stock Purchase Plans
On June 16, 2014,
the Company’s Board of Directors adopted the Executive Stock Purchase Plan (the “ESPP”), which was subsequently
amended several times most recently on September 10, 2020, retroactively effective to September 1, 2020. The ESPP allows executive officers
of the Company to elect to purchase common stock of the Company in lieu of receiving a portion of their salary. The maximum number of
shares of common stock that can be purchased by all participants, in the aggregate, pursuant to the ESPP is 750 shares. The shares will
be purchased directly from the Company at the fair market value of the Company’s common stock on the date of purchase (based on
selling prices reported on NYSE American), which is the payroll date when the salary is withheld. As of December 31, 2022, approximately
303 shares were purchased under the ESPP.
On November 8,
2016, the Company’s Board of Directors adopted the Director Stock Purchase Plan (the “DSPP”), which was subsequently
amended several times most recently on October 12, 2020. The DSPP allows non-employee directors of the Company to elect to purchase common
stock of the Company in lieu of receiving a portion of their director and meeting fees. The maximum number of shares of common stock that
can be purchased by all participants, in the aggregate, pursuant to the DSPP is 1,000 shares. The shares will be purchased directly from
the Company at the fair market value of the Company’s common stock on the date of purchase (based on selling prices reported on
NYSE American), which is the check date when the fees would normally be paid. As of December 31, 2022, approximately 390 shares were purchased
under the DSPP.
Note 15 – Preferred Stock
The Company is authorized
to issue 5,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time
to time by the Board of Directors. At December 31, 2022 and 2021, there were no outstanding preferred shares.
Note 16 – Private Placement and Common Stock Sales
On December 14, 2020, the
Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with certain accredited investors (the
"Purchasers") for the sale and issuance by the Company to the Purchasers of (i) an aggregate of 1,429 shares (the "Shares")
of the Company's common stock and (ii) warrants (the "Purchaser Warrants") to purchase an aggregate of up to 714 shares
of common stock (the "Purchaser Warrant Shares"), for aggregate gross proceeds to the Company of $1,000, before deducting
placement agent fees and offering expenses payable by the Company. The Company also agreed to issue to the placement agents and certain
persons affiliated with the placement agents, as additional compensation, (a) fully-vested warrants (the "Placement Agent Warrants")
to purchase an aggregate of up to 100 shares (the "Placement Agent Warrant Shares") of common stock and (b) contingent
warrants (the "Placement Agent Contingent Warrants") to purchase an aggregate of up to an additional 50 shares (the "Placement
Agent Contingent Warrant Shares") of common stock. The transaction closed on December 15, 2020.
The Purchase Agreement also
includes terms that give the Purchasers certain price protections, providing for adjustments of the number of shares of common stock held
by them in the event of certain future dilutive securities issuances by the Company for a period not to exceed 18 months following the
closing of the private placement, or such earlier date on which all of the Purchaser Warrants have been exercised. In addition, the Purchase
Agreement provides the Purchasers with a right to participate in certain future Company financings, up to 30% of the amount of such financings,
for a period of 24 months following the closing of the private placement. The Purchase Agreement also required the Company to register
the resale of the Shares and the Purchaser Warrant Shares pursuant to the terms of a Registration Rights Agreement between the Company
and the Purchasers, dated as of December 14, 2020, as described further below. The Company filed a registration statement with the SEC
on January 14, 2021 to register the resale of the Shares and the Purchaser Warrant Shares, which registration statement was declared effective
by the SEC on January 21, 2021.
The Purchase Agreement obligated
the Company to call a special meeting of its stockholders to seek stockholder approval of the issuance of shares of its common stock issuable
in connection with this transaction in excess of 19.99% of the Company's outstanding shares of common stock, in accordance with the requirements
of Section 713(a) of the New York Stock Exchange (“NYSE”) American Company Guide. Stockholder approval was obtained
on March 4, 2021.
