TRANS LUX Corp - Quarter Report: 2019 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, 2019

 

Commission file number 1-2257

 

TRANS-LUX CORPORATION

 

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to file such files).  Yes     X      No       

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See 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      X	Emerging growth company ___	Smaller reporting company      X

 

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                                          

 

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

 

Date		Class		Shares Outstanding
8/13/19		Common Stock - $0.001 Par Value		13,381,476

 

 

 

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TRANS-LUX CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

 

Note 1 – Basis of Presentation

 

As used in this report, “Trans-Lux,” the “Company,” “we,” “us,” and “our” refer to Trans-Lux Corporation and its subsidiaries.

 

Financial information included herein is unaudited, however, such information reflects all adjustments (of a normal and recurring nature), which are, in the opinion of management, necessary for the fair presentation of the Condensed Consolidated Financial Statements for the interim periods. The results for the interim periods are not necessarily indicative of the results to be expected for the full year.  The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”) and therefore do not include all information and footnote disclosures required under accounting principles generally accepted in the United States of America (“GAAP”).  The Condensed Consolidated Financial Statements included herein should be read in conjunction with the Consolidated Financial Statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.  The Condensed Consolidated Balance Sheet at December 31, 2018 is derived from the December 31, 2018 audited financial statements.

 

The following new accounting pronouncements were adopted in 2019:

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842).  Under ASU 2016-02, a company must recognize for all leases (with the exception of leases with terms of 12 months or less) a lease liability representing a lessee's obligation to make lease payments arising from a lease and a right of use (“ROU”) asset representing the lessee's right to use, or control the use of, a specified asset for the lease term.  A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and an ROU asset representing its right to use the underlying asset for the lease term.  For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach.  In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provided an additional (and optional) transition method to adopt the new leases standard whereby an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.  The Company adopted this standard effective January 1, 2019 using the modified retrospective method in the period of adoption.  The adoption of the standard had a material impact to our Condensed Consolidated Balance Sheets for the recognition of certain operating leases as ROU assets of approximately $1,463,000, long-term lease liabilities of $1,127,000 and current lease liabilities of $368,000, but did not have a material impact on our Condensed Consolidated Statements of Operations, Comprehensive Loss, Changes in Stockholders’ Deficit or Cash Flows.  We have analyzed our leases, implemented systems, developed processes and internal controls and updated our accounting policies to comply with the standard's adoption requirements.  The Company's rental revenue agreements were accounted for under previous lease accounting standards through December 31, 2018 and are accounted for within the scope of Topic 842 following our adoption on January 1, 2019.  Topic 842 does not significantly affect the timing of recognition or presentation of revenue for our rental contracts.  See Note 9 – Leases for further details.

 

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In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting.  ASU 2018-07 eliminates the separate accounting model for nonemployee share-based payment awards and generally requires companies to account for share-based payment transactions with nonemployees in the same way as share-based payment transactions with employees.  The accounting remains different for attribution, which represents how the equity-based payment cost is recognized over the vesting period, and a contractual term election for valuing nonemployee equity share options.  As required by this standard, the Company adopted ASU 2018-07 on January 1, 2019. The adoption of this standard did not have a material effect on the Company’s consolidated financial position and results of operations.

 

Other than the foregoing changes, there have been no material changes in our significant accounting policies during the six months ended June 30, 2019 from the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on April 15, 2019.

 

The following new accounting pronouncements, and related impacts on adoption, are being evaluated by the Company:

 

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350).  ASU 2017-04 simplifies the test for goodwill impairment.  Public business entities should apply the amendments in ASU 2017-04 for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years (i.e., January 1, 2020), early application is permitted.  The Company does not expect the adoption of this standard to have a material effect on the Company’s consolidated financial position and results of operations.

 

In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20).  ASU 2018-14 modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.  Public business entities should apply the amendments in ASU 2018-14 for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years (i.e., January 1, 2021).  Early application is permitted.  The Company does not expect the adoption of this standard to have a material effect on the Company’s consolidated financial position and results of operations.

 

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Note 2 – Liquidity

 

The Company has incurred recurring losses and has a working capital deficiency.  The Company incurred a net loss of $888,000 in the six months ended June 30, 2019 and had a working capital deficiency of $824,000 as of June 30, 2019.

 

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.  In order to more effectively manage its cash resources, the Company had, from time to time, increased the timetable of its payment of some of its payables, which delayed certain product deliveries from our vendors, which in turn delayed certain deliveries to our customers.

 

In April 2019, the Company received aggregate proceeds of $6.0 million from (i) a rights offering to current shareholders under which the shareholders could purchase shares of our Common Stock at an exercise price of $1.00 per share, resulting in gross proceeds of $2.5 million (the “Rights Offering”) and (ii) the exercise of the remaining $3.5 million warrant (the “Unilumin Warrant”) issued to Unilumin North America Inc. (“Unilumin”).  Of these proceeds, a portion has been used to satisfy outstanding obligations including certain long-term debt, certain payables, certain accrued liabilities and pension obligations.  Certain directors deferred the timing of payments owed to them related to directors’ fees and current portion of long-term debt beyond one year.  In addition, a stockholder of the Company has committed to providing additional capital up to $2.0 million, to the extent necessary to fund operations.  Management believes that its current cash resources and cash provided by operations will be sufficient to fund its anticipated current and near-term cash requirements within one year from the date of issuance of this Form 10-Q.  The Company continually evaluates the need and availability of long-term capital, including replacing the Credit Agreement (hereinafter defined) which terminated in April 2019, in order to meet its cash requirements and fund potential new opportunities.

 

Note 3 – Revenue Recognition

 

Under the revenue recognition guidance provided by ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.  To determine revenue recognition for arrangements that an entity determines are within the scope of this standard, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.  The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.  At contract inception, once the contract is determined to be within the scope of this standard, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct.  The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.  Sales tax, value added tax and other taxes collected on behalf of third parties are excluded from revenue.

