UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended~~September 30, 2017~~March 31, 2020

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ~~________~~ to ~~________~~

Commission File Number:001-31588

COMMUNICATIONS SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

MINNESOTA	41-0957999

(State or other jurisdiction of	(Federal Employer
incorporation or organization)	~~(Federal Employer~~ Identification No.)

10900 Red Circle Drive, Minnetonka, MN	55343
(Address of principal executive offices)	(Zip Code)

~~(952) 996-1674~~

(952) 996-1674

Registrant’s telephone number, including area code

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 ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). YES ☒ NO ☐

Indicate by a 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 (as defined by Rule 12b-2 of the Exchange Act).

Large Accelerated Filer ☐ Accelerated Filer ☐ Non-Accelerated Filer ☐ ☒

Smaller Reporting Company ☒ 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 ☒

Securities Registered Pursuant to Section 12(b) of the Act

Title of Each Class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value , $.05 per share	JCS	Nasdaq

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

~~Class~~		~~Name of Exchange~~ ~~On Which Registered~~		Outstanding at ~~November~~May 1, ~~2017~~
~~Common Stock, par value $.05 per share~~2020		~~NASDAQ~~		~~8,969,037~~ 9,351,486

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES

INDEX

			Page No.
Part I.	Financial Information
~~Part I.~~	~~Financial Information~~

	Item 1. Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets		3

	Condensed Consolidated Statements of ~~Loss~~Income and Comprehensive ~~Loss~~Income		4

	Condensed Consolidated ~~Statement~~Statements of Changes in Stockholders’ Equity		5

	Condensed Consolidated Statements of Cash Flows		6

	Notes to Condensed Consolidated Financial Statements		7

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23	21

	Item 3. Quantitative and Qualitative Disclosures about Market Risk	33	28

	Item 4. Controls and Procedures	33	28

Part II.	Other Information	36	29

SIGNATURES			30
CERTIFICATIONS

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS

September 30 2017 December 31 2016
CURRENT ASSETS:
Cash and cash equivalents $ 17,066,485 $ 10,443,274
Investments 725,112 5,805,276
Trade accounts receivable, less allowance for doubtful accounts of $117,000 and $77,000, respectively 13,807,564 14,552,191
Inventories 15,017,656 22,204,902
Prepaid income taxes 612,676 1,400,118
Other current assets 1,047,320 967,332
TOTAL CURRENT ASSETS 48,276,813 55,373,093

PROPERTY, PLANT AND EQUIPMENT, net 12,963,718 15,719,403
OTHER ASSETS:
Goodwill — 1,462,503
Other assets, net 19,803 622,017
TOTAL OTHER ASSETS 19,803 2,084,520
TOTAL ASSETS $ 61,260,334 $ 73,177,016
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,391,519 $ 6,953,710
Accrued compensation and benefits 2,618,752 2,149,973
Other accrued liabilities 1,711,065 1,851,938
Dividends payable 398,210 412,542
TOTAL CURRENT LIABILITIES 10,119,546 11,368,163
LONG TERM LIABILITIES:
Long-term compensation plans 34,287 16,299
Uncertain tax positions 3,649 106,864
Deferred income taxes — 52,998
TOTAL LONG-TERM LIABILITIES 37,936 176,161
COMMITMENTS AND CONTINGENCIES (Footnote 7)
STOCKHOLDERS’ EQUITY
Preferred stock, par value $1.00 per share; 3,000,000 shares authorized; none issued
Common stock, par value $.05 per share; 30,000,000 shares authorized; 8,963,516 and 8,877,379 shares issued and outstanding, respectively 448,176 443,869
Additional paid-in capital 41,894,426 41,279,281
Retained earnings 9,386,374 20,596,203
Accumulated other comprehensive loss (626,124 ) (686,661 )
TOTAL STOCKHOLDERS’ EQUITY 51,102,852 61,632,692
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 61,260,334 $ 73,177,016

ASSETS

~~The accompanying notes are an integral part of the condensed consolidated financial statements.~~

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(Unaudited)

Three Months Ended September 30 Nine Months Ended September 30
2017 2016 2017 2016

Sales $ 20,412,439 $ 25,616,640 $ 63,280,980 $ 76,594,526
Cost of sales 17,108,532 18,926,042 48,001,368 55,759,167
Gross profit 3,303,907 6,690,598 15,279,612 20,835,359
Operating expenses:
Selling, general and administrative expenses 7,161,323 7,866,009 21,516,625 27,550,271
Pension liability adjustment gains — — — (4,147,836 )
Impairment loss — — 1,617,389 —
Restructuring expense 796,231 — 2,325,861 —
Total operating expenses 7,957,554 7,866,009 25,459,875 23,402,435
Operating loss (4,653,647 ) (1,175,411 ) (10,180,263 ) (2,567,076 )
Other income (expenses):
Investment and other income 38,869 19,259 78,888 119,395
Gain (Loss) on sale of assets 26,222 (60,088 ) (32,024 ) 748,234
Interest and other expense (42,799 ) (44,228 ) (61,839 ) (94,375 )
Foreign currency translation loss — — — (4,238,497 )
Other income (expense), net 22,292 (85,057 ) (14,975 ) (3,465,243 )
Loss from operations before income taxes (4,631,355 ) (1,260,468 ) (10,195,238 ) (6,032,319 )
Income tax (benefit) expense (109,340 ) 3,301 (67,014 ) 242,617
Net loss (4,522,015 ) (1,263,769 ) (10,128,224 ) (6,274,936 )
Other comprehensive income, net of tax:
Additional minimum pension liability adjustments — — — (4,147,836 )
Unrealized (loss) gain on available-for-sale securities (240 ) (2,729 ) (3,187 ) 35,575
Foreign currency translation adjustment 31,508 15,465 63,724 4,168,590
Total other comprehensive income 31,268 12,736 60,537 56,329
Comprehensive loss $ (4,490,747 ) $ (1,251,033 ) $ (10,067,687 ) $ (6,218,607 )

Basic net loss per share: $ (0.50 ) $ (0.14 ) $ (1.13 ) $ (0.71 )
Diluted net loss per share: $ (0.50 ) $ (0.14 ) $ (1.13 ) $ (0.71 )
Weighted Average Basic Shares Outstanding 8,960,606 8,849,236 8,934,235 8,816,042
Weighted Average Dilutive Shares Outstanding 8,960,606 8,849,236 8,934,235 8,816,042
Dividends declared per share $ 0.04 $ 0.04 $ 0.12 $ 0.36

~~The accompanying notes are an integral part of the condensed consolidated financial statements.~~

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)

Accumulated
Additional Other
Common Stock Paid-in Retained Comprehensive
Shares Amount Capital Earnings Loss Total
BALANCE AT DECEMBER 31, 2016 8,877,379 $ 443,869 $ 41,279,281 $ 20,596,203 $ (686,661 ) $ 61,632,692
Net loss (10,128,224 ) (10,128,224 )
Issuance of common stock under Employee Stock Purchase Plan 18,139 907 79,857 80,764
Issuance of common stock to Employee Stock Ownership Plan 47,248 2,362 216,396 218,758
Issuance of common stock under Executive Stock Plan 22,555 1,128 0 1,128
Share based compensation 327,261 327,261
Other share retirements (1,805 ) (90 ) (8,369 ) 789 (7,670 )
Shareholder dividends (1,082,394 ) (1,082,394 )
Other comprehensive income 60,537 60,537
BALANCE AT SEPTEMBER 30, 2017 8,963,516 $ 448,176 $ 41,894,426 $ 9,386,374 $ (626,124 ) $ 51,102,852

~~The accompanying notes are an integral part of the condensed consolidated financial statements.~~

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Nine Months Ended September 30
2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,128,224 ) $ (6,274,936 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 2,489,661 2,754,189
Share based compensation 327,261 505,306
Deferred taxes (52,998 ) (11,083 )
Impairment loss 1,617,389 —
Change in fair value of acquisition-related contingent consideration — (135,316 )
Loss (gain) on sale of assets 537,470 (748,234 )
Excess tax benefit from share-based payments — 63,304
Changes in assets and liabilities:
Trade accounts receivable 765,055 1,443,908
Inventories 7,232,732 352,653
Prepaid income taxes 789,209 (141,566 )
Other assets, net 358,160 (148,010 )
Accounts payable (1,648,259 ) (1,188,066 )
Accrued compensation and benefits 701,546 224,713
Other accrued liabilities (157,422 ) 352,789
Income taxes payable (103,215 ) (49,657 )
Other — 58,001
Net cash provided by (used in) operating activities 2,728,365 (2,942,005 )

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (389,616 ) (1,889,283 )
Proceeds from the sale of property, plant and equipment 220,366 972,595
Proceeds from the sale of investments 5,076,978 2,014,023
Net cash provided by investing activities 4,907,728 1,097,335

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit — 4,894,046
Payments against line of credit — (4,894,046 )
Cash dividends paid (1,096,726 ) (4,269,451 )
Mortgage principal payments — (103,603 )
Proceeds from issuance of common stock, net of shares withheld 74,222 92,191
Excess tax expense benefit from share-based payments — (63,304 )
Payment of deferred consideration related to acquisition — (300,000 )
Net cash used in financing activities (1,022,504 ) (4,644,167 )

EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH 9,622 (90,510 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,623,211 (6,579,347 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,443,274 9,812,737
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,066,485 $ 3,233,390
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes (refunded) paid $ (646,660 ) $ 443,106
Interest paid 29,297 43,630
Dividends declared not paid 398,210 413,966
Capital expenditures in accounts payable 75,525 57,181
Acquisition costs in accrued consideration — 6,918

	March 31			December 31
	2020			2019
CURRENT ASSETS:
Cash and cash equivalents	$	20,561,982		$	13,928,504
Restricted cash		479,128			679,006
Investments		11,299,604			9,449,650
Trade accounts receivable, less allowance for doubtful accounts of $151,000 and $154,000, respectively		6,565,654			10,242,405
Inventories		8,089,911			8,531,112
Prepaid income taxes		77,078			72,994
Other current assets		1,118,883			1,160,865
Current assets held for sale		—			5,337,274
TOTAL CURRENT ASSETS		48,192,240			49,401,810

PROPERTY, PLANT AND EQUIPMENT, net		7,951,593			8,238,089
OTHER ASSETS:
Investments		355,000			250,000
Deferred income taxes		—			9,534
Operating lease right of use asset		339,933			367,909
Non-current assets held for sale		—			883,370
TOTAL OTHER ASSETS		694,933			1,510,813
TOTAL ASSETS	$	56,838,766		$	59,150,712

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	2,675,534		$	3,720,445
Accrued compensation and benefits		2,390,525			3,517,331
Operating lease liability		113,022			115,935
Other accrued liabilities		2,220,269			2,602,752
Dividends payable		200,708			200,363
Current liabilities held for sale		—			1,193,218
TOTAL CURRENT LIABILITIES		7,600,058			11,350,044
LONG TERM LIABILITIES:
Long-term compensation plans		67,175			164,348
Operating lease liability		208,831			244,038
TOTAL LONG-TERM LIABILITIES		276,006			408,386
COMMITMENTS AND CONTINGENCIES (Footnote 8)
STOCKHOLDERS’ EQUITY
Preferred stock, par value $1.00 per share; 3,000,000 shares authorized; none issued
Common stock, par value $.05 per share; 30,000,000 shares authorized; 9,346,966 and 9,252,749 shares issued and outstanding, respectively		467,347			462,637
Additional paid-in capital		43,381,778			42,977,914
Retained earnings		5,957,796			4,649,395
Accumulated other comprehensive loss		(844,219	)		(697,664	)
TOTAL STOCKHOLDERS’ EQUITY		48,962,702			47,392,282
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	56,838,766		$	59,150,712

The accompanying notes are an integral part of the condensed consolidated financial statements.

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)

	Three Months Ended March 31
	2020			2019

Sales	$	9,162,742		$	11,216,170
Cost of sales		5,425,595			6,589,954
Gross profit		3,737,147			4,626,216
Operating expenses:
Selling, general and administrative expenses		4,960,890			5,447,595
Total operating expenses		4,960,890			5,447,595
Operating loss from continuing operations		(1,223,743	)		(821,379	)
Other income (expenses):
Investment and other income		111,757			44,890
Gain (loss) on sale of assets		308,403			(9,935	)
Interest and other expense		(9,593	)		(9,444	)
Other income, net		410,567			25,511
Operating loss from continuing operations before income taxes		(813,176	)		(795,868	)
Income tax benefit		(4,457	)		(3,972	)
Net loss from continuing operations		(808,719	)		(791,896	)
Net income from discontinued operations, net of tax		2,313,352			1,032,009
Net income		1,504,633			240,113

Other comprehensive (loss) income, net of tax:
Unrealized loss on available-for-sale securities		(14,452	)		—
Foreign currency translation adjustment		(132,103	)		28,618
Total other comprehensive (loss) income		(146,555	)		28,618
Comprehensive income	$	1,358,078		$	268,731

Basic net income (loss) per share:
Continuing operations	$	(0.09	)	$	(0.08	)
Discontinued operations		0.25			0.11
	$	0.16		$	0.03

Diluted net income (loss) per share:
Continuing operations	$	(0.09	)	$	(0.08	)
Discontinued operations		0.25			0.11
	$	0.16		$	0.03

Weighted Average Basic Shares Outstanding		9,265,590			9,176,093
Weighted Average Dilutive Shares Outstanding		9,445,299			9,176,093
Dividends declared per share	$	0.02		$	0.02

The accompanying notes are an integral part of the condensed consolidated financial statements.