The Purchaser Warrants have
an exercise price of $1.25 per share, are exercisable beginning on December 15, 2020, and have a term of three years. The exercise price
and the number of shares of common stock issuable upon exercise of each Purchaser Warrant is subject to appropriate adjustments in the
event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the
common stock. The fair value of the Purchaser Warrants is $643.
In certain circumstances,
upon the occurrence of a fundamental transaction, a holder of Purchaser Warrants is entitled to receive, upon any subsequent exercise
of the Purchaser Warrant, for each Purchaser Warrant Share that would have been issuable upon such exercise of the Purchaser Warrant immediately
prior to the fundamental transaction, at the option of the holder, the number of shares of common stock of the successor or acquiring
corporation or of the Company, if it is the surviving corporation, and any additional consideration receivable as a result of the fundamental
transaction by a holder of the number of shares of common stock of the Company for which the Purchaser Warrant is exercisable immediately
prior to the fundamental transaction. If holders of the Company's common stock are given any choice as to the securities, cash or property
to be received in a fundamental transaction, then the Holder shall be given the choice as to the additional consideration it receives
upon any exercise of the Purchaser Warrant following the fundamental transaction.
The Placement Agent Warrants
have an exercise price of $0.70 per share, a term of five years from December 14, 2020, and became exercisable upon the Company obtaining
the stockholder approval described above. The exercise price and the number of shares of common stock issuable upon exercise of each Placement
Agent Warrant is subject to appropriate adjustments in the event of certain stock dividends and distributions, stock splits, stock combinations,
reclassifications or similar events affecting the common stock. The Placement Agent Warrants also provide the holders with certain “piggyback”
registration rights, permitting the holders to request that the Company include the Placement Agent Warrant Shares for sale in certain
registration statements filed by the Company. The fair value of the Placement Agent Warrants is $121. During June and July 2021, the Company
received approximately $61 as the result of the exercise of certain Placement Agent Warrants, and the Company issued 87 shares of common
stock upon exercise.
The Placement Agent Contingent
Warrants have an exercise price of $1.25 per share, a term of five years from December 14, 2020, and become exercisable if, and to the
extent, holders of the Purchaser Warrants exercise such Purchaser Warrants. In no event, however, will the Placement Agent Contingent
Warrants become exercisable unless and until Stockholder Approval has been obtained. The exercise price and the number of shares of common
stock issuable upon exercise of each Placement Agent Contingent Warrant is subject to appropriate adjustments in the event of certain
stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the common stock. The
Placement Agent Contingent Warrants also provide the holders with certain “piggyback” registration rights, permitting the
holders to request that the Company include the Placement Agent Contingent Warrant Shares for sale in certain registration statements
filed by the Company. The fair value of the Placement Agent Contingent Warrants is $56.
On August 16, 2021, the Company
entered into a Sales Agreement (the “Sales Agreement”) with Roth Capital Partners, LLC (the “Agent”).
In accordance with the terms of the Sales Agreement, the Company may offer and sell from time to time through the Agent shares of the
Company’s common stock, having an aggregate offering price of up to $400. From August 16, 2021 through December 31, 2021, the Company
sold an aggregate of 163 shares under the Sales Agreement at prices ranging from $1.088 to $1.139 per share, for aggregate proceeds, net
of sales commissions, of approximately $175.
On August 23, 2021, the Company
entered into a Stock Purchase Agreement (the “August Purchase Agreement”) with an institutional investor providing
for the sale by the Company to the investor of 200 shares of the Company’s common stock at a purchase price of $1.08 per share,
resulting in aggregate proceeds to the Company of $216. The shares were offered and sold pursuant to the Company’s effective shelf
registration statement on Form S-3. The Company's sale of the shares pursuant to the August Purchase Agreement will have the effect of
reducing the amount of shares that may be sold pursuant to the Sales Agreement from $400 to $184. Taking into account sales of common
stock pursuant to the August Purchase Agreement and sales of common stock pursuant to the Sales Agreement to date, the amount available
to be sold under the Sales Agreement is currently $9.
