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)

 

 

 

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

2019 Form 10-K Cover Page Continued

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit 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  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 OTC Pink on June 30, 2019, was approximately $249,000, 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 19, 2020, was 13,446,276 shares of Common Stock.

 

DOCUMENTS INCORPORATED BY REFERENCE:

None.

 

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TRANS-LUX CORPORATION

2019 Form 10-K Annual Report

Table of Contents

 

 

Table of Contents

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 and fixed digit scoreboards.

 

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.  All sales and service, including fixed digit scoreboards, related to sports are sold through our wholly owned subsidiary, Fariplay Corporation, capitalizing on a well-recognized brand name that has been servicing this segment for over 85 years.

 

For its fixed digit scoreboards, the Company has an industry leading unibody design that allows for seamless appearance and facilitates field installation.

 

For its digital displays, 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, 2019 and 2018 was approximately $967,000 and $3.2 million, respectively.  The December 31, 2018 backlog included orders for which delivery had been delayed due to our financial issues at that time.  The December 31, 2019 backlog is expected to be recognized as sales in 2020, 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.

 

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.

 

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As part of its ongoing development efforts, the Company seeks to package certain products for specific market segments and continually tracks 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.

 

Headquartered in New York, New York, the Company has sales and service offices in Urbandale, 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, 2019 and 2018.

 

In 2019 and 2018, no customers accounted for at least 10% of the Company’s total revenues.

 

MANUFACTURING AND OPERATIONS

 

The Company’s production facility is located in Hazelwood, Missouri.  The production facility 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.

 

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, and 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.

 

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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 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 Urbandale, Iowa and Hazelwood, Missouri.  Equipment repairs are performed in Urbandale, Iowa and service technicians are dispatched nationwide from various locations including Urbandale 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.

 

EMPLOYEES

 

The Company had approximately 50 employees as of March 1, 2020, none of whom are unionized.  The Company believes its employee relations are good.

 

ITEM 1A.              RISK FACTORS

 

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, 2019 and 2018, we incurred losses of $1.4 million and $4.7 million, 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 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.  In addition, our ability to achieve profitability is subject to a number of risks and uncertainties, many of which are beyond our control including the impact of the current economic environment, the spread of major epidemics (including coronavirus) and other related uncertainties such as government imposed travel restrictions, interruptions to supply chains and extended shut down of businesses.  These macroeconomic developments could negatively affect our business, operating results, and financial condition in a number of ways.  For example, current or potential customers may delay or decrease spending with us or may not pay us or may delay paying us for previously performed services.

 

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, and to the extent we are unable to do so, we may need to undertake additional financings.  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.  Any equity financing we receive could be substantially dilutive to our shareholders.

 

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WE HAVE SIGNIFICANT DEBT, WHICH COULD IMPAIR OUR FINANCIAL CONDITION

 

As of December 31, 2019, we had outstanding debt of approximately $2.2 million (including $650,000 of a forgivable loan), $1.6 million of which was reflected under current portion of long-term debt in our consolidated balance sheet.  Such amount includes an aggregate of $572,000 of 8¼% Limited convertible senior subordinated notes due 2012 (the “Notes”) and 9½% Subordinated debentures due 2012 (the “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.”

 

LIBOR IS EXPECTED TO BE DISCONTINUED AFTER 2021

 

Our Loan Agreement with MidCap Business Credit LLC (“MidCap”) provides procedures for determining a replacement or alternative rate in the event that LIBOR is unavailable.  However, there can be no assurance as to whether such replacement or alternative rate will be more or less favorable than LIBOR.  We intend to monitor the developments with respect to the potential phasing out of LIBOR after 2021 and will work with MidCap to ensure any transition away from LIBOR will have minimal impact on our financial condition.  We however can provide no assurance regarding the impact of the discontinuation of LIBOR on the interest rate that we would be required to pay or on our financial condition.

 

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

 

As of December 31, 2019, we had outstanding $352,000 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.

 

As of December 31, 2019, we had 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.

 

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.

 

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OUR SUCCESS IS PARTIALLY 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.  We expect our success in obtaining the renewal of existing leases or maintenance agreements or obtaining replacement leases will also be negatively impacted by the economic uncertainty arising from the impact of the coronavirus which has caused disruptions and extreme volatility in global financial markets and is expected to increase rates of default and bankruptcy, and impact levels of consumer and commercial spending.  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, Alberto Shaio, 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. Shaio.  We have an employment agreement with Mr. Shaio that expires on October 1, 2020.  We believe that in addition to Mr. Shaio, 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

 

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, negative fluctuations in currency or the impact of the coronavirus on the ability of the third-party Chinese manufacturers to provide product and international commerce, 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, health-related, logistical or other factors could have a material adverse effect on our future operating results.

 

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THE CORONAVIRUS OUTBREAK COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS

 

The recent outbreak of the coronavirus in the United States and globally has resulted in the United States and other countries halting or sharply curtailing the movement of people, goods and services.  All of this has caused extended shutdowns of businesses and the prolonged economic impact remains uncertain.  At this point, we believe the conditions will have a material adverse effect on our business but given the rapidly changing developments we cannot accurately predict what effects these conditions will have on our business, which will depend on, among other factors, the ultimate geographic spread of the virus, the duration of the outbreak and travel restrictions and business closures imposed by the United States and various other governments.

 

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 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.  A significant disruption or failure of our information technology systems may have a significant impact on our operations, potentially resulting in service interruptions, security violations, regulatory compliance failures and other operational difficulties.  In addition, any attack perpetrated against our information systems, including through a system failure, security breach or disruption by malware or other damage, could similarly impact our operations and result in loss or misuse of information, litigation and potential liability.  Although we have taken steps intended to mitigate the risks presented by potential cyber incidents, it is not possible to protect against every potential power loss, telecommunications failure, cybersecurity attack or similar event that may arise.  Moreover, the safeguards we use are subject to human implementation and maintenance and to other uncertainties.  Any of these cyber incidents may result in a violation of applicable laws or regulations (including privacy and other laws), damage our reputation, cause a loss of customers and give rise to monetary fines and other penalties, which could be significant.  Such events could have an adverse effect on our results of operations, financial condition and liquidity.

 

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

 

Our Amended and Restated Certificate of Incorporation, as amended (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 2,500,000 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 Series B Convertible Preferred Stock (“SBCPS”), none of which are outstanding.  The remaining 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.

 

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CONCENTRATION OF OWNERSHIP AMONG OUR PRINCIPAL STOCK HOLDERS MAY LIMIT OUR OTHER STOCKHOLDERS FROM INFLUENCING SIGNIFICANT COMPANY DECISIONS

 

As of March 19, 2020, one stockholder, Unilumin North America Inc. (“Unilumin”), beneficially owns approximately 52.0% of our Common Stock.  In addition, three of the Company’s five directors are employed by Unilumin or other entities affiliated with Unilumin.  Accordingly, such stockholder could exert significant control over any potential stockholder actions. The interests of this stockholder may not align with our interests or the interests of other stockholders and thereby could control our policies and operations, including the election of directors, the appointment of management, future issuances of our Common Stock or other securities, the incurrence or modification of debt by us, amendments to our Certificate of Incorporation and bylaws, and the entering of extraordinary transactions, such as a merger or sale of all or substantially all of our assets.  In addition, this majority stockholder will be able to cause or prevent a change of control of the Company and could preclude any unsolicited acquisition of the Company.  This concentration of ownership could deprive stockholders of an opportunity to receive a premium for their shares of Common Stock as part of a sale of the Company and ultimately might affect the market price of the Common Stock.

