Blonder Tongue Laboratories, Inc.
Q1 2020 Earnings Call Transcript

Published: 15 May 2020

[Operator:]

Greetings. Welcome to the Blonder Tongue First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions].I will now turn the conference over to your host, Edward Grauch. You may begin.

[Edward Grauch:]

Great, thank you. Good morning, everybody. Welcome to Blonder Tongue's first quarter 2020 financial reporting conference call. And thank you again for joining us this morning.Before we begin our presentation, I'd like to remind all callers that my statements and those made by other Blonder Tongue representatives, speaking today, will contain forward-looking statements regarding future events including the management's view of our prospects, financial performance, technology development and evolving trends in the marketplace. As you know, the future is impossible to predict, and so I caution you that actual results may differ from those that may be projected in our comments this morning. For additional information concerning factors that could cause actual results to differ from the information that will be discussed this morning, I would ask you to refer to our prior SEC filings, including our current 10-Q, our 10-Q filings for all the quarters of 2019, as well as prior years, and our recent 10-K for 2019, as well as past years, 2018, 2017 and our 8-Ks.With me today are Steve Shea, the Chairman of our Board of Directors of Blonder Tongue Laboratories; and Eric Skolnik, our Chief Financial Officer and Senior Vice President. Eric's remarks will follow mine and dig a bit deeper into some of the numbers. Following our presentations, all of us will be available to answer questions you may have during the Q&A session.Our net sales for the first quarter of 2020 of $4,050,000 were slightly lower than our net sales of the comparable quarter in 2019. And our reported net loss in the first quarter of $2,080,000 was substantially lower than the net income of $5,325,000 that we reported in Q1 of 2019. It should be noted, however, that the decrease in net earnings for the first quarter of 2020 relative to the first quarter of 2019 was primarily driven by the one-time gain recognized from the sale and leaseback transaction of our headquarters facility in Old Bridge, New Jersey during the first quarter of 2019. If we subtract out that gain, the decrease in net earnings quarter-to-quarter is closer to $230,000, providing a much clearer comparison.Our sales of digital video headend products and analog video headend products were lower compared to the same period last year. This was offset by relatively higher sales of DOCSIS, data products, CPE products, and our next -gen NXG video signal processing products. As discussed in our 2019 year-end financial reporting call only a few weeks ago, we are committed to and have already begun implementing a number of significant changes to the company's operational expenses and organizational structure with a goal of significantly improving our future performance. I will touch on the progress of these initiatives during the call.Before getting into more specifics of our quarterly performance and progress, I would like to remind those attendees who may not regularly follow Blonder Tongue Laboratories, that as a US based manufacturer of telecommunications equipment to a large number of key service providers around the country, we are categorized as an essential business, and have been able to continue operations throughout all phases of the current COVID-19 crisis, although not without some scheduled adjustments and adapting to a new normal.We have been fortunate in having an operations team that proactively began enhanced cleaning and disinfecting practices in our facilities, as well as initiating changes in our work location spacing, personal distancing, and availability of hand cleaning stations within our factory and headquarters, weeks ahead of formal government and CDC recommendations being released. We are also -- we also were able to make available gloves and non-medical grade masks to both, staff and guests, immediately after authorities issued updated workplace guidelines related to personal protective equipment. We are happy to report -- very happy to report that at least so far, we have not had a single COVID-19 case confirmed by any of our staff.As mentioned in our last call, we also transitioned all roles capable of being performed as work-from-home to be done from home company-wide in early March. And we have adapted our operational processes to accommodate those changes similar to many other companies around the country.The COVID related impacts in the markets we serve began to adversely affect our sales efforts, beginning in the last week of February, and increasing through March and April, and they continue into the current month. It has only been in the last week that we have started to see some of our most impacted customers beginning to show signs of returning some staff to work and re-engaging with us at increased levels. Although we cannot forecast timeframes for a return to normal, we are this week having specific customers schedule meetings with us for the end of May and early part of June on programs that they had put on hold at the beginning of the crisis in early March. Although these anecdotes indicate some initial signs of increased business activity, we expect the recovery process to be protracted and we are planning accordingly.As previously reported, the company worked diligently at the beginning of the crisis to improve our liquidity. As a result of these efforts in April, we obtained a subordinated debt facility for both internal and external sources, yielding aggregate commitments of $1 million thus far, and our application to the Federal Care Act, Paycheck Protection Program or PPP, was recently approved, yielding an additional $1.76 million in low interest debt, a portion of which is anticipated to be forgiven.As mentioned during our last earnings call despite these funds now being made available, we are operating the business in the most fiscally conservative way possible, recognizing that we are in a period of great economic uncertainty for our country and for our industry. Our CFO, Eric Skolnik, will cover additional details of the fundraisers and our PPP program debt following my remarks.To close on two additional status points; during the early part of Q1, the company began a program aimed at streamlining and improving our working relationships with our major distribution and integration company customers, as well as further expanding our sales initiatives with major telecommunications companies. Our distribution partners have in some cases, multiple decade relationships with us, and they will remain key partners for us in our potential growth in 2020 and 2021. To this end, over the past year, we have built stronger relationships with these customers to better align our product offerings with their respective distribution channels, and as a result of which we anticipate increased opportunities as our recovery process begins in the markets we serve.We have also made adjustments to our production and procurement processes that began in the second quarter of 2019 with specific goals of enhancing our liquidity and increase our average inventory turns per year for all our products. These efforts will be ongoing but should produce tangible improvements in our working capital during 2020. Further on this point, we mentioned in our recent 2019 investor call that we had achieved monthly cash savings of approximately $200,000 on an annualized basis. Let me say that again, monthly cash savings of approximately $200,000 on an annualized basis during the second half of 2019 and early first quarter 2020. Our efforts along these lines to increase our overall operational efficiency are continuing and will help us achieve improvements in our bottom line performance during this year.Now, I would like to turn over the call to our Chief Financial Officer, Eric Skolnik. Eric?

