TRANS LUX Corp - Annual Report: 2017 (Form 10-K)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

 

FORM 10-K

 

 

Commission file number 1-2257

 

TRANS-LUX CORPORATION

(Exact name of registrant as specified in its charter)

 

 

135 East 57th Street, 14th Floor, New York, New York  10022

(Address of registrant’s principal executive offices) (Zip code)

 

Registrant’s telephone number, including area code:  (800) 243-5544

 

Securities registered pursuant to Section 12(b) of the Act:  None

 

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $0.001 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes                 No     X              

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes                 No     X              

 

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             

 

 

CONTINUED

 

TRANS-LUX CORPORATION

2017 Form 10-K Cover Page Continued

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes      X            No                     

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [   ]

 

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

Large accelerated filer___ Accelerated filer___ Non-accelerated filer___ Smaller reporting company  X      Emerging growth company___ 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.                

 

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

 

The aggregate market value of the registrant’s voting Common Stock held by non-affiliates of the registrant based upon the last sale price of the registrant’s Common Stock reported on OTCQB on June 30, 2017, was approximately $630,000, which value solely for the purposes of this calculation excludes shares held by the registrant’s officers, directors and 10% stockholders.  Such exclusion should not be deemed a determination by the registrant that all such individuals or entities are, in fact, affiliates of the registrant.  The registrant has no non-voting common stock.

 

The number of shares outstanding of the registrant’s Common Stock, par value $0.001 per share, as of the latest practicable date, on March 29, 2018, was 2,162,171 shares of Common Stock.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

The information required by Part III of this Form 10-K is incorporated herein by reference to certain portions of a definitive proxy statement which is expected to be filed by the Company pursuant to Regulation 14A within 120 days after the close of its fiscal year.

 

 

TRANS-LUX CORPORATION

2017 Form 10-K Annual Report

 

 

Table of Content

 

PART I

 

ITEM 1.                 BUSINESS

 

SUMMARY

 

Trans-Lux Corporation is a Delaware corporation incorporated on February 5, 1920.  Our Common Stock is quoted on OTC Pink under the symbol “TNLX.”  Our principal executive offices are located at 135 East 57^th Street, 14^th Floor, New York, NY  10022, where our telephone number is (800) 243-5544.

 

Unless the context otherwise requires, the terms “Trans-Lux,” the “Company,” the “Corporation,” “we,” “us,” and “our” as used herein refer to Trans-Lux Corporation and its subsidiaries.

 

The Company is a leading designer and manufacturer of digital display solutions, fixed digit scoreboards and LED Lighting fixtures and lamps.

 

DIGITAL DISPLAY PRODUCTS

 

The Company’s LED display systems include the latest features and functionality.  The Company’s product line of high-performance state-of-the-art digital display products and controllers are used to show full-color video and messages in virtually any configuration and application.  The products are used by sports arenas and stadiums; financial institutions, including brokerage firms, banks, energy companies, insurance companies and mutual fund companies; educational institutions; outdoor advertising companies; corporate and government communication centers; retail outlets; casinos, racetracks and other gaming establishments; airports, train stations, bus terminals and other transportation facilities; movie theatres; health maintenance organizations and in various other applications.

 

The Company employs a modular engineering design strategy, allowing basic “building blocks” of modules to be easily combined and configured in order to meet the broad application requirements of the various industries it serves.  This approach ensures product flexibility, reliability, ease of service and reduced spare parts requirements.

 

The Company’s display product line is comprised of two distinct segments: the Digital product sales division and the Digital product lease and maintenance division.

 

Digital Product Sales Division:  The Digital product sales division is segmented into five categories: Out-of-Home, Sports, Transportation, Live Entertainment and Retail & Hospitality.

 

Digital product Lease and Maintenance Division:  The Digital product lease and maintenance division leases and performs maintenance on digital products across all the sectors under agreement terms ranging from 30 days to 10 years.

 

Sales Order Backlog (excluding leases):  The amount of sales order backlog at December 31, 2017 and 2016 was approximately $2.5 million and $3.1 million, respectively.  The December 31, 2017 backlog is expected to be recognized as sales in 2018, although there can be no assurance thereof.  These amounts include only the sale of products; they do not include new lease orders or renewals of existing lease agreements that may be presently in-house.

 

LED LIGHTING

 

The LED lighting market provides energy-saving lighting solutions that feature a comprehensive offering of the latest LED lighting technologies that provide facilities and public infrastructure with “green” lighting solutions that emit less heat, save energy and enable creative designs.

 

The Company has developed what it believes is a unique business model for the LED Lighting market as a source manufacturer and distributor that integrates energy efficiency as well as customer experience solutions into a seamless package that is delivered directly to the end customer.  The Company manufactures and distributes all lighting solutions from single watt vanity lights to 750-watt facility lighting.

 

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The business model for the lighting sales team is ROI (return on investment) driven and focuses on maximizing rebates and energy incentives to subsidize upfront capital expenses.  We believe we provide our customers with the highest quality lights, widest array of financing options and world-class manufacturing with full product warranties and guarantees.

 

ENGINEERING AND PRODUCT DEVELOPMENT

 

The Company’s ability to compete and operate successfully depends on its capacity to anticipate and respond to the changing technological and product needs of its customers, among other factors.  For this reason, the Company continually develops enhancements to its existing product lines and examines and tests new display technologies.

 

The Company’s TLVision^TM line includes our latest LED Large Screen Systems that feature the most recent digital product technologies and capabilities, available in various pitch design.  TLVision^TM consists of full-color video products that can be used in a multitude of applications.  These applications range from posting alphanumeric data to the displaying of full HD video.  The pixel pitches of the products range from 1.5mm for very close distance viewing and up to 50mm for very long-distance viewing.  The Company also continues to expand its line of scoreboard solutions using its TLVision^TM technology and improved hand-held, simple to operate remotes and wireless control devices.

 

As part of its ongoing development efforts, the Company seeks to package certain products for specific market segments as well as continually tracking emerging technologies that can enhance its products.  Full color, live video and digital input technologies continue to be enhanced.

 

The Company maintains a staff responsible for product development and support.  The engineering, product enhancement and development efforts are supplemented by outside independent engineering consulting organizations, as required.

 

MARKETING AND DISTRIBUTION

 

In North America, the Company markets its digital display products in the United States and Canada using a combination of distribution channels, including direct sales representatives and a network of independent dealers and distributors.  By working with software vendors and using the internet to expand the quality and quantity of multimedia content that can be delivered to our digital products, we offer customers relevant, timely information, content management software and display hardware in the form of turnkey display communications packages.

 

The Company employs a number of different marketing techniques to attract new customers, including direct marketing efforts by its sales force to known and potential users of information displays; internet marketing; advertising in industry publications; and exhibiting at domestic and international trade shows annually.

 

Headquartered in New York, New York, the Company has sales and service offices in Des Moines, Iowa, and Hazelwood, Missouri, as well as satellite offices in other parts of the United States.

 

Internationally, the Company uses a combination of internal sales people and independent distributors to market its products outside the United States.  The Company has existing relationships with independent distributors worldwide covering the rest of North America, Europe, the Middle East, South America, Africa, the Far East and Australia.  Foreign revenues represented less than 10% of total revenues for the years ended December 31, 2017 and 2016, respectively.

 

In 2017, one customer accounted for 23.2% of total revenues.  We do not expect similar revenues from this customer in 2018, but we do expect similar revenues from the sale of similar products to similar customers in 2018.  In 2016, there were no customers that accounted for at least 10% of the Company’s total revenues.

