Robert Palle - CEO Eric Skolnik - CFO Steven Shea - Chairman of the Board

George Gaspar - Richard Todaro - Todaro Capital

Good day, ladies and gentlemen. And welcome to Blonder Tongue Laboratories' Second Quarter 2017 Results. [Operator Instructions] And at this time, it is my pleasure to turn the floor over to your host CEO of Blonder Tongue Laboratories, Bob Palle. Sir, the floor is yours.

Thank you very much. Good morning, everyone. Welcome to Blonder Tongue's second quarter 2017 financial reporting teleconference. Before we begin this morning with any details of performance, I'd like to preface my remarks and those made by other Blonder Tongue representatives, who may be speaking today, by reminding you that we will be discussing certain subjects, which will contain forward-looking statements, including management's view of our prospects and evolving trends in the marketplace. As you know, the future is impossible to predict, and so I caution you that actual results may differ from those that maybe projected in our comments this morning. I would ask you that you refer to our prior SEC filings, our Form 10-Qs for the second quarter 2017 at prior quarters, and 10-Ks for years 2015 and 2016 for additional information concerning factors that could cause actual results to differ from the information discussed this morning. With me today are Eric Skolnik, Blonder Tongue's Chief Financial Officer; and Steve Shea, Blonder Tongue's Chairman of the Board. All of us will be available to answer any questions you may have following our presentations. First of all, the essence of the second quarter press release comments bear repeating. Even though we achieved a year-over-year sales increase for both the first and second quarters of 2017, we are disappointed that we are not able to show net earnings for either period. We're encouraged by the increase in sales of our data products and we're not surprised by the decrease in digital video headend products, as the sales of those products have been buoyed by the large retail chain rollout in the first and second quarters of 2016. The company's research and development teams have been working on a new series of digital products that we anticipate introducing in the fourth quarter of 2017. We remain however cautious with regard to the market outlook and therefore continue to anticipate that sales are likely to remain flat for the remainder of 2017. Continuing on the positive side, we received delivery accelerations of an order additions to the future delivery database blanket orders mentioned in the first quarter conference call. However, immediate delivery based order input for July and the first part of August has been less than expected. The feedback we are receiving from our key customers is that there remains a high level of market uncertainty especially the feedback from our premier distributors. These counter balancing data points give rise to why we anticipate the sales will be flat for the remainder of 2017. As stated in the first quarter call, we believe that certain new products currently in development be the right products at the right time to restore the company to move more meaningful sales growth and profitability but delivery of those products to begin in late 2017 and to accelerate in 2018. Now I'd like to turn the call over to Eric Skolnik, the Company's Chief Financial Officer and following Eric we will have an open question-and-answer session. Eric?

Thank you, Bob. Net sales increased $482,000 or 8.5% to $6,164,000 for the second quarter of 2017 from $5,682,000 for the comparable period in 2016. Net income or loss for the three months ended June 30, 2017 was a loss of $231,000 or $0.03 loss per share in 2017 compared to $73,000 or $0.01 per share income for the comparable period in 2016. The increase in net sales is primarily attributed to an increase in sales of data products offset by decrease in digital video headend products at on headend products and HFC distribution products. Sales of data products were $2,256,000 and $518,000, digital video headend products were $2,059,000 and $2,835,000, analog data products were $450,000 and $653,000 and HFC distribution products were $905,000 and $1,044,000 in the second three months of 2017 and 2016 respectively. For the six-month period ended June 30, net sales increased $512,000 or 4.4% to $12,137,000 in 2017 from $11,625,000 in 2016. Net loss for the six-months ended June 30, 2017 was a loss of $487,000 or loss of $0.06 per share compared to a loss of $215,000 or loss of $0.03 per share for the comparable period in 2016. The increase in net sales is primarily attributed to an increase in sales of data products offset by a decrease in digital video headend products, analog headend products, and contract manufactured products. Sales of data products were $3,386,000 and $1,277,000, digital video headend products were $5,230,000 and $6,126,000, analog video headend products were $1,036,000 and $1,230,000, and contract manufacture products were $355,000 and $529,000 in the first six months of 2017 and 2016 respectively. Now I'd like to turn the call over to our Q&A session.

[Operator Instructions] And our first question comes from George Gaspar. Please state your question.

Could you elaborate a little bit on the competition that's evolving in your main market and you're referring now to new digital products introductions late this year. Is there anything you can tell us a little bit more about how you accomplished a much broader field to place your products into and what’s the cause currently for the slowdown?

