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The following discussion and analysis of the Company’s historical results of
operations and liquidity and capital resources should be read in conjunction
with the unaudited consolidated financial statements of the Company and notes
thereto appearing elsewhere herein. The following discussion and analysis also
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors. See “Forward Looking
Statements,” below.
Forward-Looking Statements
In addition to historical information this Quarterly Report contains
forward-looking statements regarding future events relating to such matters as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of 1995, the Securities
Act of 1933 and the Securities Exchange Act of 1934 provide safe harbors for
forward-looking statements. In order to comply with the terms of these safe
harbors, the Company notes that a variety of factors could cause the Company’s
actual results and experience to differ materially and adversely from the
anticipated results or other expectations expressed in the Company’s
forward-looking statements. The risks and uncertainties that may affect the
operation, performance, development and results of the Company’s business
include, but are not limited to, those matters discussed herein in the section
entitled Item 2 – Management’s Discussion and Analysis of Financial Condition
and Results of Operations. The words “believe,” “expect,” “anticipate,”
“project,” “target,” “intend,” “plan,” “seek,” “estimate,” “endeavor,” “should,”
“could,” “may” and similar expressions are intended to identify forward-looking
statements. In addition, any statements that refer to projections for our future
financial performance, our anticipated growth trends in our business and other
characterizations of future events or circumstance are forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management’s analysis only as of the
date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the
Exchange Commission
on Form 10-K for the year ended
Exchange Commission
Factors; Item 3 – Legal Proceedings and Item 7 – Management’s Discussion and
Analysis of Financial Condition and Results of Operations).
General
The Company was incorporated in
Acquisition Corp.
Laboratories, Inc.
H. Tongue
electronics and systems equipment principally for the private cable industry.
Following the acquisition, the Company changed its name to
Laboratories, Inc.
shares of common stock in
Today, the Company is a technology-development and manufacturing company that
delivers a wide range of products and services to the telecommunications, cable
entertainment and media industry. For 70 years,
have been deployed in a long list of locations, including lodging/hospitality,
multi-dwelling units/apartments, broadcast studios/networks,
universities/schools, healthcare/hospitals, fitness centers, government
facilities/offices, prisons, airports, sports stadiums/arenas, entertainment
venues/casinos, retail stores, and small-medium businesses. These applications
are variously described as small and medium sized businesses in commercial,
institutional or enterprise environments, and will be referred to herein
collectively as “SMB”. The customers we serve include business entities
installing private video and data networks in these environments, whether they
are the largest cable television operators, telco or satellite providers,
integrators, architects, engineers or the next generation of Internet Protocol
Television (“IPTV”) streaming video providers. The technology requirements of
these markets change rapidly, and the Company’s research and development team is
continually delivering high performance-lower cost solutions to meet customers’
needs.
The Company’s strategy is focused on providing a wide range of products to meet
the needs of the SMB environments described above, including
lodging/hospitality, multi-dwelling units/apartments, broadcast
studios/networks, universities/schools, healthcare/hospitals, fitness centers,
government facilities/offices, prisons, airports, sports stadiums/arenas,
entertainment venues/casinos, retail stores, and small-medium businesses, and to
provide offerings that are optimized for an operator’s existing infrastructure,
as well as the operator’s future strategy. A key component of this growth
strategy is to provide products that deliver the latest technologies (such as
IPTV and digital 4K, UHD, HD and SD video content) and have a high
performance-to-cost ratio.
15
In 2019, the Company initiated a consumer premise equipment (“CPE”) sales
initiative. The products sold in 2019 comprise primarily Android-based IPTV set
top boxes to the Tier 2 and Tier 3 cable and telecommunications service
providers. Although this strategic initiative was designed to secure an in-home
position with the Company’s product offerings, and direct relationships with a
wide range of service providers, and increase sales of the Company’s Telecom and
SMB products by the BT Premier Distributors to those same service providers, it
was decided in 2021, to de-emphasize this strategy due to the low gross margin
of this initiative and global semiconductor supply chain limitations. The CPE
Product initiative achieved sales to over 75 different telco, municipal fiber
and cable operators and accounted for approximately 7% and 25% of the Company’s
2021 and 2020 revenues, respectively, although its contribution to net income
has not had a material impact on the Company’s performance.