 

MANUFACTURING AND OPERATIONS

 

The Company’s production facilities are located in Des Moines, Iowa, and Hazelwood, Missouri.  The production facilities consist principally of the manufacturing, assembly and testing of digital product units and related components. The Company performs most subassembly and final assembly of its digital display products.

 

All product lines are design engineered by the Company and controlled throughout the manufacturing process.  The Company has the ability to produce very large sheet metal fabrications, cable assemblies and surface mount and through-hole designed assemblies.  Some of the subassembly processes are outsourced.  The Company’s production of many of the subassemblies and final assemblies gives the Company the control opportunity needed for on-time delivery to its customers.

 

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The Company has the ability to modify its product lines.  The Company’s displays are designed with flexibility in mind, enabling the Company to customize its displays to meet different applications with a minimum amount of lead-time.  The Company designs certain of its materials to match components furnished by suppliers.  If such suppliers are unable to provide the Company with those components, the Company would have to contract with other suppliers to obtain replacement sources.  Such replacement might result in engineering design changes, as well as delays in obtaining such replacement components.  The Company believes it maintains suitable inventory and has contracts providing for delivery of sufficient quantities of such components to meet its needs.  The Company also believes that there are presently other qualified vendors of these components.  Other than the LEDs and LED modules which are manufactured by foreign sources, the Company does not acquire significant amounts of components directly from foreign suppliers.  The Company’s products are third-party certified for compliance with applicable safety, electromagnetic emissions and susceptibility requirements worldwide.

 

SERVICE AND SUPPORT

 

The Company emphasizes the quality and reliability of its products and the ability of its field service personnel and third-party agents to provide timely and expert service to the Company’s equipment on lease and maintenance bases and other types of customer-owned equipment.  The Company believes that the quality and timeliness of its on-site service personnel are essential components for the Company’s ongoing and future success.  The Company provides turnkey installation and support for the products it leases and sells in the United States and Canada.  The Company provides training to end-users and provides ongoing support to users who have questions regarding operating procedures, equipment problems or other issues.  The Company provides installation and service to those who purchase and lease equipment.  Additionally, the Company’s dealers and distributors offer support for the products they sell in the market segments they cover.

 

Personnel based in regional and satellite service locations throughout the United States and Canada provide high quality and timely on-site service for the installed equipment on lease and maintenance bases and other types of customer-owned equipment.  Purchasers or lessees of the Company’s larger products, such as financial exchanges, casinos and sports stadiums, often retain the Company to provide on-site service through the deployment of a service technician who is on-site daily for scheduled events. 

 

The Company operates its National Technical Services and Repair Centers from its facilities in Des Moines, Iowa and Hazelwood, Missouri.  Equipment repairs are performed in Des Moines, Iowa and service technicians are dispatched nationwide from various locations including Des Moines and Hazelwood.  The Company’s field service division is augmented by various service companies in the United States, Canada and overseas.  From time to time, the Company uses various third-party service agents to install, service and/or assist in the service of certain displays for reasons that include geographic area, size and height of displays.

 

COMPETITION

 

The Company’s availability of short and long-term leases to customers and its nationwide sales, service and installation capabilities are major competitive advantages in the digital product business. The Company believes that it is the largest supplier of large-scale stock, commodity, sports and race book gaming digital products in the United States, as well as one of the larger digital product and service organizations in the country.

 

The Company competes with a number of competitors, both larger and smaller than itself, with products based on different forms of technology.  There are several competitors whose current products utilize similar technology to the Company’s and who possess the resources necessary to develop competitive and more sophisticated products in the future.

 

INTELLECTUAL PROPERTY

 

The Company holds a number of trademarks for its products and considers such trademarks important to its business.

 

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EMPLOYEES

 

The Company had approximately 68 employees as of March 1, 2018.  Approximately 24% of the employees are unionized, pursuant to a collective bargaining agreement, which expires on December 31, 2019.  The Company believes its employee relations are good.

 

ITEM 1A.              RISK FACTORS

 

THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN

 

Our independent registered public accounting firm has issued an opinion on our Consolidated Financial Statements included in this Annual Report on Form 10-K that states that the Consolidated Financial Statements were prepared assuming we will continue as a going concern and further states that the continuing losses and uncertainty regarding our ability to make the required minimum funding contributions to the defined benefit pension plan and the past due principal and interest payments on our outstanding 8¼% Limited convertible senior subordinated notes due 2012 (the “Notes”) and 9½% Subordinated debentures due 2012 (the “Debentures”) raises substantial doubt about our ability to continue as a going concern.  In addition, if we are unable to (i) obtain additional liquidity for working capital, (ii) make the required minimum funding contributions to the defined benefit pension plan, (iii) make the required principal and interest payments on the Notes and the Debentures and/or (iv) repay our obligations under our Credit Agreement (hereinafter defined) with CNH Finance Fund I, L.P. (“CNH”) (formerly known as SCM Specialty Finance Opportunities Fund, L.P.), there would be a significant adverse impact on our financial position and operating results.

WE HAVE EXPERIENCED OPERATING LOSSES FOR THE PAST SEVERAL YEARS, AND THERE CAN BE NO ASSURANCE THAT WE WILL BE ABLE TO INCREASE OUR REVENUE SUFFICIENTLY TO GENERATE THE CASH REQUIRED TO FUND OUR CURRENT OPERATIONS

 

We have incurred operating losses for the past several years.  During the years ended December 31, 2017 and 2016, we incurred losses of $2.8 million and $611,000, respectively.  We are dependent upon future operating performance and, to the extent that operating performance falls short of our needs, future financing to generate sufficient cash flows in order to continue to run our businesses.  Future operating performance is dependent on general economic conditions, as well as financial, competitive and other factors beyond our control.  We have experienced a decline in our lease and maintenance bases for the past several years.  There can be no assurance that we will be able to increase our revenue sufficiently to generate the cash required to fund our current operations.  In addition, 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.  Moreover, our ability to receive debt financing could be restricted by the covenants of our Credit Agreement with CNH and any equity financing we receive could be substantially dilutive to our shareholders.

 

WE HAVE RECEIVED WAIVERS, SUBJECT TO CERTAIN CONDITIONS, OF THE 2009, 2010 AND 2012 MINIMUM FUNDING STANDARDS FOR OUR DEFINED BENEFIT PENSION PLAN, WHICH, IF WE FAIL TO FULFILL THE REQUIRED CONDITIONS FOR, MAY RESULT IN THE TERMINATION OF THE PLAN OR REQUIRE US TO MAKE THE UNPAID CONTRIBUTIONS

 

In March 2010, 2011 and 2013, the Company submitted to the Internal Revenue Service (the “IRS”) requests for waivers of the 2009, 2010 and 2012 minimum funding standards for its defined benefit pension plan.  As of December 31, 2017, the Company has fully repaid the amounts deferred for each of these waivers.  In 2017, we made $298,000 of the $444,000 of minimum required contributions to the plan.  At this time, we expect to make our minimum required contributions in 2018 of $576,000, which includes the balance of the 2017 minimum required contributions; however, there is no assurance that we will be able to make any or all such remaining payments.  See Note 13 to the Consolidated Financial Statements – Pension Plan for further details.

