TRANS LUX Corp - Quarter Report: 2015 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

Commission file number 1-2257

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes     X      No   

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to file and post such files).  Yes     X      No         

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (check one)

Large accelerated filer ___ Accelerated filer ___ Non-accelerated filer ___ Smaller reporting company  X     

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes               No     X                                          

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The accompanying notes are an integral part of these condensed consolidated financial statements.

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The accompanying notes are an integral part of these condensed consolidated financial statements.

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TRANS-LUX CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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Note 2 - Going Concern

A fundamental principle of the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business.  This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent.  In accordance with this requirement, the Company has prepared its Condensed Consolidated Financial Statements on a going concern basis.

We do not currently have adequate liquidity, including access to the debt and equity capital markets, to operate our business in the manner in which we have historically operated.  The Company incurred a net loss of $1.3 million in the six months ended June 30, 2015 and had a working capital deficiency of $5.5 million as of June 30, 2015.  As a result, our short-term business focus has been to preserve our liquidity position.  Unless we are successful in obtaining additional liquidity, we believe that we will not have sufficient cash and liquid assets to fund normal operations for the next 12 months.  In addition, the Company’s obligations under its pension plan exceeded plan assets by $6.5 million at June 30, 2015 and the Company has a significant amount due to its pension plan over the next 12 months.  In addition, the Company has not made the December 1, 2009, 2010 and 2011 required sinking fund payments on its 9½% Subordinated debentures due 2012 (the "Debentures") and the June 1, 2010, 2011 and 2012 as well as its December 1, 2010, 2011 and 2012 interest payments totaling $301,000.  In addition, the Company did not make the March 1, 2010, 2011 and 2012 as well as its September 1, 2010 and 2011 interest payments totaling $2.1 million on its 8¼% Limited convertible senior subordinated notes due 2012 (the "Notes").  As a result, if the Company is unable to (i) obtain additional liquidity for working capital, (ii) make the required minimum funding contributions to the pension plan, (iii) make the required sinking fund payments on the Debentures and/or (iv) make the required principal and interest payments on the Notes and the Debentures, there would be a significant adverse impact on the financial position and operating results of the Company, which could require the disposition of some or all of our assets, which could require us to curtail or cease operations.  The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty.  See Note 5 - Long-Term Debt for further details.

Of these fixed cash obligations, thus far in 2015 using cash on hand and cash from operating activities, the Company has made $469,000 of payments to the Company’s pension plan, with approximately $772,000 of contributions remaining for 2015.  Historically, we have made certain required contributions after their respective due dates, and we have not yet made required contributions of $197,000 due in each of April and July 2015.  The Pension Benefit Guaranty Corporation has placed a lien on all of the Company’s assets in respect of amounts owed under the plan.  If we are unable to fulfill our related obligations, the enforcement of such lien would have a material adverse impact on our financial condition, results of operations and liquidity.

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The Company continues to consider further exchanges of the $1.1 million of remaining Notes and the $334,000 of remaining Debentures.  The Company is seeking additional financing in the form of debt and/or equity in order to provide enough cash to cover our remaining current fixed cash obligations as well as providing working capital.  During the three months ended June 30, 2015, the Company entered into a credit agreement for $1.5 million, of which $1.0 million has been borrowed to date.  See Note 5 – Long-Term Debt for further details.  However, there can be no assurance as to the amounts, if any, the Company will receive in any additional financings or the terms thereof.  To the extent the Company issues additional equity securities, it could be dilutive to existing shareholders.

On June 25, 2015, the Company filed a registration statement (as subsequently amended on July 31, 2015 and August 7, 2015) for a rights offering of Series B Convertible Preferred Stock intended to raise $10.4 million before expenses.  The registration statement has not been declared effective by the SEC.  If the rights offering is consummated, the net proceeds will be used for repayment of debt and for general corporate purposes.  It is contemplated that the preferred stock will carry a 5.0% cumulative annual dividend on the stated value of the preferred stock.  The forgoing does not constitute an offer of any securities for sale.