 

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Contracts with customers may contain multiple performance obligations.  For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation.  The Company determines standalone selling prices based on the price at which the performance obligation is sold separately.  If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

 

When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component.  Applying the practical expedient in paragraph 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less.  None of the Company’s contracts contained a significant financing component as of June 30, 2019.

 

In March 2016, the FASB issued updated lease accounting guidance ("Topic 842"), as explained further in Note 9 – Leases.  We adopted Topic 842 on January 1, 2019.  Topic 842 is an update to Topic 840, which was the lease accounting standard in place through December 31, 2018.  There were no significant changes to our revenue accounting upon adoption of Topic 842.

 

We recognize revenue in accordance with two different accounting standards: 1) Topic 606 and 2) Topic 842.  Under Topic 606, revenue from contracts with customers is measured based on the consideration specified in the contract with the customer, and excludes any sales incentives and amounts collected on behalf of third parties.  A performance obligation is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account under Topic 606.  Our contracts with customers generally do not include multiple performance obligations.  We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for such products or services.

 

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Disaggregated Revenues

 

The following table represents a disaggregation of revenue from contracts with customers for the three and six months ended June 30, 2019 and 2018, along with the reportable segment for each category:

 

	Three months ended						Six months ended
In thousands	June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Digital product sales:
Catalog and small customized products	$	3,113		$	2,353		$	6,204		$	5,301
Large customized products		-			-			-			1,000
Subtotal		3,113			2,353			6,204			6,301
Digital product lease and maintenance:
Operating leases		338			439			630			766
Maintenance agreements		296			270			512			530
Subtotal		634			709			1,142			1,296
Total	$	3,747		$	3,062		$	7,346		$	7,597

 

Performance Obligations

 

The Company has two primary revenue streams which are Digital product sales and Digital product lease and maintenance.

 

Digital Product Sales

 

The Company recognizes net revenue on digital product sales to its distribution partners and to end users related to digital display solutions and fixed digit scoreboards.  For the Company’s catalog products, revenue is generally recognized when the customer obtains control of the Company’s product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract.  For the Company’s customized products, revenue is either recognized at a point in time or over time depending on the size of the contract.  For those customized product contracts that are smaller in size, revenue is generally recognized when the customer obtains control of the Company’s product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract.  For those customized product contracts that are larger in size, revenue is recognized over time based on incurred costs as compared to projected costs using the input method, as this best reflects the Company’s progress in transferring control of the customized product to the customer.  The Company may also contract with a customer to perform installation services of digital display products.  Similar to the larger customized products, the Company recognizes the revenue associated with installation services using the input method, whereby the basis is the total contract costs incurred to date compared to the total expected costs to be incurred.

 

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Revenue on sales to distribution partners are recorded net of prompt-pay discounts, if offered, and other deductions.  To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the most likely amount method to which the Company expects to be entitled.  In the case of prompt-pay discounts, there are only two possible outcomes: either the customer pays on-time or does not.  Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.  Determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available.  The Company believes that the estimates it has established are reasonable based upon current facts and circumstances.  Applying different judgments to the same facts and circumstances could result in the estimated amounts to vary.  The Company offers an assurance-type warranty that the digital display products will conform to the published specifications.  Returns may only be made subject to this warranty and not for convenience.

 

Digital Product Lease and Maintenance

 

Digital product lease revenues represent revenues from leasing equipment that we own.  We do not generally provide an option for the lessee to purchase the rented equipment at the end of the lease and do not generate material revenue from sales of equipment under such options.  Our lease revenues do not include material amounts of variable payments.  Digital product maintenance revenues represent revenues from maintenance agreements for equipment that we do not own.  Lease and maintenance contracts generally run for periods of one month to 10 years.  A contract entered into by the Company with a customer may contain both lease and maintenance services (either or both services may be agreed upon based on the individual customer contract).  Maintenance services may consist of providing labor, parts and software maintenance as may be required to maintain the customer’s equipment in proper operating condition at the customer’s service location.  The Company concluded the lease and maintenance services represent a series of distinct services and the most representative method for measuring progress towards satisfying the performance obligation of these services is the input method.  Additionally, maintenance services require the Company to “stand ready” to provide support to the customer when and if needed.  As there is no discernable pattern of efforts other than evenly over the lease and maintenance terms, the Company will recognize revenue straight-line over the lease and maintenance terms of service.

 

The Company has an enforceable right to payment for performance completed to date, as evidenced by the requirement that the customer pay upfront for each month of services. Lease and maintenance service amounts billed ahead of revenue recognition are recorded in deferred revenue and are included in accrued liabilities in the Condensed Consolidated Financial Statements.

 

Revenues from equipment lease and maintenance contracts are recognized during the term of the respective agreements.  At June 30, 2019, the future minimum lease payments due to the Company under operating leases that expire at varying dates through 2028 for its rental equipment and maintenance contracts, assuming no renewals of existing leases or any new leases, aggregating $2,100,000, are as follows:  $470,000 – remainder of 2019, $1,025,000 – 2020, $329,000 – 2021, $137,000 – 2022, $71,000 – 2023 and $68,000 thereafter.

 

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Contract Balances with Customers

 

Contract assets primarily relate to rights to consideration for goods or services transferred to the customer when the right is conditional on something other than the passage of time.  The contract assets are transferred to the receivables when the rights become unconditional.  As of June 30, 2019 and December 31, 2018, the Company had no contract assets.  The contract liabilities primarily relate to the advance consideration received from customers for contracts prior to the transfer of control to the customer and therefore revenue is recognized on completion of delivery.  Contract liabilities are classified as deferred revenue by the Company and are included in customer deposits and accrued liabilities in the Condensed Consolidated Balance Sheets.