 

WE DO NOT EXPECT TO PAY ANY DIVIDENDS ON OUR COMMON STOCK FOR THE FORESEEABLE FUTURE

 

We currently expect to retain all future earnings, if any, for future operation, expansion and debt repayment and have no current plans to pay any cash dividends to holders of our Common Stock for the foreseeable future.  Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our operating results, financial condition, cash requirements, contractual restrictions and other factors that our Board of Directors may deem relevant.  In addition, we must comply with the covenants in our credit agreement in order to be able to pay cash dividends, and our ability to pay dividends generally may be further limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur.  As a result, you may not receive any return on an investment in our Common Stock unless you sell our Common Stock for a price greater than that which you paid for it.

 

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.

 

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.

 

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 $135,000, which it uses as its primary executive, sales and administrative office.  The Company leases a facility in Hazelwood, Missouri, at an annual rental of $334,000, which is being used for manufacturing operations.  The Company leases a facility in Urbandale, Iowa, at an annual rental of $28,000, which is used for sales and administrative operations.

 

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The aggregate property rent expense was $608,000 and $662,000 for the years ended December 31, 2019 and 2018, 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.  There are no open matters that the Company deems material.

 

ITEM 4.                 MINE SAFETY DISCLOSURES

 

Not applicable.

 

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 OTC Pink under the symbol “TNLX.”  Sales price information is set forth in Item 5(d) below.  The Company had approximately 86 holders of record of its Common Stock as of March 19, 2020.  The number of record holders does not include DTC participants or beneficial owners holding shares through nominee names.  The Board of Directors did not declare any cash dividends on Common Stock during 2019 and the Company does not anticipate paying any cash dividends on its Common Stock for the foreseeable future.  As discussed in Note 14 to the Consolidated Financial Statements – Stockholders’ Deficit, the Company paid dividends on its then outstanding SBCPS in accordance with their terms.

 

(b)           Not applicable.

 

(c)          The Company did not purchase any of its equity securities during any month of the fourth fiscal quarter of 2019.

 

ITEM 6.                SELECTED FINANCIAL DATA

 

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 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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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, warrants, 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.

 

Rental Equipment:  The Company evaluates rental equipment assets for possible impairment annually to determine if the $927,000 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, 2019 impairment analysis included a renewal rate estimate of 90.2% and a CPI rate change of approximately 2.2%, which were the actual average rates for the two-year period ended December 31, 2019.  Based on these assumptions, the cash flow model determined a fair value of $6.7 million, exceeding its carrying value by 617%.  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 $155,000.  For every 0.1-percentage-point change in the CPI rate, the valuation would change by approximately $14,000.

 

Rental equipment is comprised of installed digital products on lease 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 still in operation.  Current contracts have an average age of 20.4 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 5.5 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 6.7 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.

 

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The October 1, 2019 annual review indicated that the fair value of the reporting unit exceeded its carrying value by 96.1%.  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, in October 2018, the security deposit was reduced by $50,000 to $250,000, and in October 2019, the security deposit was reduced by an additional $50,000 to $200,000, so the related letter of credit and savings account deposit were also reduced.  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.

 

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 $342,000 and $653,000 in 2019 and 2018, 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, 2019, plan assets were invested 30.7% in fixed income contracts and 69.3% 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, 2019, the weighted average rates used for the computation of benefit plan liabilities were: investment returns, 8.00% and discount rate, 4.30%.  The net periodic cost for 2020 will be based on the December 31, 2019 valuation.  The defined benefit pension plan periodic cost (benefit) was $79,000 and ($103,000) in 2019 and 2018, respectively.  At December 31, 2019, assuming no change in the other assumptions, a one-percentage point increase/(decrease) in the discount rate would have increased/(decreased) the net periodic cost by $5,000/($13,000).

 

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, 2019 and 2018.  In 2019, we made the $629,000 of minimum required contributions to the plan.  Subsequent to December 31, 2019, we made an $85,000 contribution to the plan.  At this time, we expect to make our remaining minimum required contributions in 2020 of $556,000; however, there is no assurance that we will be able to make any or all of such remaining payments.  See Note 15 to the Consolidated Financial Statements – Pension Plan for further details.

 

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

 

The Company has a $650,000 forgivable loan from the City of Hazelwood, Missouri, which is included in Long-term debt 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, 2025.  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% (6.75% at December 31, 2019).  As of December 31, 2019, the Company had accrued interest of $118,000.

 

Results of Operations

The following table presents our Statements of Operations data, expressed as a percentage of revenue for the years ended December 31, 2019 and 2018:

 

In thousands, except percentages	2019					2018
Revenues:
Digital product sales	$	14,710	86.4	%		$	11,958	83.0	%
Digital product lease and maintenance		2,325	13.6	%			2,441	17.0	%
Total revenues		17,035	100.0	%			14,399	100.0	%
Cost of revenues:
Cost of digital product sales		12,273	72.1	%			10,094	70.1	%
Cost of digital product lease and maintenance		775	4.5	%			1,234	8.6	%
Total cost of revenues		13,048	76.6	%			11,328	78.7	%
Gross profit from operations		3,987	23.4	%			3,071	21.3	%
General and administrative expenses		(4,438)	(26.0)	%			(7,117)	(49.4)	%
Operating loss		(451)	(2.6)	%			(4,046)	(28.1)	%
Interest expense, net		(504)	(3.0)	%			(940)	(6.5)	%
(Loss) gain on foreign currency remeasurement		(130)	(0.8)	%			225	1.5	%
Loss on extinguishment of debt		(193)	(1.1)	%			-	-	%
Gain on sale/leaseback transaction		-	-	%			11	0.1	%
Pension (expense) benefit		(83)	(0.5)	%			103	0.7	%
Loss before income taxes		(1,361)	(8.0)	%			(4,647)	(32.3)	%
Income tax expense		(41)	(0.2)	%			(47)	(0.3)	%
Net loss	$	(1,402)	(8.2)	%		$	(4,694)	(32.6)	%

 

2019 Compared to 2018

 

Total revenues for the year ended December 31, 2019 increased $2.6 million or 18.3% to $17.0 million from $14.4 million for the year ended December 31, 2018, primarily due to an increase in Digital product sales, partially offset by decreases in consulting services and Digital product lease and maintenance.

 

Digital product sales revenues increased $2.7 million or 23.0% to $14.7 million for the year ended December 31, 2019 compared to $12.0 million for the year ended December 31, 2018, primarily due to increases in the sports market, partially offset by a decrease in consulting services.

 

Digital product lease and maintenance revenues decreased $116,000 or 4.8% to $2.3 million for the year ended December 31, 2019 compared to $2.4 million for the year ended December 31, 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 year ended December 31, 2019 decreased $3.6 million to $451,000 from $4.0 million for the year ended December 31, 2018, principally due to the increase in revenues and a reduction in general and administrative expenses, partially offset by an increase in restructuring costs.

 

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Digital product sales operating income (loss) increased $1.9 million to income of $183,000 for the year ended December 31, 2019 compared to a loss of $1.7 million for the year ended December 31, 2018, primarily due to the increase in revenues and a decrease in general and administrative expenses.  The cost of Digital product sales increased $2.2 million or 21.6%, primarily due to the increase in revenues.  The cost of Digital product sales represented 83.4% of related revenues in 2019 compared to 84.4% in 2018.  General and administrative expenses for Digital product sales decreased $1.4 million or 37.5%, primarily due to a decrease in bad debt expenses, specifically related to two customers in 2018.