 

WE HAVE SIGNIFICANT DEBT, WHICH COULD IMPAIR OUR FINANCIAL CONDITION

 

As of December 31, 2017, we had outstanding debt of approximately $5.6 million (including $650,000 of a forgivable loan), $4.0 million of which was reflected under current portion of long-term debt in our consolidated balance sheet.  Such amount includes an aggregate of $607,000 of Notes and Debentures for which we are in default.  Our ability to satisfy our obligations will be dependent upon our future performance, which is subject to prevailing economic conditions and financial, business and other factors, including factors beyond our control.  There can be no assurance that our operating cash flows will be sufficient to meet our long-term debt service requirements or that we will be able to refinance indebtedness at maturity.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”

 

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NON-PAYMENT OF PRINCIPAL AND INTEREST ON OUTSTANDING NOTES AND DEBENTURES HAS RESULTED IN EVENTS OF DEFAULT AND MAY CONTINUE TO NEGATIVELY AFFECT OUR BALANCE SHEET

 

We have outstanding $387,000 of Notes.  The Notes matured as of March 1, 2012 and are currently in default.  The trustee, by notice to us, or the holders of 25% of the principal amount of the Notes outstanding, by notice to us and the trustee, may declare the outstanding principal plus interest due and payable immediately.

 

We have outstanding $220,000 of Debentures.  The Debentures matured as of December 1, 2012 and are currently in default.  The trustee, by notice to us, or the holders of 25% of the principal amount of the Debentures outstanding, by notice to us and the trustee, may declare the outstanding principal plus interest due and payable immediately.

 

OUR INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH

 

Our indebtedness could have important consequences to you. For example, it could: increase our vulnerability to general adverse economic and industry conditions; restrict us from making strategic acquisitions or cause us to make non-strategic divestitures; require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes; make it more difficult for us to satisfy our obligations to our creditors, resulting in possible defaults on and acceleration of such indebtedness; limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; place us at a competitive disadvantage compared to our competitors that have less debt; and limit our ability to borrow additional funds or increase our cost of borrowing.

 

In addition, the terms of the Credit Agreement with CNH contain restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our obligations under the Credit Agreement with CNH as well as our other outstanding indebtedness. The occurrence of any one of these events could have a material adverse effect on our business, financial condition, results of operations, prospects.

 

COMPETITORS MAY POSSESS SUPERIOR RESOURCES AND DELIVER MORE MARKETABLE PRODUCTS, WHICH WOULD ADVERSELY AFFECT OUR OPERATING MARGINS

 

Our digital products compete with a number of competitors, both larger and smaller than us, and with products based on different forms of technology.  In addition, there are several competitors whose current products utilize similar technology and who possess the resources to develop competitive and more sophisticated products in the future.  Our success is, to some extent, dependent upon our ability to anticipate technological changes in the industry and to successfully identify, obtain, develop and market new products that satisfy evolving industry requirements.  There can be no assurance that competitors will not market new products which may have perceived advantages over our products or which, because of pricing strategies, render the products currently sold by us less marketable or would otherwise adversely affect our operating margins.

 

OUR SUCCESS IS DEPENDENT UPON OUR ABILITY TO OBTAIN THE RENEWAL OF EXISTING LEASES OR ENTER INTO NEW LEASES AS OUR CURRENT LEASES EXPIRE, WHICH MAY NOT BE FEASIBLE.  THE INABILITY TO RENEW OR REPLACE OUR LEASES WOULD NEGATIVELY AFFECT OUR OPERATIONS

 

We derive a substantial percentage of our revenues from the leasing of our digital products, generally pursuant to leases that have an average term of one to five years.  Consequently, our future success is, at a minimum, dependent on our ability to obtain the renewal of existing leases or to enter into new leases as existing leases expire.  We also derive a significant percentage of our revenues from maintenance agreements relating to our digital display products.  The average term of such agreements is one to five years.  A portion of the maintenance agreements is cancelable upon 30 days notice.  There can be no assurance that we will be successful in obtaining the renewal of existing leases or maintenance agreements, obtaining replacement leases or realizing the value of assets currently under leases that are not renewed.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.”

 

WE ARE DEPENDENT ON OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER AND OTHER KEY PERSONNEL

 

We believe that our President and Chief Executive Officer, Jean-Marc Allain, plays a significant role in our success and the loss of his services could have an adverse effect on us.  There can be no assurance that we would be able to find a suitable replacement for Mr. Allain.  We have an employment agreement with Mr. Allain that expired on February 16, 2018 and currently renews on a month-to-month basis.  We believe that in addition to Mr. Allain, there is a core group of executives that also plays a significant role in our success.

 

OUR INTERNATIONAL OPERATIONS SUBJECT US TO POTENTIAL FLUCTUATIONS IN EXCHANGE RATES BETWEEN THE UNITED STATES DOLLAR AND FOREIGN CURRENCIES, AS WELL AS INTERNATIONAL LEGAL REQUIREMENTS, WHICH COULD IMPACT OUR PROFITABILITY

 

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Our financial condition, operating results and future growth could be significantly impacted by risks associated with our international activities, including specifically changes in the value of the U.S. dollar relative to foreign currencies and international tax rules.  Because a portion of our business is transacted in Canada dollars, fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar could seriously impact our manufacturing and other costs, as well as overall profitability.  The risks to our business related to fluctuations in currency exchange rates is further magnified by the current volatility in the currency markets that are characteristic of financial markets, and currency markets in particular.

 

Compliance with U.S. and foreign laws and regulations that apply to our international operations, including import and export requirements, anti-corruption laws, including the Foreign Corrupt Practices Act, tax laws (including U.S. taxes on foreign subsidiaries), foreign exchange controls, anti-money laundering and cash repatriation restrictions, data privacy requirements, labor laws and anti-competition regulations, increases the costs of doing business in foreign jurisdictions, and may subject us to additional costs which may arise in the future as a result of changes in these laws and regulations or in their interpretation.  We have not implemented formal policies and procedures designed to ensure compliance with all of these laws and regulations.  Any such violations could individually or in the aggregate materially adversely affect our reputation, financial condition or operating results.

 

OUR RELIANCE UPON THIRD-PARTY MANUFACTURERS IN CHINA COULD SUBJECT US TO POLITICAL AND LEGAL RISKS BEYOND OUR CONTROL

 

Many components of our products are produced in China by third-party manufacturers.  Our reliance on third-party Chinese manufacturers exposes us to risks that are not in our control, such as unanticipated cost increases or negative fluctuations in currency, which could negatively impact our results of operations and working capital.  Any termination of or significant disruption in our relationship with our Chinese suppliers may prevent us from filling customer orders in a timely manner.  Given the state of the Chinese political system, we cannot guaranty that our agreements with our Chinese suppliers will remain enforceable pursuant to Chinese law.  Furthermore, we cannot guaranty that all rights to payment or performance under our agreements with our Chinese manufacturing partners will be enforceable and that all debts owing to us, whether in the form of cash or product, will be collectible.  While we do not envision any adverse change to our international operations or suppliers, especially given the gradual move towards global integration by the Chinese government and financial markets, adverse changes to these operations as a result of political, governmental, regulatory, economic, exchange rate, labor, logistical or other factors could have a material adverse effect on our future operating results.

 

SUPPLIERS MAY BE UNABLE OR UNWILLING TO FURNISH US WITH REQUIRED COMPONENTS, WHICH MAY DELAY OR REDUCE OUR PRODUCT SHIPMENTS AND NEGATIVELY AFFECT OUR BUSINESS

 

We design certain of our products to match components furnished by suppliers.  If such suppliers were unable or unwilling to provide us with those components, we would have to contract with other suppliers to obtain replacement sources.  In particular, we purchase most of the LEDs and LED module blocks used in our digital products and lighting from three main suppliers.  We do not have long-term supply contracts with these suppliers.  A change in suppliers of either LED module blocks or certain other components may result in engineering design changes, as well as delays in obtaining such replacement components.  We believe that there are presently other qualified vendors of these components.  Our inability to obtain sufficient quantities of certain components as required, or to develop alternative sources at acceptable prices and within a reasonable time, could result in delays or reductions in product shipments that could have a materially adverse effect on our business and results of operations.