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)

For the Three Months Ended March 31, 2020

													Accumulated
							Additional						Other
	Common Stock						Paid-in			Retained			Comprehensive
	Shares			Amount			Capital			Earnings			Loss			Total
BALANCE AT DECEMBER 31, 2019		9,252,749		$	462,637		$	42,977,914		$	4,649,395		$	(697,664	)	$	47,392,282
Net income		—			—			—			1,504,633			—			1,504,633
Issuance of common stock under Employee Stock Purchase Plan		3,549			177			21,720			—			—			21,897
Issuance of common stock to Employee Stock Ownership Plan		66,059			3,303			404,281			—			—			407,584
Issuance of common stock under Executive Stock Plan		46,584			2,329			—			—			—			2,329
Share based compensation		—			—			79,168			—			—			79,168
Other share retirements		(21,975	)		(1,099	)		(101,305	)		(6,382	)		—			(108,786	)
Shareholder dividends ($0.02 per share)		—			—			—			(189,850	)		—			(189,850	)
Other comprehensive loss		—			—			—			—			(146,555	)		(146,555	)
BALANCE AT MARCH 31, 2020		9,346,966		$	467,347		$	43,381,778		$	5,957,796		$	(844,219	)	$	48,962,702

For the Three Months Ended March 31, 2019

													Accumulated
							Additional						Other
	Common Stock						Paid-in			Retained			Comprehensive
	Shares			Amount			Capital			Earnings			Loss			Total
BALANCE AT DECEMBER 31, 2018		9,158,438		$	457,922		$	42,680,499		$	(734,001	)	$	(751,293	)	$	41,653,127
Net income		—			—			—			240,113			—			240,113
Issuance of common stock under Employee Stock Purchase Plan		13,421			671			26,574			—			—			27,245
Issuance of common stock to Employee Stock Ownership Plan		132,826			6,641			262,995			—			—			269,636
Issuance of common stock under Executive Stock Plan		4,575			229			—			—			—			229
Share based compensation		—			—			69,687			—			—			69,687
Other share retirements		(740	)		(37	)		(3,422	)		1,494			—			(1,965	)
Shareholder dividends ($0.02 per share)		—			—			—			(185,425	)		—			(185,425	)
Other comprehensive income		—			—			—			—			28,618			28,618
BALANCE AT MARCH 31, 2019		9,308,520		$	465,426		$	43,036,333		$	(677,819	)	$	(722,675	)	$	42,101,265

The accompanying notes are an integral part of the condensed consolidated financial statements.

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Three Months Ended March 31
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,504,633		$	240,113
Net income from discontinued operations, net of tax		2,313,352			1,032,009
Net loss from continuing operations		(808,719	)		(791,896	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		211,461			279,248
Share based compensation		79,168			69,687
Deferred taxes		9,534			—
(Gain) loss on sale of assets		(308,403	)		9,935
Changes in assets and liabilities:
Trade accounts receivable		3,641,383			(18,958	)
Inventories		371,202			1,195,298
Prepaid income taxes		(4,085	)		3,300
Other assets, net		25,874			(1,112,293	)
Accounts payable		(1,025,979	)		(1,059,564	)
Accrued compensation and benefits		(811,873	)		(327,617	)
Other accrued liabilities		(373,465	)		(283,967	)
Income taxes payable		—			(28,267	)
Net cash provided by (used in) operating activities - continuing operations		1,006,098			(2,065,094	)
Net cash (used in) provided by operating activities - discontinued operations		(765,468	)		874,182
Net cash provided by (used in) operating activities		240,630			(1,190,912	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(56,917	)		(209,875	)
Purchases of investments		(8,417,689	)		—
Proceeds from the sale of property, plant and equipment		420,000			—
Proceeds from the sale of investments		6,448,284			—
Net cash used in investing activities - continuing operations		(1,606,322	)		(209,875	)
Net cash provided by (used in) investing activities - discontinued operations		8,110,179			(7,427	)
Net cash provided by (used in) investing activities		6,503,857			(217,302	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid		(189,505	)		(184,484	)
Proceeds from issuance of common stock, net of shares withheld		24,226			25,509
Purchase of common stock		(108,786	)		—
Net cash used in financing activities		(274,065	)		(158,975	)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH		(36,822	)		1,469

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		6,433,600			(1,565,720	)

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD		14,607,510			11,056,426
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD	$	21,041,110		$	9,490,706
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes refunded	$	(7,398	)	$	—
Interest paid		9,467			9,369
Dividends declared not paid		200,708			185,482
Capital expenditures in accounts payable		—			21,701
Operating right of use assets obtained in exchange for lease obligations		—			449,995

The accompanying notes are an integral part of the condensed consolidated financial statements.

COMMUNICATIONS SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Communications Systems, Inc. (herein collectively ~~called “CSI”~~referred to as “CSI,” “our,” “we” or the “Company”) is a Minnesota corporation organized in 1969 that operates ~~primarily as a holding company conducting~~directly and through its ~~business through four business units having operations~~subsidiaries located in the United States (U.S.) and the United ~~Kingdom.~~Kingdom (U.K.). CSI is principally engaged through its ~~Suttle~~Transition Networks, Inc. (“Transition Networks” or “Transition”) subsidiary and business unit in the manufacture and sale of solutions that provide actionable intelligence, power and connectivity ~~infrastructure~~at the edge of networks through Power over Ethernet (“PoE”) products, ~~for broadband~~software and ~~voice communications and through its Transition Networks business unit in the manufacture of core~~services as well as traditional products such as media ~~conversion products, Ethernet switches,~~converters, network adapters and other connectivity ~~and data transmission~~ products. Through its JDL Technologies, Inc. (“JDL Technologies” or “JDL”) business unit, the Company provides technology solutions including virtualization, managed services, wired and wireless network design and implementation, ~~HIPAA-compliant IT services,~~ and ~~converged~~hybrid cloud infrastructure ~~configuration~~ and deployment. Through its Net2Edge Limited (“Net2Edge”) U.K.-based business unit, the Company ~~enables~~designs, develops, and sells edge network access products, TDM (time-division multiplexing) over IP and other circuit emulation solutions, along with specialized cloud-based software solutions, primarily within the telecommunications ~~carriers to connect legacy networks to high-speed services.~~market.

The Company classifies its businesses into ~~four~~three segments ~~corresponding~~that correspond to ~~the Suttle, Transition Networks, JDL Technologies and Net2Edge~~these three business units. Non-allocated general and administrative expenses are separately accounted for as “Other” in the Company’s segment reporting. Intersegment revenues are eliminated upon consolidation.

Financial Statement Presentation

The condensed consolidated balance sheets and condensed consolidated statement of changes in stockholders’ equity as of ~~September 30, 2017~~March 31, 2020 and the related condensed consolidated statements of ~~loss~~income and comprehensive ~~loss,~~income, and the condensed consolidated statements of cash flows for the periods ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 have been prepared by Company management. In the opinion of management, all adjustments (which include only normal recurring adjustments, except where noted) necessary to present fairly the financial position, results of operations, and cash flows at ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 and for the periods then ended have been made.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted. We recommend these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, ~~2016~~2019 Annual Report to Shareholders on Form 10-K. The results of operations for the period ended ~~September 30, 2017~~March 31, 2020 are not necessarily indicative of operating results for the entire year.

The presentation of financial statements in conformity with generally accepted accounting principles 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 balance sheet date, and the reported amounts of revenues and expenses during the reporting period. The estimates and assumptions used in the accompanying condensed consolidated financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the time of the financial statements. Actual results could differ from those estimates.

Except to the extent updated or described below, the significant accounting policies set forth in Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2019, appropriately represent, in all material respects, the current status of accounting policies, and are incorporated herein by reference.

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss, net of tax, are as follows:


	Foreign Currency Translation			Unrealized gain (loss) on securities			Accumulated Other Comprehensive Loss
December 31, 2019	$	(709,000	)	$	11,000		$	(698,000	)

Net current period change		(132,000	)		(14,000	)		(146,000	)

March 31, 2020	$	(841,000	)	$	(3,000	)	$	(844,000	)

NOTE 2 – REVENUE RECOGNITION

Foreign Currency
Translation
Unrealized
(loss)/gain on
securities Accumulated
Other
Comprehensive
Loss
December 31, 2016 $ (704,000 ) $ 17,000 $ (687,000 )

Net current period change 64,000 (3,000 ) 61,000

September 30, 2017 $ (640,000 ) $ 14,000 $ (626,000 )

Transition Networks

The Company has determined that the revenue recognition for its Transition Networks division occurs upon delivery of the Company’s connectivity infrastructure and data transmission products. To determine when revenue should be recognized, ~~$4,238,000 in foreign currency translation losses within~~it is important to determine when the ~~statement~~transfer of ~~loss and comprehensive loss during the first quarter of 2016 due~~control has occurred. The Company has determined that control transfers for these products upon shipment or delivery to the ~~substantial liquidation~~customer, in accordance with the agreed upon shipping terms. As such, the timing of ~~our Austin Taylor facility~~revenue recognition occurs at a specific point in time.

JDL Technologies, Inc.

The Company has determined that the following performance obligations identified in its JDL Technologies, Inc. division are transferred over time: managed services and professional services (time and materials (“T&M”) and fixed price). JDL’s managed services performance obligation is a bundled solution consisting of a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer and are therefore recognized evenly over the term of the contract. T&M professional services arrangements are measured over time with an input method based on hours expended towards satisfying the performance obligation. Fixed price professional service arrangements under a relatively longer-term service will also be measured over time with an input method based on hours expended.

The Company has also identified the following performance obligations within its JDL Technologies division that are recognized at a point in time which include resale of third-party hardware and software, installation, arranging for another party to transfer services to the customer, and certain professional services. The resale of third-party hardware and software is recognized at a point in time, when the goods are shipped or delivered to the customer’s location, in accordance with the shipping terms. Installation services are recognized at a point in time when the services are completed. The service the Company provides to arrange for another party to transfer services to the customer is satisfied at a point in time after the Company has transferred control when the service is first available to the customer by the third-party vendor. The Company reports revenue from these third-party services on a net basis in its financial statements. Depending on the nature of the service, certain professional services transfer control at a point in time. The Company evaluates these circumstances on a case by case basis to determine if revenue should be recognized over time or at a point in time.

Net2Edge Limited

The Company’s Net2Edge division manufactures and markets Ethernet based edge network access devices. The Company principally sells these products through approved partners and integrators outside the United States. The Company has determined that the performance obligation in the ~~U.K. Refer~~Net2Edge division occurs at a point in time, specifically upon the delivery of its connectivity infrastructure and data transmission products.

Disaggregation of revenue

Revenues are recognized when control of the promised goods or services is transferred to ~~Note~~our customers, in an amount that best reflects the consideration we expect to receive in exchange for those goods or services. In accordance with ASC 606-10-50-5, the following tables present how we disaggregate our revenues, which is different for each segment.

For Transition Networks, we analyze revenue by region and product group. During 2020, the Company reclassified its product groups into two new categories as noted below. In order to conform to the 2020 presentation, the Company has reclassified the 2019 information as follows for the three months ended March 31, 2020 and 2019:


	Transition Networks Sales by Region
	Three Months Ended March 31
	2020		2019
North America	$	7,442,000	$	6,910,000
International		722,000		1,980,000
	$	8,164,000	$	8,890,000


	Transition Networks Sales by Product Group
	Three Months Ended March 31
	2020		2019
Intelligent edge solutions	$	3,100,000	$	2,272,000
Traditional products		5,064,000		6,618,000
	$	8,164,000	$	8,890,000

For JDL, we analyze revenue by customer group, which is as follows for the three months ended March 31, 2020 and 2019:

	JDL Revenue by Customer Group
	Three Months Ended March 31
	2020		2019
Education	$	93,000	$	1,473,000
Healthcare and commercial clients		534,000		451,000
CSI IT operations		200,000		284,000
	$	827,000	$	2,208,000

The Company does not currently analyze revenue for Net2Edge on a disaggregated basis. Revenues from Net2Edge were $424,000 and $448,000 for the three months ended March 31, 2020 and 2019, respectively.

NOTE 3 – DISCONTINUED OPERATIONS

On March 11, 2020, the Company sold the remainder of its Suttle business lines, including the SoHo, MediaMAX, and SpeedStar brands and inventory as well as working capital, certain capital equipment, intellectual property, and customer relationships to Oldcastle Infrastructure, Inc. (“Oldcastle”) for ~~further information regarding~~$8,000,000, with a working capital adjustment 90 days after close. Oldcastle, a wholly-owned subsidiary of Ireland based CRH PLC, will operate the ~~pension liability adjustment recognized in income~~majority of the acquired Suttle business through its wholly-owned subsidiary, Primex Technologies, Inc. The Company received proceeds of $8,308,000 and recorded a gain on the sale of $2,161,000 in the first quarter of ~~2016.~~2020.

Concurrent with the closing of the transaction, the Company and Oldcastle entered into a Transition Services Agreement (“TSA”) under which Suttle will continue to manufacture products for Oldcastle for up to six months, to ensure seamless supply and quality assurance to the existing customer base. Concurrently with the closing of the transaction and the TSA, the Company and Oldcastle also entered into a lease agreement under which Oldcastle agreed to lease two buildings in Hector, Minnesota, where Suttle had conducted operations. Base rents under the lease agreement range from $6,970 to $7,180 per month. The parties intend to work with Suttle’s existing suppliers to ensure continued support and delivery of all Suttle products during the transition period. The associated assets and liabilities related to this sale were classified as held for sale at December 31, 2019. The presentation of discontinued operations has been retrospectively applied to all prior periods presented.

The assets and liabilities of the discontinued operations that are classified as held for sale are as follows:

	March 31, 2020		December 31, 2019

Trade accounts receivable	$	—	$	2,235,000
Inventories		—		3,009,000
Other current assets		—		93,000
Total current assets	$	—	$	5,337,000

Property, plant, and equipment	$	—	$	883,000
Total noncurrent assets	$	—	$	883,000

Total assets held for sale	$	—	$	6,220,000

Accounts payable	$	—	$	1,111,000
Other accrued liabilities		—		82,000
Total liabilities held for sale	$	—	$	1,193,000

The financial results of the discontinued operations are as follows:


	Three Months Ended March 31
	2020			2019

Sales	$	3,025,000		$	5,507,000
Cost of sales		2,050,000			3,706,000
Selling, general and administrative expenses		500,000			799,000
Restructuring expenses		320,000			—
Gain on sale of assets		(2,161,000	)		(9,000	)
Operating income before income taxes		2,316,000			1,011,000
Income tax expense (benefit)		3,000			(21,000	)
Income from discontinued operations	$	2,313,000		$	1,032,000

During the three months ended March 31, 2020, the Company recorded $320,000 in restructuring expense. This consisted of severance and related benefits costs due to the sale of the remainder of Suttle’s business lines and the closure of the plant once the TSA is completed. We expect 2020 restructuring costs to be $1,200,000 including remaining severance and other shut down costs. Any remaining assets will be held for sale at the completion of the TSA. The Company did not make any restructuring charge payments during the first three months of 2020 and had $320,000 in restructuring accruals recorded in accrued compensation and benefits at March 31, 2020 that are expected to be paid during 2020.