 

The following table presents the balances in the Company’s receivables and contract liabilities with customers:

 

In thousands	June 30, 2019			December 31, 2018
Gross receivables	$	3,196		$	4,067
Allowance for bad debts		644			1,796
Net receivables		2,552			2,271
Contract liabilities		1,325			465

 

During the three and six months ended June 30, 2019 and 2018, the Company recognized the following revenues as a result of changes in the contract asset and the contract liability balances in the respective periods:

 

	Three months ended						Six months ended
In thousands	June 30, 2019			June 30, 2018			June 30,2019			June 30,2018
Revenue recognized in the period from:
Amounts included in the contract liability at the      beginning of the period	$	149		$	205		$	350		$	753

 

Transaction Price Allocated to Future Performance Obligations – alternative more qualitative presentation

 

Remaining performance obligations represents the transaction price of contracts for which work has not been performed (or has been partially performed).  The guidance provides certain practical expedients that limit this requirement and, therefore, the Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed.  As of June 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations for digital product sales was $2.4 million and digital product lease and maintenance was $2.1 million.  

 

The Company expects to recognize revenue on approximately 83%, 13% and 4% of the remaining performance obligations over the next 12 months, 13 to 36 months and 37 or more months, respectively.

 

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Costs to Obtain or Fulfill a Customer Contract

 

Prior to the adoption of ASU 2014-09, the Company expensed incremental commissions paid to sales representatives for obtaining customer contracts.  Under ASU 2014-09, the Company currently capitalizes these incremental costs of obtaining customer contracts.  Capitalized commissions are amortized based on the transfer of the products or services to which the assets relate.  Applying the practical expedient in paragraph 340-40-25-4, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less.  These costs are included in General and administrative expenses.

 

The Company accounts for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products.  When shipping and handling costs are incurred after a customer obtains control of the products, the Company also has elected to account for these as costs to fulfill the promise and not as a separate performance obligation.  Shipping and handling costs associated with the distribution of finished products to customers are recorded in costs of goods sold and are recognized when the related finished product is shipped to the customer.

 

Note 4 – Inventories

 

Inventories consist of the following:

 

	June 30, 2019			December 31, 2018
In thousands
Raw materials	$	1,396		$	1,178
Work-in-progress		840			626
Finished goods		297			397
	$	2,533		$	2,201

 

Note 5 – Rental Equipment, net

 

Rental equipment consists of the following:

 

	June 30, 2019			December 31, 2018
In thousands
Rental equipment	$	7,104		$	7,109
Less accumulated depreciation		6,011			5,799
Net rental equipment	$	1,093		$	1,310

 

Depreciation expense for rental equipment for the six months ended June 30, 2019 and 2018 was $212,000 and $353,000, respectively.  Depreciation expense for rental equipment for the three months ended June 30, 2019 and 2018 was $106,000 and $177,000, respectively.

 

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Note 6 – Property, Plant and Equipment, net

 

Property, plant and equipment consists of the following:

 

	June 30, 2019			December 31, 2018
In thousands
Machinery, fixtures and equipment	$	2,721		$	2,691
Leaseholds and improvements		12			12
		2,733			2,703
Less accumulated depreciation		631			523
Net property, plant and equipment	$	2,102		$	2,180

 

Machinery, fixtures and equipment having a net book value of $2.2 million at December 31, 2018 were pledged as collateral under various financing agreements.

 

Depreciation expense for property, plant and equipment for the six months ended June 30, 2019 and 2018 was $108,000 and $144,000, respectively.  Depreciation expense for property, plant and equipment for the three months ended June 30, 2019 and 2018 was $54,000 and $72,000, respectively.

 

Note 7 – Long-Term Debt

 

Long-term debt consists of the following:

 

	June 30, 2019			December 31, 2018
In thousands
8¼% Limited convertible senior subordinated notes due 2012	$	352		$	387
9½% Subordinated debentures due 2012		220			220
Revolving credit line		-			1,440
Term loans		-			1,590
Term loans - related party		1,000			1,000
Forgivable loan		650			650
Total debt		2,222			5,287
Less deferred financing costs		-			257
Net debt		2,222			5,030
Less portion due within one year		572			3,584
Net long-term debt	$	1,650		$	1,446

 

On July 12, 2016, the Company and its wholly-owned subsidiaries Trans-Lux Display Corporation, FairPlay Corporation (formerly Trans-Lux Midwest Corporation) and Trans-Lux Energy Corporation entered into a credit agreement, as subsequently amended on various dates, the latest being on March 1, 2019 (collectively, the “Credit Agreement”) with CNH Finance Fund I, L.P. (“CNH”) as lender.  Under the Credit Agreement, the Company was able to borrow up to an aggregate of $4.0 million, which included (i) up to $3.0 million of a revolving loan, at an interest rate of prime plus 9.0% (11.50% at December 31, 2018), and (ii) a $1.0 million term loan, at an interest rate of prime plus 11.0% (11.50% at December 31, 2018).  The availability under the revolving loan was calculated based on certain percentages of eligible receivables and inventory.  On November 6, 2018, the Company and CNH agreed to a forbearance agreement which was effective through February 28, 2019, as long as there were no additional defaults under the Credit Agreement.  On March 1, 2019, the effectiveness of the forbearance agreement was extended through April 15, 2019.  On April 10, 2019, the Company satisfied the Credit Agreement in full and the Credit Agreement was terminated.  The termination fee of $60,000 and the remaining debt discount of $23,000 were written off and included in loss on extinguishment of debt on the Condensed Consolidated Statements of Operations.

 

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On June 11, 2018, the Company entered into a Subordinated Secured Promissory Note (the “SMI Note”) with SM Investors, L.P. (“SMI”), pursuant to which the Company borrowed $330,000 from SMI at an interest rate of 12.00%.  The maturity date of the SMI Note was the earlier of June 11, 2020 or the Company’s completion of an additional financing package of at least $1 million.  The Company also issued SMI a three-year warrant to purchase 82,500 shares of the Company at an exercise price of $0.01 per share.  The Company utilized the Black-Scholes method to calculate the fair value of this warrant at the time of issuance, which was $95,000, and was being treated as a debt discount amortized over the two-year term of the loan.  On April 17, 2019, the Company satisfied the SMI Note in full and the remaining debt discount of $53,000 was written off and included in loss on extinguishment of debt on the Condensed Consolidated Statements of Operations.