 

CYBER-ATTACKS AND BREACHES COULD CAUSE OPERATIONAL DISRUPTIONS, FRAUD OR THEFT OF SENSITIVE INFORMATION

 

Aspects of our operations are reliant upon internet-based activities, such as ordering supplies and back-office functions such as accounting and transaction processing, making and accepting payments, processing payroll and other administrative functions, etc.  Although we have taken measures to protect our technology systems and infrastructure, including employee education programs regarding cybersecurity, a breach of the security surrounding these functions could result in operational disruptions, theft or fraud, or exposure of sensitive information to unauthorized parties. Such events could result in additional costs related to operational inefficiencies, or damages, claims or fines.

 

WE CURRENTLY HAVE OUTSTANDING SERIES B CONVERTIBLE PREFERRED STOCK

 

We currently have 16,512 shares of Series B Convertible Preferred Stock (“SBCPS”) issued and outstanding.  The SBCPS carries a 6.0% cumulative annual dividend, payable semi-annually on April 15 and October 15 in cash or Common Stock, and is convertible into shares of Common Stock at an initial conversion price of $10.00 per share, representing a conversion ratio of 20 common shares for each share of SBCPS held at the time of conversion.  Under Delaware law, we may only pay dividends or make a distribution to our stockholders from our surplus (as determined in accordance with Delaware General Corporate Law) or our net profits for the current fiscal year before the dividend or distribution is declared under certain circumstances.  Therefore, our ability to pay dividends and make any other distributions in the future will depend upon our financial results, liquidity and financial condition.

 

The shares of SBCPS may be subject to mandatory conversion at our discretion after November 19, 2018, or earlier if the closing sale price of our Common Stock has been greater than or equal to $15.00 for 30 consecutive days.  The conversion of all or substantially all of the SBCPS into Common Stock will be dilutive to the current holders of our Common Stock, and if the holders of the Common Stock received upon conversion of the SBCPS choose to sell all or some of all these shares of Common Stock, the resulting shares could depress the market value of our Common Stock.

 

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WE HAVE A SIGNIFICANT NUMBER OF OUTSTANDING PREFERRED STOCK AND WARRANTS, THE CONVERSION AND EXERCISE OF WHICH WOULD DILUTE THE THEN-EXISTING STOCKHOLDERS’ PERCENTAGE OWNERSHIP OF OUR COMMON STOCK

 

As of December 31, 2017, we had outstanding SBCPS convertible into 330,240 shares of Common Stock and outstanding warrants to purchase 52,000 shares of Common Stock.  If all of the outstanding warrants were exercised, the proceeds to us would average $12.40 per share.  In addition, to the extent that we elect to pay the dividends due on the SBCPS in shares of Common Stock, over the next year, up to an additional 20,000 shares of Common Stock are potentially issuable as dividends with respect to the SBCPS (based on an assumed dividend rate of 6% per annum).  The exercise of all of the outstanding warrants, the conversion of the SBCPS into Common Stock, the payment of dividends on the SBCPS through the issuance of Common Stock, the grant and exercise of additional options and/or the grant of restricted stock would dilute the then-existing stockholders’ percentage ownership of Common Stock, and any sales in the public market of the Common Stock issuable upon such exercise could adversely affect prevailing market prices for the Common Stock.  Moreover, the terms upon which we would be able to obtain additional equity capital could be adversely affected because the holders of such securities can be expected to exercise or convert them at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable than those provided by such securities.

 

EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS AND CONTROL BY EXISTING STOCKHOLDERS

 

Our Amended and Restated Certificate of Incorporation (our “Certificate of Incorporation”) contains certain provisions that could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company.  Such provisions could limit the price that certain investors might be willing to pay in the future for shares of our Common Stock, thus making it less likely that a stockholder will receive a premium on any sale of shares of our Common Stock.  Our Board of Directors is divided into three classes, each of which serves for a staggered three-year term, making it more difficult for a third party to gain control of our Board.  Our Certificate of Incorporation also contains a provision that requires a four-fifths vote on any merger, consolidation or sale of assets with or to an “Interested Person” or “Acquiring Person,” as well as any amendment to the provision which divides the Board into three classes.

 

Additionally, we are authorized to issue 500,000 shares of preferred stock, of which (i) 416,500 are designated as Series A Convertible Preferred Stock, none of which are outstanding, and (ii) 51,000 are designated as SBCPS, 16,512 of which are outstanding.  The unissued preferred stock, if issued, will contain such rights, preferences, privileges and restrictions as may be fixed by our Board of Directors, which may adversely affect the voting power or other rights of the holders of Common Stock or delay, defer or prevent a change in control of the Company, or discourage bids for the Common Stock at a premium over its market price or otherwise adversely affect the market price of the Common Stock.

 

These provisions and others that could be adopted in the future could deter unsolicited takeovers or delay or prevent changes in our control or management, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices.  These provisions may also limit the ability of stockholders to approve transactions that they may deem to be in their best interests.

 

As of March 29, 2018, 10 stockholders who are executive officers and/or directors of the Company beneficially own approximately 48.1% of our Common Stock and one stockholder who is neither an officer nor a director of the Company beneficially owns approximately 30.1% of our Common Stock.  Accordingly, such stockholders could exert significant control over any potential stockholder actions.

 

OUR COMMON STOCK IS QUOTED ON OTC PINK AND MAY BE SUBJECT TO LIMITED TRADING VOLUME AND PRICE VOLATILITY

 

Our Common Stock is quoted on the OTC Pink, an inter-dealer electronic quotation and trading system for equity securities.  Quotation of our Common Stock on OTC Pink may limit the liquidity and price of our Common Stock more than if our Common Stock were quoted or listed on the NASDAQ Stock Market or another national exchange.  Some investors may perceive our Common Stock to be less attractive because it is traded in the over-the-counter market.  In addition, as an OTC Pink company, we do not attract the extensive analyst coverage that accompanies companies listed on national exchanges.  Further, institutional and other investors may have investment guidelines that restrict or prohibit investing in securities traded on OTC Pink.  These factors may have an adverse impact on the trading and price of our Common Stock.

 

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Our Common Stock is not widely held and the volume of trading has been relatively low and sporadic.  Accordingly, our Common Stock is subject to increased price volatility and reduced liquidity.  There can be no assurance that a more active trading market for our Common Stock will develop or be sustained if it does develop.  The market price of our Common Stock has been and may continue to be subject to wide fluctuations in response to numerous factors, some of which are beyond our control.  These factors include, among other things, the factors described in the sections entitled “Safe Harbor Statement under the Private Securities Reform Act of 1995” and “Risk Factors” in this Annual Report on Form 10-K, the general state of the securities markets and the market for similar stocks, changes in capital markets that affect the perceived availability of capital to companies in our industry, and governmental legislation or regulation, as well as general economic and market conditions.

 

WE ARE DEPENDENT ON A SIGNIFICANT CUSTOMER

 

For the year ended December 31, 2017, we had one customer which accounted for 23.2% of our total revenue.  We do not expect similar revenues from this customer in 2018, which could have a material adverse effect on our results of operations.  In 2016, there were no customers that accounted for at least 10% of our total revenues.