On November 15, 2021, the Company entered into
a Stock Purchase Agreement (the “November Purchase Agreement”) with an institutional investor providing for the sale
by the Company to the investor of 425 shares of the Company’s common stock, at a purchase price of $1.12 per share, resulting in
aggregate proceeds to the Company of $476. The shares were offered and sold pursuant to the Company’s shelf registration statement
on Form S-3.
Note 17 – Equity Incentive Plans
In May 2016, the stockholders
of the Company approved the 2016 Employee Equity Incentive Plan (the “2016 Employee Plan”), which authorized the Compensation
Committee of the Board of Directors (the “Committee”) to grant a maximum of 1,000 shares of equity based and other
performance based awards to executive officers and other key employees of the Company. The term of the 2016 Employee Plan expires on February
4, 2026. In May 2017, the stockholders of the Company approved an amendment to the 2016 Employee Plan to increase the annual individual
award limits relating to stock options and stock appreciation rights from 100 to 250 shares of common stock. In June 2018, the stockholders
of the Company approved an amendment to the 2016 Employee Plan to increase the maximum number of equity based and other performance awards
to 3,000. The Committee determines the recipients and the terms of the awards granted under the 2016 Employee Plan, including the type
of awards, exercise price, number of shares subject to the award and the exercisability thereof.
In May 2005, the stockholders
of the Company approved the 2005 Employee Equity Incentive Plan (the “Employee Plan”), which initially authorized the
Compensation Committee of the Board of Directors (the “Committee”) to grant a maximum of 500 shares of equity based
and other performance based awards to executive officers and other key employees of the Company. In May 2007, the stockholders of the
Company approved an amendment to the Employee Plan to increase the maximum number of equity based and other performance awards to 1,100.
In May 2010, the stockholders of the Company approved an amendment to the Employee Plan to increase the maximum number of equity based
and other performance awards to 1,600. In May 2014, the stockholders of the Company approved the amendment and restatement of the Employee
Plan to extend the term of the Employee Plan to February 7, 2024 and increase the maximum number of equity based and other performance
awards to 2,600. In June 2018, the stockholders of the Company approved an amendment to the Employee Plan to increase the maximum number
of equity based and other performance awards to 2,700. The Committee determines the recipients and the terms of the awards granted under
the Employee Plan, including the type of awards, exercise price, number of shares subject to the award and the exercisability thereof.
In May 2016, the stockholders
of the Company approved the 2016 Director Equity Incentive Plan (the “2016 Director Plan”). The 2016 Director Plan
authorizes the Board of Directors (the “Board”) to grant a maximum of 400 shares of equity based and other performance-based
awards to non-employee directors of the Company. The term of the 2016 Director Plan expires on February 4, 2026. The Board determines
the recipients and the terms of the awards granted under the 2016 Director Plan, including the type of awards, exercise price, number
of shares subject to the award and the exercisability thereof.
In May 2005, the stockholders
of the Company approved the 2005 Director Equity Incentive Plan (the “Director Plan”). The Director Plan authorizes
the Board of Directors (the “Board”) to grant a maximum of 200 shares of equity based and other performance-based awards
to non-employee directors of the Company. In May 2010, the stockholders of the Company approved an amendment to the Director Plan to increase
the maximum number of equity based and other performance awards to 400. In May 2014, the stockholders of the Company approved the amendment
and restatement of the Director Plan to extend the term of the Director Plan to February 7, 2024 and increase the maximum number of equity
based and other performance awards to 600. The Board determines the recipients and the terms of the awards granted under the Director
Plan, including the type of awards, exercise price, number of shares subject to the award and the exercisability thereof.