Like many businesses throughout
been affected by the COVID-19 pandemic. Because there are daily, weekly and
monthly developments regarding the outbreak, we are continually assessing the
current and anticipated future effects on our business, including how these
developments are impacting or may impact our customers, employees and business
partners. In our core SMB business, we have experienced a noticeable decline in
sales. From
reduced their business operations. In our CPE business we have experienced a
more substantial reduction in sales, again as a result of our customers’
significant decrease in their business activities coupled with expected supply
chain constraints. During and since Q3 2021, the Company has seen our customers,
in general, begin to recover their business operations at the same time as the
Company began to see global disruptions in semiconductor supply chain, which is
a major raw material component of the products the Company designs, manufactures
and sells. With uncertainties surrounding the extent to which the COVID-19
outbreak will affect the economy generally, and our customers and business
partners in particular, it is impossible for us to predict when conditions will
improve to the point that we can reasonably forecast when our sales and product
shipments might return to historical levels. Since 2019, we have taken steps to
reduce and are currently taking additional steps to significantly reduce our
expenses, including adjustments in our staffing (in the form of furloughs) and
reductions in manufacturing activities, which we believe will improve our
ability to continue our operations at current levels and meet our obligations to
our customers.
The Company’s manufacturing is allocated primarily between its facility in
Bridge, New Jersey
located in
and
including the NXG product line and latest encoder, transcoder and EdgeQAM
collections at the Old Bridge Facility. Since 2007 the Company has transitioned
and continues to manufacture certain high-volume, labor intensive products,
including many of the Company’s analog and other products, in the PRC, pursuant
to manufacturing agreements that govern the production of products that may from
time to time be the subject of purchase orders submitted by (and in the
discretion of) the Company. Although the Company does not currently anticipate
the transfer of any additional products to the PRC or other countries for
manufacture, the Company may do so if business and market conditions make it
advantageous to do so. Manufacturing products both at the Company’s Old Bridge
Facility as well as in the PRC,
to realize cost reductions while maintaining a competitive position and
time-to-market advantage.
Results of Operations
Second three months of 2022 Compared with second three months of 2021
three months of 2022 from
decrease is primarily attributable to a decrease in sales of digital modulation
products, CPE products and analog modulation products, offset by an increase in
sales of DOCSIS data products and encoder/transcoder products. Sales of digital
modulation products were
products were
respectively. The Company experienced a reduction in CPE products due to the
continued deemphasis of this product line, which the Company expects to continue
during the remainder of 2022. The Company experienced a reduction in analog
modulation products due to the continued market shifting away from analog
modulation solutions. The Company expects the sales of the analog modulation
products to continue to decline during the second half of 2022. The Company
experienced an increase in DOCSIS data products due to the pent-up demand caused
by the pandemic as these products are used primarily in the hospitality and
assisted-living environments. The Company expects sales of these products may
return to more historical levels during the second half of 2022. The Company
experienced an increase in encoder/transcoder products as these product lines
represent newer products and newer technologies with higher demand from
customers. The Company expects sales of these product lines to remain at these
levels or increase during the second half of 2022. Although the Company does not
expect overall sales to return to pre pandemic levels during 2022, the Company
does expect overall sales to be higher during 2022, due to approximately
16
Cost of Goods Sold. Cost of goods sold increased to
three months of 2022 from
increased as a percentage of sales to 75.0% from 63.0%. The increase is
primarily attributable to lower margins relating to unfavorable product mix, as
well as increased overhead costs due to manufacturing inefficiencies caused by
previously mentioned supply chain constraints. The Company expects cost of goods
sold to decrease during the remaining quarters of 2022 due to product mix since
both encoder/transcoder and NXG sales have substantially lower costs of sales.