 

ITEM 1B.              UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 2.                 PROPERTIES

 

The Company’s headquarters and principal executive offices are located in a leased facility at 135 East 57^th Street, 14^th Floor, New York, New York, at an annual rental of $143,000, which it uses as its primary executive, sales and administrative office.  The Company leases a facility in Des Moines, Iowa, at an annual rental of $158,000, which is used for manufacturing, sales and administrative operations.  The Company leases a facility in Hazelwood, Missouri, at an annual rental of $323,000, which is being used for manufacturing operations.

 

The aggregate property rent expense was $848,000 and $625,000 for the years ended December 31, 2017 and 2016, respectively.

 

ITEM 3.                 LEGAL PROCEEDINGS

 

The Company is subject to legal proceedings and claims which arise in the ordinary course of its business and/or which are covered by insurance.  The Company has accrued reserves individually and in the aggregate for such legal proceedings.  Should actual litigation results differ from the Company’s estimates, revisions to increase or decrease the accrued reserves may be required. A vendor has brought a claim against us for $87,000 plus interest and damages.  The Company has accrued for the $87,000 plus interest in Accounts payable and in Accrued liabilites in the Consolidated Balance Sheet at December 31, 2017. 

 

ITEM 4.                 MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II

 

 

ITEM 5.                 MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

(a)                 The Company’s Common Stock trades on the OTCQB under the symbol “TNLX.”  Sales price information is set forth in Item 5(d) below.

 

(b)           The Company had approximately 223 holders of record of its Common Stock as of March 29, 2018.  The number of record holders does not include DTC participants or beneficial owners holding shares through nominee names.

 

(c)           The Board of Directors did not declare any cash dividends on Common Stock during 2017 and the Company does not anticipate paying any cash dividends on its Common Stock for the foreseeable future.  In addition, the terms of the Company’s Credit Agreement with CNH restrict the payment of dividends on our Common Stock.  The Board of Directors declared cash dividends of $6.00 per share in April and November 2017, aggregating approximately $198,000, for each share of SBCPS.  As described herein, the SBCPS carries a 6.0% cumulative annual dividend.

 

(d)           The following table sets forth the range of Common Stock prices on the OTCQB:

	2017						2016
	High			Low			High			Low
First Quarter		$2.45			$1.42			$4.10			$3.05
Second Quarter		$2.00			$1.01			$4.15			$2.01
Third Quarter		$1.79			$0.75			$4.20			$2.28
Fourth Quarter		$1.55			$0.50			$3.20			$2.00

 

(e)                 The Company did not purchase any of its equity securities during any month of the fourth fiscal quarter of 2017.

 

ITEM 6.                 SELECTED FINANCIAL DATA

 

(a)                 Not applicable.

 

(b)                 Not applicable.

 

ITEM 7.                 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

Trans-Lux is a leading supplier of LED technology for displays and lighting applications.  The essential elements of these systems are the real-time, programmable digital products and lighting fixtures that we design, manufacture, distribute and service.  Designed to meet the digital signage solutions for any size venue’s indoor and outdoor needs, these displays are used primarily in applications for the financial, banking, gaming, corporate, advertising, transportation, entertainment and sports markets.  The Company’s LED lighting fixtures offer energy-saving lighting solutions that feature a comprehensive offering of the latest LED lighting technologies that provide facilities and public infrastructure with “green” lighting solutions that emit less heat, save energy and enable creative designs.  The Company operates in two reportable segments: Digital product sales and Digital product lease and maintenance.

 

The Digital product sales segment includes worldwide revenues and related expenses from the sales of both indoor and outdoor digital product signage and LED lighting solutions.  This segment includes the financial, government/private, gaming, scoreboards and outdoor advertising markets.  The Digital product lease and maintenance segment includes worldwide revenues and related expenses from the lease and maintenance of both indoor and outdoor digital product signage.  This segment includes the lease and maintenance of digital product signage across all markets.

 

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Going Concern

 

We do not have adequate liquidity, including access to the debt and equity capital markets, to operate our business.  As a result, our short-term business focus has been to preserve our liquidity position.  Unless we are successful in obtaining additional liquidity, we believe that we will not have sufficient cash and liquid assets to fund normal operations for the next 12 months from the issuance of this Form 10-K.  In addition, the Company’s obligations under its defined benefit pension plan exceeded plan assets by $4.2 million at December 31, 2017, including $576,000 of minimum contributions due over the next 12 months.  The Company is in default on its Notes and Debentures, which have remaining principal balances of $387,000 and $220,000, respectively.  As a result, if the Company is unable to (i) obtain additional liquidity for working capital, (ii) make the required minimum funding contributions to the defined benefit pension plan, (iii) make the required principal and interest payments on the Notes and the Debentures and/or (iv) repay our obligations under our Credit Agreement with CNH, there would be a significant adverse impact on the financial position and operating results of the Company.

 

Moreover, because of the uncertainty surrounding our ability to obtain additional liquidity and the potential of the noteholders and/or trustees to give notice to the Company of a default on either the Debentures or the Notes, our independent registered public accounting firm has issued an opinion on our Consolidated Financial Statements that states that the Consolidated Financial Statements were prepared assuming we will continue as a going concern.  See Note 2 to the Consolidated Financial Statements - Going Concern.

 

Critical Accounting Policies and Estimates

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  On an ongoing basis, management evaluates its estimates and judgments, including those related to uncollectible accounts receivable, slow-moving and obsolete inventories, rental equipment, goodwill, income taxes, warranty reserve, warrant liabilities, pension plan obligations, contingencies and litigation.  Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.  Management has discussed the development and selection of these accounting estimates and the related disclosures with the Audit Committee of the Board of Directors.

 

Management believes the following critical accounting policies, among others, involve its more significant judgments and estimates used in the preparation of its Consolidated Financial Statements:

 

Uncollectible Accounts Receivable:  The Company maintains allowances for uncollectible accounts receivable for estimated losses resulting from the inability of its customers to make required payments.  Should non-payment by customers differ from the Company’s estimates, a revision to increase or decrease the allowance for uncollectible accounts receivable may be required.

 

Slow-Moving and Obsolete Inventories:  The Company writes down its inventory for estimated obsolescence equal to the difference between the carrying value of the inventory and the estimated net realizable value based upon assumptions about future demand and market conditions.  If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

 

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Rental Equipment:  The Company evaluates rental equipment assets for possible impairment annually to determine if the $2.0 million carrying amount of such assets may not be recoverable.  The Company uses a cash flow model to determine the fair value under the income approach, based on the remaining lengths of existing leases.  Changes in the assumptions used could materially impact our fair value estimates.  Assumptions critical to our fair value estimates are projected renewal rates and CPI rate changes.  These and other assumptions are impacted by national and global economic conditions including changes in national and international interest rates, taxes, inflation, etc. and will change in the future based on period-specific facts and circumstances, thereby possibly requiring an impairment charge in the future.  The December 31, 2017 impairment analysis included a renewal rate estimate of 89.2% and a CPI rate change of approximately 1.8%, which were the actual average rates for the two-year period ended December 31, 2017.  Based on these assumptions, the cash flow model determined a fair value of $8.0 million, exceeding its carrying value by 298%.  Therefore there is no impairment of the Rental Equipment.  For every 1-percentage-point change in the renewal rate, the valuation would change by approximately $151,000.  For every 0.1-percentage-point change in the CPI rate, the valuation would change by approximately $23,000.