Note 3 – Fair Value

The Company carries its money market funds and cash surrender value of life insurance related to its deferred compensation arrangements at fair value.  The fair value of these instruments is determined using a three-tier fair value hierarchy.  Based on this hierarchy, the Company determined the fair value of its money market funds using quoted market prices, a Level 1 or an observable input, and the cash surrender value of life insurance, a Level 2 based on observable inputs primarily from the counter party.  The Company’s money market funds and the cash surrender value of life insurance had carrying amounts of $1,000 and $55,000, respectively, at June 30, 2015 and December 31, 2014.  The carrying amounts of cash equivalents, receivables and accounts payable approximate fair value due to the short maturities of these items.  The fair value of the Company’s 8¼% Limited convertible senior subordinated notes due 2012 and 9½% Subordinated debentures due 2012, using observable inputs, was $244,000 and $33,000, respectively, at June 30, 2015 and December 31, 2014.  The fair value of the Company’s remaining long-term debt including current portion approximates its carrying value of $1.4 million at June 30, 2015 and $394,000 at December 31, 2014.

The fair value of warrants is calculated using the Black-Scholes method at the time of issuance of the warrants.  At December 31, 2014, there were no warrants classified under the liability method as they had all expired by November 14, 2014.  The Black-Scholes calculated values totaling $252,000 of the equity warrants issued to directors in 2013 are being amortized over their vesting periods of one, two and three years. The equity warrants issued in 2015 and 2014 were fully vested at the date of issuance, so their Black-Scholes calculated values of $21,000 and $92,000, respectively, were fully charged to the equity section at the date of issuance.

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Note 4 –Inventories

Inventories are stated at the lower of cost or market and consist of the following:

Note 5 –Long-Term Debt

The Company has outstanding $1.1 million of 8¼% Limited convertible senior subordinated notes due 2012 (the “Notes”) which are no longer convertible into common shares and which matured as of March 1, 2012; interest was payable semi-annually and interest expense continues to be accrued.  Such Notes were not exchanged into cash and the Company’s Common Stock as part of an exchange offer in 2011.  Based on the payment schedule prior to the offer to exchange, the Company had not remitted the March 1, 2010 and 2011 and September 1, 2010 and 2011 semi-annual interest payments of $418,000 each and the March 1, 2012 semi-annual interest and principal payment of $1.4 million to the trustee.  The non-payments constituted an event of default under the Indenture governing the Notes.  The trustee, by notice to the Company, or the holders of 25% of the principal amount of the Notes outstanding, by notice to the Company and the trustee, may declare the outstanding principal plus interest due and payable immediately.  The Company currently does not have any Senior Indebtedness.  If the Company subsequently incurs any Senior Indebtedness, the Notes would be subordinate to any Senior Indebtedness of the Company.

The Company has outstanding $334,000 of 9½% Subordinated debentures due 2012 (the “Debentures”) which matured on December 1, 2012; interest was payable semi-annually and interest expense continues to be accrued.  Such Debentures were not exchanged into cash as part of an exchange offer in 2011.  Based on the payment schedule prior to the offer to exchange, the Company had not remitted the December 1, 2009, 2010 and 2011 sinking fund payments of $106,000 each, the June 1, 2010, 2011 and 2012 and the December 1, 2010 and 2011 semi-annual interest payments of $50,000 each and the December 1, 2012 semi-annual interest and principal payment of $790,000 to the trustee.  The non-payments constituted an event of default under the Indenture governing the Debentures.  The trustee, by notice to the Company, or the holders of 25% of the principal amount of the Debentures outstanding, by notice to the Company and the trustee, may declare the outstanding principal plus interest due and payable immediately.  The Company currently does not have any Senior Indebtedness.  If the Company subsequently incurs any Senior Indebtedness, the Debentures would be subordinate to any Senior Indebtedness of the Company.