 

On June 11, 2018, the Company entered into another Subordinated Secured Promissory Note (the “SMII Note”) with SM Investors II, L.P. (“SMII”), pursuant to which the Company borrowed $670,000 from SMII at an interest rate of 12.00%.  The maturity date of the SMII Note was the earlier of June 11, 2020 or the Company’s completion of an additional financing package of at least $1 million.  The Company also issued SMII a three-year warrant to purchase 167,500 shares of the Company at an exercise price of $0.01 per share.  The Company utilized the Black-Scholes method to calculate the fair value of this warrant at the time of issuance, which was $192,000, and was being treated as a debt discount amortized over the two-year term of the loan.  On April 17, 2019, the Company satisfied the SMII Note in full and the remaining debt discount of $109,000 was written off and included in loss on extinguishment of debt on the Condensed Consolidated Statements of Operations.

 

The Company has a $500,000 loan from Carlisle Investments Inc. (“Carlisle”) at a fixed interest rate of 12.00%, which matured on April 27, 2019 with a bullet payment of all principal due at such time.  Interest is payable monthly.  Carlisle has agreed to not demand payment on the loan through at least December 31, 2020.  As of June 30, 2019, the entire amount was outstanding and is included in long-term debt, less current portion in the Condensed Consolidated Balance Sheets.  As of June 30, 2019 and December 31, 2018, the Company had accrued $90,000 and $60,000, respectively, of interest related to this loan.  Carlisle has agreed to not demand payment on $60,000 of the interest as of June 30, 2019, so it is included in deferred pension liability and other in the Condensed Consolidated Balance Sheets.  The remaining $30,000 of accrued interest as of June 30, 2019 and the $60,000 of accrued interest as of December 31, 2019 are included in accrued liabilities in the Condensed Consolidated Balance Sheets.  Marco Elser, a former director of the Company, exercises voting and dispositive power as investment manager of Carlisle.

 

The Company has an additional $500,000 loan from Carlisle at a fixed interest rate of 12.00%, which matured on December 10, 2017 with a bullet payment of all principal due at such time (the “Second Carlisle Agreement”).  Interest is payable monthly.  Carlisle has agreed to not demand payment on the loan through at least December 31, 2020.  As of June 30, 2019, the entire amount was outstanding and is included in long-term debt, less current portion in the Condensed Consolidated Balance Sheets.  As of June 30, 2019 and December 31, 2018, the Company had accrued $90,000 and $60,000, respectively, of interest related to this loan.  Carlisle has agreed to not demand payment on $60,000 of the interest as of June 30, 2019, so it is included in deferred pension liability and other in the Condensed Consolidated Balance Sheets.  The remaining $30,000 of accrued interest as of June 30, 2019 and the $60,000 of accrued interest as of December 31, 2019 are included in accrued liabilities in the Condensed Consolidated Balance Sheets.  Under the Second Carlisle Agreement, the Company granted a security interest to Carlisle in accounts receivable, materials and intangibles relating to a certain purchase order for equipment issued in April 2017.

 

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As of June 30, 2019 and December 31, 2018, the Company had outstanding $352,000 and $387,000, respectively, of 8¼% Limited convertible senior subordinated notes due 2012 (the “Notes”) which are no longer convertible into common shares.  The Notes matured as of March 1, 2012 and are currently in default.  On February 15, 2019, holders of $35,000 of the Notes 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 $7,000.  As a result of the transaction, the Company recorded a gain on the extinguishment of debt, net of expenses, of $52,000 in 2019.  As of June 30, 2019 and December 31, 2018, the Company had accrued $286,000 and $298,000, respectively, of interest related to the Notes, which is included in accrued liabilities in the Condensed Consolidated Balance Sheets.

 

As of June 30, 2019 and December 31, 2018, the Company had outstanding $220,000 of 9½% Subordinated debentures due 2012 (the “Debentures”).  The Debentures matured as of December 1, 2012 and are currently in default.  As of June 30, 2019 and December 31, 2018, the Company had accrued $200,000 and $190,000, respectively, of interest related to the Debentures, which is included in accrued liabilities in the Condensed Consolidated Balance Sheets.

 

On May 23, 2017, the Company received $650,000 structured as a forgivable loan from the City of Hazelwood, Missouri.  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% (7.50% at June 30, 2019).  As of June 30, 2019 and December 31, 2018, the Company had accrued $95,000 and $71,000, respectively, of interest related to this loan, which is included in accrued liabilities in the Condensed Consolidated Balance Sheets.  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 the March 31, 2019 measurement date, the Company has not yet attained the appropriate employment levels and has requested an additional extension from the City of Hazelwood.

 

Note 8 – 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.

 

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The following table presents the components of net periodic pension cost for the three and six months ended June 30, 2019 and 2018:

 

	Three months ended June 30						Six months ended June 30
In thousands	2019			2018			2019			2018
Interest cost	$	126		$	114		$	251		$	227
Expected return on plan assets		(173)			(203)			(345)			(406)
Amortization of net actuarial loss		66			56			131			112
Net periodic pension expense (benefit)	$	19		$	(33)		$	37		$	(67)

 

As of June 30, 2019 and December 31, 2018, the Company had recorded a current pension liability of $475,000 and $623,000, respectively, which is included in accrued liabilities in the Condensed Consolidated Balance Sheets, and a long-term pension liability of $3.5 million and $3.7 million, respectively, which is included in deferred pension liability and other in the Condensed Consolidated Balance Sheets.  The minimum required contribution in 2019 is expected to be $629,000, of which the Company contributed $391,000 in the first half of the year and $85,000 subsequent to June 30, 2019.