 

Rental equipment is comprised of installed digital products on lease that are primarily used for indoor trading applications, time and temperature displays and other digital message displays and have estimated useful lives of 10-15 years.  For example, the Company is party to contracts for equipment originally installed over 30 or 40 years ago in the 1970’s and 1980’s, as well as dozens of installations from the 1990’s that are still in operation.  Current contracts have an average age of 19.6 years from their installation dates through the expiration of their current terms.

 

Goodwill:  The Company evaluates goodwill for possible impairment annually and when events or changes in circumstances indicate that the carrying amount may not be recoverable.  The Company uses the income and the market approach to test for impairment of its goodwill, and considers other factors including economic trends and our market capitalization relative to net book value.  The Company weighs these approaches by using a 67% factor for the income approach and a 33% factor for the market approach.  Together these two factors estimate the fair value of the reporting unit.  The Company’s $744,000 goodwill relates to its digital product sales reporting unit.  The Company uses a discounted cash flow model to determine the fair value under the income approach which contemplates a conservative overall weighted average revenue growth rate.  If the Company were to reduce its revenue projections on the reporting unit by 3.3 percentage points within the income approach, the fair value of the reporting unit would be below carrying value.  The gross profit margins used were consistent with historical margins achieved by the Company during previous years.  If there is a margin decline of 3.0 percentage points or more, the model would yield results of a fair value less than the carrying amount.  The Company uses a market multiple approach based on revenue to determine the fair value under the market approach which includes a selection of and market price of a group of comparable companies and the performance of the guidelines of the comparable companies and of the reporting unit.

 

The October 1, 2017 annual review indicated that the fair value of the reporting unit exceeded its carrying value by 169.2%.  Therefore, there was no impairment of goodwill related to our digital product sales reporting unit.  Changes in the assumptions used could materially impact our fair value estimates.  Assumptions critical to our fair value estimates are: (i) discount rate used to derive the present value factors used in determining the fair value of the reporting unit, (ii) projected average revenue growth rates used in the reporting unit models and (iii) projected long-term growth rates used in the derivation of terminal year values.  These and other assumptions are impacted by economic conditions and expectations of management and will change in the future based on period-specific facts and circumstances, thereby possibly requiring an impairment charge in the future.

 

Restricted Cash:  The Company classifies cash as restricted when the cash is unavailable for withdrawal or usage for general operations.  Restrictions may include legally restricted deposits, contracts entered into with others, or the Company’s statements of intention with regard to particular deposits.  In May 2017, the Company deposited $650,000 in a savings account as collateral for a letter of credit in favor of the City of Hazelwood, Missouri as collateral for a forgivable loan.  In July 2016, the Company deposited $400,000 in a savings account as collateral for a letter of credit in favor of the landlord at its Hazelwood, Missouri manufacturing facility as a security deposit.  In October 2017, the security deposit was reduced by $100,000 to $300,000, so the related letter of credit and savings account deposit were also reduced.  In July 2014, the Company deposited $212,000 in a savings account as collateral for a letter of credit in favor of the landlord at its former New York headquarters as a security deposit.  The lease expired on November 29, 2017 and the related letter of credit was released on February 9, 2018.  The Company has presented these funds in Restricted cash in the Consolidated Balance Sheets since the use of the funds under the letters of credit is restricted.

 

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Income Taxes:  The Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized.  While the Company has considered future taxable income and ongoing feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.  Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made.

 

Warranty Reserve:  The Company provides for the estimated cost of product warranties at the time revenue is recognized.  While the Company engages in product quality programs and processes, including evaluating the quality of the component suppliers, the warranty obligation is affected by product failure rates.  Should actual product failure rates differ from the Company’s estimates, revisions to increase or decrease the estimated warranty liability may be required.

 

Pension Plan Obligations:  The Company is required to make estimates and assumptions to determine the obligation of our pension benefit plan, which includes investment returns and discount rates.  The Company recorded after-tax charges in unrecognized pension liability of $95,000 and $409,000 in 2017 and 2016, respectively, in other comprehensive loss.  Estimates and assumptions are reviewed annually with the assistance of external actuarial professionals and adjusted as circumstances change.  Assumed mortality rates of plan participants are a critical estimate in measuring the expected payments a participant will receive over their lifetime and the amount of liability and expense we recognize.  At December 31, 2017, plan assets were invested 28.0% in fixed income contracts and 72.0% in equity and index funds.  The investment return assumption takes the asset mix into consideration.  The assumed discount rate reflects the rate at which the pension benefits could be settled.  The Company utilizes a yield curve in lieu of a single weighted discount rate in determining liabilities and the interest cost for the following year.  At December 31, 2017, the weighted average rates used for the computation of benefit plan liabilities were: investment returns, 8.00% and discount rate, 3.66%.  The net periodic cost for 2018 will be based on the December 31, 2017 valuation.  The defined benefit pension plan periodic cost was ($31,000) and $14,000 in 2017 and 2016, respectively.  At December 31, 2017, assuming no change in the other assumptions, one-percentage point increase/(decrease) in the discount rate would have increased/(decreased) the net periodic cost by $7,000/($16,000).

 

As of December 31, 2003, the benefit service under the defined benefit pension plan had been frozen and, accordingly, there is no service cost for the years ended December 31, 2017 and 2016.  In March 2010, 2011 and 2013, the Company submitted to the IRS requests for waivers of the 2009, 2010 and 2012 minimum funding standards for its defined benefit pension plan.  As of December 31, 2017, the Company has fully repaid the amounts deferred for each of these waivers.  In 2017, we made $298,000 of the $444,000 of minimum required contributions to the plan.  At this time, we expect to make our minimum required contributions in 2018 of $576,000, which includes the balance of the 2017 minimum required contributions; however, there is no assurance that we will be able to make any or all of such remaining payments.  See Note 13 to the Consolidated Financial Statements – Pension Plan for further details.

 

Contingencies and Litigation:  The Company is subject to legal proceedings and claims which arise in the ordinary course of its business and/or which are covered by insurance.  The Company has accrued reserves individually and in the aggregate for such legal proceedings.  Should actual litigation results differ from the Company’s estimates, revisions to increase or decrease the accrued reserves may be required. A vendor has brought a claim against us for $87,000 plus interest and damages.  The Company has accrued for the $87,000 plus interest in Accounts payable and in Accrued liabilites in the Consolidated Balance Sheet at December 31, 2017.  Potential damages, if any, are not yet determinable.

 

On May 23, 2017, the Company received $650,000 structured as a forgivable loan from the City of Hazelwood, Missouri, which is included in Forgivable loan in the Consolidated Balance Sheets.  The loan will be forgiven on a pro-rata basis if predetermined employment levels are attained and would expire on April 1, 2024.  If the Company attains the employment levels required by the agreement, there is no interest due, otherwise interest accrues at a rate of prime plus 2.00% (6.50% at December 31, 2017).  In February 2018, in accordance with the agreement, the Company requested a 1-year extension of the terms of the agreement, which was approved by the City of Hazelwood in March 2018, so the agreement now terminates on April 1, 2025.  As of December 31, 2017, the Company has accrued interest of $26,000.