NOTE 24 – CASH EQUIVALENTS AND INVESTMENTS

The following tables show the Company’s cash equivalents and ~~available-for-sale~~available –for-sale securities’ amortized cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or ~~short~~short- and ~~long term~~long-term investments as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016:~~2019:


March 31, 2020

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cash Equivalents		Short-Term Investments		Long-Term Investments

Cash equivalents:
Money Market funds	$	16,913,000	$	—	$	—		$	16,913,000	$	16,913,000	$	—	$	—
Subtotal		16,913,000		—		—			16,913,000		16,913,000		—		—

Investments:
Commercial Paper		11,316,000		1,000		(17,000	)		11,300,000		—		11,300,000		—
Convertible Debt		355,000		—		—			355,000		—		—		355,000
Subtotal		11,671,000		1,000		(17,000	)		11,655,000		—		11,300,000		355,000

Total	$	28,584,000	$	1,000	$	(17,000	)	$	28,568,000	$	16,913,000	$	11,300,000	$	355,000


December 31, 2019

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cash Equivalents		Short-Term Investments		Long-Term Investments

Cash equivalents:
Money Market funds	$	8,761,000	$	—	$	—		$	8,761,000	$	8,761,000	$	—	$	—
Subtotal		8,761,000		—		—			8,761,000		8,761,000		—		—

Investments:
Commercial Paper		8,695,000		—		(1,000	)		8,694,000		—		8,694,000		—
Corporate Notes/Bonds		756,000		—		—			756,000		—		756,000		—
Convertible Debt		250,000		—		—			250,000		—		—		250,000
Subtotal		9,701,000		—		(1,000	)		9,700,000		—		9,450,000		250,000


Total	$	18,462,000	$	—	$	(1,000	)	$	18,461,000	$	8,761,000	$	9,450,000	$	250,000

September 30, 2017

Amortized Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value Cash
Equivalents Short-Term Investments Long-Term Investments

Cash equivalents:
Money Market funds $ 8,986,000 $ — $ — $ 8,986,000 $ 8,986,000 $ — $ —
Subtotal 8,986,000 — — 8,986,000 8,986,000 — —

Investments:
Certificates of deposit 725,000 — — 725,000 — 725,000 —
Subtotal 725,000 — — 725,000 — 725,000 —

Total $ 9,711,000 $ — $ — $ 9,711,000 $ 8,986,000 $ 725,000 $ —

The Company tests for other than temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary in nature. The Company intends to hold the investments until it can recover the full principal amount and has the ability to do so based on other sources of liquidity. The Company expects such recoveries to occur prior to the contractual maturities. All unrealized losses as of March 31, 2020 were in a continuous loss position of less than twelve months and are not deemed to be other than temporarily impaired as of March 31, 2020.

December 31, 2016

Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Cash Equivalents Short-Term Investments Long-Term Investments

Cash equivalents:
Money Market funds $ 3,851,000 $ — $ — $ 3,851,000 $ 3,851,000 $ — $ —
Subtotal 3,851,000 — — 3,851,000 3,851,000 — —

Investments:
Certificates of deposit 4,291,000 4,000 (1,000 ) 4,294,000 — 4,294,000 —
Corporate Notes/Bonds 1,511,000 — — 1,511,000 — 1,511,000 —
Subtotal 5,802,000 4,000 (1,000 ) 5,805,000 — 5,805,000 —

Total $ 9,653,000 $ 4,000 $ (1,000 ) $ 9,656,000 $ 3,851,000 $ 5,805,000 $ —

The following table summarizes the estimated fair value of our investments, designated as available-for-sale and classified by the contractual maturity date of the securities as of ~~September 30, 2017:~~March 31, 2020:

Amortized Cost Estimated Market Value

Due within one year $ 725,000 $ 725,000


	Amortized Cost		Estimated Market Value

Due within one year	$	11,316,000	$	11,300,000
Due after one year through five years		355,000		355,000
	$	11,671,000	$	11,655,000

The Company did not recognize any gross realized gains or losses during either of the ~~three and nine month~~three-month periods ending ~~September 30, 2017~~March 31, 2020 and ~~2016,~~2019, respectively. If the Company had realized gains or losses, they would be included within investment and other income in the accompanying condensed consolidated statement of ~~loss~~income and comprehensive ~~loss.~~income.

NOTE 35 - STOCK-BASED COMPENSATION

Employee Stock Purchase Plan

Under the Company’s Employee Stock Purchase Plan (“ESPP”), employees are able to acquire shares of common stock at 85% of the price at the end of each current quarterly plan term. The most recent term ended ~~September 30, 2017.~~March 31, 2020. The ESPP is considered compensatory under current Internal Revenue Service rules. At ~~September 30, 2017,~~March 31, 2020, after giving effect to the shares issued as of that date, ~~58,726~~85,573 shares remain available for ~~purchase~~future issuance under the ESPP.

2011 Executive Incentive Compensation Plan

On March 28, 2011 the Board adopted and on May 19, 2011 the Company’s shareholders approved the Company’s 2011 Executive Incentive Compensation Plan (“2011 Incentive Plan”). The 2011 Incentive Plan authorizes incentive awards to officers, key employees and non-employee directors in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units, performance stock units (“deferred stock”), performance cash units, and other awards in stock, cash, or a combination of stock and cash. The 2011 Incentive Plan, as amended, allows the issuance of up to ~~2,000,000~~2,500,000 shares of common stock.

During 2017, stock options covering 259,686 shares have been awarded to key executive employees and directors. These options expire seven years from the date of award and generally vest 25% each year beginning one year after the date of award. The Company also granted deferred stock awards of 100,239 shares to key employees during the first quarter of 2017 under the Company’s long-term incentive plan for performance over the 2017 to 2019 period. The actual number of shares of deferred stock, if any, that are ultimately earned by the respective employees will be determined based on achievement against performance goals at the end of the three-year period ending December 31, 2019 and any shares earned will be issued in the first quarter of 2020 to those key employees still with the Company at that time.

At ~~September 30, 2017, 160,138~~March 31, 2020, 411,664 shares have been issued under the 2011 Incentive Plan, ~~1,292,968~~1,298,156 shares are subject to currently outstanding options, deferred stock awards, and unvested restricted stock units, and ~~546,894~~790,180 shares are eligible for grant under future awards.

Stock Option Plan for Directors

Shares of common stock are reserved for issuance to non-employee directors under options granted by the Company prior to 2011 under its Stock Option Plan for Non-Employee Directors (the “Director Plan”). Under the Director Plan nonqualified stock options to acquire shares of common stock were automatically granted to each non-employee director concurrent with annual meetings of shareholders in 2010 and earlier years, with the exercise price of options granted being the fair market value of the common stock on the date of the respective shareholder meetings. Options granted under the Director Plan expire 10 years from date of grant. No options have been granted under the Director Plan since 2011 when the Company amended the Director Plan to prohibit future option grants. As of ~~September 30, 2017,~~March 31, 2020, there were ~~51,000~~18,000 shares subject to outstanding options under the Director Plan.

~~1992 Stock Plan~~

Under the Company’s 1992 Stock Plan (“the Stock Plan”), shares of common stock may be issued pursuant to stock options, restricted stock or deferred stock grants to officers and key employees. Exercise prices of stock options under the Stock Plan cannot be less than fair market value of the stock on the date of grant. Rules and conditions governing awards of stock options, restricted stock and deferred stock are determined by the Compensation Committee of the Board of Directors, subject to limitations in the Stock Plan. The Company amended the Stock Plan in 2011 to prohibit future equity awards. At September 30, 2017, after reserving for stock options and deferred stock awards granted in prior years and adjusting for forfeitures and issuances during the year, there were 10,230 shares reserved for issuance under the Stock Plan.

Changes in Stock Options Outstanding

The following table summarizes changes in the number of outstanding stock options under the 2011 Incentive Plan and the Director ~~Plan and Stock~~ Plan over the period December 31, ~~2016~~2019 to ~~September 30, 2017:~~March 31, 2020:

Weighted average Weighted average
exercise price remaining
Options per share contractual term
Outstanding – December 31, 2016 922,930 $ 10.10 4.90
Awarded 259,686 4.42
Exercised — —
Forfeited (37,199 ) 11.57
Outstanding – September 30, 2017 1,145,417 8.76 4.74

Exercisable at September 30, 2017 669,186 $ 10.50 3.97
Expected to vest September 30, 2017 1,145,417 8.76 4.74


						Weighted average
				Weighted average		remaining
				exercise price		contractual term
	Options			per share		in years
Outstanding – December 31, 2019		1,130,472		$	7.28		3.48
Awarded		—			—
Exercised		—			—
Forfeited		(28,369	)		10.66
Outstanding – March 31, 2020		1,102,103			7.20		3.31

Exercisable at March 31, 2020		922,192		$	7.93		2.94
Expected to vest March 31, 2020		1,102,103			7.20		3.31

The aggregate intrinsic value of all options (the amount by which the market price of the stock on the last day of the period exceeded the market price of the stock on the date of grant) outstanding at ~~September 30, 2017~~March 31, 2020 was ~~$0.~~$400,000. The intrinsic value of all options exercised during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 was $0. Net cash proceeds from the exercise of all stock options were $0 in each of the ~~nine month~~three-month periods ended ~~September 30, 2017~~March 31, 2020 and ~~2016.~~2019.

Changes in Deferred Stock Outstanding

The following table summarizes the changes in the number of deferred stock shares under the ~~Stock Plan and~~ 2011 Incentive Plan over the period December 31, ~~2016~~2019 to ~~September 30, 2017:~~

Weighted Average
Grant Date
Shares Fair Value
Outstanding – December 31, 2016 149,260 $ 9.55
Granted 100,239 4.42
Vested (9,214 ) 12.29
Forfeited (44,845 ) 10.28
Outstanding – September 30, 2017 195,440 6.62

~~Changes in Restricted Stock Units Outstanding~~March 31, 2020:

~~The following table summarizes the changes in the number of restricted stock units under the 2011 Incentive Plan over the period December 31, 2016 to September 30, 2017:~~

Weighted Average
Grant Date
Shares Fair Value
Outstanding – December 31, 2016 27,134 $ 8.65
Granted — —
Issued (13,341 ) 11.05
Forfeited — —
Outstanding – September 30, 2017 13,793 6.33

				Weighted Average
				Grant Date
	Shares			Fair Value
Outstanding – December 31, 2019		321,227		$	3.37
Granted		—			—
Vested		(46,584	)		2.64
Forfeited		(60,590	)		4.40
Outstanding – March 31, 2020		214,053			3.24

Compensation Expense

Share-based compensation expense recognized for the ~~nine month period~~three months ended ~~September 30, 2017~~March 31, 2020 was ~~$327,000~~$79,000 before income taxes and ~~$213,000~~$63,000 after income taxes. Share-based compensation expense recognized for the ~~nine month period~~three months ended ~~September 30, 2016~~March 31, 2019 was ~~$505,000~~$70,000 before income taxes and ~~$328,000~~$55,000 after income taxes. Unrecognized compensation expense for the Company’s plans was ~~$378,000~~$235,000 at ~~September 30, 2017~~March 31, 2020 and is expected to be recognized over a weighted-average period of ~~2.1~~1.8 years. Excess tax benefits from the exercise of stock options and issuance of stock included in financing cash flows for the nine month periods ended September 30, 2017 and 2016 were $ 0 and $ (63,000), respectively. Share-based compensation expense is recorded as a part of selling, general and administrative expenses.

NOTE 46 - INVENTORIES

Inventories summarized below are priced at the lower of first-in, first-out cost or ~~market:~~net realizable value:

September 30 December 31
2017 2016
Finished goods $ 8,406,000 $ 12,083,000
Raw and processed materials 6,612,000 10,122,000
$ 15,018,000 $ 22,205,000

~~The Company’s reserve for obsolete inventory increased by $3,131,000 during the nine months ended September 30, 2017, or $0.35 per basic and diluted share.~~

~~NOTE 5 –GOODWILL AND INTANGIBLE ASSETS~~

Goodwill is required to be evaluated for impairment on an annual basis and between annual tests upon the occurrence of certain events or circumstances. In January 2017, the FASB issued new accounting guidance regarding the simplification of the test for goodwill impairment. The new standard eliminates the quantitative goodwill impairment analysis requirement to determine the fair value of individual assets and liabilities of a reporting unit to determine the amount of any goodwill impairment and instead permits an entity to recognize goodwill impairment loss as the excess of a reporting unit’s carrying value over the estimated fair value of the reporting unit, to the extent this amount does not exceed the carrying amount of goodwill. The Company chose to adopt this standard early for the annual impairment analysis in 2017. The Company performed the first step of the previous two-step process, which requires that the fair value of the reporting unit be compared to its book value including goodwill. If the fair value is higher than the book value, no impairment is recognized. If the fair value is lower than the book value, an impairment adjustment must be recorded.

The Company performs its annual impairment analysis as of April 1 each year. The Company analyzed the reporting unit that had the goodwill and also analyzed the company as a whole, including the Company’s four separate reporting units. Although JDL Technologies had been profitable for the prior eight quarters, the cyclical and unpredictable nature of revenues from its education sector raised issues in forecasting cash flows in future quarters used to estimate the reporting unit’s fair value. Based on this analysis of comparing the fair value of each reporting unit to the book value, and comparing the Company’s overall book value with its market capitalization, the Company determined that the book value exceeded the overall fair value of the reporting units as well as the Company’s overall market value. As a result, the Company recorded a goodwill impairment charge totaling $1,463,000 during the second quarter of 2017.