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On April 23, 2015, the Company entered into a Credit Agreement (the “Credit Agreement”) with BFI Capital Fund II, LLC (“Lender”) for $1.5 million at a fixed rate of interest of 12.00%, with a maturity date of May 1, 2016, which may be extended at the Company’s option for an additional six months, provided that the Company is not in default at the time of extension and has paid the Lender an extension fee of 1.00% of the then principal balance of the loan.  As of the date of this filing, the Company has borrowed $1.0 million under the Credit Agreement.  The funds utilized to make the loan included $500,000 of funding provided by Marco Elser, a Director of the Company, to the Lender.  In connection with the Credit Agreement, the Company granted the Lender a security interest in all of its assets.  The Company also issued the Lender a warrant to purchase 10,000 shares of the Company at an exercise price of $12.00 per share.

The Company, through a subsidiary, has a $367,000 mortgage, of which $68,000 is current, on its facility located in Des Moines, Iowa at a fixed rate of interest of 5.95% payable in monthly installments through March 1, 2020, which requires a compensating balance of $100,000.  The mortgage was due to mature on March 1, 2015, at which time the mortgage was extended for 5 years, the fixed interest rate was adjusted from 6.50% to 5.95% and the compensating balance was adjusted from $200,000 to $100,000.

Note 6 –Pension Plan

As of December 31, 2003, the benefit service under the pension plan had been frozen and, accordingly, there is no service cost.  As of April 30, 2009, the compensation increments had been frozen and, accordingly, no additional benefits are being accrued under the pension plan.

The following table presents the components of net periodic pension cost:

As of June 30,2015, the Company has recorded a current pension liability of $1.2 million, which is included in Accrued liabilities in the Condensed Consolidated Balance Sheets, and a long-term pension liability of $5.3 million, which is included in Deferred pension liability and other in the Condensed Consolidated Balance Sheets.  The minimum required contribution in 2015 is expected to be $1.2 million, of which $469,000 has already been paid through June 30, 2015, with approximately $772,000 of contributions remaining for 2015.  Historically, we have made certain required contributions after their respective due dates, and we have not yet made required contributions of $197,000 due in each of April and July 2015.  We expect to make all of our required contributions for 2015, however there is no assurance that we will be able to make any or all the remaining 2015 payments.  The Pension Benefit Guaranty Corporation has placed a lien on all of the Company’s assets in respect of amounts owed under the plan.  If we are unable to fulfill our related obligations, the enforcement of such lien would have a material adverse impact on our financial condition, results of operations and liquidity.

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The pension plan asset information included below is presented at fair value.  ASC 820 establishes a framework for measuring fair value and required disclosures about assets and liabilities measured at fair value. The fair values of these assets are determined using a three-tier fair value hierarchy.  Based on this hierarchy, the Company determined the fair value of its mutual stock funds using quoted market prices, a Level 1 or an observable input.  The Company does not have any Level 2 pension assets, in which such valuation would be based on observable inputs and quoted prices in markets that are not active, or Level 3 pension assets, in which such valuation would be based on unobservable measurements and management’s estimates.

The following table presents the pension plan assets by level within the fair value hierarchy as of June 30, 2015:

In March 2010, 2011 and 2013, the Company submitted to the Internal Revenue Service requests for waivers of the minimum funding standard for its defined benefit plan for the 2009, 2010 and 2012 plan years, respectively.  The waiver requests were submitted as a result of the economic climate and the business hardship that the Company was experiencing.  The waivers for the 2009, 2010 and 2012 plan years were approved and granted subject to certain conditions and have deferred payment of $285,000, $559,000 and $871,000 of the minimum funding standard for the 2009, 2010 and 2012 plan years, respectively.  If the Company does not fulfill the conditions of the waivers, the Pension Benefit Guaranty Corporation and the Internal Revenue Service have various enforcement remedies that can be implemented to protect the participant’s benefits, such as termination of the plan or a requirement that the Company make the unpaid contributions.

Note 7 – Share-Based Compensation

The Company accounts for all share-based payments to employees and board members, including grants of employee stock options, at fair value and expenses the benefit in the Condensed Consolidated Statements of Operations over the service period (generally the vesting period).  The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes pricing valuation model, which requires various assumptions including estimating stock price volatility, expected life of the stock option, risk free interest rate and forfeiture rate.

The Company did not issue any stock options during the six month periods ended June 30, 2015 and 2014.  There are no unrecognized compensation costs related to unvested stock options granted under the Company’s stock option plans.

