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Edited Transcript of BDR earnings conference call or presentation 15-May-19 3:00pm GMT

Q1 2019 Blonder Tongue Laboratories Inc Earnings Call

Old Bridge Jun 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Blonder Tongue Laboratories Inc earnings conference call or presentation Wednesday, May 15, 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. - Executive VP & COO

* Eric S. Skolnik

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

* Robert J. Pallé

Blonder Tongue Laboratories, Inc. - CEO, President & Director

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Conference Call Participants

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* 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 the Blonder Tongue First Quarter 2019 Results Conference Call. (Operator Instructions)

At this time, it is my pleasure to turn the floor over to your host for today, Mr. Bob Pallé, President and CEO. Sir, the floor is yours.

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

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Thank you very much. Good morning, everyone. Welcome to Blonder Tongue's 2019 First Quarter Financial Reporting Teleconference. We thank you for your participation.

Before we begin our presentation 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, and 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 would ask you to refer to our prior SEC filings, including our Form 10-Qs for prior quarters, including the first, second and third quarters of 2018 and the first quarter of 2019, and our 10-Ks for years '18 -- 2018, 2017 as well as our 8-Ks.

With me today are Steve Shea, Chairman of the Board; Ted Grauch, Chief Operating Officer; and Eric Skolnik, 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.

First, in my letters to you for the years 2016, '17 and '18, 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.

Second, we provided a comprehensive status and forward-looking report in the previous investor teleconference on April 1, just 6 weeks ago. Not much has changed since that call. Regardless, we believe that our comments in the press release this morning bear repeating.

We are disappointed in the sales for the first quarter 2019. We believe that the decline in sales was due to several factors: the temporary government shutdown, the market uncertainty due to the ongoing trade conflict with China and the fact that the company's largest customer further slowed purchases of BT's data and digital video products.

On the other hand, in February, we completed the sale leaseback transaction for the Old Bridge, New Jersey facility, which has positively improved our balance sheet and provided the working capital we need to accelerate the initiatives that we believe will reverse the sales decline and restore the company to a period of sales growth and profitability. Over the second -- and this would be over the second half of 2019.

Although we are still concerned about the first half of 2019, the plan we have outlined for the remainder of 2019 includes accelerated promotion and sales of the BT NeXgen Gateway product line and an IPTV-based set-top box sales initiative. The company recently secured its first CATV Tier 1 MSO provider customer for NeXgen Gateway. The IPTV set-top box initiative started in the first quarter and it's one that we anticipate will add several million dollars of incremental revenue as the remainder of 2019 unfolds.

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

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

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Thanks, Bob, and good morning, everyone. During the first quarter, in line with Blonder Tongue's goals to create higher-value, systems-focused products for our current customers and new customer targets, BT initiated an IPTV set-top box value-added reselling or VAR program aimed at a number of Tier 2 and Tier 3 U.S. cable operators as well as municipal fiber operators and telephone operators.

The first public introduction of this product line was announced during the NCTC National Cable TV Cooperative's Winter Education Conference that happened on February 25 and 26 in Atlanta this year. These new VAR products are associated -- and the associated sales initiative were extremely well received during that trade show as well as in direct sales initiatives before and after the public announcement.

This is giving rise to the referred comments in the press release this morning. And as Bob has already mentioned, this initiative is now expected to positively impact our revenue in 2019. And we will keep our investors up to date on this and all of our key strategic systems-related and other initiatives as they unfold in the coming quarters.

Now I would like to turn the call over to our Chief Financial Officer, 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 first quarter 2019 sales were down 23.9% as compared to prior year, our gross margin, excluding the effect of the write-down of the noncurrent inventory of $692,000, increased to 43.7% compared to 41.5% in the prior period.

Operating expenses for the first 3 months of 2019 were up approximately 33.8% as compared to the comparable period last year. This increase is primarily due to salary and headcount increases, which were necessary due to the company's prior continued efforts to contain and reduce these related costs.

As mentioned in the previous call, the Old Bridge facility sale leaseback now allows us to have the resources to implement an aggressive strategy that we anticipate will be able to reverse the downward trend as the second half of 2019 unfolds.

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], a private investor.

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Gregory Irvin, - Private Investor [2]

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Let's see. Let's look at revenues. Number one, could you -- I get what you said already that the -- you're looking for the set-top box initiative to sort of bring us toward the black going into the second half of the year.

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

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It's not only the set-top box initiative, but that will help a lot if it's as successful as we project it to be. The other major initiative is our NeXgen Gateway, and we have secured our first Tier 1 operator in Q1 with actual orders and shipments.

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Gregory Irvin, - Private Investor [4]

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Right. Yes. Noticing the dropoff in revenues from headend and data equipment, is that primarily due to customers sort of delaying orders? Or is it related more to the transition to the NeXgen equipment?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO, President & Director [5]

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I think it's a little bit of a combination. But the -- we're disappointed that the traction on the NeXgen Gateway was difficult to get started with the major guys. But we're now over that hurdle at several operators. And the -- when you said the headend equipment on -- give me just a second, I want to look at...