 

Digital product lease and maintenance operating income increased $690,000 or 65.0% to $1.8 million for the year ended December 31, 2019 compared to $1.1 million for the year ended December 31, 2018, primarily as a result of decreases in general and administrative expenses and 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 $459,000 or 37.2%, primarily due to a decrease in depreciation expense.  The cost of Digital product lease and maintenance revenues represented 33.3% of related revenues in 2019 compared to 50.6% 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 decreased $347,000 or 239.3%, primarily due to a decrease in bad debt expenses.

 

Corporate general and administrative expenses decreased $978,000 or 29.1% to $2.4 million for the year ended December 31, 2019 compared to $3.4 million for the year ended December 31, 2018, primarily due to decreases in payroll and expenses related to employees and directors of $670,000, consulting expenses of $355,000 and professional fees of $216,000, partially offset by an increase in restructuring costs of $306,000.

 

Net interest expense decreased $436,000 or 46.4% to $504,000 for the year ended December 31, 2019 compared to $940,000 for the year ended December 31, 2018, primarily due to a decrease in the average outstanding long-term debt, due to the termination of the CNH Finance Fund I, L.P. (“CNH”) loans and the SMI and SMII notes (hereinafter defined).

 

The loss on extinguishment of debt for the year ended December 31, 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 years ended December 31, 2019 and 2018 was an expense of 3.0% and 1.0%, respectively.  In 2019 and 2018, the Company recognized income tax expense of $41,000 and $47,000, respectively.  The income tax expense in 2019 and 2018 is 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 recurring losses and continues to have a working capital deficiency.  The Company incurred a net loss of $1.4 million in the year ended December 31, 2019 and had a working capital deficiency of $3.1 million as of December 31, 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 $5.3 million of net proceeds received from the exercises of the Unilumin Warrant and the $2.4 million of net proceeds raised from the Rights Offering (hereinafter defined), which allowed us to decrease the current portion of long-term debt and accounts payable.

 

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.

 

A stockholder of the Company has committed to providing additional capital of 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 to meet its cash requirements and fund potential new opportunities.

 

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The Company used cash for operating activities of $4.3 million and $1.1 million in the years ended December 31, 2019 and 2018, respectively.  The Company has implemented several initiatives to improve operational results and cash flows over future periods, including reducing headcount, 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 decreased $238,000 in 2019.  The decrease is primarily attributable to cash used in operating activities of $4.3 million, primarily to reduce accounts payable by $2.8 million, payments of $1.6 million to terminate term loans and payments of $1.4 million to terminate the Credit Agreement (hereinafter defined), partially offset by the net proceeds from the exercises of the Unilumin Warrant (hereinafter defined) of $5.3 million and the net proceeds from the Rights Offering (hereinafter defined) of $2.4 million.  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 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 2019 until the underlying debts mature.

 

The following table summarizes the Company’s fixed cash obligations as of December 31, 2019 over the next five fiscal years:

 

In thousands		2020			2021			2022			2023			2024
Long-term debt, including interest	$	2,445		$	-		$	-		$	-		$	-
Pension plan payments		641			417			490			324			212
Employment obligations		338			-			-			-			-
Estimated warranty liability		149			117			88			49			27
Operating lease payments		513			370			348			309			-
Total	$	4,086		$	904		$	926		$	682		$	239

 

As of December 31, 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.  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 exchanges.  See Note 12 to the Consolidated Financial Statements – Long-Term Debt for further details.

 

On September 16, 2019, the Company entered into the Loan Agreement (hereinafter defined) with MidCap (hereinafter defined).  The Loan Agreement has a term of three years, unless earlier terminated by the parties in accordance with the termination provisions of the Loan Agreement.  The Loan Agreement allows the Company to borrow up to an aggregate of $4.0 million at an interest rate of the 3-month LIBOR interest rate plus 4.75% (6.66% at December 31, 2019) on a revolving credit loan based on accounts receivable, inventory and equipment for general working capital purposes.  LIBOR is expected to be discontinued after 2021.  The Loan Agreement with MidCap provides procedures for determining a replacement or alternative rate in the event that LIBOR is unavailable.  We however can provide no assurance regarding the impact of the discontinuation of LIBOR on the interest rate that we would be required to pay or on our financial condition.  As of December 31, 2019, there is no balance outstanding under the Loan Agreement.

 

For a further description of the Company’s long-term debt, see Note 12 to the Consolidated Financial Statements – Long-Term Debt.  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.

 

Pension Plan Contributions

 

In 2019, we made the $629,000 of minimum required contributions to the pension benefit plan.  Subsequent to December 31, 2019, we made an $85,000 contribution to the pension benefit plan.  At this time, we expect to make our minimum required contributions to the pension benefit plan in 2020 of $556,000; however, there is no assurance that we will be able to make any or all of such remaining payments.  See Note 15 to the Consolidated Financial Statements – Pension Plan for further details.

 

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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 12 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 $7,000.  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 $263,000, 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, 2019.

 

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                                                                                                      15

 

Consolidated Balance Sheets as of December 31, 2019 and 2018                                                                                             16

 

Consolidated Statements of Operations for the Years Ended December 31, 2019 and 2018                                                    17

 

Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2019 and 2018                                    17

 

Consolidated Statements of Changes in Stockholders’ Deficit for the Years Ended December 31, 2019 and 2018                18

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2019 and 2018                                                   19

 

Notes to Consolidated Financial Statements                                                                                                                              20

 

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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, 2019 and 2018, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ deficit, and cash flows for each of the two years in the period ended December 31, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Adoption of New Accounting Standards

 

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of ASU No. 2016-12, Leases (Topic 842), as amended, effective January 1, 2019, using the modified retrospective approach.

 

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, whether due to error or fraud.  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 20, 2020

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Notes To Consolidated Financial Statements

 

1.  Summary of Significant Accounting Policies

 

Trans-Lux Corporation is a leading designer and manufacturer of digital signage display solutions.  The Company sells and leases its digital signage display solutions.

 

Principles of consolidation:  The Consolidated Financial Statements include the accounts of Trans-Lux Corporation, a Delaware corporation, and all wholly-owned subsidiaries (collectively, the “Company”).  Intercompany balances and transactions have been eliminated in consolidation.

 

Use of estimates:  The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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.  Actual results could differ from those estimates.  Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the financial statements in the period in which the change is determined.  Estimates are used when accounting for such items as costs of long-term sales contracts, allowance for uncollectible accounts, inventory valuation allowances, depreciation and amortization, valuation of pension obligations, valuation of warrants, income taxes, warranty reserve, management’s assessment of going concern, contingencies and litigation.

 

Cash and cash equivalents:  The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.  The Company has deposits in United States financial institutions that maintain Federal Deposit Insurance Corporation (“FDIC”) deposit insurance on all interest and non-interest-bearing accounts, collectively, with an aggregate coverage up to $250,000 per depositor per financial institution.  At times, the amount of the deposits exceeds the FDIC limits.  The portion of the deposits in excess of FDIC limits represents a credit risk of the Company.

 

Accounts receivable, net:  Accounts receivable are carried at net realizable value.  Credit is extended based on an evaluation of each customer’s financial condition; collateral is generally not required.  Reserves for uncollectible accounts receivable are provided based on historical experience and current trends.  The Company evaluates the adequacy of these reserves regularly.

 

The following is a summary of the allowance for uncollectible accounts at December 31:

 

In thousands	2019			2018
Balance at beginning of year	$	1,797		$	235
Provisions		(97)			1,562
Write-offs		(957)			-
Balance at end of year	$	743		$	1,797

 

Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers, the relatively small account balances within the majority of the Company’s customer base and their dispersion across different businesses.  At December 31, 2019, two customers accounted for 39.8% of the balance in Accounts receivable, net.  In 2019, no customers accounted for at least 10% of our total revenues.  At December 31, 2018, one customer accounted for 18.0% of the balance in Accounts receivable, net.  In 2018, no customers accounted for at least 10% of our total revenues.