[Eric Skolnik:]

Thank you, Ted. Net sales decreased $32,000 or 0.8% to $4,050,000 for the first quarter of 2020, from $4,082,000 for the comparable period in 2019. Net loss for the three months ended March 31, 2020 was a loss of $2,080,000 or $0.21 loss per diluted share, compared to net earnings of $5,325,000 or $0.53 per diluted share for the comparable period in 2019.The decrease in sales is primarily attributable to a decrease in sales of digital video headend products and analog video headend products offset by an increase in sales of DOCSIS data products, CPE products, and next-gen products. Sales of digital video headend products were $1,057,000 and $1,946,000, analog video headend products were $339,000 and $474,000, DOCSIS data products were $871,000 and $540,000, CPE products were $646,000 and $191,000, and NXG products were $196,000 and $82,000 in the first three months of 2020 and 2019 respectively. The decrease in net earnings for the first quarter of 2020 relative to the first quarter of 2019 is primarily driven by the $7,175,000 gain recognized in the first quarter of 2019 upon the consummation of the sale and leaseback transaction of our headquarters facility in Old Bridge, New Jersey.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 growing concern. As of March 31, 2020, the above factors still exist; accordingly, there still exists substantial doubt about the company's ability to continue as a growing concern. The financial statements do not include any adjustments relating to the recoverability of the recovered assets or the classification of the liabilities that might be necessary, should the company be unable to continue as a growing concern.In an offer to mitigate the company's liquidity constraints, as mentioned on the previous conference call, we've entered into a senior subordinated convertible loan and security agreement which provides up to $1,500,000 upon mutual agreement of the lending parties. As of today, we're pleased to report $900,000 has been funded.Finally, and as Ted mentioned in his remarks, we received approximately $1 million -- $1.76 million, excuse me, of funds under the Paycheck Protection Program, PPP. As you might be aware, there has been a lot of negative publicity concerning publicly-traded companies receiving such funds. On May 13, 2020, the SBA released an update to it's frequently asked questions, addressing borrowers required good faith certification concerning the necessity of their PPP loan request. The SBA issued a Safe Harbor which states that any borrower together with it's affiliates received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. The SBA determined that this Safe Harbor is appropriate because borrowers with loans below this threshold are generally less likely to have access to adequate sources of liquidity in the current economic environment than borrowers that obtain larger loans. As our loan is less than $2 million, we are covered by the Safe Harbor.Now, I'd like to open up the call to the question-and-answer session.

[Operator:]

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Greg Bourbon [ph], who is a private investor. People proceed with your question.

[Unidentified Analyst:]

Good morning, guys. First, regarding the financing, Eric, you said that $900,000 of the $1,000,000 and the $1,005,000 has been drawn on?

[Eric Skolnik:]

That is correct. We've received the funds. Yes.

[Unidentified Analyst:]

So there is $100,000 on tranche B still available?

[Eric Skolnik:]

It's part of tranche A and it's committed, and it hasn't been drawn yet.

[Unidentified Analyst:]

All right. Any movement towards using the tranche C, the remaining $500,000?

[Eric Skolnik:]

Not at this time. No.

[Unidentified Analyst:]

All right. Regarding the PPE loan, can -- any idea how much of it percentage-wise might be forgivable?