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The following table summarizes the activity of the Company's stock options for the six months ended June 30, 2015:

Note 8 – Loss Per Common Share

Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period.  Diluted loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding, adjusted for shares that would be assumed outstanding after warrants and stock options vested under the treasury stock method.  At June 30, 2015 and 2014, there were outstanding equity warrants convertible into 85,300 and 245,800 shares of Common Stock, respectively, which were excluded from the calculation of diluted loss per share because their impact would have been anti-dilutive.  At June 30, 2015 and 2014, there were outstanding stock options to purchase 40 and 60 shares of Common Stock, respectively, which were excluded from the calculation of diluted loss per share because their impact would have been anti-dilutive.

Note 9 – Contingencies

The Company is subject to legal proceedings and claims which arise in the ordinary course of its business and/or which are covered by insurance.  The Company believes that it has accrued adequate reserves individually and in the aggregate for such legal proceedings.  Should actual litigation results differ from the Company’s estimates, revisions to increase or decrease the accrued reserves may be required.

Note 10 –Business Segment Data

Operating segments are based on the Company’s business components about which separate financial information is available and are evaluated regularly by the Company’s chief operating decision makers in deciding how to allocate resources and in assessing performance of the business.

The Company evaluates segment performance and allocates resources based upon operating income (loss). The Company’s operations are managed in two reportable business segments: Digital product sales and Digital product lease and maintenance.  Both design and produce large-scale, multi-color, real-time digital products and LED lighting, which has a line of energy-saving lighting solutions that provide facilities and public infrastructure with “green” lighting solutions that emit less heat, save energy and enable creative designs.  Both operating segments are conducted on a global basis, primarily through operations in the United States.  The Company also has operations in Canada.  The Digital product sales segment sells equipment and the Digital product lease and maintenance segment leases and maintains equipment.  Corporate general and administrative items relate to costs that are not directly identifiable with a segment.  There are no intersegment sales.

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Foreign revenues represent less than 10% of the Company’s revenues in 2015 and 2014.  The foreign operation does not manufacture its own equipment; the domestic operation provides the equipment that the foreign operation leases or sells.  The foreign operation operates similarly to the domestic operation and has similar profit margins.  Foreign assets are immaterial.

Information about the Company’s operations in its two business segments for the three months ended June 30, 2015 and 2014 is as follows:

Note 11 –Subsequent Events

On June 25, 2015, the Company filed a registration statement (as subsequently amended on July 31, 2015 and August 7, 2015) for a rights offering of Series B Convertible Preferred Stock intended to raise $10.4 million before expenses.  The registration statement has not been declared effective by the SEC.  If the rights offering is consummated, the net proceeds will be used for repayment of debt and for general corporate purposes.  It is contemplated that the preferred stock will carry a 5.0% cumulative annual dividend on the stated value of the preferred stock.  The forgoing does not constitute an offer of any securities for sale.

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Item 2.             Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Results of Operations

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

The following table presents our Statements of Operations data, expressed as a percentage of revenue for the three months ended June 30, 2015 and 2014:

Total revenues for the three months ended June 30, 2015 increased $143,000 or 2.4% to $6.0 million from $5.9 million for the three months ended June 30, 2014, primarily due to an increase in Digital product sales, partly offset by a decrease in Digital product lease and maintenance revenues.

Digital product sales revenues increased $545,000 or 11.9%, primarily due to increases in the scoreboard and lighting markets.

Digital product lease and maintenance revenues decreased $402,000 or 30.2%, primarily due to the continued expected revenue decline in the older outdoor display equipment rental and maintenance bases acquired in the early 1990s.  The financial services market continues to be negatively impacted by the current investment climate resulting in consolidation within that industry and the wider use of flat-panel screens for smaller applications.

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Total operating loss for the three months ended June 30, 2015 decreased $1.5 million to $492,000 from $2.0 million for the three months ended June 30, 2014, principally due to a reduction in the cost of revenues and a reduction in general and administrative expenses.