	March 31		December 31
	2020		2019
Finished goods	$	6,776,000	$	6,728,000
Raw and processed materials		1,314,000		1,803,000
	$	8,090,000	$	8,531,000

~~The changes in the carrying amount of goodwill in the JDL Technologies segment for the nine months ended September 30, 2017 are as follows:~~

JDL Technologies

January 1, 2017 $ 1,463,000

Impairment loss (1,463,000 )

September 30, 2017 $ —

Gross goodwill 1,463,000
Accumulated impairment loss (1,463,000 )
Balance at September 30, 2017 $ —

As part of the overall annual impairment analysis noted above, the Company also reviewed other intangible assets for potential impairment. Based on this analysis, the Company deemed the intangible assets related to customer relationships to be impaired and recorded a $154,000 impairment loss during the second quarter of 2017.

The Company’s identifiable intangible assets with finite lives, included in other assets, net on the condensed consolidated balance sheets, are being amortized over their estimated useful lives and were as follows:

September 30, 2017
Gross Carrying Amount Accumulated Amortization Impairment loss Foreign Currency Translation Net

Trademarks $ 98,000 $ (63,000 ) $ — $ (16,000 ) $ 19,000
Customer relationships 491,000 (230,000 ) (154,000 ) (107,000 ) —
Technology 229,000 (187,000 ) — (42,000 ) —
$ 818,000 $ (480,000 ) $ (154,000 ) $ (165,000 ) $ 19,000

December 31, 2016
Gross Carrying Amount Accumulated Amortization Impairment loss Foreign Currency Translation Net

Trademarks $ 91,000 $ (50,000 ) $ — $ (20,000 ) $ 21,000
Customer relationships 491,000 (200,000 ) — (122,000 ) 169,000
Technology 229,000 (172,000 ) — (57,000 ) —
$ 811,000 $ (422,000 ) $ — $ (199,000 ) $ 190,000

~~Amortization expense on these identifiable intangible assets was $27,000 and $63,000 2017 and 2016, respectively. The amortization expense is included in selling, general and administrative expenses.~~At~~September 30, 2017, the estimated future amortization expense for definite-lived intangible assets for the remainder of2017and all of the following four fiscal years is as follows:~~

Year Ending December 31:
2017 $ 3,000
2018 7,000
2019 2,000
2020 2,000
2021 2,000
Thereafter 2,000

~~NOTE 6 – WARRANTY~~

We provide reserves for the estimated cost of product warranties at the time revenue is recognized. We estimate the costs of our warranty obligations based on our warranty policy or applicable contractual warranty, historical experience of known product failure rates, and use of materials and service delivery costs incurred in correcting product failures. Management reviews the estimated warranty liability on a quarterly basis to determine its adequacy. The actual warranty expense could differ from the estimates made by the Company based on product performance. The warranty liability is included in other accrued liabilities on the condensed consolidated balance sheet.

The following table presents the changes in the Company’s warranty liability for the nine month periods ended September 30, 2017 and 2016, respectively, the majority of which relates to a five-year obligation to provide for potential future liabilities for network equipment sales.

2017 2016
Beginning balance $ 600,000 $ 554,000
Amounts charged to expense 43,000 119,000
Actual warranty costs paid (57,000 ) (75,000 )
Ending balance $ 586,000 $ 598,000

NOTE 7 – CONTINGENCIES

In the ordinary course of business, the Company is exposed to legal actions and claims and incurs costs to defend against these actions and claims. Company management is not aware of any outstanding or pending legal actions or claims that could materially affect the Company’s financial position or results ofoperations.

NOTE 8 – DEBT

~~Long-term Debt~~

The mortgage on the Company’s headquarters building was payable in monthly installments and carried an interest rate of 6.83%. The mortgage matured on March 1, 2016 and the Company paid $104,000 in the first quarter of 2016 to fully settle the liability.

Line of Credit

The Company has a $15,000,000 line of credit from Wells Fargo ~~Bank.~~Bank, N.A. The Company had no outstanding borrowings against the line of credit at ~~September 30, 2017 and~~March 31, 2020 or December 31, ~~2016.~~2019. Due to the revolving nature of loans under our credit facility, additional borrowings and periodic repayments and re-borrowings may be made until the maturity date. The total amount available for borrowings under our credit facility at ~~September 30, 2017~~March 31, 2020 was ~~$11,200,000,~~$3,875,000, based on the borrowing base calculation. Interest on borrowings on the credit line is at LIBOR plus 2.0% ~~(3.2%~~(3.0% at ~~September 30, 2017)~~March 31, 2020). The credit agreement expires August 12, 2021 and is secured by assets of the Company. Our credit agreement contains financial covenants including a minimum liquidity balance of $10,000,000. Liquidity is calculated as the sum of unrestricted cash, marketable securities and the availability on the line of credit. The Company was in compliance with its financial covenants at ~~September 30, 2017.~~March 31, 2020.

NOTE 9 – INCOME TAXES

In the preparation of the Company’s consolidated financial statements, management calculates income taxes based upon the estimated effective rate applicable to operating results for the full fiscal year. This includes estimating the current tax liability as well as assessing differences resulting from different treatment of items for tax and book accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet. Management analyzes these assets and liabilities regularly and assesses the likelihood that deferred tax assets will be recovered from future taxable income.

At ~~September 30, 2017~~March 31, 2020 there was ~~$44,000~~$131,000 of net uncertain tax benefit positions that would reduce the effective income tax rate if recognized. The Company records interest and penalties related to income taxes as income tax expense in the condensed consolidated statements of ~~loss~~income (loss) and comprehensive ~~loss.~~income (loss).

The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The tax years ~~2014-2016~~2016-2019 remain open to examination by the Internal Revenue Service and the years ~~2012-2016~~2015-2019 remain open to examination by various state tax departments. The tax years from ~~2013-2016~~2016-2018 remain open in Costa Rica. ~~In April 2016, we received notification from the Internal Revenue Service that they would be performing an examination of our 2012 and 2013 federal consolidated income tax returns. Asof September 30, 2017, theexamination was complete. The settlement and payment that resulted from the examination did not have a material effect on our results of operations.~~

The Company’s effective income tax rate was ~~0.7%~~0.5% for the first ~~nine~~three months of ~~2017.~~2020. The effective tax rate differs from the federal tax rate of ~~35%~~21% due to state income taxes, foreign tax rate differences, foreign losses not deductible for U.S. income tax purposes, ~~provisions for interest charges for~~the effect of uncertain income tax positions, stock compensation ~~shortfalls~~windfalls and changes in valuation allowances related to deferred tax assets.The foreignoperating losses may ultimately be deductible in the countries in which they occurred; however, the Company has not recorded a deferred tax asset for these losses due to uncertainty regarding the eventual realization of the benefit. The effect of the foreign operations was an overall rate decrease of approximately ~~(14.0%~~(10.1%) for the ~~nine~~three months ended~~September 30, 2017~~. March 31, 2020. There were no additional uncertain tax positions identified in the first ~~nine months~~quarter of ~~2017.~~2020. The Company’s effective income tax rate forthe ~~nine~~three monthsended ~~September 30, 2016~~March 31, 2019 was~~(4.0%)~~ 0.5%, and differed from the federal tax rate due to state income taxes, foreign tax rate differences, foreign losses not deductible for U.S. income tax purposes, changes in the reserve for uncertain income tax positions, provisions for interest charges for uncertain income tax positions, stock compensation shortfalls and changes in valuation allowances related to deferred tax assets.

NOTE 10 – SEGMENT INFORMATION

The Company classifies its remaining businesses into ~~the following four segments:~~three segments as follows:

●

~~Suttle manufactures and markets connectivity infrastructure products for broadband and voice communications;~~

●

Transition Networks ~~manufactures~~designs, develops and sells Intelligent Edge solutions that provide connectivity and power through PoE products and actionable intelligence to end devices in an IoT ecosystem through embedded and cloud-based management software. Transition Networks continues to generate revenue from its traditional products consisting of, media converters, ~~NIDs,~~ NICs, and Ethernet switches ~~and other connectivity products~~ that offer the ability to affordably integrate the benefits of fiber optics into any data network;

●

JDL Technologies provides technology solutions that address prevalent IT challenges, including virtualization and cloud solutions, managed services, wired and wireless network design and implementation, and converged infrastructure configuration and ~~deployment;~~deployment; and

●

Net2Edge designs, develops, ~~manufactures~~ and sells edge network access products, ~~that enable~~TDM over IP and other circuit emulation solutions, along with specialized cloud-based software solutions, primarily within the telecommunications ~~carriers to connect legacy networks to high-speed services~~.market.

Management has chosen to organize the ~~enterprise~~Company and disclose reportable segments based on our products and services. Intersegment revenues are eliminated upon consolidation. “Other” includes non-allocated corporate overhead costs. As a result of our treatment of Suttle as discontinued operations, “Other” includes amounts previously allocated to Suttle that do not meet the criteria to be included in income from discontinued operations.

Information concerning the Company’s continuing operations in the various segments for the three ~~and nine~~ month periods ended ~~September 30, 2017~~March 31, 2020 and ~~2016 is~~2019 are as follows:

Transition JDL Intersegment
Suttle Networks Technologies Net2Edge Other Eliminations Total
Three Months Ended September 30, 2017
Sales $ 7,536,000 $ 9,327,000 $ 3,613,000 $ 182,000 $ — $ (245,000 ) $ 20,413,000
Cost of sales 8,967,000 5,342,000 2,730,000 122,000 — (52,000 ) 17,109,000
Gross profit (1,431,000 ) 3,985,000 883,000 60,000 — (193,000 ) 3,304,000
Selling, general and administrative expenses 2,239,000 3,809,000 471,000 836,000 — (193,000 ) 7,162,000
Impairment loss — — — — — — —
Restructuring expense 796,000 — — — — — 796,000
Operating (loss) income $ (4,466,000 ) $ 176,000 $ 412,000 $ (776,000 ) $ — $ — $ (4,654,000 )

Depreciation and amortization $ 525,000 $ 158,000 $ 76,000 $ 9,000 $ — $ — $ 768,000

Capital expenditures $ 52,000 $ 174,000 $ — $ 3,000 $ 23,000 $ — $ 252,000

Assets $ 21,389,000 $ 12,593,000 $ 4,809,000 $ 1,258,000 $ 21,239,000 $ (27,000 ) $ 61,261,000

Transition JDL Intersegment
Suttle Networks Technologies Net2Edge Other Eliminations Total
Three Months Ended September 30, 2016
Sales $ 10,420,000 $ 11,789,000 $ 3,397,000 $ 275,000 $ — $ (264,000 ) $ 25,617,000
Cost of sales 10,080,000 6,350,000 2,384,000 128,000 — (16,000 ) 18,926,000
Gross profit 340,000 5,439,000 1,013,000 147,000 — (248,000 ) 6,691,000
Selling, general and administrative expenses 2,891,000 3,824,000 563,000 836,000 — (248,000 ) 7,866,000
Operating (loss) income $ (2,551,000 ) $ 1,615,000 $ 450,000 $ (689,000 ) $ — $ — $ (1,175,000 )

Depreciation and amortization $ 627,000 $ 205,000 $ 65,000 $ 23,000 $ — $ — $ 920,000

Capital expenditures $ 593,000 $ 26,000 $ 44,000 $ 16,000 $ (4,000 ) $ — $ 675,000

Assets $ 36,830,000 $ 17,758,000 $ 3,729,000 $ 1,488,000 $ 16,692,000 $ (26,000 ) $ 76,471,000

	Transition		JDL									Intersegment
	Networks		Technologies			Net2Edge			Other			Eliminations			Total

Three Months Ended March 31, 2020
Sales	$	8,164,000	$	827,000		$	424,000		$	—		$	(252,000	)	$	9,163,000
Cost of sales		4,604,000		620,000			214,000			—			(12,000	)		5,426,000
Gross profit		3,560,000		207,000			210,000			—			(240,000	)		3,737,000
Selling, general and administrative expenses		3,344,000		328,000			593,000			936,000			(240,000	)		4,961,000
Operating income (loss)		216,000		(121,000	)		(383,000	)		(936,000	)		—			(1,224,000	)
Other income		—		—			14,000			397,000			—			411,000
Income (loss) before income tax	$	216,000	$	(121,000	)	$	(369,000	)	$	(539,000	)	$	—		$	(813,000	)

Depreciation and amortization	$	54,000	$	13,000		$	17,000		$	127,000		$	—		$	211,000

Capital expenditures	$	41,000	$	—		$	2,000		$	14,000		$	—		$	57,000

Assets	$	13,087,000	$	1,394,000		$	2,578,000		$	39,807,000		$	(27,000	)	$	56,839,000

Transition JDL Intersegment
Suttle Networks Technologies Net2Edge Other Eliminations Total
Nine Months Ended September 30, 2017
Sales $ 24,888,000 $ 27,831,000 $ 10,504,000 $ 719,000 $ — $ (661,000 ) $ 63,281,000
Cost of sales 24,447,000 15,667,000 7,699,000 262,000 — (74,000 ) 48,001,000
Gross profit 441,000 12,164,000 2,805,000 457,000 — (587,000 ) 15,280,000
Selling, general and administrative expenses 6,775,000 11,481,000 1,604,000 2,244,000 — (587,000 ) 21,517,000
Impairment loss — — 1,463,000 154,000 — — 1,617,000
Restructuring expense 2,326,000 — — — — — 2,326,000
Operating (loss) income $ (8,660,000 ) $ 683,000 $ (262,000 ) $ (1,941,000 ) $ — $ — $ (10,180,000 )

Depreciation and amortization $ 1,695,000 $ 518,000 $ 230,000 $ 47,000 $ — $ — $ 2,490,000