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Gregory Irvin, - Private Investor [6]

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I see digital was down, analog was up.

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

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Exactly. So what we call headend is, classically, is the analog headend, and that was up. And that's why I was going to check the numbers because I could have sworn that was up, so -- and it is.

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Gregory Irvin, - Private Investor [8]

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And as I understand it, the move is going to be to the NeXgen, the backbone?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO, President & Director [9]

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Yes, sir.

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Gregory Irvin, - Private Investor [10]

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And is that to occur over quarters or over years?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO, President & Director [11]

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Well, I think that it's going to occur over quarters and years. So I think we're going to stair step up. And maybe Ted could comment on the progress also?

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - Executive VP & COO [12]

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Sure. If you look at -- the market for NeXgen is a combination of cable operators and communication operators doing upgrades to expand the ability of their core networks to deliver more IPTV in different ways, coupled with a separate sort of submarket, which is the demarcation points between these cable operators' distribution networks and the business-to-business interaction that they have.

So for example, when a cable -- when a large multiple-system operator MSO has a customer, let's say, a hotel chain in their operating area, they have a demarcation point on that property that they have to terminate their distribution system and redistribute those same video and data content within that property, right? So that's a separate submarket for the NeXgen.

So to answer the question on timing and to expand on what Bob had just mentioned in that area, there will be quarters of increased sales of NeXgen, we believe, that have to do with the current customer base that we started to win in the Tier 1 and in the Tier 2 markets. Those will come more in quarters. There are other bigger fish that we're going after, other Tier 1 operators that we'd like to win. Those tend to be long sales cycles and those will take more in the half year, a year or potentially even multiple years to win over.

So we're going after all those segments and subsegments, and we're excited that we've won our first major Tier 1 operator in the last quarter. And we're very close to winning some others, we believe. So we'll just accelerate the sales and marketing efforts to close those deals. Did we answer your question?

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Gregory Irvin, - Private Investor [13]

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Yes.

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - Executive VP & COO [14]

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You're welcome.

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Gregory Irvin, - Private Investor [15]

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Now with respect to addressing the needs of the larger fish, is the R&D progressing such and they're turning out the necessary new modules to satisfy those needs now -- needs currently? Are those available? Now that we have the parts there...

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

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Yes, we actually believe that -- yes, 90% of the modules that are on our technology road map will be finished before the end of the year currently. So those are looking very good.

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Gregory Irvin, - Private Investor [17]

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The need to need. Now since the -- making this transition within the facility, I assume, to the NeXgen product, what about the inventory? Because as I see, there was some write-off of inventory this time. Have you made it through the transition to the NeXgen product? [How many] obsolescence might there be in the future?

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

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No, we don't believe that there's going to be a significant amount of obsolescence as a result of this transition. The reason for the write-down in the first quarter had to do with taking a much more conservative position on our current inventory. So that was the main reason for it. It wasn't necessarily driven by changes that have occurred in the -- as a result of NeXgen.

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Gregory Irvin, - Private Investor [19]

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Manufacturing, is that a nonrecurring? Or are we likely to see that in Q2?

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

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No, we are not likely to see that in Q2.

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO, President & Director [21]

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As you, [Greg], as you noticed probably over the last 3 or 4 years, that noncurrent inventory has been descending from a very high number to a very low number. And then with -- consistent with or at the same time as the building sale, we decided to take a conservative view and write off the rest of it, which was $500,000 or $600,000. It's in the Q, exactly what we did. So...

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Gregory Irvin, - Private Investor [22]

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And looking at the revenue, of the 3 main factors that impacted this quarter, how about China? And what's going on in the tariff world and what that's going to mean to Blonder?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO, President & Director [23]

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Well, we are positioning ourselves such that to mitigate what looks -- what portends to be now an additional sweeping increase in tariffs on an increasing number of categories. We are prepared to move in cooperation with our partners that have been supplying us finished goods to move the production, especially the final assembly and test, to here in New Jersey. And -- but we're not sure how much of that we're going to be able to do or whether we decide doing 100% of what is in my mind right now or whether we want to do 50%, but we're definitely going to do some.

The -- it's a matter of when they formalize this next wave of categories, which at the finished goods level, we have been -- and a bunch of our contemporaries, have been in major categories not impacted dramatically by the tariffs. This next wave that Trump is saber-rattling about is a whole different kettle of fish. And we will have to have a major initiative to move stuff either back from the Far East, from China into our factory because we moved it there in the first place from our factory. So that's a doable task.

But it's hard to do in like 10 days or something, more like 6 months, 8 months. But we've been talking about this and doing the groundwork and preparation in the event that it went this way, which certainly in the newspapers, it looks like it's going this way.

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Gregory Irvin, - Private Investor [24]

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Now the other factor that you mentioned, the falloff in business from either World Cinema or Toner Cable, that looked like that began last year. Is that the relationship at risk? What's going on there?