The Company also expects cost of goods sold to decrease during the remainder of
2022 as overhead costs stabilize.
Selling Expenses. Selling expenses decreased to
months of 2022 from
percentage of sales to 12.5% for the second three months of 2022 from 14.6% for
the second three months of 2021. The
of a decrease in salaries and fringe benefits due to a decrease in head count of
General and Administrative Expenses. General and administrative expenses
increased to
second three months of 2021 and increased as a percentage of sales to 23.5% for
the second three months of 2022 from 22.3% for the second three months of 2021.
The
fees of
Research and Development Expenses. Research and development expenses decreased
to
months of 2021 and decreased as a percentage of sales to 11.8% for the second
three months of 2022 from 14.4% for the second three months of 2021. This
benefits of
Operating Loss. Operating loss of
represents an increase from the operating loss of
three months of 2021. Operating loss as a percentage of sales was (22.7) % in
the second three months of 2022 compared to (14.2) % in the second three months
of 2021.
Other income. Other income decreased to zero in the second three months of 2022
from
the accrual of the payroll tax credit through the Employee Retention Tax Credit
for the second quarter of 2021. This program ended in the third quarter of 2021.
Interest Expense. Interest expense increased to
months of 2022 from
primarily the result of higher average borrowing and a higher interest rate
under the MidCap facility.
First six months of 2022 Compared with first six months of 2021
months of 2022 from
primarily attributable to a decrease in sales of CPE products, analog modulation
products and coax distribution products offset by an increase in sales of DOCSIS
data products and encoder/transcoder products. Sales of CPE products were
coax distribution products were
experienced a reduction in CPE products due to the continued deemphasis of this
product line, which the Company expects to continue during the remainder of
2022. The Company experienced a reduction in analog modulation products due to
the continued market shifting away from analog modulation solutions. The Company
expects the sales of the analog modulation products to continue to decline
during 2022. The Company experienced an increase in DOCSIS data products due to
the pent-up demand caused by the pandemic as these products are used primarily
in the hospitality and assisted-living environments. The Company expects sales
of these products may return to more historical levels during the second half of
2022. The Company experienced an increase in encoder/transcoder products as
these product lines represent newer products and newer technologies with higher
demand from customers. The Company expects sales of these product lines to
remain at these levels or increase during the second half of 2022. Although the
Company does not expect overall sales to return to pre pandemic levels during
2022, the Company does expect overall sales to be higher during 2022, due to
approximately
17
Cost of Goods Sold. Cost of goods sold increased to
months of 2022 from
a percentage of sales to 73.6% from 60.6%. The increase is primarily
attributable to lower margins relating to unfavorable product mix, as well as
increased overhead costs due to manufacturing inefficiencies caused by
previously mentioned supply chain constraints. The Company expects cost of goods
sold to decrease during the remaining quarters of 2022 due to product mix since
both encoder/transcoder and NXG sales have substantially lower costs of sales.
The Company also expects cost of goods sold to decrease during the remainder of
2022 as overhead costs stabilize.
Selling Expenses. Selling expenses decreased to
months of 2022 from
percentage of sales to 13.7% for the first six months of 2022 from 15.4% for the
first six months of 2021. The
decrease in salaries and fringe benefits due to a decrease in head count of
General and Administrative Expenses. General and administrative expenses
decreased to
first six months of 2021 and decreased as a percentage of sales to 25.2% for the
first six months of 2022 from 26.9% for the first six months of 2021. The
benefits of
Research and Development Expenses. Research and development expenses decreased
to
months of 2021 and decreased as a percentage of sales to 13.2% for the first six
months of 2022 from 16.6% for the first six months of 2021. This
decrease is primarily the result of a decrease in salaries and fringe benefits
of
(engineering prototypes) of
Operating Loss. Operating loss of
represents an increase from the operating loss of
months of 2021. Operating loss as a percentage of sales was (26.2) % in the
first six months of 2022 compared to (19.5) % in the first six months of 2021.