 

Note 9 – Leases

 

The Company leases administrative and manufacturing facilities through operating lease agreements. The Company has no finance leases as of June 30, 2019.  Our leases include both lease (e.g., fixed payments including rent) and non-lease components (e.g., common area or other maintenance costs). The facility leases include one or more options to renew.  The exercise of lease renewal options is typically at our sole discretion, therefore, the renewals to extend the lease terms are not included in our ROU assets or lease liabilities as they are not reasonably certain of exercise.  We regularly evaluate the renewal options and, when they are reasonably certain of exercise, we include the renewal period in our lease term.

 

Operating leases result in the recognition of ROU assets and lease liabilities on the Condensed Consolidated Balance Sheets.  ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments.  Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.  As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate at the commencement date to determine the present value of lease payments.  Most real estate leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 5 years or more.  Lease expense is recognized on a straight-line basis over the lease term.  Leases with an initial term of 12 months or less are not recorded on the Condensed Consolidated Balance Sheets.  The primary leases we enter into with initial terms of 12 months or less are for equipment.

 

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Supplemental information regarding leases:

 

	June 30 2019
In thousands, unless otherwise noted
Balance Sheet:
ROU assets	$	1,281
Current lease liabilities		322
Non-current lease liabilities		994
Total lease liabilities		1,316
Weighted average remaining lease term (years)		3.0
Weighted average discount rate		8.9%
Future minimum lease payments:
2019	$	245
2020		349
2021		342
2022		348
2023		295
Thereafter		-
Total		1,579
Less: Imputed interest		263
Total lease liabilities		1,316
Less: Current lease liabilities		322
Long-term lease liabilities	$	994

 

Supplemental cash flow information regarding leases:

 

	For the three months ended June 30, 2019			For the six months ended June 30, 2019
In thousands
Operating cash flow information:
Cash paid for amounts included in the measurement of lease liabilities	$	121		$	243
Non-cash activity:
ROU assets obtained in exchange for lease liabilities		-			162

 

Total operating lease expense and short-term lease expense was $249,000 and $64,000, respectively, for the six months ended June 30, 2019.  Total operating lease expense and short-term lease expense was $124,000 and $32,000, respectively, for the three months ended June 30, 2019.

 

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Note 10 – Stockholders’ Deficit and Loss Per Share

 

The following table presents the calculation of loss per share for the three and six months ended June 30, 2019 and 2018:

 

	Three months ended June 30						Six months ended June 30
In thousands, except per share data	2019			2018			2019			2018
Numerator:
Net loss, as reported	$	(365)		$	(1,028)		$	(888)		$	(968)
Change in dividends accumulated on preferred shares		(3)			(50)			(38)			(99)
Net loss attributable to common shares	$	(368)		$	(1,078)			(926)		$	(1,067)
Denominator:
Weighted average shares outstanding		13,226			2,243			9,123			2,203
Basic and diluted loss per share	$	(0.03)		$	(0.48)		$	(0.10)		$	(0.48)

 

Basic loss per common share is computed by dividing net loss attributable to common shares by the weighted average number of common shares outstanding for the period.  Diluted loss per common share is computed by dividing net loss attributable to common shares, 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, 2019 and 2018, the Company had accumulated unpaid dividends of $5,000 and $41,000, respectively, related to the Series B Convertible Preferred Stock (“SBCPS”).

 

For each holder of SBCPS that converted their shares into Common Stock in March 2019, the Company declared a dividend of $4.60 per share of SBCPS on March 29, 2019, aggregating $73,000, which was distributed to these former holders of the SBCPS on April 2, 2019.

 

As of June 30, 2019, the Company had warrants to purchase 250,000 shares of Common Stock outstanding, which were included in the calculation of diluted loss per share because their exercise price was less than the average share price of our Common Stock for the period, so their inclusion was dilutive.  As of June 30, 2019 and 2018, the Company had other warrants to purchase 10,000 and 52,000 shares, respectively, of Common Stock outstanding, which were excluded from the calculation of diluted loss per share because their exercise price was greater than the average share price for the period and their inclusion would have been anti-dilutive.  The remaining warrants to purchase 10,000 shares as of June 30, 2019 could be dilutive in the future if the average share price increases and is greater than the exercise price of these warrants.

 

As of June 30, 2019 and 2018, the Company had 648 and 16,512 shares, respectively, of SBCPS outstanding, which were convertible into 64,800 and 330,240 shares of Common Stock, none of which were used in the calculation of diluted loss per share because their conversion price was greater than the average share price for the period and their inclusion would have been anti-dilutive.  These shares of SBCPS could be dilutive in the future if the average share price of our Common Stock increases and is greater than the purchase price of these shares of SBCPS.

 

On February 5, 2019, the Company commenced a Rights Offering to current shareholders under which the shareholders could purchase shares of our Common Stock at an exercise price of $1.00 per share.  On April 5, 2019, the Company completed its Rights Offering and accepted subscriptions for a total of 2,500,000 shares of its Common Stock, representing approximately all of the shares offered, for aggregate gross proceeds to the Company of $2.5 million, less issuance costs of $72,000.

 

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Note 11 – 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 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.  There are no open matters that the Company deems material.

 

Note 12 – Related Party Transactions

 

In addition to the Company’s loans from Carlisle described in Note 7, the Company has the following related party transactions:

 

Yaozhong Shi, a former director of the Company, is the Chairman of Transtech LED Company Limited (“Transtech”), which is one of our LED suppliers.  The Company purchased $416,000 and $127,000 of product from Transtech in the six months ended June 30, 2019 and 2018, respectively.  The Company purchased $406,000 and $64,000 of product from Transtech in the three months ended June 30, 2019 and 2018, respectively.  Amounts payable by the Company to Transtech were $0 and $305,000 as of June 30, 2019 and December 31, 2018, respectively.