Digital product sales operating income (loss) increased $1.3 million to income of $120,000 for the three months ended June 30, 2015 compared to a loss of $1.2 million for the three months ended June 30, 2014, primarily due to a reduction in the cost of revenues and a reduction in general and administrative expenses.  The cost of Digital product sales decreased $191,000 or 4.6% despite the 11.9% increase in revenues, primarily due to improved material pricing and increased efficiencies in our manufacturing processes.  The cost of Digital product sales represented 78.2% of related revenues in 2015 compared to 91.7% in 2014.  Digital product sales general and administrative expenses decreased $588,000 or 37.2%, primarily due to a decrease in the allowance for uncollectible accounts and the closing of our former Georgia sales office.

Digital product lease and maintenance operating income increased $317,000, primarily as a result of a decrease in general and administrative expenses, partly offset by the decrease in revenues.  The cost of Digital product lease and maintenance decreased $369,000 or 36.0%, primarily due to a $136,000 decrease in depreciation expense and a $233,000 decrease in field service costs to maintain the displays.  The cost of Digital product lease and maintenance revenues represented 70.4% of related revenues in 2015 compared to 76.9% in 2014.  The cost of Digital product lease and maintenance includes field service expenses, plant repair costs, maintenance and depreciation.  Digital product lease and maintenance general and administrative expenses decreased $350,000, primarily due to a decrease in the allowance for uncollectible accounts.

Corporate general and administrative expenses increased $132,000 or 18.3%, primarily due to an increase in payroll and benefits, partly offset by a $42,000 expense on Canadian currency exchange in 2015 compared to a $132,000 expense on Canadian currency exchange in 2014.

Net interest expense increased $3,000 or 4.3%, primarily due to an increase in long-term debt and higher borrowing rates.

The warrant expense in 2015 is attributable to the amortization of equity warrants granted to directors in 2013.  The warrant expense and change in warrant liabilities in 2014 is primarily attributable to the change in the fair market value of the warrants, as well as the amortization of equity warrants granted to directors in 2013.  All liability warrants expired in November 2014.

The effective tax rate for the three months ended June 30, 2015 and 2014 was 0.0% and 0.4%, respectively.  Both the 2015 and 2014 tax rates are being affected by the valuation allowance on the Company’s deferred tax assets as a result of reporting pre-tax losses.  The income tax expense relates to the Company’s Canadian subsidiary.

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Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

The following table presents our Statements of Operations data, expressed as a percentage of revenue for the six months ended June 30, 2015 and 2014:

Total revenues for the six months ended June 30, 2015 decreased $2.0 million or 15.9% to $10.4 million from $12.4 million for the six months ended June 30, 2014, primarily due to a decrease in Digital product sales as well as a decrease in Digital product lease and maintenance revenues.

Digital product sales revenues decreased $1.3 million or 12.9%, primarily due to a large individual sale in the scoreboard market in 2014 that did not recur in 2015.

Digital product lease and maintenance revenues decreased $709,000 or 27.4%, primarily due to the continued expected revenue decline in the older outdoor display equipment rental and maintenance bases acquired in the early 1990s.  The financial services market continues to be negatively impacted by the current investment climate resulting in consolidation within that industry and the wider use of flat-panel screens for smaller applications.

Total operating loss for the six months ended June 30, 2015 decreased $1.0 million to $1.1 million from $2.1 million for the six months ended June 30, 2014, principally due to a reduction in general and administrative expenses.

Digital product sales operating loss decreased $745,000 to $189,000 for the six months ended June 30, 2015 compared to $934,000 for the six months ended June 30, 2014, primarily due to a decrease in general and administrative expenses.  The cost of Digital product sales decreased $1.5 million or 18.1% despite only a 12.9% increase in revenues, primarily due to improved material pricing and increased efficiencies in our manufacturing processes.  The cost of Digital product sales represented 77.0% of related revenues in 2015 compared to 82.0% in 2014.  Digital product sales general and administrative expenses decreased $549,000 or 20.4%, primarily due to decreases in marketing expenses, the allowance for uncollectible accounts and payroll and benefits.