Other income. Other income decreased to zero in the first six months of 2022
from
the accrual of the payroll tax credit through the Employee Retention Tax Credit
for the first and second quarters of 2021.
Interest Expense. Interest expense increased to
of 2022 from
the result of higher average borrowing and higher interest rates under the
MidCap facility.
Liquidity and Capital Resources
As of
capital was
capital was primarily due to an increase in the revolving line of credit.
The Company’s net cash used in operating activities for the six-month period
ended
offset by adjustments to reconcile net income to cash used in operating
activities of
for the six-month period ended
income of
and adjustments to reconcile net income to cash used in operating activities of
Cash used in investing activities for the six-month period ended
was
licenses of
ended
expenditures and
Cash provided by financing activities was
2022, which was comprised of net borrowings of the line of credit of
offset by repayments of debt of
was
borrowing of line of credit of
by borrowings under the subordinated convertible debt facility of
proceeds of the exercise of stock options of
exercise of stock warrants of
18
For a full description of the Company’s senior secured indebtedness under the
MidCap Facility and its effect upon the Company’s consolidated financial
position and results of operations, see Note 5 – Debt of the Notes to Condensed
Consolidated Financial Statements.
The Company’s primary sources of liquidity have been its existing cash balances,
cash generated from operations, amounts available under the MidCap Facility and
amounts available under the Subordinated Loan Facility. As of
Company had approximately
As previously disclosed, on
its Old Bridge Facility to
with the completion of the sale, the Company and the Buyer (as landlord) entered
into a lease (the “Lease”), pursuant to which the Company continues to occupy,
and conduct its manufacturing, engineering, sales and administrative functions,
in the Old Bridge Facility. Also as previously disclosed, certain disagreements
have arisen between the Company and the landlord with respect to the parties’
interpretation of elements of the Lease, including with respect to amounts being
held in escrow by the landlord, which the Company believes should either be
refunded to the Company or credited against future lease payments, and the
landlord’s claim that the Company is obligated to pay management fees to the
landlord under the Lease. Without prejudice to the Company’s positions
regarding these matters, and without creating any inference that the Company
agrees with any of the landlord’s claims or waiving any rights available to the
Company under the Lease or otherwise, on
to the landlord of
claimed were due. The parties continue to discuss these matters in an attempt
to negotiate a resolution of these disagreements. The Company, however, cannot
assure you that these matters will be resolved in a manner that is favorable to
the Company or that litigation might not result if a negotiated resolution is
not forthcoming. On July29, 2022, the Company extended its lease by another five
years, with a new termination date of
On
party for 32,500 square feet of the Old Bridge Facility (the “Sublease Space”)
which commenced on
benefit of the Company. The sublease also provides for a one-year renewal
option, which was exercised in
approximately
year and approximately
In connection with the fulfillment of certain of the Company’s purchase orders,
the Company was financing expediting fees charged in connection with the
purchase orders by delivering a promissory note (the “Note”) to the supplier of
the goods, in the principal amount of approximately
unsecured and has an interest rate of 12% per annum. The Company was obligated
to repay the principal balance of the note beginning in
continuing thereafter for an additional five consecutive monthly installments on
the 15thday of each successive calendar month, as follows:
was paid concurrently with each principal installment. The final
payment was made in
In connection with the continued extension of credit terms, the Company entered
into promissory notes (the “Notes”) to three vendors of the goods, in the
principal amount of approximately
interest rates varying between 0% and 9% per annum. The Company is obligated to
repay the principal balance of the notes beginning in
thereafter until fully paid in
remaining under the Notes is approximately
to be paid by
non-payment of principal or interest, the Company’s obligations may be
accelerated, and the Note holders may pursue their rights under the Notes and
under applicable law.
As disclosed in the Company’s most recent Annual Report on Form 10-K, the
Company experienced a decline in sales, a reduction in working capital, a loss
from operations and net cash used in operating activities, in conjunction with
liquidity constraints. These factors raised substantial doubt about the
Company’s ability to continue as a going concern. As of
factors still exist. Accordingly, there still exists substantial doubt about the
Company’s ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability of the recorded
assets or the classification of the liabilities that might be necessary should
the Company be unable to continue as a going concern.