The Company issues performance-based
stock options to employees. The Company estimates the fair value of performance stock option awards using the Black-Scholes-Merton option
pricing model. Compensation expense for stock option awards is amortized on a straight-line basis over the awards’ vesting period.
The expected term of the stock
options represents the average period the stock options are expected to remain outstanding and is based on the expected term calculated
using the approach prescribed by the Securities and Exchange Commission's Staff Accounting Bulletin No. 110 for “plain vanilla”
options. The expected stock price volatility for the Company’s stock options was determined by using an average of the historical
volatilities of the Company. The Company will continue to analyze the stock price volatility and expected term assumptions as more data
for the Company’s common stock and exercise patterns become available. The risk-free interest rate assumption is based on the U.S.
Treasury instruments whose term was consistent with the expected term of the Company’s stock options. The expected dividend assumption
is based on the Company’s history and expectation of dividend payouts. The Company does not estimate forfeitures based on historical
experience but rather reduces compensation expense when they occur.
The fair value of employee
stock options is being amortized on a straight-line basis over the requisite service periods of the respective awards. The fair value
of employee stock options was estimated using the following weighted-average assumptions:
| | |
Years ended December 31, | |
| | |
2022 | | |
2021 | |
| Fair value of the company’s common stock on date of grant | |
$ | 0.565 | | |
$ | 1.513 | |
| Expected term | |
| 6.5 years | | |
| 6.5 years | |
| Risk free interest rate | |
| 2.69 | % | |
| 1.13 | % |
| Dividend yield | |
| 0.00 | % | |
| 0.00 | % |
| Volatility | |
| 118.0 | % | |
| 79.0 | % |
| Fair value of options granted | |
$ | 0.496 | | |
$ | 1.06 | |
The following table summarizes total stock-based
compensation costs recognized for the years ended December 31, 2022 and 2021:
| | |
Years ended December 31, | |
| | |
2022 | | |
2021 | |
| Cost of goods sold | |
$ | 40 | | |
$ | 42 | |
| Selling expenses | |
| 45 | | |
| 77 | |
| General and administrative | |
| 421 | | |
| 343 | |
| Research and development | |
| 65 | | |
| 100 | |
| Total | |
$ | 571 | | |
$ | 562 | |
The following table summarizes
information about stock-based awards outstanding for the year ended December 31, 2022:
| Plan | |
Stock Options | |
| 2016 Employee Plan | |
| 2,207 | |
| 2016 Director Plan | |
| 1,209 | |
| Other | |
| 500 | |
| 2005 Employee Plan | |
| 730 | |
| 2005 Director Plan | |
| 219 | |
| | |
| 4,865 | |
| Stock-based awards available for grant as of December 31, 2022 | |
| 77 | |
Stock options award activity
for the year ended December 31, 2022 is as follows:
| | |
Number of
shares | | |
Weighted-
Average
Exercise
Price | | |
Weighted-
Average
Contractual
Term | | |
Aggregate
Intrinsic
Value | |
| Outstanding at January 1, 2022 | |
| 4,229 | | |
$ | 0.90 | | |
| | | |
| | |
| Options granted | |
| 956 | | |
| 0.54 | | |
| | | |
| | |
| Options exercised | |
| - | | |
| - | | |
| | | |
| | |
| Options forfeited | |
| (80 | ) | |
| 1.08 | | |
| | | |
| | |
| Options expired | |
| (248 | ) | |
| 1.00 | | |
| | | |
| | |
| Outstanding at December 31, 2022 | |
| 4,857 | | |
$ | 0.82 | | |
| 5.1 | | |
$ | - | |
| Exercisable at December 31, 2022 | |
| 3,760 | | |
$ | 0.86 | | |
| 5.2 | | |
$ | - | |
During the year ended December 31, 2022, the Company
granted options under the 2016 Employee Plan and the 2016 Director Plan to purchase 956 shares of common stock to its employees and directors.
The fair value of these options was approximately $449.