 

Inventories:  Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value.  Valuation allowances for slow-moving and obsolete inventories are provided based on historical experience and demand for servicing of the displays.  The Company evaluates the adequacy of these valuation allowances regularly.

 

Rental equipment and property, plant and equipment, net:  Rental equipment and property, plant and equipment are stated at cost and depreciated over their respective useful lives using the straight-line method.  Leaseholds and improvements are amortized over the lesser of the useful lives or term of the lease.  Repairs and maintenance costs related to rental equipment and property, plant and equipment are expensed in the period incurred.

 

The estimated useful lives are as follows:

 

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

 

When rental equipment and property, plant and equipment are fully depreciated, retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the accounts.  Any gains or losses on disposals are recorded in the period incurred.

 

Goodwill:  Goodwill represents the excess of purchase price over the estimated fair value of net assets acquired.  The goodwill of $744,000 relates to the Digital product sales segment.

 

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The Company annually evaluates the value of its goodwill on October 1 and determines if it is impaired by comparing the carrying value of goodwill to its estimated fair value.  Changes in the assumptions used could materially impact the 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.  The Company uses the income and the market approach when testing for goodwill impairment.  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 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 5.5% within the income approach, the fair value of the reporting unit would be below carrying value.  The gross profit margins used are consistent with historical margins achieved by the Company during previous years.  If there is a margin decline of 6.7% or more, the model would yield results of a fair value less than 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 impairment test for goodwill is a two-step process.  The first step of the goodwill impairment test compares the fair value of the reporting unit with its carrying amount.  If the carrying amount of the reporting unit exceeds its fair value, a second step is performed to calculate the implied fair value of the goodwill of the reporting unit by deducting the fair value of all of the individual assets and liabilities of the reporting unit from the respective fair values of the reporting unit as a whole.  To the extent the calculated implied fair value of the goodwill is less than the recorded goodwill, an impairment charge is recorded for the difference.  Fair value is determined using cash flow and other valuation models (generally Level 3 inputs in the fair value hierarchy described in Note 4 – Fair Value).  There was no impairment of goodwill in 2019 or 2018.

 

Impairment or disposal of long-lived assets:  The Company evaluates whether there has been an impairment in value of its long-lived assets if certain circumstances indicate that a possible impairment may exist.  An impairment in value may exist when the carrying value of a long-lived asset exceeds its undiscounted cash flows.  If it is determined that an impairment in value has occurred, the carrying value is written down to its fair value as determined by a discounted cash flow model.  There were no impairments of long-lived assets in 2019 or 2018.

 

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.  The Company had Restricted cash in 2019 and 2018 for letters of credit in connection with the forgivable loan ($650,000 in 2019 and 2018) and security deposits ($200,000 in 2019 and $250,000 in 2018).  During 2019, a security deposit was reduced by $50,000.  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.

 

Shipping Costs:  The costs of shipping product to our customers of $436,000 and $487,000 in 2019 and 2018, respectively, are included in Cost of digital product sales.

 

Advertising/Marketing Costs:  The Company expenses the costs of advertising and marketing at the time that the related advertising takes place.  Advertising and marketing costs of $43,000 and $174,000 in 2019 and 2018, respectively, are included in General and administrative expenses.

 

Revenue recognition:  See Note 3 – Revenue Recognition.

 

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.

 

Taxes on income:  Deferred income tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at tax rates expected to be in effect when such temporary differences are expected to reverse and for operating loss carryforwards.  The temporary differences are primarily attributable to operating loss carryforwards, depreciation and the pension plan.  The Company records a valuation allowance against net deferred income tax assets if, based upon the available evidence, it is more-likely-than-not that the deferred income tax assets will not be realized.

 

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The Company considers whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position.  Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements.  The Company’s policy is to classify interest and penalties related to uncertain tax positions in income tax expense.  To date, there have been no interest or penalties charged to the Company in relation to the underpayment of income taxes.  The Company’s determinations regarding uncertain income tax positions may be subject to review and adjustment at a later date based upon factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof.

 

Foreign currency:  The functional currency of the Company’s Canadian business operation is the Canadian dollar.  The assets and liabilities of such operation are translated into U.S. dollars at the year-end rate of exchange, and the operating and cash flow statements are converted at the average annual rate of exchange.  The resulting translation adjustment is recorded in Accumulated other comprehensive loss in the Consolidated Balance Sheets and as a separate item in the Consolidated Statements of Comprehensive Loss.  In relation to intercompany balances, these have been classified as short-term in nature and therefore the changes in the foreign currency remeasurement adjustment for intercompany balances are recorded as (Loss) gain on foreign currency remeasurement in the Consolidated Statements of Operations.

 

Share-based compensation:  The Company measures share-based payments to employees, directors and non-employees at the grant date fair value of the instrument.  The fair value is estimated on the date of grant using the Black-Scholes valuation model, which requires various assumptions including estimating stock price volatility, expected life of the instrument, estimated forfeiture rate and risk free interest rate.  For details on the accounting effect of share-based compensation, see Note 16 – Share-Based Compensation.

 

Consideration of Subsequent Events:  The Company evaluated events and transactions occurring after December 31, 2019 through the date these Consolidated Financial Statements were included in this Form 10-K and filed with the SEC, to identify subsequent events which may need to be recognized or non-recognizable events which would need to be disclosed.

 

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, which the Company has so elected. 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 Consolidated Balance Sheets for the recognition of certain operating leases as ROU assets of $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 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 13 – Leases for further details.

 

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.

 

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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.

 

2. Liquidity

 

The Company has incurred recurring losses and has a working capital deficiency.  The Company incurred a net loss of $1.4 million in 2019 and had a working capital deficiency of $3.1 million as of December 31, 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 March and April 2019, the Company received aggregate proceeds of $8.0 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 $5.5 million warrant (the “Unilumin Warrant”) issued to Unilumin North America Inc. (“Unilumin”)  Of these proceeds, a portion was used to satisfy outstanding obligations including certain long-term debt, certain payables, certain accrued liabilities and pension obligations.  On September 16, 2019, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with MidCap Business Credit LLC (“MidCap”) as lender.  The Loan Agreement allows the Company to borrow up to an aggregate of $4.0 million on a revolving credit loan based on accounts receivable, inventory and equipment for general working capital purposes.  A stockholder of the Company has committed to providing additional capital up to $2.0 million through December 31, 2020, 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-K.  The Company continually evaluates the need and availability of long-term capital in order to meet its cash requirements and fund potential new opportunities.

 

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 December 31, 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.

 

Disaggregated Revenues

 

The following table represents a disaggregation of revenue from contracts with customers for the years ended December 31, 2019 and 2018, along with the reportable segment for each category:

 

In thousands	2019			2018
Digital product sales:
Catalog and small    customized products	$	13,322		$	10,958
Large customized    products		1,388			1,000
Subtotal		14,710			11,958
Digital product lease and     maintenance:
Operating leases		1,215			1,413
Maintenance agreements		1,110			1,028
Subtotal		2,325			2,441
Total	$	17,035		$	14,399

 

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.

 

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

 

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.

 

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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 Consolidated Balance Sheets.

 

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 December 31, 2019 and 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 and included in Accrued liabilities in the Consolidated Balance Sheets.

 

The following table presents the balances in the Company’s receivables and contract liabilities with customers as of December 31, 2019 and 2018:

 

In thousands		2019			2018
Gross receivables	$	3,124		$	4,067
Allowance for bad debts		743			1,796
Net receivables		2,381			2,271
Contract liabilities		230			465

 

During the years ended December 31, 2019 and 2018, the Company recognized bad debt recovery (expense) of $97,000 and ($1.6 million), respectively.