19
Beginning in the middle of 2019, the Company experienced a significant decline
in its net sales of core or legacy products, which while not recovering to
historical norms, stabilized during the early part of the first quarter of 2020.
Beginning in
outbreak of COVID-19 took hold, the Company began to experience adverse impacts
to revenues across all of its product lines. Sales of the Company’s products did
not return to historical norms during 2021. The Company still does not
anticipate that sales will recover to historical norms during 2022, due
primarily to supply chain shortages related to COVID-19 impacting the Company’s
ability to source raw materials used in the manufacturing process. In light of
these developments and as detailed below, the Company has taken significant
steps during the past year, implemented in several phases, in order to manage
operations through what has been a period of diminished sales levels.
As part of its efforts to improve liquidity and provide operating capital, on
Agreement and Loan Documents with Midcap (the “MidCap First Amendment”), which
amended the MidCap Facility to, among other things, remove the existing
availability block, subject to the same being re-imposed at the rate of
approximately
relating to the removal of the availability block under the MidCap First
Amendment became effective on
Company of the transactions contemplated by the Subordinated Loan Facility
(defined below).
On
(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
conditioned, in part, on the entry into a participation agreement between MidCap
and
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
Over-Advance Facility and the participation agreement, the Pallé Parties funded
an initial advance of
2022
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
parties. The amount advanced in each tranche will bear an interest rate of 1%
per month.
On
(wholly owned by the Company’s Chief Executive Officer,
MidAtlantic IRA, LLC FBO Steven L. Shea IRA (an IRA account for the benefit of
the Company’s Chairman of the Board,
Pallé
“Initial Lenders”) and
capacity, the “Agent”) entered into a certain Senior Subordinated Convertible
Loan and Security Agreement (the “Subordinated Loan Agreement”), pursuant to
which the lenders from time to time party thereto may provide up to
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
Tranche A term loan facility of
Company on
and
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
at
by the rules of the NYSE American, and was obtained on
Company’s annual meeting of stockholders.
On
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
additional loans as a Tranche B term loan under the Subordinated Loan Facility
established under the Subordinated Loan Agreement, with such loans being
provided by the Additional Lenders. The Amendment also sets the conversion price
of
Additional Lenders to convert the accreted principal balance of the loans held
by each of them into shares of the Company’s common stock. The terms and
conditions of the conversion rights applicable to the Initial Lenders and the
Additional Lenders are otherwise identical in all material respects, including
the terms restricting conversion to an aggregate amount of shares of common
stock that would not result in the Company’s non-compliance with NYSE American
rules requiring stockholder approval of issuances or potential issuances of
shares in excess of the percentage limits specified therein or in an amount that
may be deemed to constitute a change of control under such rules. These
restrictions terminated as the requisite stockholder approval was obtained on
20
On
established as part of the Coronavirus Aid, Relief and Economic Security Act
(“CARES Act”), provided for loans to qualifying businesses for amounts up to 2.5
times the average monthly payroll expenses of the qualifying business. The PPP
Loan and accrued interest are forgivable after twenty-four weeks (the “Covered
Period”) as long as the borrower uses the loan proceeds for eligible purposes,
including payroll, benefits, rent and utilities, and maintains its payroll
levels. The amount of loan forgiveness would be reduced if the borrower
terminated employees or reduced salaries during the eight-week period.
The PPP Loan was evidenced by a promissory note, dated as of
“PPP Note”), between the Company, as Borrower, and
Lender (the “Lender”). The interest rate on the PPP Note was 0.98% per annum,
with interest accruing on the unpaid principal balance computed on the basis of
the actual number of days elapsed in a year of 360 days. No payments of
principal or interest were due during the ten-month period beginning after the
Covered Period (the “Deferral Period”).