What's the cause or the cost?

The cause.

Cause.

The cause.

For the slowdown?

Right

Well - no we always have this product mix issue where certain product categories are down certain product categories are up and I think that if you characterize that and those various categories that are down as a slowdown which I don't choose to characterize it as that, there just seems to be a lot of uncertainty in the marketplace. And we’re not sure exactly why but the numbers of projects where we normally participate seem to be somewhat less, but it goes up and down right now we’re just confessing that it's a little down here in the first half. But we also have long-range – blanket orders with those customers that are successful and – compensated. And so we have the - counter balancing data points as we did last year – we had the large retail rollout we don't have that this year we have to compensate that. And then you had – you want to meet or elaborate on the competition?

Yes.

The competition has a fairly comprehensive it’s solely distribution product lines that we were not participating in where the input signal was coming from a cable system are encrypted. It didn’t have a solution and so the new products that we're working on we do have a solution there and we think we will get once we have that complete and we’ll rollout we will have fair market share. And that will lead to growth in sales and profitability.

And if I could do a follow-up here in your product line do you sell to hotel operations, throughout city just a little ago?

We do not sell to hotels directly they wind up we've been through this one way or another maybe you weren’t on the calls almost every call that we sell to operators whether they be CATV operators, telecommunications operators, private cable operators – or satellite based operators that supply full suite of services to the hotels and our products are a portion of those products that they implement when they provide those services to the hotels. We do not sell the hotels directly.

And just if I could squeeze one more in your financial situation as you read your financial requirement moving forward. Do you have – and I know that wasn’t too long ago you had had reestablished your financing arrangement. How much flexibility do have to borrow additional money relative to where you are currently?

Those numbers are set forth in the Q in fairly great detail but I can let Eric speak to that we’re on a – no when you have a bank relationship the way we have there, certain covenants that we have to meet and we've been meeting them. And we have also – it may not be obvious but I don’t think I'm speaking out of school here there’s an additional $250,000 that is not in the company yet because we haven't needed in the convertible loan that the Directors myself and my wife have with the company. And then I'll let Eric talk.

And then at June 30 we had about $1,150,000 of additional availability under our formula based borrowing.

I mean that was a $1.2 million.

1,150,000, yes.

And our next question comes from Richard Todaro from Todaro Capital. Please state your question.

Can you talk about the loss a little bit for some reason I would have thought at this level you guys would've been anticipating kind of breakeven at the sales level, but it could be off and that I'm traveling and I’m trying to think about this for moment?

Let me just give you a couple numbers that depressed the – net earnings one is that we had a term in our convertible loan agreement that was we didn't realize the consequences of it because it guaranteed that those lenders in other words the people that have that convertible loan agreement including myself. Nobody could come in and get a convertible loan at a lower price per share than we had. And so there was a price protection clause and – we thought that was important to have in the loan agreements but it was a freaking mistake. Because there's a derivative liability calculation it’s associated with that cause and that cause only and it amounted to in this first half of about 320, 318 or something of a hit to earnings. And it winds up down on the balance sheet buried in the balance sheet – some place there. Eric can tell you exactly what line, but regardless of that and we've been working hard to reduce our expenses which means that we’re working on lowering our overhead rate and of course that lower overhead rate gets reflected in future periods is a positive thing. But in prior periods in existing periods it gets taken as a hit to gross margin that runs through the cost of sales as a gross margin hit. And so maybe there is 150 maybe I don't thousand dollars there. And so – just those two things alone you can see that we’ll be at breakeven. So and I'll let Eric also speak to EBITDA because – he is little bit more familiar with how those calculations go, but I don't think that EBITDA is horrible and that's the reflection of breakeven.

And Q1 we had an EBITDA of about $353,000 and in Q2 we had an EBITDA of about $42,000 so the six months is $395,000. And to further Bob’s point – also product mix as Bob alluded to earlier plays a lot into our profitability. And in the first half and the second quarter and of course the first half we sold a lot of data products which carry with it a lower gross margin than some of our previous products would have carried for example in 2016 so that all kind of factors into our overall profitability.

So as you look forward in the 2017/2018 do you still see margin compression due to product mix or is very tough to get there?

That’s a very good question, the products that – where we have in research and development which we think we have some pretty hard pulls on the line here. And that we'll be successful in selling those. Those will be built here and they will carry a bunch of overhead out of here. And the profitability of those products we believe will be certainly better than the data products which are dominated by things that we don't make in our factory. We have coming from other people's factories to us so that are built offshore. So we think that we’re on the right plan we’re just it’s more of a next year kind of benefits for us.