Capital expenditures $ 100,000 $ 199,000 $ 5,000 $ 63,000 $ 23,000 $ — $ 390,000

Transition JDL Intersegment
Suttle Networks Technologies Net2Edge Other Eliminations Total
Nine Months Ended September 30, 2016
Sales $ 33,424,000 $ 30,294,000 $ 12,360,000 $ 1,434,000 $ — $ (918,000 ) $ 76,594,000
Cost of sales 29,939,000 17,270,000 8,025,000 682,000 — (157,000 ) 55,759,000
Gross profit 3,485,000 13,024,000 4,335,000 752,000 — (761,000 ) 20,835,000
Selling, general and administrative expenses 10,038,000 13,224,000 2,531,000 2,499,000 — (742,000 ) 27,550,000
Pension liability adjustment gains — — — — (4,148,000 ) — (4,148,000 )
Operating (loss) income $ (6,553,000 ) $ (200,000 ) $ 1,804,000 $ (1,747,000 ) $ 4,148,000 $ (19,000 ) $ (2,567,000 )

Depreciation and amortization $ 1,819,000 $ 658,000 $ 189,000 $ 88,000 $ — $ — $ 2,754,000

Capital expenditures $ 1,414,000 $ 185,000 $ 128,000 $ 18,000 $ 220,000 $ (19,000 ) $ 1,946,000

	Transition		JDL									Intersegment
	Networks		Technologies			Net2Edge			Other			Eliminations			Total

Three Months Ended March 31, 2019
Sales	$	8,890,000	$	2,208,000		$	448,000		$	—		$	(330,000	)	$	11,216,000
Cost of sales		5,136,000		1,341,000			227,000			—			(114,000	)		6,590,000
Gross profit		3,754,000		867,000			221,000			—			(216,000	)		4,626,000
Selling, general and administrative expenses		3,695,000		376,000			748,000			844,000			(216,000	)		5,447,000
Operating (loss) income		59,000		491,000			(527,000	)		(844,000	)		—			(821,000	)
Other income (expense)		—		(10,000	)		(1,000	)		36,000			—			25,000
Income (loss) before income tax	$	59,000	$	481,000		$	(528,000	)	$	(808,000	)	$	—		$	(796,000	)

Depreciation and amortization	$	79,000	$	28,000		$	20,000		$	152,000		$	—		$	279,000

Capital expenditures	$	—	$	36,000		$	7,000		$	167,000		$	—		$	210,000

Assets	$	17,668,000	$	3,814,000		$	2,863,000		$	27,873,000		$	(27,000	)	$	52,191,000

NOTE 11 – ~~PENSIONS~~

The Company’s U.K. based subsidiary Austin Taylor maintained a defined benefit pension plan for its employees through March 31, 2016. The Company does not provide any other post-retirement benefits to its employees. Components of net periodic benefit of the pension plans for the three and nine months ended September 30, 2017 and 2016 were:

Three Months Ended September 30 Nine Months Ended September 30
2017 2016 2017 2016
Service cost $ — $ — $ — $ —
Interest cost — — — 26,000
Expected return on assets — — — (24,000 )
Settlement benefit — — — (43,000 )
Net periodic pension benefit $ — $ — $ — $ (41,000 )

The Company settled all its obligations under this pension plan in the first quarter of 2016. The Company had contributed $650,000 toward the settlement of the pension into annuities in 2015, which resulted in the recognition of $1,222,000 of pension settlement costs in the income statement in the fourth quarter of 2015. The Company contributed an additional $68,000 toward the settlement in the first quarter of 2016, which resulted in a benefit of $43,000 recorded within operating expenses. As a result of the final settlement of all of its pension obligations, in the first quarter of 2016, the Company recorded $4,148,000 in pension liability adjustment gains previously recorded in accumulated other comprehensive income within operating expenses in the consolidated statement of income.

~~NOTE 12 –~~ NET ~~LOSS~~INCOME (LOSS) PER SHARE

Basic net income (loss) per common share is based on the weighted average number of common shares outstanding during each period and year. Diluted net income per common share takes into effect the dilutive effect of potential common shares outstanding. The Company’s only potential common shares outstanding are stock options and shares associated with the long-term incentive compensation plans, which resulted in noa dilutive effect of 179,709 and 0 for the three months ended March 31, 2020 and ~~nine month periods ended September 30, 2017 and 2016.~~2019, respectively. The Company calculates the dilutive effect of outstanding options using the treasury stock method. ~~Due to the net losses in the first three and nine months of 2017 and 2016, there was no dilutive impact from stock options or unvested shares.~~ Options totaling ~~1,145,417~~632,114 and 1,311,090 were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2020 and ~~nine ended September 30, 2017~~2019, respectively because the exercise price was greater than the average market price of common stock during the period and deferred stock awards totaling ~~181,224~~117,688 and 216,929 shares would not have been included for the three ~~and nine~~ months ended ~~September 30, 2017 because of unmet performance conditions. Options totaling 964,563~~March 31, 2020 and 846,584 were excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2016 because the exercise price was greater than the average market price of common stock during the period and deferred stock awards totaling 159,689 shares would not have been included for the three and nine months ended September 30, 20162019, respectively, because of unmet performance conditions.

NOTE 1312 – FAIR VALUE MEASUREMENTS

The accounting guidance establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date.

Level 2 – Observable inputs such as quoted prices for similar instruments and quoted prices in markets that are not active, and inputs that are directly observable or can be corroborated by observable market data. The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, such as treasury securities with pricing interpolated from recent trades of similar securities, or priced with models using highly observable inputs, such as commodity options priced using observable forward prices and volatilities.

Level 3 – Significant inputs to pricing that have little or no observability as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as the complex and subjective models and forecasts used to determine the fair value of financial instruments.

As discussed in Note 5, we tested our goodwill for impairment as of April 1, 2017. As part of this impairment testing, the Company determined the fair value of the net assets of the JDL Technologies reporting unit, based primarily on discounted cash flows and forecasted future operating results, which represent Level 3 inputs. As a result of our analysis, the Company recorded a non-cash impairment charge of $1,463,000 to fully impair goodwill. A reconciliation of the beginning and ending balances of goodwill are included in Note 5.

Financial assets and liabilities measured at fair value on a recurring basis as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, are summarized below:

September 30, 2017

Level 1 Level 2 Level 3 Total Fair Value

Cash equivalents:
Money Market funds $ 8,986,000 $ — $ — $ 8,986,000
Subtotal 8,986,000 — — 8,986,000

Short-term investments:
Certificates of deposit — 725,000 — 725,000
Subtotal — 725,000 — 725,000

Total $ 8,986,000 $ 725,000 $ — $ 9,711,000

December 31, 2016

Level 1 Level 2 Level 3 Total Fair Value

Cash equivalents:
Money Market funds $ 3,851,000 $ — $ — $ 3,851,000
Subtotal 3,851,000 — — 3,851,000

Short-term investments:
Certificates of deposit — 4,294,000 — 4,294,000
Corporate Notes/Bonds — 1,511,000 — 1,511,000
Subtotal — 5,805,000 — 5,805,000

Total $ 3,851,000 $ 5,805,000 $ — $ 9,656,000

	March 31, 2020

	Level 1		Level 2		Level 3		Total Fair Value

Cash equivalents:
Money Market Funds	$	16,913,000	$	—	$	—	$	16,913,000
Subtotal		16,913,000		—		—		16,913,000

Short-term investments:
Commercial Paper		—		11,300,000		—		11,300,000
Subtotal		—		11,300,000		—		11,300,000

Long-term investments:
Convertible debt		—		—		355,000		355,000
Subtotal		—		—		355,000		355,000

Total	$	16,913,000	$	11,300,000	$	355,000	$	28,568,000

	December 31, 2019

	Level 1		Level 2		Level 3		Total Fair Value

Cash equivalents:
Money Market Funds	$	8,761,000	$	—	$	—	$	8,761,000
Subtotal		8,761,000		—		—		8,761,000

Short-term investments:
Commercial Paper		—		8,694,000		—		8,694,000
Corporate Notes/Bonds		—		756,000		—		756,000
Subtotal		—		9,450,000		—		9,450,000

Long-term investments:
Convertible debt		—		—		250,000		250,000
Subtotal		—		—		250,000		250,000

Total	$	8,761,000	$	9,450,000	$	250,000	$	18,461,000

We record transfers between levels of the fair value hierarchy, if necessary, at the end of the reporting period. There were no transfers between levels during the ~~nine~~three months ended ~~September 30, 2017.~~

~~NOTE 14 – RESTRUCTURING~~

During the nine months ended September 30, 2017, the Company recorded $2,326,000 in restructuring expense. This consisted of severance and related benefits costs due to the restructuring within the Suttle business segment, including ongoing costs related to the closure of the Costa Rica facility. We transferredsubstantially all of the production from Costa Rica to Minnesota by the end of the second quarter of 2017 completed the closure in the third quarter of 2017. In the third quarter of 2017, we identified $505,000 of equipment, net of accumulated depreciation, that we determined we would no longer use as a result of consolidating our operations in the Minnesota location. We were not able to make this determination until we observed and assessed the condition of the equipment once it arrived in Minnesota. We included the loss on the disposal of this equipment has been included in restructuring expense on the consolidated statement of loss and comprehensive loss. The Company paid $1,821,000 in restructuring charges during the first nine months of 2017 and had $0 in restructuring~~accruals recorded in accrued compensation and benefits at September 30, 2017.~~ ~~We do not expect any material restructuring costs in the fourth quarter of 2017.~~March 31, 2020.

NOTE 1513 – GENERAL COMMITMENTS

On August 2, 2018, the Company entered into a purchase agreement with Launch Properties, LLC for the sale of the Company’s building located at 10900 Red Circle Drive, Minnetonka, MN for $10,000,000. The building currently includes the Company’s corporate administrative offices, as well as some operations for Transition Networks and JDL Technologies. The closing of the transaction is subject to several closing conditions, including the buyer’s ability to complete due diligence within 180 days and the buyer’s ability to obtain regulatory approval for its intended use of the property. The original due diligence period lapsed on January 29, 2019, and through two amendments to the original agreement, the due diligence period has been extended to June 30, 2020, and the buyer has met certain required obligations under these amendments. One of the conditions of the agreement and amendments included non-refundable deposits into an escrow account. As of March 31, 2020, the balance within this escrow account was $225,000 and is included within restricted cash within the condensed consolidated balance sheet. If the sale proceeds, the Company currently expects the transaction to close in early 2021.

NOTE 14 – RECENT ACCOUNTING PRONOUNCEMENTS

In ~~May 2014,~~December 2019, the ~~Financial~~FASB issued ASU 2019-12, “Simplifying the Accounting ~~Standards Board (FASB) issued a new~~for Income Taxes”, which, as part of its Simplification Initiative to reduce the cost and complexity in accounting ~~standard update on revenue recognition from contracts with customers. The new guidance will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. According~~for income taxes, removes certain exceptions related to the ~~new guidance, revenue is recognized when promised goods or services are transferred to customers~~approach for intra-period tax allocation, the methodology for calculating income taxes in an ~~amount that reflects~~interim period and the ~~consideration the Company expects to receive in exchange~~recognition of deferred tax liabilities for ~~those goods or services. As a result~~outside basis differences. ASU 2019-12 also amends other aspects of the ~~FASB’s July 2015 deferral~~guidance to help simplify and promote consistent application of ~~the standard’s required implementation date, the~~GAAP. The guidance is effective for interim and annual ~~reporting~~ periods beginning after December 15, 2017. The Company will adopt the accounting standard using the modified retrospective transition approach. The modified retrospective transition approach will recognize any changes from the beginning of the year of initial application through retained earnings with no restatement of comparative periods.

We have established an implementation team and engaged a third-party consultant to assist with our assessment of the impact of the new revenue guidance on our operations, consolidated financial statements and related disclosures. To date, this assessment has included (1) utilizing questionnaires to identify our revenue streams, (2) performing detailed contract analyses for each material revenue stream identified, and (3) assessing the noted differences in recognition and measurement that may result from adopting this new standard. Based on the preliminary results of the evaluation, which we expect to complete during the fourth quarter of 2017, we believe the most significant potential changes relate to variable consideration, the timing of recognition for certain promises included within service contracts, and net recognition of third-party maintenance and support services, although our technical analysis of these potential impacts is still on-going. We also anticipate changes to the consolidated balance sheet related to accounts receivable, contract assets, and contract liabilities.

We expect to adopt certain practical expedients and make certain policy elections related to the accounting for significant finance components, sales taxes, shipping and handling, right to invoice, costs to obtain a contract and immaterial promised goods or services, which will mitigate certain impacts of adopting this new standard. We are also currently reviewing the tax impact, if any, that the new standard will have on our financial statements. We are in the process of evaluating and designing the necessary changes to our business processes, policies, systems and controls to support recognition and disclosure under the new standard. Further, we are continuing to assess what incremental disaggregated revenue disclosures will be required in our consolidated financial statements.

In July 2015, the FASB issued an accounting standard on inventory, which simplifies the subsequent measurement of inventory by requiring entities to measure inventory at the lower of cost or net realizable value, except for inventory measured using the last-in, first-out (LIFO) or the retail inventory methods. This standard requires entities to compare the cost of inventory to one measure – net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The standard is effective for the annual period beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted, and is to be applied prospectively. The Company adopted this standard in the first quarter of 2017 with no material impact on its consolidated financial statements.

In November 2015, the FASB issued an accounting standard on deferred taxes, which removes the requirement to present deferred tax assets and liabilities as current and noncurrent on the balance sheet based on the classification of the related asset or liability, and instead requires classification of all deferred tax assets and liabilities as noncurrent. This guidance will be effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company adopted this guidance in the first quarter of 2017 and other than the prescribed classification of all deferred tax assets and liabilities as noncurrent, there was no material impact on its consolidated financial statements.

In February 2016, the FASB issued new accounting requirements regarding accounting for leases, which requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period, and early adoption is permitted. We have not yet determined the potential effects on our financial condition or results of operations.

In March 2016, the FASB issued a new accounting standard that changed certain aspects of accounting for share-based payments to employees, including the accounting for income taxes, forfeitures and statutory withholding requirements, as well as classification in the statement of cash flows. The new standard is effective for annual and interim periods beginning after December 15, 2016. The Company adopted this standard during the first quarter of 2017 with no material impact on our financial condition or results of operations.