[Eric Skolnik:]

At this point, it would be a little premature to try to quantify that. We will have a better number in Q2.

[Unidentified Analyst:]

I asked that because knowing that there have been furloughs, I'm not sure -- and I assume you probably know, how those would be regarded; the folks that have been furloughed?

[Eric Skolnik:]

Well, we've taken steps to -- as Ted mentioned, to bring -- we have brought some people back that we felt were appropriate, and we are wisely utilizing our headcount appropriately during this period.

[Unidentified Analyst:]

All right. Has it been a permanent reduction in headcount?

[Edward Grauch:]

I think as we -- I can touch on that, Eric. So as we touched on the last call, we've done a combination of permanent reductions that were already in process due to our overall work that we started last year on reducing operational costs and increasing operational efficiencies. So those permanent steps were already in the process, we're already through independent decisions, regardless of the current COVID situation. Within the COVID situation itself in response to that particular crisis, we have not made any permanent headcount reductions related to the crisis situation, right. So, we've got a combination of permanent decisions we made that were not related to the crisis and short-term decisions we made that were related to the crisis.

[Unidentified Analyst:]

Do you have a number of the total headcount now? I didn't see it. I may be overlooked it in the queue or maybe it wasn't there.

[Eric Skolnik:]

We don't generally report headcount.

[Unidentified Analyst:]

Okay. I thought it generally was reported in the 10-K but…

[Eric Skolnik:]

Only, correct. You're right, only on an annualized basis; on an annual basis we do so, not on the Q's.

[Unidentified Analyst:]

All right. Now turning to income; you say in the last week or so you've seen maybe hints that the interest is starting to come back from what -- from what you'd witnessed over the prior six weeks to two months?

[Edward Grauch:]

Yes, I could speak anecdotally on a couple of points. But I do want to make sure I emphasize the point that I mentioned in my prepared remarks, which is that, the sort of initial anecdotal indications we have of a potential increase in activity; it's very early and very, very premature to make any kind of predictions on this. But that said, what we have seen is, overall about 85% or 90%, roughly, of the customers we normally deal with on a day to day, week to week basis -- 85% or 90% of those customers remained open and had some level and have continuing to have some level of activity in their businesses which are then reflected into sales in our business.What we have seen are two things just in the last week; a week we can have the most. Number one, a few of the businesses that were completely closed have started to either reopen or indicate to us that they will be coming back to work at the end of May or the early first half of June, right. So we're actually getting scheduled for meetings with companies that have been closed since some part of March. So that's very encouraging, although early. And then the other thing is, the companies that were open through the crisis we're starting to see them bring back some of the people that they had taken temporary actions on because of the crisis, not in a big way but in a small way.So again, it's encouraging, it's great, we've been looking for these kinds of signs on daily basis because -- as you can imagine, the current situation for everyone is very fluid. So, we're encouraged and it's good anecdotal information, but we can't lead from this level of information into anything concrete related to timing or any kind of a slope on recovery, but it is encouraging.

[Unidentified Analyst:]

All right. Looking at one of the last paragraphs in the queue today, the -- what it seemed the fall-off and a 45% to 50% plus, that's got to be scary.

[Eric Skolnik:]

I wouldn't use the word scary, I would use the word -- of course, any business that has a fall-off of that level is absolutely concerning; the thing that we have to our advantage is we prepared last year for having a lot more flexibility in the way we can move temporary and long-term actions on our staff and our -- in some of our -- a big chunk of our operating costs, and adjust them up or down based on what the economic conditions are. So, I feel very comfortable that we have the levers in place to move our operating costs up or down on a monthly basis. Those are not infinite, of course, no business has them; but, you know, to look a little bit on the positive side, we're in a business that is an essential service; telecommunication services across the United States are an essential service. Our -- a lot of the service operators that are either our direct customers or our end customers through distribution channels are holding up very well.So, relative to some other areas of business out there that have been really hammered horribly and don't have a lot of good prospects for any kind of foreseeable future we see the downsides currently as -- at least from what we can tell currently, from our customers and from their reactions in the way, that they're acting the way, that they're speaking with us; we believe these are temporary. And we're planning accordingly, and -- but we are managing our operating costs associated with our revenue levels. And that goes beyond just our running our factory, it extends into sales staff, management staff, operational staff, etcetera.

[Unidentified Analyst:]

Right. And looking at the decrease in sales, is it more delays rather than cancellations?