 

On March 4, 2019, 96.1% of our issued and outstanding SBCPS holders converted their SBCPS into 1,586,400 shares of Common Stock.  Such amount included shares of SBCPS held by a greater than 5% stockholder of the Company and certain directors of the Company.

 

On March 4, 2019, Unilumin exercised $2.0 million of the Unilumin Warrant and the Company issued 2,061,856 shares of Common Stock, and on April 5, 2019, Unilumin exercised the remaining $3.5 million of the Unilumin Warrant and the Company issued 3,608,247, raising an aggregate of $5.5 million for the Company, less issuance costs of $202,000.  As a result of the exercises, Unilumin now holds 52.2% of the Company’s outstanding Common Stock, which resulted in a change in control event.  The Company did not elect to apply pushdown accounting.  Nicholas Fazio, Yang Liu and Yantao Yu, each directors of the Company, are also each directors and/or officers of other subsidiaries of Unilumin’s parent company Unilumin Group Co. Ltd.

 

As of June 30, 2019 and December 31, 2018, the Company had outstanding payables to certain executive officers aggregating $0 and $427,000, respectively.

 

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Note 13 – 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 displays.  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.

 

Foreign revenues represent less than 10% of the Company’s revenues in 2019 and 2018.  The Company’s 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 and six months ended June 30, 2019 and 2018 is as follows:

 

	Three months ended June 30						Six months ended June 30
In thousands	2019			2018			2019			2018
Revenues:
Digital product sales	$	3,113		$	2,353		$	6,204		$	6,301
Digital product lease and maintenance		634			709			1,142			1,296
Total revenues	$	3,747		$	3,062		$	7,346		$	7,597
Operating (loss) income:
Digital product sales	$	248		$	(442)		$	364		$	118
Digital product lease and maintenance		415			258			673			548
Corporate general and administrative expenses		(628)			(710)			(1,241)			(1,421)
Total operating income (loss)		35			(894)			(204)			(755)
Interest expense, net		(80)			(218)			(335)			(414)
(Loss) gain on foreign currency remeasurement		(50)			50			(107)			122
Loss on debt extinguishment		(245)			-			(193)			-
Gain on sale leaseback transaction		-			-			-			11
Pension (expense) benefit		(19)			34			(37)			68
Loss before income taxes		(359)			(1,028)			(876)			(968)
Income tax expense		(6)			-			(12)			-
Net loss	$	(365)		$	(1,028)		$	(888)		$	(968)
	June 30 2019			December 31 2018
Assets
Digital product sales	$	8,466		$	7,689
Digital product lease and maintenance		4,246			3,054
Total identifiable assets		12,712			10,743
General corporate		1,413			723
Total assets	$	14,125		$	11,466

 

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Note 14 – Subsequent Events

 

The Company has evaluated events and transactions subsequent to June 30, 2019 and through the date these Condensed Consolidated Financial Statements were included in this Form 10-Q and filed with the SEC.

 

 

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

 

Overview

 

Trans-Lux is a leading supplier of LED technology for display applications.  The essential elements of these systems are the real-time, programmable digital products 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 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.  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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Results of Operations

 

Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018

 

The following table presents our Statements of Operations data, expressed as a percentage of revenue for the six months ended June 30, 2019 and 2018:

 

	Six months ended June 30
In thousands, except percentages	2019						2018
Revenues:
Digital product sales	$	6,204		84.5	%		$	6,301		82.9	%
Digital product lease and maintenance		1,142		15.5	%			1,296		17.1	%
Total revenues		7,346		100.0	%			7,597		100.0	%
Cost of revenues:
Cost of digital product sales		4,741		64.5	%			4,880		64.2	%
Cost of digital product lease and maintenance		389		5.3	%			676		8.9	%
Total cost of revenues		5,130		69.8	%			5,556		73.1	%
Gross profit		2,216		30.2	%			2,041		26.9	%
General and administrative expenses		(2,420)		(33.0)	%			(2,796)		(36.8)	%
Operating income (loss)		(204)		(2.8)	%			(755)		(9.9)	%
Interest expense, net		(335)		(4.5)	%			(414)		(5.4)	%
(Loss) gain on foreign currency remeasurement		(107)		(1.5)	%			122		1.6	%
Loss on extinguishment of debt		(193)		(2.6)	%			-		-	%
Gain on sale/leaseback transaction		-		-	%			11		0.1	%
Pension (expense) benefit		(37)		(0.5)	%			68		0.9	%
(Loss) income before income taxes		(876)		(11.9)	%			(968)		(12.7)	%
Income tax expense		(12)		(0.2)	%			-		-	%
Net loss	$	(888)		(18.0)	%		$	(968)		(12.7)	%

 

Total revenues for the six months ended June 30, 2019 decreased $251,000 or 3.3% to $7.3 million from $7.6 million for the six months ended June 30, 2018, primarily due to decreases in consulting services and Digital product lease and maintenance, partially offset by an increase in other Digital product sales.

 

Digital product sales revenues decreased $97,000 or 1.5% for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to a decrease in consulting services, partially offset by increases in the sports market.  Consulting services represented $1.0 million of revenue from one customer in 2018 for planning services related to a potential larger project which has not yet commenced.  There were no such projects in the same period in 2019.

 

Digital product lease and maintenance revenues decreased $154,000 or 11.9% for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, 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, 2019 decreased $551,000 to $204,000 from $755,000 for the six months ended June 30, 2018, principally due to a reduction in general and administrative expenses, partially offset by the decrease in revenues.  Without the consulting revenues in 2018, the total operating loss in 2019 would have decreased $1.6 million as compared to the same period in 2018.