~~In August 2016, the FASB issued new accounting guidance regarding the classification of cash receipts and payments in the Statement of Cash Flows. This guidance is~~intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the Consolidated Statement of Cash Flows by providing guidance on eight specific cash flow issues. The new standard is effective retrospectively on January 1, 2018, with early adoption permitted.~~We are still evaluating the impact of this standard, but do not believe it will have a material impact on our Consolidated Statement of Cash Flows.~~

In January 2017, the FASB issued new accounting guidance regarding the simplification of the test for goodwill impairment. The new standard eliminates the quantitative goodwill impairment analysis requirement to determine the fair value of individual assets and liabilities of a reporting unit to determine the amount of any goodwill impairment and instead permits an entity to recognize goodwill impairment loss as the excess of a reporting unit’s carrying value over the estimated fair value of the reporting unit, to the extent this amount does not exceed the carrying amount of goodwill. The new guidance continues to allow an entity to perform a qualitative assessment over goodwill impairment indicators in lieu of a quantitative assessment in certain situations. The standard will be effective for annual and interim periods beginning January 1, 2020, with early adoption permitted. The Company adopted this standard during ~~2017. As noted above~~the first quarter of 2020 with an immaterial impact to our consolidated financial statements.

In June 2016, FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” The amendments in ~~Note 5,~~this update replace the ~~Company analyzed~~incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses. This ASU is intended to provide financial statement users with more decision-useful information about the ~~reporting unit that had~~expected credit losses and is effective for annual periods and interim periods for those annual periods beginning after December 15, 2022, which for us is the ~~goodwill and also analyzed~~first quarter ending March 31, 2023. Entities may early adopt beginning after December 15, 2018. We are currently evaluating the Company as a whole, including the Company’s four separate reporting units. Based on this analysis of comparing the fair value of each reporting unit to the book value and comparing the Company’s overall book value with its market capitalization, the Company determined that the book value exceeds the overall fair valueimpact of the ~~reporting units as well as the Company’s overall market value. As a result, the Company recorded a goodwill impairment charge totaling $1,463,000 during the second quarter~~adoption of ~~2017.~~ASU 2016-13 on our consolidated financial statements.

NOTE 1615 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date of this filing. ~~We do not believe there are any material subsequent events~~In April 2020, the Company made an $899,000 investment in Quortus Ltd., a UK-based company that ~~would require further disclosure.~~provides virtual core network software for Private LTE solutions for critical and secure communications. The Company believes this investment is important for its Transition Networks and Net2Edge business segments as they have begun exploring partnering with Quortus to integrate their Private LTE core in existing and new products for the Company’s federal business, network extensions, and private networks for enterprises.

On May 14, 2020, the Company completed the acquisition of Ecessa Corporation (“Ecessa”) in a reverse triangular merger for $4.0 million with working capital adjustments 90 days after closing. At the closing, Ecessa became a wholly owned subsidiary of CSI. Based in Plymouth, Minnesota, Ecessa designs and distributes software-defined wide area networking (SD-WAN) solutions for businesses through the deployment of field installations of Ecessa Edge®, PowerLink®, and WANworX® controllers.

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

Overview

Communications Systems, Inc. provides physical connectivity infrastructure and services for global deployments of broadband networks through the following business units:

Transition Networks

With over 30 years of growth and expertise in hardware and software development, Transition Networks offers customers the ability to securely and reliably connect, power and manage edge devices in an IoT (“Internet of Things”) ecosystem as well as affordably integrate the benefits of fiber optics into any data network, in any application, and in any environment. Offering support for multiple speeds and protocols, multiple POE options, any interface, and hardware and software platforms, Transition Networks’ portfolio gives customers simple, secure and intelligent solutions for the network edge. Transition Networks distributes hardware-based connectivity solutions through a network of resellers in over 90 countries.

JDL Technologies

JDL Technologies provides technology services and infrastructure to the commercial, healthcare and education market segments. JDL’s portfolio of technology solutions includes managed services, virtualization and cloud solutions, wired and wireless network design and implementation services, and converged infrastructure configuration and deployment. JDL has provided many of these technology services to the education space, including one of the largest school districts in the US for more than 30 years, and also provides these services to a number of commercial and healthcare clients.

Net2Edge

Net2Edge designs and sells a range of solutions to address the needs of customers at the network edge. Specifically, this ranges from traditional Ethernet based switches, to circuit emulation devices, to bespoke niche solutions deploying LTE for example. The circuit emulation products range from legacy over packet interfaces such as Serial, TDM or ISDN. Net2Edge targets these products at telecommunications service providers, enterprises and system integrators. These solutions assist in resolving challenges in the areas of bandwidth constraints, security risks, and distance limitations as networks extend from local area to wide area networks and adapt to ever increasing end-user demands. As enterprise networks continue to change and evolve, our solutions enable customers to integrate multiple services into their existing infrastructure. All Net2Edge products incorporate features for performing advanced levels of management and automated provisioning minimizing the administrative burden of the operator.

First Quarter 2020 Summary

●

~~Suttle manufactures and markets connectivity infrastructure products for broadband and voice communications;~~

Consolidated sales were $9.2 million in Q1 2020 compared to $11.2 million in Q1 2019.

●

Transition Networks manufactures media converters, NIDs, NICs, Ethernet switches and other connectivity products that offer customers the ability to affordably integrate the benefits of fiber optics into any data network;

●

JDL Technologies provides technology solutions including virtualization, managed services, wired and wireless network design and implementation, HIPAA-compliant IT services, and converged infrastructure configuration and deployment; and

●

~~Net2Edgeenables telecommunications carriers to connect legacy networks to high-speed services.~~

~~Third Quarter 2017 Summary~~

● ~~Consolidated sales of $20.4 million compared to $25.6 million in Q3 2016, resulting primarily from lower sales at Suttle.~~

●

The Company incurred an operating loss from continuing operations of ~~$4.7~~$1.2 million in Q1 2020 compared to an operating loss from continuing operations of ~~$1.2~~$0.8 million in the third quarter of 2016. The 2017 operating loss was primarily due to a $4.5 million operating loss at Suttle. The Suttle loss included $0.8 million of restructuring costs associated with the final closure of its Costa Rica facility as it moved these operations to Minnesota, $0.4 million write-off of prepaid royalties under a product development agreement, and $2.6 million in excess and obsolete inventory write offs and adjustments primarily related to Suttle’s legacy products. In the third quarter of 2016, the Company had no restructuring costs and Suttle’s excess and obsolete inventory adjustment was $353,000.Q1 2019.

●

Net loss from continuing operations was ~~$4.5 million,~~$809,000, or ($~~0.50)~~0.09) per diluted share in Q1 2020, compared to a net loss from continuing operations of ~~$1.3 million,~~$792,000, or ($~~0.14)~~0.09) per diluted share, in ~~Q3 2016.~~Q1 2019.

Forward-looking statements

In this report and, from time to time, in reports filed with the Securities and Exchange Commission (“SEC”), in press releases, and in other communications to shareholders or the investing public, the Company may make ~~“forward looking~~“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of ~~1995~~1995. We may make these forward-looking statements concerning possible or anticipated future financial performance, business activities, plans, pending claims, investigations or litigation, which are typically preceded by the words “believes,” “expects,” “anticipates,” “intends” or similar expressions. For these forward-looking statements, the Company claims the protection of the safe harbor for forward-looking statements contained in federal securities laws. Shareholders and the investing public should understand that these forward-looking statements are subject to risks and uncertainties that could cause actual performance, activities, anticipated results, outcomes or plans to differ significantly from those indicated in the forward-looking statements. These risks and uncertainties include, but are not limited to:

General Risks and Uncertainties:

●

The ability of the Company’s ~~four~~three operating units to each function in an efficient and cost-effective manner, under the oversight of the CSI parent;

●

~~The~~

Any short-term or long-term effect that the COVID-19 Pandemic may have on the American and world economies generally, or us as a manufacturing entity, including our ability to manufacture, market, and sell our products while complying with applicable or otherwise appropriate social distancing policies, as discussed more thoroughly below in the section “Impact of ~~our four business units to operate profitably; and~~COVID-19 Pandemic”;

●

Our ability to successfully and profitably integrate our new Ecessa subsidiary into our existing operations;

●

The ability of our three business units to operate profitably;

●

The ability to manage corporate costs incurred as a public company in an effective manner;

●

The ability of the Special Committee of the Board of Directors and business leadership to develop business development options for the Company and the Company’s ability to implement these plans;

●

The impact of changing government expenditures in our ~~markets.~~

markets;

~~Suttle Risks and Uncertainties:~~

●

~~Suttle’s dependence upon its sales to a small number of major communication service providers and their continued investment and deployment into building out their networks;~~

●

~~Volatility in purchases~~

The fact that the sale of ~~Suttle’s products by major communication service providers as well as continuing pressure on our margins;~~the Company’s Minnetonka headquarters is subject to contingencies, some of which are beyond the Company’s control; and

●

~~Suttle’s~~

The fact that our information technology systems may be exposed to various cybersecurity risks and other disruptions that could impair our ability to continue to introduce and sell new enterprise copper and fiber products, such as the MediaMax and FutureLink product lines, to replace declining sales and lower or fluctuating gross margins in its legacy products; and

operate.

●

~~Suttle’s ability to effectively and efficiently consolidate manufacturing operations from its Costa Rica facility into its Hector, Minnesota facility.~~

Transition Networks Risks and Uncertainties:

●

The ability of Transition Networks to develop and sell new products for new and existing markets at a level adequate to counter the decline in sales of its traditional products;

●

~~Transition Networks’ ability to profitably sell its products in international markets; and~~

●

Transition Networks’ reliance on contract manufacturers and OEMs to supply it with components and products in a timely manner as Transition Networks develops and introduces new ~~products.~~products;

●

The fact that as Transition Networks has more success in selling its products as part of major infrastructure projects, it may experience significant fluctuations in quarter-to-quarter and year-to-year revenue and profitability; and

●

Transition Networks’ ability to manage its inventory of components and finished products is complex and complicated by its need to maintain a significant inventory of components (i) that may be or become in short supply or discontinued by the component manufacturer, (ii) that must be purchased in bulk to obtain favorable pricing, or (iii) that require long lead times. These factors may result in Transition Networks purchasing and maintaining significant amounts of inventory, that if not used or expected to be used based on anticipated production requirements, (i) may become excess or obsolete and (ii) could result in sales price reductions or inventory write-downs that could adversely affect Transition Networks’ business and results of operations.

JDL Technologies Risks and Uncertainties:

●

JDL’s ability to continue to obtain and manage the historically fluctuating business from its traditional South Florida school district ~~customer;~~customer in light of continuing delays in the government funding of this customer including JDL’s ability to efficiently deliver products and services to this customer when funding is restored;

●

JDL’s ability to expand to other educational prospects;

●

JDL’s ability to profitably increase its business serving small and medium-sized commercial businesses; ~~and~~

●

JDL’s ability to successfully and profitably manage a large number of small accounts; and

●

JDL’s ability to establish and maintain a productive and efficient workforce given revenues that have historically fluctuated significantly from period to period, in part due to the uncertainty and timing of federal government funding of school initiatives, including the E-Rate program.workforce.

Net2Edge’s Risks and Uncertainties:

●

Net2Edge’s ability to develop, field test, manufacture and sell new products in sufficient quantities to achieve ~~profitability.~~profitability; and

●

Net2Edge’s ability to sustain meaningful product differentiation and achieve substantial gross margins.

The Company discusses these and other risk factors from time to time in its filings with the SEC, including risk factors presented under Item 1A of the Company’s most recently filed Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

Impact of COVID-19 Pandemic

We are subject to risks and uncertainties as a result of the COVID-19 pandemic. In response to the pandemic, we have instituted office closures, implemented shelter-in-place orders and restrictions and instituted a mandatory work from home policy for substantially all office employees, and instituted social distancing work rules for operations personnel that continued to work in our facilities to satisfy customer orders. While we experienced supply chain and demand disruptions during the first quarter of 2020, it did not have a significant impact on our results. We expect the disruption to our supply to continue throughout 2020, as well as higher logistics and operational costs due to the COVID-19 pandemic. At the same time, we have seen an increase in demand for our Transition Networks’ fiber and high-speed products as customers are looking to upgrade their networks. We are also seeing delays in orders as some projects are pushed out due to the inability to access locations due to the shutdowns. We are continuing to actively monitor the effects and potential impacts of the COVID-19 pandemic on all aspects of our business, liquidity and capital resources. The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity or results of operations is uncertain at this time.

Company Results

Three Months Ended ~~September 30, 2017~~March 31, 2020 Compared to

Three Months Ended ~~September 30, 2016~~March 31, 2019

Consolidated sales ~~declined 20%~~decreased 18.3% in the ~~third~~first quarter of ~~2017~~2020 to ~~$20,413,000~~$9,163,000 compared to ~~$25,617,000~~$11,216,000 in the same period of ~~2016.~~2019. Consolidated operating loss from continuing operations in the ~~third~~first quarter of ~~2017~~2020 was ~~$4,654,000~~$1,224,000 compared to an operating loss from continuing operations of ~~$1,175,000~~$821,000 in the ~~third~~first quarter of ~~2016. The Company incurred $796,000 in restructuring expense~~2019. Net loss from continuing operations in the ~~third~~first quarter of ~~2017 related to the closure of its Costa Rica facility in 2017. Net loss in the third quarter of 2017~~2020 was ~~$4,522,000~~$809,000 or $ ~~(0.50)~~(0.09) per share compared to net loss from continuing operations of ~~$1,264,000~~$792,000 or $ ~~(0.14)~~(0.09) per share in the ~~third~~first quarter of ~~2016.~~

~~Suttle Results~~

Suttle sales decreased 28% in the third quarter of 2017 to $7,536,000 compared to $10,420,000 in the same period of 2016 due to continuing pricing pressures from major telecommunications customers, volume declines in legacy products, and a continuing shift in purchasing decisions from Tier 1 telecom suppliers to contractors and installers.