[Edward Grauch:]

It's a combination, and I'm glad you asked that question because that is a good point. I don't want to characterize a percentage basis but absolutely, we've had very specific orders that were on the books that were planned to be deployed; by deployed I mean shipped out of our facilities and deployed into customer's homes. In the April timeframe and in the May timeframe, and even in June time frame; and there is absolutely percentage of those PO's that have been put on hold and asked to be shipped in later months. Some have actually already been scheduled for later months such as July and August. But the most part, when customer's put things on hold in the current crisis situation, they have not indicated a precise shipping date.

[Unidentified Analyst:]

And given that I assume that anyone and everyone in this business has taken a hit, that you get any sensitive lost market share to competition?

[Edward Grauch:]

Another great question. We're seeing -- I don't want to say the opposite because I don't have enough data to really predict how much market share we've gained or lost. The sense I have from our customers, in fact, and the activity and the kinds of questions that they're asking us is that our competition is suffering the same or possibly much worse than us, frankly.

[Unidentified Analyst:]

Well, once…

[Edward Grauch:]

I have no indication we've lost any market share, and quite frankly, the opposite. We're seeing a lot of customers that we've never with -- pick a phone and call us and inquire about availability and different topics.

[Unidentified Analyst:]

Any sense or suspicion that the growing concern issue is weighing on sales or on relationships within…

[Edward Grauch:]

Oh, no, no. We've never -- we haven't had that come up with any customers that I'm aware of. No, I mean, we see that statement is an assessment buyer; it's a proper assessment by our accounting organization. We believe we've been taking the steps to write that situation with liquidity points that we raised, both the -- the internal external raise we've done, the additional availability in the tranche C that you've already mentioned. And we've been very fortunate and happy that the government was able to extend this CARES program, specifically for the reasons that we've used that we've applied for, received acceptance for, and have used the funds was to keep a substantial number of people off of the unemployment rolls and allowing us to keep operating in a diminished revenue situation.So I -- we believe that we are sort of the -- the kind of target audience we believe that the government intended for that program to benefit and we're taking advantage of that, and we're using the funds as wisely and as an investment -- and viewing the funds as an investment into the product completion, accelerating product completions and accelerating our ability to produce some products that will be prepared for shipping to customers when the economic recovery turns around. So we've sort of been using that money in a way that it can be held as additional value inside the company and redeployed when the recovery starts to happen.

[Unidentified Analyst:]

And finally, regarding income; I was somewhat surprised comparing Q1 across the various segments to Q4 of '19. To see that the next-gen and the CPE, both decline -- they were declined there quarter-to-quarter. Because -- why I'm saying surprised is because those are the newer introductions. It seems that the legacy sales of the legacy -- that's the digital and audio headend and the HFC and whatnot didn't -- there was actually -- in some cases, an increase in sales quarter-to-quarter but with the next-gen and the CPE, both of those are off about 50% from the prior quarter.

[Edward Grauch:]

I think you may have read them backwards from year-to-year. Eric, you want to comment on that? I think you've got it backwards.

[Eric Skolnik:]

Well, no. He is referring to Q4, not Q1.

[Edward Grauch:]

Oh, okay. I thought he was referring to the information we shared today.

[Unidentified Analyst:]

No. For my purposes, you know, I -- looking back, not a whole year; just looking back quarter-by-quarter.

[Edward Grauch:]

Oh, for that I can touch on that very easily. So, some of the products we shipped such as the next-gen are targeted towards some of the larger customers. And those larger customers tend to budget on a yearly basis and the kind of activity we end up seeing from Q4 to Q1 is we have this -- and you probably see -- I know your voice, and I've heard you beyond our earnings calls on a consistent basis over the last year; so, I know you follow the company very, very closely. We have this tendency in our markets and with our customers that there's a little bit of a boost in the end of the year every year, and some of that has to do with the fact that with these larger customers, they want to use up their budgets before the end of the year. So we do see in some product categories, especially the ones targeted to the bigger service operators, they want to use up budget in Q4 and then -- that they are holding that in their inventory, it's not used up very quickly and you start to see the recovery of a more consistent sales to those guys starting more in Q2; and then, again, another bump in Q4. So I would put the next-gen and CPE related decreases; I'd put them in that category.

[Unidentified Analyst:]

Okay. And finally, turning to marketing; has -- how much of a change has that been given what restrictions COVID have placed on, particularly face-to-face? Are you still able to do most of that via the web or by phone? Has that impacted your ability to sell in market?