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Digital product lease and maintenance operating income increased $357,000 to $511,000 in 2015 from $154,000 in 2014, primarily as a result of a decrease in general and administrative expenses.  The cost of Digital product lease and maintenance decreased $746,000 or 36.4%, primarily due to a $272,000 decrease in depreciation expense and a $474,000 decrease in field service costs to maintain the displays.  The cost of Digital product lease and maintenance revenues represented 69.4% of related revenues in 2015 compared to 79.2% in 2014.  The cost of Digital product lease and maintenance includes field service expenses, plant repair costs, maintenance and depreciation.  Digital product lease and maintenance general and administrative expenses decreased $320,000 or 83.3%, primarily due to a decrease in the allowance for uncollectible accounts.

Corporate general and administrative expenses increased $65,000 or 4.8%, primarily due to an increase in payroll and benefits, partly offset by a $190,000 gain on Canadian currency exchange in 2015 compared to a $30,000 expense on Canadian currency exchange in 2014.

Net interest expense decreased $17,000 or 12.1%, primarily due to lower average outstanding debt during the first half of 2015 as compared to 2014.

The warrant expense in 2015 is attributable to the amortization of equity warrants granted to directors in 2013.  The warrant expense and change in warrant liabilities in 2014 is primarily attributable to the change in the fair market value of the warrants, as well as the amortization of equity warrants granted to directors in 2013.  All liability warrants expired in November 2014.

The effective tax rate for the six months ended June 30, 2015 and 2014 was 0.6% and 0.6%, respectively.  Both the 2015 and 2014 tax rates are being affected by the valuation allowance on the Company’s deferred tax assets as a result of reporting pre-tax losses.  The income tax expense relates to the Company’s Canadian subsidiary.

Liquidity and Capital Resources

Current Liquidity

Although operating results improved in the second quarter and year to date 2015, the Company has incurred significant recurring losses and continues to have a significant working capital deficiency.  The Company incurred a net loss of $1.3 million in the six months ended June 30, 2015 and had a working capital deficiency of $5.5 million as of June 30, 2015.

The Company is dependent on future operating performance in order to generate sufficient cash flows in order to continue to run its businesses.  Future operating performance is dependent on general economic conditions, as well as financial, competitive and other factors beyond our control.  As a result, we have experienced a decline in our lease and maintenance bases.  The cash flows of the Company are constrained, and in order to more effectively manage its cash resources in these challenging economic times, the Company has, from time to time, increased the timetable of its payment of some of its payables.  There can be no assurance that we will meet our anticipated current and near term cash requirements.  Management believes that its current cash resources and cash provided by operations would not be sufficient to fund its anticipated current and near term cash requirements and is seeking additional financing in order to execute our operating plan.  We cannot predict whether future financing, if any, will be in the form of equity, debt, or a combination of both.  We may not be able to obtain additional funds on a timely basis, on acceptable terms, or at all.  The Company continually evaluates the need and availability of long-term capital in order to meet its cash requirements and fund potential new opportunities.

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The Company used cash of $1.1 million for operating activities for the six months ended June 30, 2015 and $83,000 for the six months ended June 30, 2014.  The Company has implemented several initiatives to improve operational results and cash flows over future periods, including reducing head count, reorganizing its sales department, outsourcing its human resources department and expanding its sales and marketing efforts in the LED lighting market.  The Company continues to explore ways to reduce operational and overhead costs.  The Company periodically takes steps to reduce the cost to maintain the digital products on lease and maintenance agreements.

Cash and cash equivalents decreased $316,000 in the six months ended June 30, 2015.  The decrease is primarily attributable to cash used in operating activities of $1.1 million, investment in property and equipment of $163,000, investment in equipment manufactured for rental of $61,000 and scheduled payments of long-term debt of $27,000, partly offset by proceeds from long-term debt of $1.0 million.

Under various agreements, the Company is obligated to make future cash payments in fixed amounts.  These include payments under the Company’s current and long-term debt agreements, pension plan contributions, employment agreement payments and rent payments required under operating lease agreements.  The Company has both variable and fixed interest rate debt.  Interest payments are projected based on actual interest payments incurred in 2015 until the underlying debts mature.

