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Edited Transcript of BDR earnings conference call or presentation 14-Aug-19 3:00pm GMT

Q2 2019 Blonder Tongue Laboratories Inc Earnings Call

Old Bridge Sep 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Blonder Tongue Laboratories Inc earnings conference call or presentation Wednesday, August 14, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward Rowland Grauch

Blonder Tongue Laboratories, Inc. - President & COO

* Eric S. Skolnik

Blonder Tongue Laboratories, Inc. - Senior VP, CFO, Treasurer & Secretary

* Robert J. Pallé

Blonder Tongue Laboratories, Inc. - CEO & Director

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Conference Call Participants

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* Richard E. Greulich

REG Capital Advisors - President & CEO

* Gregory Irvin

- Private Investor

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to this Blonder Tongue Second Quarter 2019 Results Conference Call. (Operator Instructions) Also, a reminder that today's conference is being recorded. (Operator Instructions) And now to get us started with opening remarks and introductions, I am pleased to turn the floor to CEO, Mr. Bob Pallé. Please go ahead, sir.

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [2]

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Good morning, everyone. Welcome to Blonder Tongue's 2019 Second Quarter and 6 Months Financial Reporting Teleconference. We thank you for your participation.

Before we begin our presentations this morning, 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, so I caution you that actual results may differ from those that may be projected in our comments this morning.

For additional information concerning factors that could cause actual results to differ from the information that will be discussed this morning, I ask that you refer to our prior SEC filings, including our Form 10-Qs for prior quarters, including the first, second and third quarters 2018 and the first and second quarters of 2019, and our 10-Ks for years 2018 and '17 as well as our SEC 8-K filings.

With me today are Steve Shea, Chairman of the Board; Ted Grauch, President and Chief Operating Officer; Eric Skolnik, Senior Vice President and Chief Financial Officer. Our presentations will follow in that same sequence, and following the presentations, all of us will be available to answer any questions you may have during the question-and-answer period.

As stated in the last teleconference and in my letters to you from prior years, we outlined the areas within which we needed to achieve major improvements in order to effect a successful turnaround in our financial performance, and as a result of those major improvements, drive an increase in stockholder value. We remain committed to achieving those goals.

We believe that our comments in the press release this morning bear repeating. Although sales in the second quarter of 2019 showed a 3% increase over sales in the second quarter of 2018 and a 33% increase over the first quarter of 2019, we are disappointed in the amount of the increase and the resulting financial performance. We are taking steps to address these issues by making adjustments to our operating expenses so that they better align with our current sales forecast and by increasing the intensity of our new product sales initiatives. Despite this second quarter and year-to-date performance, we're pleased with the early responses to both our IPTV set-top box and NeXgen Gateway introductions. We anticipate that these initiatives will be the catalyst for an increase in sales in future periods.

Continuing, we have engaged the management talent and committed the resources to move the new development sales initiatives forward, which as you can see from the details in the 10-Q for this reporting period resulted in an increase in expenses.

Also, you can see in Note 3, the positive outcomes are detailed by product category. Unfortunately at this point, we find ourselves in the time period where we can see the positive outcomes for the execution of the initiatives we plan but the totality of the forecasted financial impact of those initiatives is not yet where it needs to be. Regardless, we remain committed to getting there.

Now I'd like to turn the call over to Ted Grauch, BT's President and Chief Operating Officer. Ted?

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - President & COO [3]

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Thank you, Bob, and good morning, everyone.

Clearly, the Q2 results were below our expectations and counter to our extensive efforts to expand sales and marketing and our addition of new product lines and product features that we began during Q1 of 2019. The primary situation that we have seen in Q2 has been an overall decline in demand for the traditional broadband HFC, hybrid fiber-coax, distribution equipment across the entire industry, coupled with the increased cost of sales, marketing and engineering that we've taken on in order to shift our product mix to a more modern product focus, including the focus on delivering digital-based delivery of video, IP television and IP delivery of data services.

On the positive side of the company operations, our flagship NeXgen, NXG, product line began shipping to our first Tier 1 operator customer during Q2, and we have seen a distinct positive momentum in our distribution channels, who are beginning to stock larger volumes of NXG products, and they're increasing their own sales efforts and promotion of Blonder Tongue's NeXgen Gateway video signal-processing gateway.

We have also begun to have significant market traction in the value-added reselling of our IPTV set-top box product line, and we are tracking to our internal sales and margin goals on that new line of business.