 

During the years ended December 31, 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 period:

 

In thousands		2019		2018
Revenue recognized in the period from:
Amounts included in the contract liability   at the beginning of the period	$	392	$	891
Performance obligations satisfied in    previous periods (for example, due to    changes in transaction price)		-		-

 

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 December 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations for digital product sales was $843,000 and digital product lease and maintenance was $3.3 million.

 

The Company expects to recognize revenue on approximately 59%, 20% and 21% of the remaining performance obligations over the next 12 months, 13 to 36 months and 37 or more months, respectively.

 

Costs to Obtain or Fulfill a Customer Contract

 

Prior to the adoption of ASU 2014-9, the Company expensed incremental commissions paid to sales representatives for obtaining customer contracts.  Under ASU 2014-9, 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.

 

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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.

 

4.  Fair Value

 

The Company carries the cash surrender value of life insurance related to its deferred compensation arrangements at fair value.  Under ASC 820, the fair value of all assets and liabilities is determined using a three-tier fair value hierarchy.

 

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

 

• 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.

 

Based on this hierarchy, the Company determined the fair value of the cash surrender value of life insurance, a Level 2 based on observable inputs primarily from the counter party.  The Company’s cash surrender value of life insurance had a carrying amount of $55,000 at December 31, 2019 and 2018, and is included in Other assets in the Consolidated Balance Sheets.  The carrying amounts of cash equivalents, receivables and accounts payable approximate fair value due to the short maturities of these items.  The fair value of the Company’s 8¼% Limited convertible senior subordinated notes due 2012 (the “Notes”), using observable inputs, was $70,000 at December 31, 2019 and $77,000 at December 31, 2018.  The fair value of the Company’s 9½% Subordinated debentures due 2012 (the “Debentures”), using observable inputs, was $44,000 at December 31, 2019 and 2018.  The fair value of the Company’s remaining long-term debt including current portion approximates its carrying value of $1.7 million at December 31, 2019 and $4.7 million at December 31, 2018.

5.  Inventories

 

Inventories consist of the following:

 

In thousands	2019			2018
Raw materials	$	1,393		$	1,178
Work-in-progress		512			626
Finished goods		277			397
Total inventory	$	2,182		$	2,201

 

6.  Rental Equipment, net

 

Rental equipment consists of the following:

 

In thousands	2019			2018
Rental equipment	$	4,291		$	7,109
Less accumulated depreciation		3,364			5,799
Net rental equipment	$	927		$	1,310

 

During 2019, $2.9 million of fully depreciated rental equipment was written off.  Depreciation expense for rental equipment for the years ended December 31, 2019 and 2018 was $427,000 and $706,000, respectively.

 

7.  Property, Plant and Equipment, net

 

Property, plant and equipment consists of the following:

 

In thousands	2019			2018
Machinery, fixtures and equipment	$	2,884		$	2,691
Leaseholds and improvements		23			12
		2,907			2,703
Less accumulated depreciation		623			523
Net property, plant and equipment	$	2,284		$	2,180

 

Equipment having net book values of $2.3 million and $2.2 million at December 31, 2019 and 2018, respectively, are pledged as collateral under various financing agreements.

 

During 2019 and 2018, $76,000 and $421,000, respectively, of fully depreciated property, plant and equipment was written off.  Depreciation expense for property, plant and equipment for the years ended December 31, 2019 and 2018 was $241,000 and $246,000, respectively.

 

8.  Other Assets

 

Other assets consist of the following:

 

In thousands	2019			2018
Refundable AMT credits	$	275		$	592
Prepaids		55			55
Deposits		73			73
Total other assets	$	403		$	720

 

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9.  Taxes on Income

 

The components of income tax expense are as follows:

 

In thousands	2019			2018
Current:
Federal	$	-		$	-
State and local		25			25
Foreign		16			22
	$	41		$	47
Deferred:
Federal	$	-		$	-
State and local		-			-
		-			-
Income tax expense	$	41		$	47

 

Loss before income taxes from the United States operations was $1.2 million and $4.5 million for the years ended December 31, 2019 and 2018, respectively.  Loss before income taxes from Canada was $0.2 million and $0.1 million for the years ended December 31, 2019 and 2018, respectively.

 

The effective income tax rate differed from the expected federal statutory income tax benefit rate of 21.0% as follows:

 

	2019			2018
Statutory federal income tax benefit rate		21.0 %			21.0 %
State income taxes, net of federal benefit		2.5			4.2
Deemed dividend tax of deferred foreign income		-			0.5
Foreign income taxed at different rates		(3.6)			(1.1)
Deferred tax asset valuation allowance		285.5			(22.6)
Section 382 adjustment to deferred net operating loss		(309.3)			-
Other		0.9			(3.0)
Effective income tax benefit (expense) rate		(3.0) %			(1.0)%

Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  Significant components of the Company’s deferred income tax assets and liabilities are as follows:

 

In thousands	2019			2018
Deferred income tax asset:
Tax credit carryforwards	$	-		$	30
Operating loss carryforwards		1,487			5,347
Net pension costs		2,210			2,357
Accruals		-			(3)
Allowance for bad debts		182			467
Other		148			302
Valuation allowance		(3,563)			(7,447)
		464			1,053
Deferred income tax liability:
Depreciation		345			425
Other		119			628
		464			1,053
Net deferred income taxes	$	-		$	-

 

Operating tax loss carryforwards primarily relate to U.S. federal net operating loss carryforwards of approximately $4.9 million, which began to expire in 2019.  The operating loss carryforwards have been limited by changes in ownership of the Company in 2012 and 2019 as defined under Section 382 of the Internal Revenue Code.  The change in ownership as of June 26, 2012 limited our operating loss carryforwards at that time to $295,000 per year aggregating $5.9 million.  The change in ownership as of April 10, 2019 limited our operating loss carryforwards at that time to $148,000 per year aggregating $3.0 million.  Subsequent losses in 2019 have increased the operating loss carryforwards.

 

A valuation allowance has been established for the amount of deferred income tax assets as management has concluded that it is more-likely-than-not that the benefits from such assets will not be realized.

 

The Company’s determinations regarding uncertain income tax positions may be subject to review and adjustment at a later date based upon factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof.  The Company does not have any material uncertain tax positions in 2019 and 2018.

 

The Company is subject to U.S. federal income tax as well as income tax in multiple state and local jurisdictions and Canadian federal and provincial income tax.  Currently, no federal, state or provincial income tax returns are under examination.

 

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10.  Accrued Liabilities

 

Accrued liabilities consist of the following:

 

In thousands	2019			2018
Directors fees	$	1,202		$	1,148
Taxes payable		1,114			1,083
Interest payable		875			731
Deferred revenues		787			1,000
Current portion of pension liability   (see Note 15 – Pension Plan)		641			623
Warranty reserve		430			405
Compensation and employee benefits		336			636
Audit fees		122			148
Other		539			558
	$	6,046		$	6,332

 

A summary of the warranty reserve for the years ended December 31, 2019 and 2018 is as follows:

 

In thousands	2019			2018
Balance at beginning of year	$	405		$	322
Provisions		176			307
Deductions		(151)			(224)
Balance at end of year	$	430		$	405

 

11.  Warrant Issuances

 

In connection with a Securities Purchase Agreement (“SPA”) with Unilumin, the Company issued the Unilumin Warrant to purchase 5,670,103 shares of the Company’s Common Stock at an exercise price of $0.97 per share.  In 2019, Unilumin fully exercised the Unilumin Warrant, aggregating $5.5 million.  The Company received cash of $5.3 million after fees related to the exercise of this warrant.