~~Sales by customer groups in the third quarters of 2017 and 2016 were:~~

Suttle Sales by Customer Group
2017 2016
Communication service providers $ 6,912,000 $ 9,441,000
International 173,000 368,000
Distributors 451,000 611,000
$ 7,536,000 $ 10,420,000

~~Suttle’s sales by product groups in third quarter of 2017 and 2016 were:~~

Suttle Sales by Product Group
2017 2016
Structured cabling and connecting system products $ 7,230,000 $ 9,649,000
DSL and other products 306,000 771,000
$ 7,536,000 $ 10,420,000

Sales to the major communication service providers decreased 27% in 2017 due to continuing pricing pressures and volume declines in legacy products. Sales to major communication service providers accounted for 92% of Suttle’s sales in the third quarter of 2017 compared to 91% of sales in 2016. Sales to distributors decreased 26% in 2017 due to the continued decline in DSL products and the impact from the discontinuation of certain legacy products, and accounted for 6% and 6% of sales in the third quarters of 2017 and 2016, respectively. International sales decreased 53% in 2017 and accounted for 2% of Suttle’s third quarter 2017 sales.

~~Sales of structured cabling and connecting system products decreased 25% due to volume declines as a result of project delays from major telecommunications customers.~~

Suttle’s gross margin decreased 521% in the third quarter of 2017 to $ (1,431,000) compared to $340,000 in the same period of 2016. Gross margin as a percentage of sales decreased to -19.0% from 3.3% in the same period of 2016 due to the $417,000 write off of prepaid royalties under a product development agreement and excess and obsolete inventory adjustments. The margin impact of excess and obsolete inventory adjustments was $2,637,000 in the third quarter of 2017 (35.1% of sales) compared to $353,000 (3.4% of sales) in the same period of last year. Selling, general and administrative expenses decreased 23% to $2,239,000, or 29.7% of sales, in the third quarter of 2017 compared to $2,891,000, or 27.7% of sales, in the same period in 2016 due to reduced research and development expenditures and ongoing expense control measures. Suttle incurred $112,000 and $592,000 in research and development expenses in the respective 2017 and 2016 third quarters. Suttle incurred $796,000 in restructuring expense in the third quarter of 2017 related to the closure of its Costa Rica facility in 2017.

~~Suttle incurred an operating loss of $4,466,000 in the third quarter of 2017 compared to an operating loss of $2,551,000 in 2016.~~2019.

Transition Networks Results

Transition Networks sales decreased ~~21%~~8% to ~~$9,327,000~~$8,164,000 in the ~~third~~first quarter of ~~2017~~2020 compared to ~~$11,789,000~~$8,890,000 in ~~2016.~~2019. Transition Networks organizes its sales force by vertical markets and segments its customers geographically. ~~Third~~First quarter sales by region are presented in the following table:

Transition Networks Sales by Region
2017 2016
North America $ 7,404,000 $ 9,469,000
Rest of World 1,301,000 1,512,000
Europe, Middle East, Africa (“EMEA”) 622,000 808,000
$ 9,327,000 $ 11,789,000

	Transition Networks Sales by Region
	2020		2019
North America	$	7,442,000	$	6,910,000
International		722,000		1,980,000
	$	8,164,000	$	8,890,000

The following table summarizes Transition Networks’ ~~2017~~2020 and ~~2016 third~~2019 first quarter sales by its major product groups:

Transition Networks Sales by Product Group
2017 2016
Media converters $ 4,950,000 $ 6,703,000
Ethernet switches and adapters 2,263,000 3,045,000
Other products 2,114,000 2,041,000
$ 9,327,000 $ 11,789,000

	Transition Networks Sales by Product Group
	2020		2019
Intelligent edge solutions	$	3,100,000	$	2,272,000
Traditional products		5,064,000		6,618,000
	$	8,164,000	$	8,890,000

Sales in North America ~~decreased $2,065,000,~~increased $532,000, or ~~22%, due to a delay in federal government spending and disruptions in our supply chain. International sales decreased $397,000, or 17%~~8%, primarily due to ~~generally slow global markets. Media converter~~a strong quarter of sales to Federal agencies partially offset by a decline in sales to one major telecommunications customer. International sales decreased ~~26%~~$1,258,000, or ~~$1,753,000~~64%, primarily due to ~~delays~~an overall drop in demand for traditional products and the ~~federal sector and product availability.~~economic effects of COVID-19. Sales of ~~ethernet switches and adapters decreased 26%~~Intelligent edge solutions (“IES”) products increased 36% or ~~$782,000~~$828,000 due to higher sales of security and surveillance products and federal government ~~spending delays. All other~~contracts. Traditional product sales ~~increased 4%~~decreased 23% or ~~$73,000~~$1,554,000 due mainly to ~~strong accessory sales.~~a decline in media converter orders from one major telecommunications customer.

Gross ~~margin~~profit on ~~third~~first quarter sales decreased to ~~$3,985,000~~$3,560,000 in ~~2017~~2020 as compared to ~~$5,439,000~~$3,754,000 in ~~2016.~~2019. Gross margin ~~as a percentage~~increased to 43.6% in the first quarter of 2020 from 42.2% in 2019 primarily due to sales ~~decreased to 42.7%~~of lower margin media converter products in ~~2017 from 46.1% in 2016. The margin impact of excess and obsolete inventory adjustments was $344,000 in third quarter 2017 (3.7% of sales) compared to $88,000 (0.7% of sales)~~ the ~~same period last~~prior year. Selling, general and administrative expenses ~~remained fairly flat at $3,809,000,~~decreased 9% to $3,344,000, or ~~40.8%~~41.0% of sales, in ~~2017~~the first quarter of 2020 compared to ~~$3,824,000,~~$3,695,000, or ~~32.4%~~41.6% of sales, in ~~2016.~~2019 due to reduced personnel expenses.

Transition Networks had operating income of ~~$176,000~~$216,000 in ~~2017~~the first quarter of 2020 compared to operating income of ~~$1,615,000~~$59,000 in ~~2016, with the decrease primarily due to lower sales and gross margins.~~2019.

JDL Technologies Results

JDL Technologies sales ~~increased 6%~~decreased 63% to ~~$3,613,000~~$827,000 in the first quarter of 2020 compared to ~~$3,397,000~~$2,208,000 in ~~2016.~~2019.

JDL’s revenues by customer group were as follows:

		JDL Revenue by Customer Group			JDL Revenue by Customer Group
		2017		2016	2020		2019
Education	$	2,870,000	$	2,383,000	$	93,000	$	1,473,000
Healthcare and commercial clients		743,000		1,014,000		534,000		451,000
CSI IT operations						200,000		284,000
	$	3,613,000	$	3,397,000	$	827,000	$	2,208,000

Revenues from the education sector ~~increased $487,000~~decreased $1,380,000 or ~~20%~~94% in the ~~third~~first quarter of ~~2017~~2020 as compared to the ~~2016 third quarter~~2019 first quarter. Sales were below expectations due to ~~the addition un-forecasted projects by~~ongoing funding related delays at our ~~primary~~largest education customer. Revenue from sales to small and medium-sized commercial businesses (“SMBs”), which are primarily healthcare and commercial clients ~~decreased $271,000,~~increased $83,000 or ~~27%~~18% in the first quarter of 2020 as compared to 2019 due to anew client acquisition and rate increases in our commercial services division. The decrease in the ~~number~~CSI IT operations revenue as compared to the first quarter of ~~infrastructure and professional services projects completed~~2019 is related to hardware refresh revenue in the ~~third quarter, due,~~prior year that was not repeated in part, to JDL’s continued focus on building managed services revenue rather than incident-based or project-based opportunities, and fewer bids for, and therefore, contracts for infrastructure refresh projects.the current year.

Gross ~~margin~~profit decreased ~~13%~~76% to ~~$883,000~~$207,000 in the ~~third~~first quarter of ~~2017~~2020 compared to ~~$1,013,000~~$867,000 in the same period in 2016. Gross margin as a percentage of sales decreased to 24.4% in 2017 compared to 29.8% in 2016 due to a change in revenue mix. Selling, general and administrative expenses decreased 16% in 2017 to $471,000, or 13.0% of sales, compared to $563,000, or 16.6% of sales, in 2016 due to cost saving measures taken over the past year.

~~JDL Technologies reported operating income of $412,000 in the third quarter of 2017 compared to income of $450,000 in the same period of 2016.~~

~~Net2Edge Results~~

~~Net2Edge’s sales decreased 34% to $182,000 in the third quarter of 2017 compared to $275,000 in 2016 due to delays in the release of new products.~~2019. Gross margin decreased ~~59%~~ to $60,000 in the third quarter of 2017 compared to $147,000 in the same period of 2016. Gross margin as a percentage of sales decreased to 33.0% in 2017 from 53.5% in 2016 due to an increase in the excess and obsolete inventory reserve during the quarter. Selling, general and administrative expenses remained flat year over year. Net2Edge reported an operating loss of $776,000 in the third quarter of 2017 compared to an operating loss of $689,000 in the same period of 2016.

~~Income Taxes~~

~~The Company’s loss before income taxes decreased to $4,631,000 in 2017 compared to $1,260,000 in 2016. The Company’s effective income tax rate was 2.4% in 2017 and (0.3%) in 2016.~~

~~Nine Months Ended September 30, 2017 Compared to~~
~~Nine Months Ended September 30, 2016~~

Consolidated sales decreased 17% in 2017 to $63,281,000 compared to $76,594,000 in 2016. Consolidated operating loss in 2017 was $10,180,000 compared to a loss of $2,567,000 in the first nine months of 2016, which included $4,148,000 in pension liability adjustment gains recognized in operating income25.0% in the first quarter of 2016 from the settlement of the pension plan. The Company incurred $2,326,000 in restructuring expense in the first nine months of 2017 related to the closure of its Costa Rica facility in 2017 and $1,617,000 in asset impairment losses related to goodwill at JDL and intangible assets at Net2Edge. Net loss in 2017 was $10,128,000 or $ (1.13) per share2020 compared to ~~net loss of $6,275,000 or $ (0.71) per share~~39.3% in ~~the first nine months of 2016.~~

~~Suttle Results~~

Suttle sales decreased 26% in the first nine months of 2017 to $24,888,000 compared to $33,424,000 in the same period of 2016 due to continuing pricing pressures from major telecommunications customers, volume declines in legacy products, and a shift in purchasing decisions from Tier 1 telecom suppliers to installers. Sales by customer groups in the first nine months of 2017 and 2016 were:

Suttle Sales by Customer Group
2017 2016
Communication service providers $ 22,468,000 $ 30,252,000
International 545,000 1,147,000
Distributors 1,875,000 2,025,000
$ 24,888,000 $ 33,424,000

~~Suttle’s sales by product groups in first nine months of 2017 and 2016 were:~~

Suttle Sales by Product Group
2017 2016
Structured cabling and connecting system products $ 22,798,000 $ 30,332,000
DSL and other products 2,090,000 3,092,000
$ 24,888,000 $ 33,424,000

Sales to the major communication service providers decreased 26% in 2017 due to continuing pricing pressures and volume declines in legacy products. Sales to major communication service providers accounted for 90% of Suttle’s sales in the first nine months of 2017 compared to 91% of sales in 2016. Sales to distributors decreased 7% in 20172019 due to the ~~continued decline~~cost of maintaining the specialized education sector engineering team in ~~DSL product sales and the impact from the discontinuation~~anticipation of ~~certain legacy products, and accounted for 8% and 6% of sales~~pending projects we expect to begin in the ~~first nine months~~second quarter of 2017 and 2016, respectively. International sales decreased 52% in 2017 and accounted for 2% of Suttle’s first nine month 2017 sales, due to reduced volume from legacy products in major telecommunications customers.

~~Sales of structured cabling and connecting system products decreased 25% due to volume declines as a result of project delays from major telecommunications customers.~~

Suttle’s gross margin decreased 87% in the first nine months of 2017 to $441,000 compared to $3,485,000 in the same period of 2016. Gross margin as a percentage of sales decreased to 1.8% from 10.4% in the same period in 2016 primarily due to due to the $417,000 write off of prepaid royalties under a product development agreement and increases to the inventory reserves, driven by Suttle’s decision to discontinue certain legacy products. The margin impact of excess and obsolete inventory adjustments was $3,752,000 in the first nine months of 2017 (15.1% of sales) compared to $589,000 (1.8% of sales) the same period last year. Selling, general and administrative expenses decreased 33% to $6,775,000, or 27.2% of sales, in the first nine months of 2017 compared to $10,038,000, or 30.0% of sales, in the same period in 2016 due to reduced research and development expenditures and ongoing expense control measures. Suttle incurred $495,000 and $2,137,000 in research and development expenses in the respective 2017 and 2016 first nine months. Suttle incurred $2,326,000 in restructuring expense in the first nine months of 2017 related to the planned closure of its Costa Rica facility in 2017.

~~Suttle incurred an operating loss of $8,660,000 in the first nine months of 2017 compared to an operating loss of $6,553,000 in 2016.~~

~~Transition Networks Results~~

Transition Networks sales decreased 8% to $27,831,000 in the first nine months of 2017 compared to $30,294,000 in 2016. Transition Networks organizes its sales force by vertical markets and segments its customers geographically. First nine month sales by region are presented in the following table:

Transition Networks Sales by Region
2017 2016
North America $ 22,560,000 $ 24,296,000
Rest of World 3,751,000 3,888,000
Europe, Middle East, Africa (“EMEA”) 1,520,000 2,110,000
$ 27,831,000 $ 30,294,000

~~The following table summarizes Transition Networks’ 2017 and 2016 first nine months sales by its major product groups:~~

Transition Networks Sales by Product Group
2017 2016
Media converters $ 16,004,000 $ 18,817,000
Ethernet switches and adapters 5,750,000 6,083,000
Other products 6,077,000 5,394,000
$ 27,831,000 $ 30,294,000

Sales in North America decreased $1,736,000, or 7%, due to delays in federal projects and disruptions in our supply chain. International sales decreased $727,000, or 12%, due to continued weakness in the EMEA region and project timing. Media converter sales decreased 15% or $2,813,000 due to delays in federal spending. Sales of ethernet switches and adapters decreased 5% or $333,000 due to delays in federal projects. All other products increased 13% or $683,000 due to strong accessory sales.