We expect that this trend of lower spending in hybrid fiber-coax or HFC and broadband distribution product may continue due to a number of overlapping factors in the market that include political and tariff concerns but also include a general trend towards a larger percentage of content distribution over digital fiber and lower percentage of distribution by hybrid fiber-coax or HFC. In light of these trends, the management team is in the process of taking the necessary measures to lower our operating costs in our legacy areas of business while maintaining our new investment in growth areas of technology and the associated sales initiatives.

Now I would like to turn the call over to our Chief Financial Officer, Mr. Eric Skolnik. Eric?

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Eric S. Skolnik, Blonder Tongue Laboratories, Inc. - Senior VP, CFO, Treasurer & Secretary [4]

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Thank you, Ted. Although the second quarter of 2019 net sales were up 3% as compared to prior year, our gross margin decreased to 36.9% compared to 41.5% in the prior period due to our more traditional product mix being blended with lower margin product lines.

Operating expenses for the second 3 months of 2019 were up approximately 18.4% as compared to the comparable period last year. This increase is primarily due to salary and headcount increases necessary due to the company's prior continued efforts to contain and reduce these costs as well as an increase in various consulting fees.

For the 6 months ended June 30, 2019, net sales were down 10.5% as compared to prior year, and our gross margin decreased to 32.5% compared to 41.5% in the prior period due to the aforementioned blended product mix.

Operating expenses for the first 6 months of 2019 were up approximately 25.6% as compared to the comparable period last year. Again, this increase is primarily due to salary and headcount increases necessary due to the company's prior continued efforts to contain and reduce these costs.

We have not made any adjustments to the credit facility since our last call. However, we still expect that further changes to accommodate our progress will be made in the coming months.

Now I'd like to open up the call to the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take a question from [Gregory Irvin], private investor.

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Gregory Irvin, - Private Investor [2]

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I think the way I look at things, and I know this is traditional way that the results are outlined on the PRs, but I -- my own comparison, I looked at Q1 versus Q2, and it seems you've made progress. Sales are up, as you did mention, 33%, profits up. The net loss quarter-to-quarter is down 50%, and operating expenses are pretty much flat when comparing the 2 quarters. So I take that as progress.

The question is, if -- what the -- assuming that the margins are going to stay about the same in the 36%, 37% range, what level of sales would be necessary to achieve breakeven? And what might the time line for that be?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [3]

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Okay. Well, the -- those 2 questions are inextricably linked. The answers are inextricably linked, as you know, because if you get a large uplift in the networking products where the margins are high versus the CPE products where the margins are lower, then it's going to come at a much lower overall -- the breakeven is going to be a much lower overall sales number. Whereas if the reverse is true, then you need a much larger overall sales number.

So we're really pleased with the pull on our networking products introductions, but the sales cycle for those is longer than we had expected. And we put that -- we previously announced those findings in our letter to the shareholders and in the prior releases.

The CPE products, I'll let Ted speak to because he brought that initiative to the company when he came and has led its introduction, and I'm really pleased with that. But I'll let him speak to that.

And if we get in the budgeting process for this year and this cycle, this budgeting process for the major service providers, then 2020 could really be a nice year for us because both the sales and our margins are very high, potentially very high, I mean. So Ted?

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - President & COO [4]

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Sure. So without getting into predicting specific numbers, and I'm not trying to side skirt your question but to give you the kind of information I feel like is publicly -- that we can make publicly available, the -- clearly, the margins on CPE business are going to be lower than what we call the core or traditional networking video distribution and management business.

As a rule of thumb, if we can run about 2.5 or 3x revenue in the CPE versus an equivalent level of revenue in our core traditional business, we'll end up with an equivalent net margin. And that's what we're going after at least.

The turns on inventory on CPE is also a lot faster, so it's benefiting us from a cash flow perspective. So frankly, what we're trying to achieve in the not-too-distant future is to get some multiple of revenue on CPE versus the traditional core business, so that the 2 create a nice blend and they complement each other.

The other element of the strategy, which is actually core to the overall thinking is that by bringing these more fast sales cycle CPE products to market, we are able to create direct sales and more meaningful direct sales relationships with a wider range of service operators directly and thereby be able to affect their decision-making on some of the traditional video products, which are higher margins.

So what we want to see is a higher uplift in the core or traditional product lines, coupled with a faster turn blend in the newer CPE technologies and overall become more relevant to the different people in our industry that are the core decision-makers. And that's what we're going after.

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Gregory Irvin, - Private Investor [5]

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All right. Do you expect -- looking at the -- to drivers to the future, the set-top box initiative, I assume, and the NeXgen, which one of those has the prospect of a higher growth rate over the short term?