 

On June 11, 2018, in connection with a Subordinated Secured Promissory Note (the “SMI Note”), the Company issued SM Investors, L.P. (“SMI”) a three-year warrant to purchase 82,500 shares of Common Stock 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 treated as a debt discount.  This warrant has not yet been exercised.

 

On June 11, 2018, in connection with a Subordinated Secured Promissory Note (the “SMII Note”) with SM Investors II, L.P. (“SMII”), the Company issued SMII a three-year warrant to purchase 167,500 shares of Common Stock 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 treated as a debt discount.  This warrant has not yet been exercised.

 

On April 23, 2015, the Company entered into a credit agreement with BFI Capital Fund II, LLC (“BFI”) for a $1.5 million credit line, which was repaid in full prior to 2016.  In connection with the agreement, the Company also issued BFI a warrant to purchase 10,000 shares of Common Stock at an exercise price of $12.00 per share, which expires on April 23, 2020.  This warrant has not yet been exercised.

 

In November 2012, the Board of Directors approved the issuance to two board members, George W. Schiele and Salvatore J. Zizza, of warrants to purchase 20,000 shares of Common Stock at an exercise price of $12.50 per share.  In April 2013, the Board of Directors approved the issuance to one board member, Jean Firstenberg, of warrants to purchase 2,000 shares of Common Stock at an exercise price of $12.50 per share.  These warrants became fully vested on October 2, 2016 and expired on October 2, 2018.  No expense was recorded in 2019 or 2018 related to these warrants.  These warrants did not include a potential adjustment of the strike price if the Company sold or granted any options or warrants at a price per share less than the strike price of the warrants, so they were considered indexed to the Company’s Common Stock and were accounted for as equity at the time of the grant.

 

12.  Long-Term Debt

 

Long-term debt consists of the following:

 

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

 

Payments of long-term debt due for the next five years are:

 

In   thousands	2020			2021			2022			2023			2024			Thereafter
	$	1,572		$	-		$	-		$	-		$	-		$	650

 

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On September 16, 2019, the Company entered into the Loan Agreement with MidCap.  The Loan Agreement has a term of three years, unless earlier terminated by the parties in accordance with the termination provisions of the Loan Agreement.  The Loan Agreement allows the Company to borrow up to an aggregate of $4.0 million at an interest rate of the 3-month LIBOR interest rate plus 4.75% (6.66% at December 31, 2019) on a revolving credit loan based on accounts receivable, inventory and equipment for general working capital purposes.  As of December 31, 2019, there is no balance outstanding under this Loan Agreement.  The Loan Agreement also requires the payment of certain fees, including a facility fee, an unused credit line fee and a collateral monitoring charge.  The Loan Agreement contains financial and other covenant requirements, including financial covenants that require the Borrowers to attain certain EBITDA amounts for certain periods, the first of which is for the three months ended December 31, 2019.  As of December 31, 2019, the Company satisfied this covenant.  The Loan Agreement is secured by substantially all of the Borrowers’ assets.

 

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 December 31, 2019, the entire amount was outstanding and is included in current portion of long-term debt in the Consolidated Balance Sheets.  As of December 31, 2019 and 2018, the Company had accrued $120,000 and $60,000, respectively, of interest related to this loan, which are included in accrued liabilities in the 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 December 31, 2019, the entire amount was outstanding and is included in current portion of long-term debt Consolidated Balance Sheets.  As of December 31, 2019 and 2018, the Company had accrued $120,000 and $60,000, respectively, of interest related to this loan, which are included in accrued liabilities in the 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.

 

As of December 31, 2019 and 2018, the Company had outstanding $352,000 and $387,000, respectively, of Notes.  The Notes matured as of March 1, 2012 and are currently in default.  As of December 31, 2019 and 2018, the Company had accrued $300,000 and $298,000, respectively, of interest related to the Notes, which is included in Accrued liabilities in the Consolidated Balance Sheets.  The trustee, by notice to the Company, or the holders of 25% of the principal amount of the Notes outstanding, by notice to the Company and the trustee, may declare the outstanding principal plus interest due and payable immediately. 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 December 31, 2019 and 2018, the Company had outstanding $220,000 of Debentures.  The Debentures matured as of December 1, 2012 and are currently in default.  As of December 31, 2019 and 2018, the Company had accrued $211,000 and $190,000, respectively, of interest related to the Debentures, which is included in Accrued liabilities in the 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.

 

The Company has a $650,000 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, 2025.  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% (6.75% at December 31, 2019).  As of December 31, 2019 and 2018, the Company had accrued $118,000 and $71,000, respectively, of interest related to this loan, which is included in accrued liabilities in the Consolidated Balance Sheets.

 

On July 12, 2016, the Company entered into a credit agreement, as subsequently amended on various dates, the latest being 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 and (ii) a $1.0 million term loan.  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 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.  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 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.  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 Consolidated Statements of Operations.

 

13.  Leases

 

Certain premises are occupied under operating leases that expire at varying dates through 2023.  Certain of these leases provide for the payment of real estate taxes and other occupancy costs.  On June 21, 2016, the Company entered into a lease for a manufacturing facility in Hazelwood, Missouri for a seven-year lease period at an initial annual rental of $317,000.  On December 23, 2019, the Company entered into a lease for office space in Urbandale, Iowa for a two-year lease period at an initial annual rental of $28,000.  On February 1, 2016, the Company sold its Des Moines, Iowa facility in a sale/leaseback transaction.  The lease was for a two-year lease period at an annual rental of $158,000.  In 2017, the Company extended the lease through February 1, 2019 at the same rate.  In 2018, the Company extended the lease for another year through February 1, 2020 at the same rate.  Rent expense was $608,000 and $662,000 for the years ended December 31, 2019 and 2018, respectively.

 

The Company leases administrative and manufacturing facilities through operating lease agreements. The Company has no finance leases as of December 31, 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 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 Consolidated Balance Sheets.  The primary leases we enter into with initial terms of 12 months or less are for equipment.

 

Supplemental information regarding leases:

 

	2019
In thousands, unless otherwise noted
Balance Sheet:
ROU assets	$	1,141
Current lease liabilities		284
Non-current lease liabilities		893
Total lease liabilities		1,177
Weighted average remaining lease term (years)		2.5
Weighted average discount rate		9.0%
Future minimum lease payments:
2020	$	377
2021		370
2022		348
2023		295
2024		-
Thereafter		-
Total		1,390
Less: Imputed interest		213
Total lease liabilities		1,177
Less: Current lease liabilities		284
Long-term lease liabilities	$	893

 

Supplemental cash flow information regarding leases:

 

In thousands	2019
Operating cash flow information:
Cash paid for amounts included in the measurement    of lease liabilities	$	488
Non-cash activity:
ROU assets obtained in exchange for lease liabilities		212

 

Total operating lease expense and short-term lease expense was $497,000 and $111,000 for the year ended December 31, 2019.

 

14.  Stockholders’ Deficit

 

During 2019 and 2018, the Board of Directors did not declare any quarterly cash dividends on the Company’s Common Stock.

 

During 2019, the Company declared cash dividends aggregating $80,000 which was paid in connection with the redemption of all of the outstanding Series B Convertible Preferred Stock (“SBCPS”).  In September 2018, the Board of Directors declared a cash dividend of $6.00 per share for each share of SBCPS (aggregating $99,000, which was paid in November 2018).  In April 2018, the Board of Directors declared a stock dividend of 7.6923 shares of Common Stock for each share of SBCPS (aggregating 127,013 common shares, which were issued in May 2018).  As of December 31, 2018, the Company had recorded accumulated unpaid dividends related to SBCPS of $41,000.