 

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Digital product sales operating income increased $246,000 to $364,000 for the six months ended June 30, 2019 compared to $118,000 for the six months ended June 30, 2018, primarily due to a decrease in general and administrative expenses, partially offset by the decrease in revenues.  The cost of Digital product sales decreased $139,000 or 2.8%, primarily due to the decrease in revenues.  The cost of Digital product sales represented 76.4% of related revenues in 2019 compared to 77.4% in 2018.  Without the consulting revenues in 2018, Digital product sales operating income (loss) would have been a loss of $882,000 in the six months ended June 30, 2018 and the cost of Digital product sales would have represented 92.1% of related revenues in the six months ended June 30, 2018.  General and administrative expenses for Digital product sales decreased $204,000 or 15.7%, primarily due to decreases in marketing expenses, bad debt expenses and employee expenses.

 

Digital product lease and maintenance operating income increased $125,000 or 22.8% for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily as a result of a decrease in the cost of Digital product lease and maintenance, partially offset by the decrease in revenues.  The cost of Digital product lease and maintenance decreased $287,000 or 42.5%, primarily due to a decrease in depreciation expense.  The cost of Digital product lease and maintenance revenues represented 34.1% of related revenues in 2019 compared to 52.2% in 2018.  The cost of Digital product lease and maintenance includes field service expenses, plant repair costs, maintenance and depreciation.  General and administrative expenses for Digital product lease and maintenance increased slightly.

 

Corporate general and administrative expenses decreased $180,000 or 12.7% for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to decreases in payroll and benefits and employee expenses.

 

Net interest expense decreased $79,000 or 19.1% for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to a decrease in the average outstanding long-term debt, due to the termination of the CNH and SM Investors loans.

 

The loss on extinguishment of debt for the six months ended June 30, 2019 represented the write-off of the remaining debt discount costs and the termination fees related to the CNH and SM Investors loans, partially offset by the gain on the extinguishment of $35,000 of Notes.

 

The effective tax rate for the six months ended June 30, 2019 and 2018 was 1.4% and 0.0%, respectively.  Both the 2019 and 2018 tax rates are being affected by the valuation allowance on the Company’s deferred tax assets as a result of reporting pre-tax losses.

 

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Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018

 

The following table presents our Statements of Operations data, expressed as a percentage of revenue for the three months ended June 30, 2019 and 2018:

 

 

Total revenues for the three months ended June 30, 2019 increased $685,000 or 22.4% to $3.7 million from $3.1 million for the three months ended June 30, 2018, primarily due to an increase in Digital product sales, partially offset by a decrease in Digital product lease and maintenance.

 

Digital product sales revenues increased $760,000 or 32.3% for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to an increase in the sports market.

 

Digital product lease and maintenance revenues decreased $75,000 or 10.6% for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, 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 income (loss) for the three months ended June 30, 2019 increased $929,000 to income of $35,000 from a loss of $894,000 for the three months ended June 30, 2018, principally due to the increase in revenues and a decrease in the cost of revenues as a percentage of revenues.

 

Digital product sales operating income (loss) increased $690,000 to income of $248,000 for the three months ended June 30, 2019 compared to a loss of $442,000 for the three months ended June 30, 2018, primarily due to the increase in revenues and a decrease in the cost of revenue as a percentage of revenues, partially offset by a decrease in general and administrative expenses.  The cost of Digital product sales increased $126,000 or 6.0%, primarily due to the increase in revenues.  The cost of Digital product sales represented 71.3% of related revenues in 2019 compared to 89.0% in 2018.  This decrease as a percentage of revenues is primarily due to increased manufacturing efficiency.  General and administrative expenses for Digital product sales decreased $56,000 or 8.0%, primarily due to a decrease in marketing expenses, partially offset by increases in bad debt expenses and employee expenses.

 

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Digital product lease and maintenance operating income increased $157,000 or 60.9% for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily as a result of a decrease in the cost of Digital product lease and maintenance, partially offset by the decrease in revenues.  The cost of Digital product lease and maintenance decreased $240,000 or 57.1%, primarily due to a decrease in depreciation expense.  The cost of Digital product lease and maintenance revenues represented 28.4% of related revenues in 2019 compared to 59.2% in 2018.  The cost of Digital product lease and maintenance includes field service expenses, plant repair costs, maintenance and depreciation.  General and administrative expenses for Digital product lease and maintenance increased $8,000 or 25.8%, primarily due to an increase in bad debt expense.

 

Corporate general and administrative expenses decreased $82,000 or 11.5% for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to a decrease in payroll and benefits and employee expenses.

 

Net interest expense decreased $138,000 or 63.3% for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to decreases in the average outstanding long-term debt, due to the termination of the CNH and SM Investors loans.

 

The loss on extinguishment of debt for the three months ended June 30, 2019 represented the write-off of the remaining debt discount costs and the termination fees related to the CNH and SM Investors loans.

 

The effective tax rate for the three months ended June 30, 2019 and 2018 was 1.7% and 0.0%, respectively.  Both the 2019 and 2018 tax rates are being affected by 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 recurring losses and continues to have a working capital deficiency.  The Company incurred a net loss of $888,000 in the six months ended June 30, 2019 and had a working capital deficiency of $824,000 as of June 30, 2019.  As of December 31, 2018, the Company had a working capital deficiency of $8.5 million.  The decrease in the working capital deficiency as compared to December 31, 2018 is primarily due to the $5.5 million of exercises of the Unilumin Warrant and the $2.5 million raised from the Rights Offering, which allowed us to decrease the current portion of long-term debt and accounts payable, as well as the deferral of the timing of payments owed to certain directors related to $1.0 million of long-term debt and $771,000 of accrued liabilities directors.

 

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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.  In order to more effectively manage its cash resources, the Company had, from time to time, increased the timetable of its payment of some of its payables, which had, from time to time,  delayed certain product deliveries from our vendors, which in turn had, from time to time, delayed certain deliveries to our customers.  The recent cash infusions have resolved these previous issues.

 

Certain directors deferred the timing of payments owed to them related to directors’ fees and current portion of long-term debt beyond one year.  In addition, a stockholder of the Company has committed to providing additional capital up to $2.0 million, to the extent necessary to fund operations.  Management believes that its current cash resources and cash provided by operations will be sufficient to fund its anticipated current and near-term cash requirements and to execute our operating plan.  The Company continually evaluates the need and availability of long-term capital, including replacing the Credit Agreement, in order to meet its cash requirements and fund potential new opportunities.