 

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Results of Operations

The following table presents our Statements of Operations data, expressed as a percentage of revenue for the years ended December 31, 2017 and 2016:

 

In thousands	2017						2016
Revenues:
Digital product sales	$	22,093		90.4	%		$	18,138		85.6	%
Digital product lease and maintenance		2,350		9.6	%			3,053		14.4	%
Total revenues		24,443		100.0	%			21,191		100.0	%
Cost of revenues:
Cost of digital product sales		19,221		78.6	%			13,355		63.0	%
Cost of digital product lease and maintenance		1,490		6.1	%			2,032		9.6	%
Total cost of revenues		20,711		84.7	%			15,387		72.6	%
Gross profit from operations		3,732		15.3	%			5,804		27.4	%
General and administrative expenses		(6,578)		(26.9)	%			(6,624)		(31.3)	%
Operating loss		(2,846)		(11.6)	%			(820)		(3.9)	%
Interest expense, net		(708)		(2.9)	%			(374)		(1.8)	%
Loss on foreign currency remeasurement		(178)		(0.7)	%			(45)		(0.2)	%
Gain on extinguishment of debt		-		-	%			462		2.2	%
Gain on sale/leaseback transaction		132		0.5	%			121		0.6	%
Warrant expense		-		-	%			(21)		(0.1)	%
Loss before income taxes		(3,600)		(14.7)	%			(677)		(3.2)	%
Income tax benefit		751		3.0	%			66		0.3	%
Net loss	$	(2,849)		(17.7)	%		$	(611)		(2.9)	%

 

2017 Compared to 2016

 

Total revenues for the year ended December 31, 2017 increased $3.2 million or 15.3% to $24.4 million from $21.2 million for the year ended December 31, 2016, primarily due to an increase in Digital product sales, partially offset by a decrease in Digital product lease and maintenance.

 

Digital product sales revenues for the year ended December 31, 2017 increased $4.0 million or 21.8%, primarily due to a single large scoreboard customer sale, offset by a reduction in other sales to the scoreboard and lighting markets.

 

Digital product lease and maintenance revenues for the year ended December 31, 2017 decreased $703,000 or 23.0%, primarily due to the continued expected revenue decline in the older outdoor display equipment rental and maintenance bases acquired in the early 1990s.

 

Total gross margin for the year ended December 31, 2017 decreased to 15.3% from 27.4% for the year ended December 31, 2016, primarily due to the strategically reduced margin on the single large scoreboard customer sale, partially offset by lower depreciation expense related to Digital product lease and maintenance revenues, as well as increased efficiencies achieved in our manufacturing facility.

 

Total operating loss for the year ended December 31, 2017 increased $2.0 million to $2.8 million as compared to $820,000 for the year ended December 31, 2016, principally due to the decrease in gross margin.

 

Digital product sales operating (loss) income decreased $1.8 million to a loss of $149,000 as compared to income of $1.6 million, primarily due to the decrease in gross margin.  The cost of Digital product sales increased $5.9 million or 43.9%, primarily due to the decreased gross margin on the single large scoreboard customer sale and the increase in revenues.  The cost of Digital product sales represented 87.0% of related revenues in 2017 compared to 73.6% in 2016.  Digital product sales general and administrative expenses decreased $131,000 or 4.2%, primarily due to a decrease in bad debt expense.

 

Digital product lease and maintenance operating income decreased $172,000 or 20.8%, primarily as a result of a decrease in revenues, offset by the decrease in depreciation expense.  The cost of Digital product lease and maintenance decreased $542,000 or 26.7%, primarily due to the decrease in depreciation expense.  The cost of Digital product lease and maintenance revenues represented 63.4% of related revenues in 2017 compared to 66.6% in 2016.  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 increased $11,000 or 5.6%, primarily due to an increase in bad debt expense.

 

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Corporate general and administrative expenses increased $74,000 or 2.3%, primarily due to an increase in payroll and benefits, partially offset by decreases in insurance, legal and pension plan expenses.

 

Net interest expense increased $334,000 or 89.3%, primarily due to an increase in the average outstanding long-term debt, as well as an increase in interest rates.

 

The loss on foreign currency remeasurement increased $133,000 to $178,000 in 2017 as compared to $45,000 in 2016, primarily due to increased fluctuations in the exchange rate between currency in Canada and the United States.

 

Gain on extinguishment of debt in 2016 relates to the Company’s offers to exchange each $1,000 of principal of its Notes and Debentures, forgiving any related interest, for $200 in cash, for an aggregate payment by the Company of $71,000.

 

Warrant expense in 2016 is attributable to the amortization of equity warrants granted to directors in 2013.

 

The effective tax rate for the years ended December 31, 2017 and 2016 was a benefit of 20.9% and 9.7%, respectively.  In 2017 and 2016, the Company recognized benefits of $777,000 and $89,000, respectively, as a result of refundable alternative minimum tax (“AMT”) credits.  The income tax benefit in 2017 and 2016 is also affected by income tax expense related to the Company’s Canadian subsidiary and the valuation allowance on the Company’s deferred tax assets as a result of reporting pre-tax losses.

 

Liquidity and Capital Resources

 

Current Liquidity

 

The Company has incurred significant recurring losses and has a significant working capital deficiency.  The Company incurred a net loss of $2.8 million in 2017 and had a working capital deficiency of $5.8 million as of December 31, 2017.

 

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, and we have no commitments, agreements or understandings with respect to any equity or debt financing.  Moreover, our ability to receive debt financing could be restricted by the covenants of our Credit Agreement with CNH and any equity financing we receive could be substantially dilutive to our shareholders.  The Company continually evaluates the need and availability of long-term capital in order to meet its cash requirements and fund potential new opportunities.

 

The Company used cash for operating activities of $810,000 and $772,000 for the years ended December 31, 2017 and 2016, respectively.  The Company has implemented several initiatives to improve operational results and cash flows over future periods, including reducing headcount, 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 increased $141,000 in 2017.  The increase is primarily attributable to borrowings of long-term debt of $3.5 million and proceeds from a forgivable loan of $650,000, offset by payments of long-term debt of $2.2 million, cash used for operations of $810,000, cash designated as restricted cash of $550,000, investments in equipment for rental, property and equipment of $222,000 and payments of dividends on the SBCPS of $198,000.

 

Under various agreements, the Company is obligated to make future cash payments in fixed amounts.  These include payments under the Company’s long-term debt agreements, payments to the Company’s pension plan, employment agreement payments, warranty liabilities and rental 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 2017 until the underlying debts mature.

 

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The following table summarizes the Company’s fixed cash obligations as of December 31, 2017 over the next five fiscal years:

 

In thousands	2018			2019			2020			2021			2022
Long-term debt, including interest	$	4,625		$	1,143		$	-		$	-		$	-
Pension plan payments		576			267			312			276			333
Employment obligations		100			-			-			-			-
Estimated warranty liability		103			87			64			44			24
Operating lease payments		701			356			336			342			348
Total	$	6,105		$	1,853		$	712		$	662		$	705

 

Of the fixed cash obligations for debt for 2018, $1.0 million, including interest, of Notes and Debentures remains outstanding.  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 such financing or the terms thereof.  To the extent the Company issues additional equity securities, it could be dilutive to existing shareholders.

 

Long-Term Debt

 

On July 12, 2016, the Company and its wholly-owned subsidiaries Trans-Lux Display Corporation, Trans-Lux Midwest Corporation and Trans-Lux Energy Corporation (the “Borrowers”) entered into a credit and security agreement, as subsequently amended on September 8, 2016, February 14, 2017, March 28, 2017, July 28, 2017, October 10, 2017, November 9, 2017, November 16, 2017 and March 14, 2018 (collectively, the “Credit Agreement”) with CNH as lender.  Under the Credit Agreement, the Company can borrow up to an aggregate of $4.0 million, which includes (i) up to $3.0 million of a revolving loan, at an interest rate of prime plus 4.0% (amended to be prime plus 6.0% effective March 1, 2018), and (ii) a $1.0 million term loan, at an interest rate of prime plus 6.0%.  The availability under the revolving loan is calculated based on certain percentages of eligible receivables and inventory.  During 2017, the Company had drawn $917,000 on the revolving loan and $600,000 on the term loan.  As of December 31, 2017, $2.7 million and $790,000, respectively, were outstanding on the revolving loan and the term loan, respectively.  Interest under the Credit Agreement is payable monthly in arrears.  The Credit Agreement also requires the payment of certain fees, including, but not limited to a facility fee, an unused line fee and a collateral management fee.  See Note 11 to the Consolidated Financial Statements – Long-Term Debt for further details.