The aggregate intrinsic value
of stock options is calculated as the difference between exercise price of the underlying stock options and the fair value of the Company’s
common stock or $0.19 per share at December 31, 2022.
The Company does not capitalize
any cost associated with stock-based compensation.
The Company issues new shares
of common stock (or reduces the amount of treasury stock) upon exercise of stock options or release of restricted stock awards.
As of December 31, 2022, the
unamortized stock compensation expense was approximately $321.
The following table represents
warrant activity for the year ended December 31, 2022:
| | |
Number of
shares | | |
Weighted-
Average
Exercise
Price | | |
Weighted-
Average
Contractual
Term | |
| Outstanding at January 1, 2022 | |
| 841 | | |
$ | 1.21 | | |
| | |
| Warrants granted | |
| 111 | | |
| 0.45 | | |
| | |
| Warrants exercised | |
| - | | |
| - | | |
| | |
| Warrants forfeited | |
| - | | |
| - | | |
| | |
| Warrants expired | |
| - | | |
| - | | |
| | |
| Outstanding at December 31, 2022 | |
| 952 | | |
$ | 1.12 | | |
| 2.25 | |
| Exercisable at December 31, 2022 | |
| 952 | | |
$ | 1.12 | | |
| 1.10 | |
In January 2021, the Company
issued a 5-year warrant to purchase 42 shares of common stock of the Company to VFT Special Ventures, Ltd. a Delaware corporation (“VFT”).
The warrant was granted as partial consideration in connection with the placement fee for the Subordinated Loan Facility (see Note 7).
The warrant is exercisable at $1.00 per share and vested immediately. The fair value of the warrant was $60.
In December 2022, the Company issued a 5-year warrant to purchase 111
shares of common stock of the Company to David E. Cymiak. The warrant was granted as partial consideration in connection with the placement
fee for the Subordinated Loan Facility (see Note 7). The warrant is exercisable at $0.45 per share and vested immediately. The fair value
of the warrant was $12.
Note 18 – Other Income
For the year ended December
31, 2021, the Company accrued payroll tax credits of $1,804, through the Employee Retention Tax Credit program (“ERTC”).
The amount was recorded as other income and included in prepaid and other current assets as of the applicable quarter end date. The Company
received $577 of the first quarter of 2021 ERTC in April, $115 towards Q2 in July, $181 towards Q3 in August, $219 towards Q3 in October
and $195 towards Q3 in November. The ERTC was initially established as part of the CARES Act of 2020 and subsequently amended by the Consolidated
Appropriation Act (“CAA”) of 2021 and the American Rescue Plan Act (“ARPA”) of 2021. The CAA and
ARPA amendments to the ERTC program provide eligible employers with a tax credit in an amount equal to 70% of qualified wages (including
certain health care expenses) that eligible employers pay their employees after January 1, 2021 through September 30, 2021. The maximum
amount of qualified wages taken into account with respect to each employee for each calendar quarter is $10,000, so that the maximum credit
that an eligible employer may claim for qualified wages paid to any employee is $7,000 per quarter. For purposes of the amended ERTC,
an eligible employer is defined as having experienced a significant (20% or more) decline in gross receipts during each 2021 calendar
quarter when compared with the same quarter in 2019. The credit is taken against the Company’s share of Social Security Tax when
the Company’s payroll provider files the applicable quarterly tax filings on Form 941. At December 31, 2022, the Company is still
owed $299 in ERTC funds which it expects to receive during the second quarter of 2023.