On
Loan. On
was granted. The Company recorded the
forgiveness during the year ended
On
6, submitted irrevocable notices of conversion under the Tranche B Term Loan. As
a result, approximately
interest outstanding under the Tranche B Term Loan were converted into 338,272
shares of Company common stock in full satisfaction of the underlying
indebtedness.
On
(the “Purchase Agreement”) with certain accredited investors (the “Purchasers”)
for the sale and issuance by the Company to the Purchasers of (i) an aggregate
of 1,429,000 shares (the “Shares”) of the Company’s common stock and (ii)
warrants (the “Purchaser Warrants”) to purchase an aggregate of up to 714,000
shares of common stock (the “Purchaser Warrant Shares”), for aggregate gross
proceeds to the Company of
offering expenses payable by the Company. The Company also agreed to issue to
the placement agents and certain persons affiliated with the placement agents,
as additional compensation, (a) fully-vested warrants (the “Placement Agent
Warrants”) to purchase an aggregate of up to 100,000 shares (the “Placement
Agent Warrant Shares”) of common stock and (b) contingent warrants (the
“Placement Agent Contingent Warrants”) to purchase an aggregate of up to an
additional 50,000 shares (the “Placement Agent Contingent Warrant Shares”) of
common stock. The transaction closed on
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
Company filed a registration statement with the
register the resale of the Shares and the Purchaser Warrant Shares, which
registration statement was declared effective by the
The Purchaser Warrants have an exercise price of
exercisable beginning on
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
21
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
of five years from
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
Company received approximately
were exercised.
The Placement Agent Contingent Warrants have an exercise price of
share, a term of five years from
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
On
Subordinated Convertible Loan and Security Agreement and Joinder (the “LSA Third
Amendment”) with the Tranche A Parties, the Tranche B Parties (that had not
previously converted the loans attributable to each of them into shares of
common stock), the Agent and certain other investors (the “Tranche C Parties”).
Pursuant to the LSA Third Amendment, the parties agreed to increase the
aggregate loan limit under the Subordinated Loan Agreement from
commitment for a
Company on
loans provided by the Tranche A Parties and Tranche B Parties, interest on the
Tranche C Loans accrues at 12% per annum and is payable monthly in-kind, by the
automatic increase of the principal amount of the loans on each monthly interest
payment date, by the amount of the accrued interest payable at that time. The
Company, at its option, may pay any interest due on the Tranche C Loans in cash
on any interest payment date in lieu of PIK Interest. The Tranche C Parties also
have the option, following Stockholder Approval (defined below) of converting
the accreted principal balance of the Tranche C Loans attributable to each of
them into shares of the Company’s common stock at a conversion price of
Both the Purchase Agreement and the Subordinated Loan Agreement (as amended by
the LSA Third Amendment) obligated the Company to call a special meeting of its
stockholders to seek stockholder approval of the issuance of shares of its
common stock issuable in connection with the transactions contemplated by the
Securities Purchase Agreement and the LSA Third Amendment, in excess of 19.99%
of the Company’s outstanding shares of common stock, in accordance with the
requirements of Section 713(a) of the NYSE American Company Guide. Stockholder
approval of the foregoing was obtained on
the difference in stock price due to the beneficial conversion feature.
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.
22
On
of conversion under the Tranche C Loans. As a result,
principal and
converted into 100,987 shares of Company common stock in partial satisfaction of
the indebtedness to that
On
conversion under the Tranche C Loans. As a result,
and
into 51,260 shares of Company common stock in partial satisfaction of the
indebtedness to that
On
conversion under the Tranche C Loans. As a result,
and
into 52,277 shares of Company common stock in complete satisfaction of their
indebtedness.
On
notice of conversion under the Tranche A Loans. As a result,
principal and
converted into 104,399 shares of Company common stock in complete satisfaction
of their indebtedness.