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - President & COO [6]

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In the very short term, it's the set-top product line. But go ahead, Bob, I'm sorry.

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [7]

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No, I was going to say the same thing.

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Gregory Irvin, - Private Investor [8]

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Okay. Is that because of the longer lead times necessary to get the products out (multiple speakers)

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - President & COO [9]

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No. Not at all. Not at all. We actually can turn around NeXgen deliveries relatively quickly when we want to sell it.

It's simply the deliberation process inside of these service operators around the country and Canada, by the way. It's a long process to win core video distribution business. Now once they've decided to go with your product, as we noted in the press release -- sorry, as we noted in my comments earlier in the call, we have won our first Tier 1 and we're working on several others. Those took a long time, and the other ones are taking a long time, the ones we have not won yet. The benefit of those, though, is when you do win them, it's harder for your competitors to then go back and displace you.

And just where we are in the overall sales cycle, they're just -- they're just longer sales to close. They tend to take 5, 6, 7, 8 core decision-makers at -- an operator have to kind of align with each other and say, "Yes, we believe the Blonder Tongue technology is the right way to go and supplant one of our competitors for us to win the core business." Once we've done that, it's a better margin, more stable long-term business. But that's really the difference.

On the CPE or, for the moment, set-top box side, we've caught a particular wave, and this wasn't just by coincidence. It was an analysis that was done last year and decisions made in the late fall and January that led us to say that there's a particular wave of technology change going on in the second and third tier cable operator and municipal operator markets around the country, and we want to bring a particular set of products to market that would capture that wave. And we've done a very good job of capturing that wave so far, and that looks to be very, very positive through at least the end of the year and likely well into 2020.

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Gregory Irvin, - Private Investor [10]

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But any number on the total size of the set-top box market?

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - President & COO [11]

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Not on this call, no. I think we're reluctant to make any predictions at this moment, but we are very positive that it's going to add to the overall positive cash flow of the business. It's -- even though it dilutes margin at the top side, the fact that it's got fast returns, it's not going to greatly affect our ability to manage the cash flow at all, and it should be positive on several fronts to the company.

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Gregory Irvin, - Private Investor [12]

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And I take it your impression, or at least the way I hear it, is that wave has not yet crested.

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - President & COO [13]

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No, not nearly, no.

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [14]

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Far from it.

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Gregory Irvin, - Private Investor [15]

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In the last call, you mentioned the potential or the likelihood of some new vertical markets. Anything new to add on that?

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - President & COO [16]

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We'll be making some press announcements on that between now and the middle of the fourth quarter on that.

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Gregory Irvin, - Private Investor [17]

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A look forward?

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - President & COO [18]

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They're well underway to launch additional product line.

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Gregory Irvin, - Private Investor [19]

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Not to take up too much time, but I'm curious, how -- you say you're going to work on the OpEx expenses. I'm curious how can you do that. They seemed relatively flat, and I think they're running fairly lean now. What more can be subtracted?

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - President & COO [20]

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You want me to handle that, Bob, or do you want to handle it?

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Gregory Irvin, - Private Investor [21]

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Are we looking at a headcount reduction or...

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [22]

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Go ahead. There's just -- we just found that there's more we can do, and I don't think we needed to go into the details on this call, but we're striving to be more flex-oriented and craft our expenses around the amount of work that we have here at -- in New Jersey. So it's -- and I'd rather not get into it, but if Ted wants to give you some more information, that's fine.

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - President & COO [23]

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I was only going to reiterate what I said earlier, Greg, which is that at the top line of operating expenses, you may not see a big overall movement. But what we're doing is trimming the operation expenses related to the more legacy products that we've seen, the decline in market demand on.

So you can see that the overall operational costs are blended between the new investments we've made and running what we might call business as usual in the previous product lines, which are still very good product lines and they still sell well. They just are not selling as well as we had anticipated this year.

So those -- the related operating costs for those product lines and market demand decline is what we're focusing on.

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Gregory Irvin, - Private Investor [24]

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Great. Well, I appreciate that. It looks like the path to profitability is not going to be so much in operating expense. It's going to be in revenues. That where I'm focusing.

I know I asked last time, and I'll ask again regarding China and the tariff issues, where are we there?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [25]

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Well, they just yesterday released the real List 4, and the dominant category that we use for importing a multiplicity of our key products that we do import are impacted to the 10% amount. And we know that there has been a counter by the Chinese government by revaluing their currency to offset that. So we're in negotiations, but negotiations are less than 24 hours old, and we will make a plan to try to mitigate those expenses. But 10% is not 25%, but it is 10%. So...