Note 19 - Income Taxes
The following summarizes the benefit for income
taxes for the years ended December 31, 2022 and 2021:
| | |
2022 | | |
2021 | |
| Current: | |
| | |
| |
| Federal | |
$ | - | | |
$ | - | |
| State and local | |
| 0 | | |
| 15 | |
| | |
| 0 | | |
| 15 | |
| Deferred: | |
| | | |
| | |
| Federal | |
| (471 | ) | |
| (266 | ) |
| State and local | |
| (7 | ) | |
| (3 | ) |
| | |
| (478 | ) | |
| (269 | ) |
| Valuation allowance | |
| 478 | | |
| 269 | |
| Provision for income taxes | |
$ | 0 | | |
$ | 15 | |
The provision for income taxes differs from the
amounts computed by applying the applicable Federal statutory rates due to the following for the years ended December 31, 2022 and 2021:
| | |
2022 | | |
2021 | |
| Provision (benefit) for Federal income taxes at the statutory rate | |
$ | (613 | ) | |
$ | 21 | |
| State and local income taxes, net of Federal provision (benefit) | |
| (25 | ) | |
| 10 | |
| Permanent differences: | |
| | | |
| | |
| Other | |
| 88 | | |
| (285 | ) |
| Change in valuation allowance | |
| 478 | | |
| 269 | |
| Stock Compensation | |
| 72 | | |
| - | |
| Provision for income taxes | |
$ | 0 | | |
$ | 15 | |
Significant components of the Company’s
deferred tax assets and liabilities are as follows:
| | |
December 31, | |
| | |
2022 | | |
2021 | |
| Deferred tax assets: | |
| | |
| |
| Allowance for doubtful accounts | |
$ | 46 | | |
$ | 51 | |
| Inventories | |
| 746 | | |
| 668 | |
| Intangible | |
| 114 | | |
| 139 | |
| Share based compensation | |
| 330 | | |
| 332 | |
| Net operating loss carry forward | |
| 7,832 | | |
| 7,691 | |
| Sec 174 Research & Development | |
| 303 | | |
| | |
| Depreciation | |
| 8 | | |
| 22 | |
| Pension liability | |
| 63 | | |
| 43 | |
| Other | |
| 1 | | |
| 2 | |
| Total deferred tax assets | |
| 9,443 | | |
| 8,948 | |
| Deferred tax liabilities: | |
| | | |
| | |
| Intangible | |
| (4 | ) | |
| (4 | ) |
| Indefinite life intangibles | |
| (191 | ) | |
| (174 | ) |
| Total deferred tax liabilities | |
| (195 | ) | |
| (178 | ) |
| | |
| 9,248 | | |
| 8,770 | |
| Valuation allowance | |
| (9,248 | ) | |
| (8,770 | ) |
| Net | |
$ | - | | |
$ | - | |
For the year ended December
31, 2022, the Company had approximately $28,169 and $24,541 of federal and state net operating loss carryovers ("NOL"),
respectively, which begin to expire in 2022. Additionally, there are federal NOL carryovers of $8,300 which do not expire.
The changes in the valuation
allowance for the years ended December 31, 2022 and December 31, 2021 were $478 and $269, respectively.
In assessing the realization
of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will
be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and taxing strategies in making this assessment. The decision to record this valuation allowance was based
on management evaluating all positive and negative evidence. The significant negative evidence includes a loss for the current year, a
cumulative pre-tax loss for the three years ended December 31, 2022, the inability to carryback the net operating losses, limited future
reversals of existing temporary differences and the limited availability of tax planning strategies. The Company expects to continue to
provide a full valuation allowance until, or unless, it can sustain a level of profitability that demonstrates its ability to utilize
these assets.
The Company had no change
in its liability for uncertain tax position during 2022 and no liabilities for uncertain tax positions as of December 31, 2022. ASC 740
discusses the classification of related interest and penalties on income taxes. The Company’s policy is to record interest and penalties
incurred in connection with income taxes as a component of income tax expense. No interest or penalties were recorded during the years
ended December 31, 2022 and 2021.
The Company is required to
file U.S. federal and state income tax returns. These returns are subject to audit by tax authorities beginning with the year ended December
31, 2018 or tax years beginning with the year ended December 31,2003 as the Company utilizes net operating losses.