The following table summarizes the Company’s fixed cash obligations as of June 30, 2015 for the remainder of 2015 and over the next four fiscal years:

Of these fixed cash obligations, the Company continues to consider further exchanges of the $2.1 million, including interest, of remaining Notes and Debentures for an aggregate amount of $277,000. The Company is seeking additional financing in order to provide enough cash to cover our remaining current fixed cash obligations as well as providing working capital.  However, there can be no assurance as to the amounts, if any, the Company will receive in any additional financings or the terms thereof.  To the extent the Company issues additional equity securities, it could be dilutive to existing shareholders.

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On June 25, 2015, the Company filed a registration statement (as subsequently amended on July 31, 2015 and August 7, 2015) for a rights offering of Series B Convertible Preferred Stock intended to raise $10.4 million before expenses.  The registration statement has not been declared effective by the SEC.  If the rights offering is consummated, the net proceeds will be used for repayment of debt and for general corporate purposes.  It is contemplated that the preferred stock will carry a 5.0% cumulative annual dividend on the stated value of the preferred stock.  The forgoing does not constitute an offer of any securities for sale.

Long-Term Debt

The Company has outstanding $1.1 million of 8¼% Limited convertible senior subordinated notes due 2012 (the “Notes”) which are no longer convertible into common shares and which matured as of March 1, 2012; interest was payable semi-annually and interest expense continues to be accrued.  Such Notes were not exchanged for cash and the Company’s Common Stock as part of an exchange offer in 2011.  Based on the payment schedule prior to the offer to exchange, the Company had not remitted the March 1, 2010 and 2011 and September 1, 2010 and 2011 semi-annual interest payments of $418,000 each and the March 1, 2012 semi-annual interest and principal payment of $1.4 million to the trustee.  The non-payments constitute an event of default under the Indenture governing the Notes.  The trustee, by notice to the Company, or the holders of 25% of the principal amount of the Notes outstanding, by notice to the Company and the trustee, may declare the outstanding principal plus interest due and payable immediately.  The Company currently does not have any Senior Indebtedness.  If the Company subsequently incurs any Senior Indebtedness, the Notes would be subordinate to any Senior Indebtedness of the Company.

The Company has outstanding $334,000 of 9½% Subordinated debentures due 2012 (the “Debentures”) which matured on December 1, 2012; interest was payable semi-annually and interest expense continues to be accrued.  Such Debentures were not exchanged for cash as part of an exchange offer in 2011.  Based on the payment schedule prior to the offer to exchange, the Company had not remitted the December 1, 2009, 2010 and 2011 sinking fund payments of $106,000 each, the June 1, 2010, 2011 and 2012 and the December 1, 2010 and 2011 semi-annual interest payments of $50,000 each and the December 1, 2012 semi-annual interest and principal payment of $790,000 to the trustee.  The non-payments constitute an event of default under the Indenture governing the Debentures.  The trustee, by notice to the Company, or the holders of 25% of the principal amount of the Debentures outstanding, by notice to the Company and the trustee, may declare the outstanding principal plus interest due and payable immediately.  The Company currently does not have any Senior Indebtedness.  If the Company subsequently incurs any Senior Indebtedness, the Debentures would be subordinate to any Senior Indebtedness of the Company.

On April 23, 2015, the Company entered into a Credit Agreement (the “Credit Agreement”) with BFI Capital Fund II, LLC (“Lender”) for $1.5 million at a fixed rate of interest of 12.00%, with a maturity date of May 1, 2016, which may be extended at the Company’s option for an additional six months, provided that the Company is not in default at the time of extension and has paid the Lender an extension fee of 1.00% of the then principal balance of the loan.  As of the date of this filing, the Company has borrowed $1.0 million under the Credit Agreement.  The funds utilized to make the loan included $500,000 of funding provided by Marco Elser, a Director of the Company, to the Lender.  In connection with the Credit Agreement, the Company granted the Lender a security interest in all of its assets.  The Company also issued the Lender a warrant to purchase 10,000 shares of the Company at an exercise price of $12.00 per share. 