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Gregory Irvin, - Private Investor [26]

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Is that a greater likelihood now compared to 3 months ago of moving those back from China to...

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [27]

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It will be a blend, Greg, and that's exactly the initiative that I may have spoken about on previous calls. And with that, we're going to leverage our factory to the extent that we can to mitigate the impact of the tariffs. That's part of our strategy and part of -- the good part about having our own factory here in New Jersey.

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Gregory Irvin, - Private Investor [28]

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So that's all I have. I'll just remind people, as I started out initially, I think comparisons' sake are better made from quarter-to-quarter rather than from quarter 2 2019 to quarter 2 2018. I think it's more apples-to-apples if we compare Q1 to Q2.

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Operator [29]

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(Operator Instructions) We'll take our next question from the line of Richard Greulich with REG Capital.

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Richard E. Greulich, REG Capital Advisors - President & CEO [30]

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With the pronounced slowdown in more legacy products, will that cause any inventory obsolescence valuations to be made?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [31]

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We have taken action earlier in the year, and it's detailed in the Q, and you can find it's $730,000, and that was a preemptive strike. And since that -- was that March or was that February? When was that...

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Eric S. Skolnik, Blonder Tongue Laboratories, Inc. - Senior VP, CFO, Treasurer & Secretary [32]

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Was it like $650,000 or something in Q1, and then it stopped at like $730,000.

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [33]

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Yes, right. So the increase since that period of time, traditional -- what we find, more obsolescence. We have a very active program on this. We meet once a month, then we do stuff about it, and so $80,000 over the last 6 months, it's $10,000, $15,000 a month. We think that's modest. And the -- we don't see any large inventory impact because of the legacy product comments that we made this morning.

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Richard E. Greulich, REG Capital Advisors - President & CEO [34]

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Okay. Were you intending to lease out some of the space in your building?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [35]

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We are. Yes sir, that's part of the plan.

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Richard E. Greulich, REG Capital Advisors - President & CEO [36]

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Okay. But you haven't done that yet? Or you're...

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [37]

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Well -- okay. So there is a process here. I don't think it's -- I don't think there's anything that I say here that's any secret.

Like all towns, they have their infrastructures. And guys who have worked there for 20, 30 years and their children and grandchildren also work there lower levels, and they have a bunch of requirements that they -- over a multiplicity of iterations tell you about rather than giving you a full list of what you need to do to get space ready to rent. And so it's not for the faint-hearted. It's not easy to get through that process. We are now on the far side of that process, and we believe we have -- I'm looking at Eric. He's nodding his head up and down. We now have the talent satisfied, and we have almost all of the work completed so that a prospective lessee can see, "Oh, I see light at the end of the tunnel, I can get a real move-in date. I know you're going to get a CO, I can see you're in compliance with 90% of this," and he says a last few things. Until you reach that tipping point, it's really hard to get a prospect who needs space now to get serious. So it's just normal stuff really.

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Richard E. Greulich, REG Capital Advisors - President & CEO [38]

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And does the tariff situation give you pause about leasing out as much space as you might otherwise have decided to do?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [39]

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No. We are at about 15%, 20% of capacity, and we could double or triple -- in fact, we could probably double or maybe even triple on a single shift, but we have lots of open production time and stuff.

But even with leasing, the -- and the reason is because of the migration of automation, we run some SMP lines, and it's a principal work that's done, and we have enough final assembly space to grow a lot larger than we are here now.

So we think that the tariff thing could be a blessing if we can get some other companies to commit, to put their work here, which we think is a possibility. We're working on it. We don't know what the results will be, but we think it could be a win-win for both parties. So we're hopeful, and we're working on that.

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Richard E. Greulich, REG Capital Advisors - President & CEO [40]

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Could that as a contract manufacturer to those parties?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [41]

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It's exactly -- exactly. Yes, sir. Yes, sir, exactly. Or an ODM/contract manufacturer.

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Operator [42]

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And gentlemen, we have no questions in the queue. (Operator Instructions) And we have no questions from the phones. I'll turn it back to the leadership team for any closing or additional remarks.

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [43]

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Thank you all for participating in Blonder Tongue's financial reporting teleconference. We look forward to speaking with you at the next teleconference. Have a great day and a great next quarter. Talk to you soon.

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Operator [44]

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Ladies and gentlemen, thank you all for joining us today. You may now disconnect.