 

The Company used cash of $3.8 million and generated cash of $324,000 from operating activities for the six months ended June 30, 2019 and 2018, respectively.  The Company has implemented several initiatives to improve operational results and cash flows over future periods, including reducing head count, reorganizing its sales department and outsourcing certain administrative functions.  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, cash equivalents and restricted cash increased $690,000 in the six months ended June 30, 2019 to $2.3 million at June 30, 2019 from $1.6 million at December 31, 2018.  This increase is primarily attributable to the gross proceeds from the exercises of the Unilumin Warrant of $5.5 million and the gross proceeds from the Rights Offering of $2.5 million, partially offset by cash used in operating activities of $3.8 million, primarily to reduce Accounts Payable by $3.0 million, payments of $1.6 million to terminate term loans and payments of $1.4 million to terminate the revolving loan.  The current economic environment has increased the Company’s trade receivables collection cycle, and its allowances for uncollectible accounts receivable, but collections continue to be favorable.

 

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 minimum required 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 2019 until the underlying debts mature.

 

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The following table summarizes the Company’s fixed cash obligations as of June 30, 2019 for the remainder of 2019 and over the next four fiscal years:

 

 

As of June 30, 2019, the Company still had outstanding $352,000 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.  On February 15, 2019, holders of $35,000 of the Notes 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 $7,000.  The Company continues to consider future exchanges of the $352,000 of remaining Notes and $220,000 of remaining Debentures, but has no agreements, commitments or understandings with respect to any further such exchanges.

 

The Company may still seek 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.  The Company has no agreements, commitments or understandings with respect to any such financings.  To the extent the Company issues additional equity securities, it could be dilutive to existing shareholders.

 

For a further description of the Company’s long-term debt, see Note 7 to the Condensed Consolidated Financial Statements – Long-Term Debt.

 

Pension Plan Contributions

 

The minimum required pension plan contribution for 2019 is expected to be $629,000, of which the Company contributed $391,000 through to June 30, 2019, and contributed $85,000 subsequent to June 30, 2019.  At this time, we expect to make the remaining minimum required contributions of $153,000; however, there is no assurance that we will be able to make any or all of such remaining payments.  See Note 8 to the Condensed Consolidated Financial Statements – Pension Plan for further details.

 

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

 

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 7 to the Condensed Consolidated Financial Statements – Long-Term Debt.  Every 1-percentage-point change in interest rates would result in an annual interest expense fluctuation of approximately $7,000.  In addition, the Company is exposed to foreign currency exchange rate risk mainly as a result of its investment in its Canadian subsidiary. A 10% change in the Canadian dollar relative to the U.S. dollar would result in a currency remeasurement expense fluctuation of approximately $261,000, 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 June 30, 2019.

 

Item 4.             Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures.  As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this report, we have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Chief Accounting Officer (our principal accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures.  Our Chief Executive Officer and Chief Accounting Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management (including our Chief Executive Officer and our Chief Accounting Officer) to allow timely decisions regarding required disclosures.  Based on such evaluation, our Chief Executive Officer and Chief Accounting Officer have concluded that these disclosure controls are effective as of June 30, 2019.

 

Changes in Internal Control over Financial Reporting.  There has been no change in the Company’s internal control over financial reporting that occurred in the quarter ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II – Other Information

 

Item 1.             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.  There are no open matters that the Company deems material.

 

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Item 1A.          Risk Factors

 

The Company is subject to a number of risks including general business and financial risk factors.  Any or all of such factors could have a material adverse effect on the business, financial condition or results of operations of the Company.  You should carefully consider the risk factors identified in our Annual Report on Form 10-K for the year ended December 31, 2018.  There have been no material changes to those previously disclosed risk factors.

 

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

 

During the three months ended June 30, 2019, the Company issued 3,608,247 shares of Common Stock pursuant to the exercise of the Unilumin Warrant.  The Common Stock issued to Unilumin was issued pursuant to the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended.

 

Item 3.             Defaults upon Senior Securities

 

As disclosed in Note 7 to the Condensed Consolidated Financial Statements – Long-Term Debt, as of June 30, 2019 and December 31, 2018, the Company had outstanding $352,000 and $387,000, respectively, of Notes which are no longer convertible into common shares.  The Notes matured as of March 1, 2012 and are currently in default.  As of June 30, 2019 and December 31, 2018, the Company had accrued $286,000 and $298,000, respectively, of interest related to the Notes, which is included in accrued liabilities in the Condensed Consolidated Balance Sheets.

 

As disclosed in Note 7 to the Condensed Consolidated Financial Statements – Long-Term Debt, the Company has outstanding $220,000 of Debentures.  The Debentures matured as of December 1, 2012 and are currently in default.  As of June 30, 2019 and December 31, 2018, the Company had accrued $200,000 and $190,000, respectively, of interest related to the Debentures, which is included in accrued liabilities in the Condensed Consolidated Balance Sheets.  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.

 

Item 4.             Mine Safety Disclosures

 

Not applicable.

 

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Item 5.             Other Information

 

None.

 

Item 6.             Exhibits

 

31.1     Certification of Alberto Shaio, President and Chief Executive Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

 

31.2     Certification of Todd Dupee, Senior Vice President and Chief Accounting Officer, pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

 

32.1     Certification of Alberto Shaio, President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

 

32.2     Certification of Todd Dupee, Senior Vice President and Chief Accounting Officer,  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

	TRANS-LUX CORPORATION
	(Registrant)
	by	/s/  Alberto Shaio
		Alberto Shaio
		President and Chief Executive Officer
	by	/s/  Todd Dupee
		Todd Dupee
		Senior Vice President and Chief Accounting Officer
Date:  August 14, 2019

 

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