[Edward Grauch:]

It's clearly affected our ability to market. I don't necessarily see that as by itself having a huge impact on our business because if we did have the ability to mark the -- the reality of the situation is, everybody's out there mostly inwardly focused for the most part, nobody's out. Our customers are not out, casually looking for information on new products and new technologies; they are all very focused on very short-term operational and keeping the lights on kind of activities. So most of the sales that we're getting are for sort of bread-and-butter products, things that are being shipped out to replace or fix a network problem or to implement a network expansion that an operator might have in a certain geography or whatnot.We're not seeing the kinds of things you pick up from a trade show, for example, where someone is coming by a booth at Blonder Tongue to find out what the latest technology is in encoding technology, transcoding technology or whatnot. People are not in that mode of exploring what could be done, they are in the mode of running their businesses as efficiently and as cost-effectively as possible and getting through operational issues. So from that perspective, I don't think we're losing a lot in perspective sales of new technology by having the marketing activities not be there in the form of trade shows and things.What we have done on marketing, though, is we have flipped over to start to greatly expand in fact, free webinars, educational services; we're running one every couple weeks now, the latest one actually just happened yesterday and the previous ones -- and we're getting fantastic turnout for those like we've never seen before. So for example, a webinar we did on just basic operational educational event drew like 200-205 attendees, we've never had attendance like that on any of our webinars in the past before. So, we're using every single one of our service people that are capable of doing that kind of stuff as the "talent" for going out there and trying to get people to reinforce the brand, reinforce what we're good at, what we're known for, and just keep the brand alive in people's names.And I'll finish up quickly now. On the sales side of that though, it has not hindered us in reaching out to customers. And in fact, it's been a curious kind of new normal; I know it's an overused term at this point, but I think it's effective in this context. We're getting people -- we're getting customers and potential customers a lot more on the phone than we had been previous to the COVID situation, people who were very busy with their normal pre-COVID situation activities are finding that they've got additional time on their schedules for taking calls with us, for dealing with potential projects or for talking about what-if scenarios, and things like that.So in fact, we -- we're actually pretty encouraged by the overall dialogue and activity and discussions that we're having with customers; that has not decreased, it's actually increased. Although, you know, actual sales on a month-to-month and week-to-week basis have been in the levels that we've reported and discussed in all the filings and press releases.

[Unidentified Analyst:]

Well, that level of participation is good to hear.

[Edward Grauch:]

It is.

[Unidentified Analyst:]

And I assume you would be participating virtually with InfoComm or any of the other upcoming trade shows? Did you hear me? Ed?

[Edward Grauch:]

Yes. I'm sorry, I was speaking to mute -- on mute. For every virtual version of a trade show that was missed because of the current situation, we've had a dialogue with those trade show coordinators and made an independent decision whether we felt like it was worth the time and effort -- and I shouldn't say time and effort, it's worth the time and effort, it was worth the money to attend, the actual expenditure. I do not believe -- yes, I'm pretty sure we did not have anything significant that we involve ourselves in for the NAB virtual show because we felt like that was put together relatively quickly and wasn't going to have enough time. For the InfoComm, one I believe we are putting in a lot more effort and we'll be much more involved. So we're kind of taking it case by case scenario.I know right now, for example, we're also looking to see if we should be attending some of the few trade shows that were actually rescheduled for the fall, we're a little bit concerned that even if things are recovered, the customers are likely to still be very focused on their operational activities and may not be spending the money to attend. So the cost versus benefit for each one of those expense is very important. We don't want to go to an empty trade show where all we're doing is seeing all of our friends and our competitors and partner booths; we want to go someplace where there is customers, right. So that's the assessment we're doing on a case by case basis.

[Unidentified Analyst:]

And there might be some reluctance to jump on the airplane?

[Edward Grauch:]

Great reluctance. Exactly, exactly.

[Unidentified Analyst:]

Well, thanks for your time. And I'm glad to hear that no one has been affected with COVID. And hopefully, that will stay the case. Thanks.

[Edward Grauch:]

Thanks for pointing it out. That's -- we feel exactly the same way, we feel very blessed or lucky that for whatever combination of both, our own activities and the activity -- and the efforts of our employees and partners, that's the case. Yes.

[Unidentified Analyst:]

Well, good luck. Good luck, as always.

[Edward Grauch:]

Thank you.

[Operator:]

[Operator Instructions] And there are no more further questions. Therefore, I will now return to call back to management for any closing remarks.

[Edward Grauch:]

Great, thank you. So, I thank everybody for -- I want to thank everybody for attending our call and for the questions. And if there is any other follow-up or calls, you have contacts of Eric and myself in our press releases and our filings. So, if there are no other questions then we can wrap it up for today. Thank you.

[Operator:]

This concludes today's conference. And you may disconnect your lines at this time. Thank you for your participation.