Just to clarify that one when you said it ran through gross margin was that severance that you're talking about?

No, it had to do - let’s say that we have X percent overhead on our direct labor that goes into inventory as part of the products that are in inventory.

Okay.

That overhead rate is a percentage of direct labor. And if we lower our overhead and therefore we lower the percentage of direct labor than that makes your gross margin in future periods more positive right. But of the – in inventory at the time that you make that decision and you lower the overhead rates you have to take the hit on the value of that inventory. And that hit runs through cost of sales for that period.

And then the last question.

That’s just the way it works – that how the accounting works.

So the last question so that 300,000 that was related to the convert that's a noncash charge. And if the stock stays above $0.50 do you still keep taking charges or do you have [indiscernible] if the stock drops?

We rewrote the agreements to eliminate that clause and now we’re no longer bound to make.

Calculation.

Derivative liability calculations not part of the deal anymore because there's no price protection clause.

And was that a non-cash charge?

Yes absolutely.

Okay, all right, great okay. Thanks a lot of guys.

It is moving numbers around the balance sheet wonderful stuff.

Thank you. And our next question comes from [Gregory Bourbon]. Please state your question.

I had a further question about the digital video headend products this period it looks like there was about $1 million drop off in Q1. Could you explain that and do you expect that to stay at current levels say the rest of the year?

We believe it will stay at current levels for the rest of the year, but we don't really know but the drop off is 100% attributable to the fact that we did a major retail company rollout in 2016 and we did not have a similar rollout in 2017.

I understand that but I am comparing Q2 this year versus Q1 this year digital video headend quarter-to-quarter this year fall off?

Just give me a second here.

As I’ll understand, it embracing last year Q2?

Give me a second I understand your question now just a give me a second we look at the first quarter release isolates those number.

I didn’t mean do this to you but…

Sorry, this is fair question well good just give me a second to find freaking document here - which know I have a copy of it here in my folder somewhere because I used it as part of my preparation but I can't lay my hand on it right now. So let me see if I can force the numbers from the six-month numbers to the Q1.

Well I have 3,171,000 in Q1 is that’s the number you’re looking for?

No, I remember that number, I saw, but just I can’t find the freaking document and then subtract so. Give me a minute, I'm going to go in the next office to get my first quarter folder? I am sorry so did you pull that number from the first quarter release?

From the first quarter Q1?

And you’re showing digital video product for 2016 at how much.

Digital video products at Q1 of this year?

I'm sorry I misunderstood you. Yes, okay.

3,171,000.

Correct compared to $2.59 million

Right.

Got it, understood.

And I hate to say it, but I think you're worried that you think they'll also be similar to the 2 million number for the rest of the year but not with all the higher-margin product. I'm looking this is I see the margins falling off – gross margins from Q1 to Q2. And looks like that why should explained it – Eric most of the gross margin what you said was of product mix?

Correct. 75% to 80% was product mix.

And as I put Bob’s earlier comment we’re looking in the next year to get those higher margin products for higher level and thereby increase our gross margins.

I can’t lay my hands on the document – I am looking for right now I remember the 3,171,000 as you stated but that category is comprised of a multiplicity of categories. And I just I am not sure which of those – what sub category accounts for that shift so if you want to after where I got a few minutes…

Just cannot lay that decrease on any one segment then or no? And more importantly, where is it going to be in the future?

He is speaking of gross margins Bob.

I think that you don’t need a hope-based comment, but we're taking the actions that we are in the lowering the overhead and a part from price pressure in the marketplace which there is quite a bit when there's all this uncertainty and people are willing to drop their prices try to get the next order I am talking about our competitors. So there's that factor, but apart from that factor and accounting for just the accounting like we're talking about before. Then we think that gross margin should increase in the future. That will be reflected surely when we get into shipping are our new products – later this year and next year so.

And finally, if you can recapture with respect to from six months ago, overall, can you say the overall is confident now or at the beginning of the year or maybe more confident looking forward despite the uncertainties in the marketplace?

I think the key to our success is getting these new products into production okay.

Okay. Thank you.

That’s what I think is key to our success.

And there appear to be no further questions at this time.

Thank you very much for participating in the investor conference call this morning. Appreciate your participation and your patience and I’ll talk to you next quarter. Thanks.

Thanks everybody.