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

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The relationships are not at risk. They're not at risk, and it has to do with product mix and product approach, and we are doing stuff about that. So...

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Gregory Irvin, - Private Investor [26]

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Do you expect that to stabilize -- or revenue to stabilize from those sources or not?

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

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We do. Well, we really expect to have improvement, especially from the first quarter. But if you use the first quarter as a basis, we expect a significant improvement. We anticipate significant improvement, I think, is the way I'm supposed to phrase those forward-looking statements.

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Gregory Irvin, - Private Investor [28]

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Okay. Now turning to expenses. What are we looking at as far as the SG&A over the rest of the year?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO, President & Director [29]

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That's a very good question because the SG&A was, as you could see, was extremely high for this quarter compared to the first quarter of 2018. So...

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Eric S. Skolnik, Blonder Tongue Laboratories, Inc. - Senior VP, CFO, Treasurer & Secretary [30]

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I would expect that the SG&A should be decreased slightly as we go through the year. It remains to be seen exactly how much because as we alluded to earlier, we have several initiatives and with a lot of these sales initiatives come obviously related costs. So it's a little hard to prognosticate at this point, but I would say that it would definitely be lower. I would expect it to be lower going forward.

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Gregory Irvin, - Private Investor [31]

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What's the total headcount now?

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

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I believe we're somewhere around 114 employees all-in.

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Gregory Irvin, - Private Investor [33]

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Okay. So you haven't ramped up the sales and marketing on the...

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO, President & Director [34]

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We've selected the key guys. And they may not have hit a full quarter's work, but they're on -- they're either onboard or almost onboard. So we don't -- at this time, we don't see a dramatic increase in dollars on the sales side. We do have 1 or 2 more key people we want to hire, but that's...

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Eric S. Skolnik, Blonder Tongue Laboratories, Inc. - Senior VP, CFO, Treasurer & Secretary [35]

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If I can add some more color to that. With any company, there's -- you have to allocate your resources accordingly. So what we've done is we've evaluated our SG&A structure and where we believed that there was some areas that we could reduce, we did so and then took those funds and then redeployed them into the initiatives that we were referring to. So even though you may say that we haven't spent the money, that's probably a more accurate presentation of what happened.

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO, President & Director [36]

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We have shifted resources.

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Eric S. Skolnik, Blonder Tongue Laboratories, Inc. - Senior VP, CFO, Treasurer & Secretary [37]

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Yes, correct.

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Gregory Irvin, - Private Investor [38]

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Has there been any progress on the sublease of the available space?

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Eric S. Skolnik, Blonder Tongue Laboratories, Inc. - Senior VP, CFO, Treasurer & Secretary [39]

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Yes. We have a couple of interested parties, and we anticipate and believe that we would be able to report on that at the next quarter.

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Gregory Irvin, - Private Investor [40]

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A couple of more things. Given that it was hard for me to figure out what the cash -- where we stood cash flow was and looking at the minimum liquidity covenant that you have with Sterling, I just wonder if there's any worries about staying in compliance with that given the cash burn of the first quarter.

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Eric S. Skolnik, Blonder Tongue Laboratories, Inc. - Senior VP, CFO, Treasurer & Secretary [41]

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Currently, we do not anticipate there to be any worries. At March 31, we had with -- including the cash in bank and the excess availability over the minimum liquidity covenant, we still had $2.7 million in excess of that. And yes, we may have burnt a little bit of cash. But if you think about it, we're currently not in our line of credit. So what's happening, of course, is that our accounts receivable, as it turns over, that's the cash that we're using to fund our operations and pay our expenses accordingly.

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Gregory Irvin, - Private Investor [42]

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Okay. That's good. That's good to hear. And finally, and I'll let you go, Mr. Grauch, you mentioned in the previous call about moving into new verticals, new markets, vertical markets.

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - Executive VP & COO [43]

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Yes, yes.

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Gregory Irvin, - Private Investor [44]

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I wondered what's the status there. Any elaboration?

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - Executive VP & COO [45]

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Well, what we press announced in February related to the set-top box value-added reselling program is one of those verticals we had previously alluded to. There are some others that we're working on that we're not quite ready to discuss publicly, but there are several.

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Gregory Irvin, - Private Investor [46]

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And might they be of the same size?

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - Executive VP & COO [47]

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Different size with different sales initiatives and markets and submarkets that we're going after that we had not before with those current product lines tailored to a new market type as well as new systems sales that we're looking to happen.

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Operator [48]

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(Operator Instructions) And there appear to be no further questions at this time. I'll turn the conference back to management for any additional or closing remarks.

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO, President & Director [49]

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Thank you very much, and thank you all for participating in the Blonder Tongue financial reporting teleconference. We look forward to speaking with you at the next teleconference. Have a great day.

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Operator [50]

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Thank you. Ladies and gentlemen, that will conclude today's teleconference. We thank you for your participation. You may disconnect your phone line at this time, and have a great day.