On
Agreement”) with
the terms of the Sales Agreement, the Company may offer and sell from time to
time through the Agent shares of the Company’s common stock, par value
per share, having an aggregate offering price of up to
2021
under the Sales Agreement at prices ranging from
for aggregate proceeds, net of sales commissions, of approximately
On
“Purchase Agreement”) with an institutional investor providing for the sale by
the Company to the investor of 200,000 shares of the Company’s common stock at a
purchase price of
Company of
effective shelf registration statement on Form S-3. The Company’s sale of the
Shares pursuant to the Purchase Agreement will have the effect of reducing the
amount of shares that may be sold pursuant to the Sales Agreement from
to
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
For the year ended
amount was recorded as other income and included in prepaid and other current
assets as of the applicable quarter end date. The Company received
the first quarter of 2021 ERTC in April,
towards Q3 in August,
November. The Company received
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
The maximum amount of qualified wages taken into account with respect to each
employee for each calendar quarter is
an eligible employer may claim for qualified wages paid to any employee 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
which it expects to receive during the fourth quarter of 2022.
In other efforts to alleviate the liquidity pressures and reposition the Company
to generate positive cash flow at a lower level of net sales, since
the Company has implemented a multi-phase cost-reduction program which reduced
cash expenses during 2019 by approximately
annualized cash savings of approximately
reduction in 2021 of approximately
annualized savings of approximately
of
commencement of the cost reduction program. Although the Company believes it has
made and will continue to make progress under these programs and the funding
provided under the Subordinated Loan Agreement and available as a result of the
release of the availability block under the MidCap Facility, the Company
operates in a rapidly evolving and often unpredictable business environment that
may change the timing or amount of expected future cash receipts and
expenditures. Accordingly, there can be no assurance that our planned
improvements will be successful.
23
In addition, the COVID-19 outbreak has affected the supply chain for many types
of products and materials, particularly those being manufactured in
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 second 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. We believe this disruption may continue beyond 2022. If these or
any similar types of supply disruptions continue, it is possible that we will be
unable to complete sales of any affected products to our customers on requested
schedules.
The Company has reacted to these unprecedented circumstances, as many
enterprises have had to do over the course of the pandemic, with a range of
actions designed to compensate for anticipated temporary revenue shortfalls,
manage the Company’s working capital and minimize the overall financial impact
of this disruption, including implementation of exceptional short-term operating
expense reductions, such as temporary manufacturing shut-downs and employee
furloughs.
The Company’s primary long-term obligations are for payment of interest on the
MidCap Facility, which expires on
cash generated from operations to meet its long-term debt obligations. The
Company also expects to make financed and unfinanced long-term capital
expenditures from time to time in the ordinary course of business, which capital
expenditures were
the year ended
generated from operations, amounts available under the MidCap Facility, amounts
available under the Subordinated Loan Facility, and purchase-money financing to
meet any anticipated long-term capital expenditures.
Critical Accounting Estimates
The Company prepares its financial statements in accordance with accounting
principles generally accepted in
statements in accordance with generally accepted accounting principles requires
the Company to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The following paragraphs include a
discussion of some critical areas where estimates are required. You should also
review Note 2 – Summary of Significant Accounting Policies in the Notes to our
Condensed Consolidated Financial Statements for further discussion of
significant accounting policies.
Inventory and Obsolescence
Inventories are stated at the lower of cost, determined by the first-in,
first-out (“FIFO”) method, or net realizable value.
The Company periodically analyzes anticipated product sales based on historical
results, current backlog and marketing plans. Based on these analyses, the
Company anticipates that certain products will not be sold during the next
twelve months. Inventories that are not anticipated to be sold in the next
twelve months, have been reserved..
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.
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.
24
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 during the three and six months ended
Valuation of Deferred Tax Assets
The Company accounts for income taxes under the provisions of the FASB ASC Topic
740 “Income Taxes”. Deferred income taxes are provided for temporary differences
in the recognition of certain income and expenses for financial and tax
reporting purposes. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
Recent Accounting Pronouncements
See Note 2(d) of the Notes to Condensed Consolidated Financial Statements for a
full description of recent accounting pronouncements, including the anticipated
dates of adoption and the effects on the Company’s consolidated financial
position and results of operations.
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