 

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The Company was authorized to issue 2,500,000 shares of preferred stock as of December 31, 2019, of which (i) 416,500 shares were designated as Series A Convertible Preferred Stock, none of which were outstanding, (ii) 51,000 shares were designated as SBCPS, none of which were outstanding, and (iii) 2,032,500 shares were not yet designated.  The undesignated preferred stock would contain such rights, preferences, privileges and restrictions as may be fixed by our Board of Directors.

 

Shares of the Company’s Common Stock reserved for future issuance in connection with convertible securities and stock option plans were 260,000 and 6,260,343 at December 31, 2019 and 2018, respectively.

 

During 2019 and 2018, certain board members deferred payment of their director fees.  In lieu of a cash payment, certain board members and former board members have agreed to receive restricted shares of Common Stock of the Company or a combination of cash and restricted shares of Common Stock of the Company, which such restricted shares shall contain a legend under the Securities Act of 1933 and shall not be transferable unless and until registered or otherwise in accordance with applicable securities laws.  No restricted stock was issued in lieu of cash payments for directors’ fees in 2019 or 2018.

 

Accumulated other comprehensive loss is comprised of approximately $6.8 million and $6.5 million of unrecognized pension costs at December 31, 2019 and 2018, respectively, and $194,000 and $76,000 of unrealized foreign currency translation gains at December 31, 2019 and 2018, respectively.

 

The components of accumulated other comprehensive loss are as follows:

 

In thousands	Pension plan actuarial loss			Foreign currency translation gain (loss)			Total
Balances at January 1, 2018	$	(5,817)		$	281		$	(5,536)
Actuarial loss		(653)			-			(653)
Translation loss		-			(205)			(205)
Balances at December 31, 2018		(6,470)			76			(6,394)
Actuarial loss		(342)			-			(342)
Translation gain		-			118			118
Balances at December 31, 2019	$	(6,812)		$	194		$	(6,618)

 

15.  Pension Plan

 

All eligible salaried employees of Trans-Lux Corporation and certain of its subsidiaries are covered by a non-contributory defined benefit pension plan.  Pension benefits vest after five years of service and are based on years of service and final average salary.  The Company’s general funding policy is to contribute at least the required minimum amounts sufficient to satisfy regulatory funding standards, but not more than the maximum tax-deductible amount.  The benefit service under the pension plan had been frozen since 2003 and, accordingly, there was no service cost for the years ended December 31, 2019 and 2018.  In 2009, the compensation increments were frozen, and accordingly, no additional benefits are being accrued under the plan.  For 2019 and 2018, the accrued benefit obligation of the plan exceeded the fair value of plan assets, due primarily to the plan’s investment performance and updates to actuarial longevity tables.  The Company’s obligations under its pension plan exceeded plan assets by $4.1 million at December 31, 2019.

 

The Company employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk.  The intent of this strategy is to minimize plan expenses by outperforming plan liabilities over the long run.  Risk tolerance is established through careful consideration of plan liabilities, plan funded status and corporate financial condition.  The portfolio contains a diversified blend of equity and fixed income investments.  Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies and quarterly investment portfolio reviews.

 

At December 31, 2019 and 2018, the Company’s pension plan weighted-average asset allocations by asset category are as follows:

 

	2019	2018
Equity and index funds	69.3%	64.7%
Fixed income funds	30.7	35.3
	100.0%	100.0%

 

The pension plan asset information included below is presented at fair value as established by ASC 820.

 

The following table presents the pension plan assets by level within the fair value hierarchy as of December 31, 2019 and 2018:

 

In thousands	2019			2018
Level 1:
Equity and index funds	$	7,028		$	5,593
Fixed income funds		3,120			3,054
Total Level 1		10,148			8,647
Level 2		-			-
Level 3		-			-
Total pension plan assets	$	10,148		$	8,647

 

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The funded status of the plan as of December 31, 2019 and 2018 is as follows:

 

In thousands	2019			2018
Change in benefit obligation:
Projected benefit obligation at   beginning of year	$	12,965		$	14,320
Interest cost		501			455
Actuarial loss (gain)		1,565			(908)
Benefits paid		(773)			(902)
Projected benefit obligation at   end of year		14,258			12,965
Change in plan assets:
Fair value of plan assets at   beginning of year		8,647			10,130
Actual return on plan assets		1,645			(1,002)
Company contributions		629			421
Benefits paid		(773)			(902)
Fair value of plan assets at end of   year		10,148			8,647
Funded status (underfunded)	$	(4,110)		$	(4,318)
Amounts recognized in other   accumulated comprehensive loss:
Net actuarial loss	$	8,296		$	7,954
Weighted average assumptions as of   December 31:
Discount rate:
Components of cost		4.30%			3.65%
Benefit obligations		3.20%			4.30%
Expected return on plan assets		8.00%			8.00%
Rate of compensation increase		N/A			N/A

 

The Company determines the long-term rate of return for plan assets by studying historical markets and the long-term relationships between equity securities and fixed income securities, with the widely-accepted capital market principal that assets with higher volatility generate higher returns over the long run.  The 8.0% expected long-term rate of return on plan assets is determined based on long-term historical performance of plan assets, current asset allocation and projected long-term rates of return.

 

In 2020, the Company expects to amortize $281,000 of actuarial losses to pension expense.  The accumulated benefit obligation at December 31, 2019 and 2018 was $14.3 million and $13.0 million, respectively.  The minimum required contribution in 2020 is expected to be $641,000, which is included in Accrued liabilities in the Consolidated Balance Sheets.  The long-term pension liability is $3.5 million and is included in Deferred pension liability and other in the Consolidated Balance Sheets.

 

In 2019, we made the $629,000 of minimum required contributions to the plan, which includes the balance of the 2018 minimum required contributions.  Subsequent to December 31, 2019, we made an $85,000 contribution to the plan.  At this time, the Company is expecting to make its minimum required $556,000 of contributions remaining for 2020; however, there is no assurance that the Company will be able to make any or all such remaining payments.  If we are unable to fulfill our related obligations, the implementation of any such enforcement remedies would have a material adverse impact on our financial condition, results of operations, and liquidity.

 

The following estimated benefit payments are expected to be paid by the Company’s pension plan in the next 5 years:

 

In thousands	2020			2021			2022			2023			2024
	$	720		$	1,229		$	731		$	865		$	956

 

The following table presents the components of the net periodic pension cost for the years ended December 31, 2019 and 2018:

 

In thousands	2019			2018
Interest cost	$	501		$	455
Expected return on plan assets		(682)			(787)
Amortization of net actuarial loss		264			229
Net periodic pension cost (benefit)	$	83		$	(103)

 

The following table presents the change in unrecognized pension costs recorded in other comprehensive loss as of December 31, 2019 and 2018:

 

In thousands	2019			2018
Balance at beginning of year	$	7,954		$	7,301
Net actuarial loss		606			882
Recognized loss		(264)			(229)
Balance at end of year	$	8,296		$	7,954

 

In addition, the Company provided unfunded supplemental retirement benefits for the retired, former Chief Executive Officer.  During 2009 the Company accrued $0.5 million for such benefits, which was settled in November 2019.  The Company does not offer any post-retirement benefits other than the pension and supplemental retirement benefits described herein.

 

16.  Share-Based Compensation

 

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

 

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On October 5, 2018, the Company granted 20,000 shares of Common Stock to the Company’s Chief Executive Officer.  The closing share price on the date of the grant was $0.49 and there was no vesting period.  The Company recorded compensation expense of $10,000 in 2018.