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The Company, through a subsidiary, has a $367,000 mortgage, of which $68,000 is current, on its facility located in Des Moines, Iowa at a fixed rate of interest of 5.95% payable in monthly installments through March 1, 2020, which requires a compensating balance of $100,000.  The mortgage was due to mature on March 1, 2015, at which time the mortgage was extended for 5 years, the fixed interest rate was adjusted from 6.50% to 5.95% and the compensating balance was adjusted from $200,000 to $100,000.

At June 30, 2015 and December 31, 2014, there were no warrants classified under the liability method as they had all expired by November 14, 2014.

Pension Plan Contributions

In March 2010, 2011 and 2013, the Company submitted to the Internal Revenue Service requests for waivers of the 2009, 2010 and 2012 minimum funding standards for its defined benefit plan.  The waiver requests were submitted as a result of the economic climate and the business hardship that the Company experienced.  The 2009, 2010 and 2012 waivers were approved and granted subject to certain conditions, and have deferred payment of $285,000, $559,000 and $871,000 of the minimum funding standard for the 2009, 2010 and 2012 plan years, respectively.  If the Company does not fulfill the conditions of the waivers, the Pension Benefit Guaranty Corporation and the Internal Revenue Service have various enforcement remedies that can be implemented to protect the participant’s benefits, such as termination of the plan or a requirement that the Company make the unpaid contributions.  As of June 30, 2015, we had made $469,000 of our required contributions for 2015, with approximately $772,000 of contributions remaining for 2015.  Historically, we have made certain required contributions after their respective due dates, and we have not yet made required contributions of $197,000 due in each of April and July 2015.  We expect to make all of our required contributions for 2015, however there is no assurance that we will be able to make any or all the remaining 2015 payments.  The Pension Benefit Guaranty Corporation has placed a lien on all of the Company’s assets in respect of amounts owed under the plan.  If we are unable to fulfill our related obligations, the enforcement of such lien would have a material adverse impact on our financial condition, results of operations and liquidity.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

The Company may, from time to time, provide estimates as to future performance.  These forward-looking statements will be estimates and may or may not be realized by the Company.  The Company undertakes no duty to update such forward-looking statements.  Many factors could cause actual results to differ from these forward-looking statements, including loss of market share through competition, introduction of competing products by others, pressure on prices from competition or purchasers of the Company’s products, interest rate and foreign exchange fluctuations, terrorist acts and war.

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Item 3.             Quantitative and Qualitative Disclosures about Market Risk

Item 4.             Controls and Procedures

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Item 1.             Legal Proceedings

Item 1A.          Risk Factors

Item 2.             Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.             Defaults upon Senior Securities

Item 4.             Mine Safety Disclosures

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Item 5.             Other Information

On June 25, 2015, the Company filed a registration statement (as subsequently amended on July 31, 2015 and August 7, 2015) for a rights offering of Series B Convertible Preferred Stock intended to raise $10.4 million before expenses. The registration statement has not been declared effective by the SEC. If the rights offering is consummated, the net proceeds will be used for repayment of debt and for general corporate purposes. It is contemplated that the preferred stock will carry a 5.0% cumulative annual dividend on the stated value of the preferred stock. The forgoing does not constitute an offer of any securities for sale.

On April 23, 2015, the Company entered into a Credit Agreement (the “Credit Agreement”) with BFI Capital Fund II, LLC (“Lender”) for $1.5 million at a fixed rate of interest of 12.00%, with a maturity date of May 1, 2016, which may be extended at the Company’s option for an additional six months, provided that the Company is not in default at the time of extension and has paid the Lender an extension fee of 1.00% of the then principal balance of the loan.  As of the date of this filing, the Company has borrowed $1.0 million under the Credit Agreement.  The funds utilized to make the loan included $500,000 of funding provided by Marco Elser, a Director of the Company, to the Lender.  In connection with the Credit Agreement, the Company granted the Lender a security interest in all of its assets.  The Company also issued the Lender a warrant to purchase 10,000 shares of the Company at an exercise price of $12.00 per share.  

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SIGNATURES