 

The Credit Agreement contains financial and other covenant requirements, including, but not limited to, financial covenants that require the Borrowers to maintain a fixed charge coverage ratio of at least 1.0 to 1.0 starting with their August 31, 2017 financial statements and a loan turnover rate of no more than 35 days.  As of December 31, 2017, the fixed charge ratio was 0.0 to 1.0 and the loan turnover rate was 44 days, so the Company was not in compliance with all covenants.  The Company entered into an Eighth Amendment to the Credit Agreement dated as of March 14, 2018 with CNH, to waive the Company’s non-compliance with these financial covenants and to amend the interest rate of prime plus 4.0% to be prime plus 6.0% effective March 1, 2018.

 

On April 27, 2016, the Company received a $500,000 loan from Carlisle Investments Inc. (“Carlisle”) at a fixed interest rate of 12.00%, which is due to mature on April 27, 2019 with a bullet payment of all principal due at such time.  Interest is payable monthly.  Marco Elser, a director of the Company, exercises voting and dispositive power as investment manager of Carlisle.

 

On November 6, 2017, the Company received an additional $500,000 loan from Carlisle at a fixed interest rate of 12.00%, which was due to mature on December 10, 2017 with a bullet payment of all principal due at such time (the “Second Carlisle Agreement”).  Interest is payable monthly.  As of December 31, 2017, the outstanding balance was $500,000.  Marco Elser, a director of the Company, exercises voting and dispositive power as investment manager of Carlisle.

 

On July 15, 2016, holders of $239,000 of the Notes and $114,000 of the Debentures accepted the Company’s offer to exchange each $1,000 of principal, forgiving any related interest, for $200 in cash, for an aggregate payment by the Company of $71,000.  The Company continues to consider future exchanges of the $387,000 of remaining Notes and $220,000 of remaining Debentures, but has no agreements, commitments or understandings with respect to any further such exchanges.  As of December 31, 2017, the Company still had outstanding $387,000 of Notes which matured as of March 1, 2012.  The Company also still had outstanding $220,000 of Debentures which matured on December 1, 2012.  See Note 11 to the Consolidated Financial Statements – Long-Term Debt for further details.

 

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Pension Plan Contributions

 

In March 2010, 2011 and 2013, the Company submitted to the IRS requests for waivers of the 2009, 2010 and 2012 minimum funding standards for its defined benefit pension plan.  As of December 31, 2017, the Company had fully repaid the amounts deferred for each of these waivers.  In 2017, we made $298,000 of the $444,000 of minimum required contributions to the plan.  At this time, we expect to make our minimum required contributions in 2018 of $576,000, which includes the balance of the 2017 minimum required contributions; however, there is no assurance that we will be able to make any or all of such remaining payments.  See Note 13 to the Consolidated Financial Statements – Pension Plan for further details.

 

Off-Balance Sheet Arrangements:  The Company has no majority-owned subsidiaries that are not included in the Consolidated Financial Statements nor does it have any interests in or relationships with any special purpose off-balance sheet financing entities.

 

Safe Harbor Statement under the Private Securities Reform Act of 1995

 

This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Any statement that is not a statement of historical fact should be considered a forward-looking statement.  We often use words or phrases of expectation or uncertainty like “believe,” “anticipate,” “plan,” “expect,” “intent,” “project,” “future,” “may,” “will,” “could,” “would” and similar words to help identify forward-looking statements.  Examples of forward-looking statements include statements regarding our future financial results, operating results, business strategies, projected costs, product development or future sales, competitive positions and plans and objectives of management for future operations.

 

We have based these forward-looking statements on our current expectations and projections about future events.  However, they are subject to various risks and uncertainties, many of which are outside our control, including the circumstances described in the section entitled “Risk Factors” in this report.  Accordingly, our actual results or financial condition could differ materially and adversely from those discussed in, or implied by, these forward-looking statements.  We caution you not to place undue reliance on our forward-looking statements.  Each forward-looking statement speaks only as of the date on which it is made, and, except to the extent required by federal securities laws, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

ITEM 7A.              QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is subject to interest rate risk on its long-term debt.  The Company manages its exposure to changes in interest rates by the use of variable and fixed interest rate debt.  The fair value of the Company’s fixed rate long-term debt is disclosed in Note 11 to the Consolidated Financial Statements – Long-Term Debt.  Every 1-percentage-point change in interest rates would result in an annual interest expense fluctuation of approximately $42,000.  In addition, the Company is exposed to foreign currency exchange rate risk mainly as a result of investment in its Canadian subsidiary.  A 10% change in the Canadian dollar relative to the U.S. dollar would result in a currency exchange expense fluctuation of approximately $284,000, based on dealer quotes, considering current exchange rates.  The Company does not enter into derivatives for trading or speculative purposes and did not hold any derivative financial instruments at December 31, 2017.

 

ITEM 8.                 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The following financial statements of Trans-Lux Corporation and its subsidiaries are included on the following pages:

 

Report of Independent Registered Public Accounting Firm	17
Consolidated Balance Sheets as of December 31, 2017 and 2016	18
Consolidated Statements of Operations for the Years Ended December 31, 2017 and 2016	19
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2017 and 2016	19
Consolidated Statements of Stockholders’ Deficit for the Years Ended December 31, 2017 and 2016	20
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017 and 2016	21
Notes to Consolidated Financial Statements	22

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and Board of Directors of

Trans-Lux Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Trans-Lux Corporation and Subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive loss, stockholders’ deficit, and cash flows for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”).  In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Explanatory Paragraph – Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As more fully described in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a significant working capital deficiency that raise substantial doubt about its ability to continue as a going concern.  Further, the Company is in default of the indenture agreements governing its outstanding 9½% subordinated debentures which were due in 2012 (the "Debentures") and its 8¼% limited convertible senior subordinated notes which were due in 2012 (the "Notes") so that the trustees or holders of 25% of the outstanding Debentures and Notes have the right to demand payment immediately.  Additionally, the Company has a significant amount due to their pension plan over the next 12 months.  Management's plans in regard to these matters are also described in Note 2.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.  We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.  Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.  We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Marcum LLP

 

Marcum LLP

 

We have served as the Company’s auditor since 2015.

 

Hartford, CT

March 30, 2018

 

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In thousands	2017			2016
Balance at beginning of year	$	39		$	559
Provisions		196			305
Write-offs		-			(825)
Balance at end of year	$	235		$	39

	Years
Indoor rental equipment	10
Outdoor rental equipment	15
Machinery, fixtures and equipment	5 – 15
Leaseholds and improvements	7

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• Level 1 – Inputs to the valuation methodology based on unadjusted quoted market prices in active markets that are accessible at the measurement date.
• Level 2 – Inputs to the valuation methodology that include quoted market prices that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly.
• Level 3 – Inputs to the valuation methodology that are unobservable and significant to the fair value measurement.

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