 

The Company currently has one stock option plan.  As of December 31, 2019, 800 shares of Common Stock were available for grant under the Non-Employee Director Stock Option Plan.

 

Changes in the stock option plan are as follows:

 

	Number of Shares						Weighted Average Exercise Price
	Authorized		Granted		Available
Balance January 1, 2018	800		-		800			N/A
Authorized	-		-		-
Expired	-		-		-
Granted	-		-		-
Balance December 31, 2018	800		-		800
Authorized	-		-		-
Expired	-		-		-
Granted	-		-		-
Balance December 31, 2019	800		-		800

 

Under the Non-Employee Director Stock Option Plan, option prices must be at least 100% of the market value of the Common Stock at the time of grant.  No option may be exercised prior to one year after the date of grant and the optionee must be a director of the Company at the time of exercise, except in certain cases as permitted by the Compensation Committee.  Exercise periods are for six years from the date of grant and terminate at a stipulated period of time after an optionee ceases to be a director.  At December 31, 2019, there were no outstanding options to purchase shares.

 

As of December 31, 2019, there was no unrecognized compensation cost related to non-vested options granted under the Plans.

17.  Loss Per Share

 

The following table presents the calculation of loss per share for the years ended December 31, 2019 and 2018:

 

In thousands, except per share data	2019			2018
Numerator:
Net loss, as reported	$	(1,402)		$	(4,694)
Dividends paid on preferred shares		(80)			(198)
Change in dividends accumulated on     preferred shares		41			-
Net loss attributable to common    shares	$	(1,441)		$	(4,892)
Denominator:
Weighted average shares outstanding		11,417			2,603
Basic and diluted loss per share	$	(0.13)		$	(1.88)

 

At December 31, 2019, there are no dividends accumulated on the Company’s SBCPS.  At December 31, 2018, dividends accumulated on the Company’s SBCPS totaled $41,000.

 

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 December 31, 2019 and 2018, outstanding warrants exercisable into 260,000 and 5,680,000 shares of Common Stock, respectively, were excluded from the calculation of diluted loss per share because their impact would have been anti-dilutive. 

 

18.  Restructuring

 

The Company records restructuring liabilities that represent charges in connection with consolidations of certain operations as well as headcount reduction programs.  In the third quarter of 2019, the Company approved restructuring plans to consolidate the manufacturing facilities.  The Company recorded restructuring costs of $306,000 for the year ended December 31, 2019, which mainly consisted of costs to relocate equipment and inventory and other costs to consolidate the manufacturing facilities.  This restructuring relates to the digital product sales segment.  Through December 31, 2019, the Company has paid $51,000 of costs so far to relocate equipment and inventory.  Therefore, the remaining $253,000 is included in accrued liabilities in the Condensed Consolidated Balance Sheet at December 31, 2019.  These remaining costs are expected to be paid in cash in the first quarter of 2020, when the consolidation of the manufacturing facilities is completed.  There were no restructuring costs in the year ended December 31, 2018.

 

19.  Commitments and Contingencies

 

Commitments:  The Company has employment agreements with its Chief Executive Officer and its Chief Accounting Officer, which expire in October 2020.  At December 31, 2019, the aggregate commitment for future salaries, excluding bonuses, was approximately $338,000.  Contractual salaries expense was $450,000 and $338,000 for the years ended December 31, 2019 and 2018, respectively.

 

Contingencies:  The Company is subject to legal proceedings and claims which arise in the ordinary course of its business and/or which are covered by insurance.  The Company believes that it has accrued adequate reserves individually and in the aggregate for such legal proceedings.  Should actual litigation results differ from the Company’s estimates, revisions to increase or decrease the accrued reserves may be required.  There are no open matters that the Company deems material.

 

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20.  Related Party Transactions

 

On March 4, 2019, the Unilumin exercised $2.0 million of the Unilumin Warrant, and on April 5, 2019, Unilumin exercised the remaining $3.5 million of the Unilumin Warrant, raising an aggregate of $5.5 million for the Company.  Unilumin now owns 52.0% of the Company’s outstanding Common Stock.  Nicholas Fazio, Yang Liu and Yantao Yu, each directors of the Company, are each directors and/or officers of Unilumin.

 

On April 5, 2019, the Rights Offering terminated.  At the closing of the Rights Offering on April 9, 2019, the Company received gross proceeds of $2.5 million in exchange for 2,500,000 shares of Common Stock.  Participants in the Rights Offering included (a) Gabelli Funds, LLC, a greater than 5% stockholder, (b) Salvatore Zizza and George Schiele, both directors of the Company, and (c) Alberto Shaio and Todd Dupee, both executive officers of the Company.

 

In connection with the Company’s agreement with Unilumin in 2018, the Company paid $175,000 to Durkin Law, LLC in early 2019.  In connection with Durkin Law, LLC’s representation of the Company in regards to the Loan Agreement and certain other general corporate matters later in 2019, the Company paid $26,000 to Durkin Law, LLC.  Thomas E. Durkin, principal of Durkin Law, LLC, was appointed the Company’s Executive Vice President, General Counsel & Corporate Secretary on July 30, 2019.

 

Yaozhong Shi, a former director of the Company, is the Chairman of Transtech LED Company Limited (“Transtech”), which is one of our primary LED suppliers.  The Company purchased $211,000 of product from Transtech in 2018.  The amount payable by the Company to Transtech was $305,000 as of December 31, 2018.

 

As of December 31, 2019 and 2018, the Company had outstanding payables to certain executive officers aggregating $19,000 and $427,000, respectively.

 

21.  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-maker 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.  The Company’s operations are managed in two reportable business segments: Digital product sales and Digital product lease and maintenance.  Both design and produce large-scale, multi-color, real-time digital products.  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 for 2019 and 2018.  The foreign operation does not manufacture its own equipment; the domestic operation provides the equipment that the foreign operation leases or sells.  The foreign operation operates similarly to the domestic operation and has similar profit margins.  Foreign assets are immaterial.

 

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Information about the Company’s operations in its two business segments for the years ended December 31, 2019 and 2018 and as of December 31, 2019 and 2018 were as follows:

 

In thousands	2019			2018
Revenues:
Digital product sales	$	14,710		$	11,958
Digital product lease & maintenance		2,325			2,441
Total revenues	$	17,035		$	14,399
Operating income (loss):
Digital product sales	$	183		$	(1,744)
Digital product lease & maintenance		1,752			1,062
Corporate general and     administrative expenses		(2,386)			(3,364)
Total operating loss		(451)			(4,046)
Interest expense, net		(504)			(940)
(Loss) gain on foreign currency   remeasurement		(130)			225
Loss on extinguishment of debt		(193)			-
Gain on sale/leaseback transaction		-			11
Pension (expense) benefit		(83)			103
Loss before income taxes		(1 361)			(4,647)
Income tax expense		(41)			(47)
Net loss	$	(1 402)		$	(4,694)
Assets:
Digital product sales	$	8,204		$	7,689
Digital product lease &       maintenance		3,515			3,054
Total identifiable assets		11,719			10,743
General corporate		535			723
Total assets	$	12,254		$	11,466
Depreciation and amortization:
Digital product sales	$	234		$	234
Digital product lease &       maintenance		427			706
General corporate		7			12
Total depreciation and amortization	$	668		$	952
Capital expenditures:
Digital product sales	$	376		$	140
Digital product lease &       maintenance		44			-
General corporate		1			-
Total capital expenditures	$	421		$	140

 

22.  Subsequent Events

 

The Company has evaluated events and transactions subsequent to December 31, 2019 and through the date these Consolidated Financial Statements were included in this Form 10-K and filed with the SEC.