Gross margin on first nine month sales decreased 7% to $12,164,000 in 2017 as compared to $13,024,000 in 2016. Gross margin as a percentage of sales increased to 43.7% in 2017 from 43.0% in 2016 due to favorable product mix and efficiencies in manufacturing operations.2020. Selling, general and administrative expenses decreased 13% ~~to $11,481,000, or 41.3% of sales, in 2017 compared to $13,224,000, or 43.7% of sales, in 2016 due to actions taken in 2016 to reduce selling and administrative expenses.~~

~~Transition Networks had operating income of $683,000 in 2017 compared to an operating loss of $200,000 in 2016.~~

~~JDL Technologies Results~~

~~JDL Technologies sales decreased 15% to $10,504,000~~ in the first ~~nine months of 2017 compared to $12,360,000 in 2016.~~

~~JDL’s revenues by customer group were as follows:~~

JDL Revenue by Customer Group
2017 2016
Education $ 8,085,000 $ 9,154,000
Healthcare and commercial clients 2,419,000 3,206,000
$ 10,504,000 $ 12,360,000

Revenues from the education sector decreased $1,069,000 or 12% in the first nine months of 2017 as compared to the 2016 first nine months due to the timing of the current network refresh cycle. Revenue from sales to small and medium-sized commercial businesses (SMBs), which are primarily healthcare and commercial clients, decreased $787,000, or 25% due to a decrease in the number of infrastructure and professional services projects completed in the first nine months, due, in part, to JDL’s continued focus on building managed services revenue rather than incident-based or project-based opportunities, and fewer bids for, and therefore, contracts for infrastructure refresh projects.

Gross margin decreased 35% to $2,805,000 in the first nine months of 2017 compared to $4,335,000 in the same period in 2016. Gross margin as a percentage of sales decreased to 26.7% in 2017 compared to 35.1% in 2016 due to a lower margin project in our education sector during the second quarter of ~~2017. Selling, general and administrative expenses decreased 37% in 2017~~2020 to ~~$1,604,000,~~$328,000, or ~~15.3%~~39.7% of sales, compared to ~~$2,531,000,~~$376,000, or ~~20.5%~~17.0% of sales, in ~~2016~~2019 due to cost saving measures ~~taken over the past year.~~put in place.

JDL Technologies reported an operating loss of ~~$262,000~~$121,000 in the first ~~nine months~~quarter of ~~2017~~2020 compared to operating income of ~~$1,804,000~~$491,000 in the same period of ~~2016, due to a $1,463,000 goodwill impairment loss recognized in the second quarter of 2017.~~2019.

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Net2Edge Results

Net2Edge’s sales decreased ~~50%~~5% to ~~$719,000~~$424,000 in the first ~~nine months~~quarter of ~~2017~~2020 compared to ~~$1,434,000~~$448,000 in ~~2016~~2019 primarily due to delays in completing final approval for a ~~large legacy~~new product for a key Latin American customer ~~project in~~as a result of the ~~second quarter of 2016.~~Latin American country-wide COVID-19 lock-down. Gross ~~margin~~profit decreased ~~39%~~5% to ~~$457,000~~$210,000 in the first ~~nine months~~quarter of ~~2017~~2020 compared to ~~$752,000~~$221,000 in the same period of ~~2016.~~2019. Gross margin ~~as a percentage of sales~~ increased slightly to ~~63.6%~~49.5% in ~~2017~~2020 from ~~52.4%~~49.3% in ~~2016 due to lower margins realized on the large customer project in 2016.~~2019. Selling, general and administrative expenses decreased ~~10%~~21% in ~~2017~~2020 to ~~$2,244,000~~$593,000 compared to ~~$2,499,000~~$748,000 in ~~2016~~2019 due ~~primarily~~ to ~~the decrease~~a reduction in ~~the exchange rate.~~selling expenses and other cost saving measures. Net2Edge reported an operating loss of ~~$1,941,000~~$383,000 in the first ~~nine months~~quarter of ~~2017~~2020 compared to aan operating loss of ~~$1,747,000~~$527,000 in the same period of ~~2016, due to a $154,000 impairment loss related to intangible assets during the second quarter of 2017.~~2019.

~~Income Taxes~~Other

As a result of our treatment of Suttle as discontinued operations, “Other” includes non-allocated corporate overhead costs as well as costs allocated to Suttle that are not considered discontinued operations. Each year the Company estimates revenue and headcount for each of its three principal business units and allocates a portion of shared service corporate overhead costs based on these metrics. Because Suttle is now treated as discontinued operations, these costs are now included within Other.

Income Taxes

The Company’s loss from continuing operations before income taxes ~~increased to $10,195,000~~was $813,000 in ~~2017~~the first three months of 2020 compared to ~~$6,032,000~~a loss from continuing operations before income taxes of $796,000 in ~~2016.~~the first three months of 2019. The Company’s effective income tax rate was ~~0.7%~~0.5% in ~~2017~~the first three months of 2020 and ~~(4.0%)~~0.5% in ~~2016.~~2019. This effective tax rate for ~~2017~~2020 differs from the federal tax rate of ~~35%~~21% due to state income taxes, foreign tax rate differences, foreign losses not deductible for U.S. income tax purposes, ~~provisions for interest charges for~~the effect of uncertain income tax positions, stock compensation ~~shortfalls~~windfalls and changes in valuation allowances related to deferred tax assets. As of December 31, 2019, the Company had a federal net operating loss carryforward from 2015 through 2019 activity of approximately $7,687,000 that is available to offset future taxable income and begins to expire in 2035. The Company also has a federal capital loss carryforward from 2018 of approximately $1,930,000 that is available to offset future capital gains and expires in 2023.

Liquidity and Capital Resources

As of ~~September 30, 2017,~~March 31, 2020, the Company had ~~approximately $17,792,000~~$32,341,000 in cash, cash equivalents, restricted cash, and investments. Of this amount, ~~$8,986,000~~$16,913,000 was invested in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by the FDIC or other government agency. These money market funds seek to preserve the value of the investment at $1.00 per share; however, it is possible to lose money investing in these funds. The remainder in cash and cash equivalents is operating ~~cash and certificates of deposit that are insured through the FDIC.~~cash. The Company also had ~~$725,000~~$11,300,000 in investments consisting of ~~certificates of deposit~~commercial paper that are traded on the open market and are classified as available-for-sale at ~~September 30, 2017.~~March 31, 2020.

The Company had working capital of ~~$38,157,000~~$40,592,000 at ~~September 30, 2017,~~March 31, 2020, consisting of current assets of approximately ~~$48,277,000~~$48,192,000 and current liabilities of ~~$10,120,000~~$7,600,000 compared to working capital of ~~$44,005,000~~$38,052,000 at December 31, ~~2016~~2019, consisting of current assets of ~~$55,373,000~~$49,402,000 and current liabilities of ~~$11,368,000.~~$11,350,000.

Cash flow provided by operating activities was approximately ~~$2,728,000~~$241,000 in ~~2017 compared to $2,942,000~~the first three months of 2020 and $1,191,000 used in the same period of ~~2016.~~2019. Significant working capital changes from December 31, ~~2016~~2019 to ~~September 30, 2017~~March 31, 2020 included a decrease in ~~inventory~~accounts receivable of ~~$7,232,000, offset by~~$3,641,000, a decrease in accounts payable of ~~$1,648,000. Additionally, the Company had~~$1,026,000 and a ~~$1,617,000 non-cash impairment charge.~~decrease in accrued compensation and benefits of $812,000.

Net cash provided by investing activities was ~~$4,908,000~~$6,504,000 in ~~2017 and $1,097,000~~first three months of 2020 compared to $217,000 used in ~~2016,~~2019, due to proceeds from the Suttle sale, ~~of investments.~~included in discontinued operations, partially offset by additional investment purchases.

Net cash used in financing activities was ~~$1,023,000~~$274,000 in ~~2017~~the first three months of 2020 compared to ~~$4,644,000~~$159,000 used in financing activities in ~~2016.~~2019. Cash dividends paid on common stock ~~decreased~~increased to ~~$1,097,000~~$190,000 in ~~2017~~2020 ($~~0.12~~0.02 per common share) from ~~$4,269,000~~$184,000 in ~~2016~~2019 ($~~0.36~~0.02 per common share). Proceeds from common stock issuances, principally ~~shares sold to the Company’s Employee Stock Ownership Plan and~~ issued under the Company’s Employee Stock Purchase Plan, totaled approximately ~~$82,000~~$24,000 in ~~2017~~2020 and ~~$118,000~~$27,000 in 2016. The Company did not repurchase any shares in 2017 or 2016 under the Board-authorized program. At September 30, 2017, Board of Director authority to purchase approximately 411,910 additional shares remained in effect.2019. The Company acquired ~~$8,000~~$55,000 and ~~$26,000~~$2,000 in ~~2017~~2020 and ~~2016,~~2019, respectively, of Company stock from employees to satisfy withholding tax obligations related to share-based compensation, pursuant to terms of Board and shareholder-approved compensation plans. The Company also acquired $54,000 of Company stock under a $2,000,000 Stock Repurchase Program authorized by the Board of Directors in August 2019. The new 2019 Stock Repurchase Program replaced a 2008 Stock Repurchase Program that had authorized the repurchase of up to 411,910 additional shares, but had no specific dollar amount associated with it. The Company had not made any market repurchases under the 2008 Stock Repurchase Program in the past several years. At March 31, 2020, there remained $572,000 available for future purchases under the 2019 Stock Repurchase Program. See “Issuer Purchases of Equity Securities” in Part II, Item 2 of this Form 10-Q.

The Company has a $15,000,000 line of credit from Wells Fargo Bank. Interest on borrowings on the credit line is at LIBOR plus 2.0% ~~(3.2%~~(3.0% at ~~September 30, 2017)~~March 31, 2020). The Company had no outstanding borrowings against the line of credit at ~~September 30, 2017.~~March 31, 2020. The credit agreement expires August 12, 2021 and is secured by assets of the Company.

In the opinion of management, based on the Company’s current financial and operating position and projected future expenditures, sufficient funds are available to meet the Company’s anticipated operating and capital expenditure ~~needs~~.needs.

Critical Accounting Policies

Our critical accounting policies, including the assumptions and judgments underlying them, are discussed in our ~~2016~~2019 Form 10-K in Note 1 Summary of Significant Accounting Policies included in our Consolidated Financial Statements. There were no other significant changes to our critical accounting policies during the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2020.

The Company’s accounting policies have been consistently applied in all material respects and disclose matters such as allowance for doubtful accounts, sales returns, inventory valuation, warranty expense, income taxes, revenue recognition, asset impairment recognition and foreign currency translation. On an ongoing basis, we evaluate our estimates based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the result of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. Management reviews these estimates and judgments on an ongoing basis.

Recently Issued Accounting Pronouncements

Recently issued accounting standards and their estimated effect on the Company’s condensed consolidated financial statements are also described in Note ~~15,~~14, Recent Accounting Pronouncements, to the Condensed Consolidated Financial Statements.

Item 3.Quantitative and Qualitative Disclosures about Market Risk.

The Company has no freestanding or embedded derivatives. The Company’s policy is to not use freestanding derivatives and to not enter into contracts with terms that cannot be designated as normal purchases or sales.

The vast majority of our transactions are denominated in U.S. dollars; as such, fluctuations in foreign currency exchange rates have historically not been material to the Company. At ~~September 30, 2017~~March 31, 2020 our bank line of credit carried a variable interest rate based on LIBOR plus 2.0%. As noted above, we had no outstanding borrowings at ~~September 30, 2017.~~March 31, 2020.

Based on the Company’s operations, in the opinion of management, no material future losses or exposure exist relative to market risk.

Item 4.Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the disclosure controls and procedures, as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report. Based on that evaluation, as detailed below, management concluded that the Company’s disclosure controls and procedures are effective.

(b) Changes in Internal Controls

There have been no changes in internal control over financial reporting that occurred during the third quarter of 2017 that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting, except for the successful implementation of the remediation plan in this section. As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, we concluded that our internal control over financial reporting ~~was not effective. As detailed below, management concluded that the Company’ internal control over financial reporting was effective at September 30, 2017.~~

~~Financial Management/Enterprise Resource Planning Systems.~~

~~Based on management’s testing and evaluation, we identified a material weakness in~~during our internal controls at December 31, 2016 surrounding segregation of duty conflicts in our financial management/enterprise resource planning (“ERP”) systems. We did not design and maintain processes (i) to restrict access to appropriate users or (ii) to evaluate whether appropriate segregation of duties was maintained throughout the year. Several individuals had access to programs and data, or had approval authority, beyond what they needed to perform their individual job responsibilities, and the Company did not maintain adequate independent monitoring of these individuals. In addition, we did not track or verify changes made to our vendor master file data were appropriate. These failures would have allowed individual users to override other internal controls by setting up a vendor and approving payments to that vendor.

We have performed incremental procedures and concluded that the segregation of duty conflicts did not result in misstatements within the Company’s consolidated financial statements. We concluded, however, that there was a reasonable possibility that a material misstatement in the Company’s consolidated financial statements may not have been prevented or detected on a timely basis.

In order to remediate the material weakness related to segregation of duty conflicts within our ERP systems, we completed a thorough assessment of system access and have modified access accordingly to either reduce or eliminate conflicts wherever possible and have designed, implemented and tested compensating controls for design and operating effectiveness in those instances where complete duty segregation could not be achieved without substantial negative impact on our business operations.

As a result of these management actions and the remediation actions completed during the first, second and third quarters of 2017, and the related controls validation testing performed, management has concluded that the material weakness related to segregation of duty conflicts within our financial management/enterprise resource planning systems was remediated as of September 30, 2017.

~~Goodwill Impairment Testing.~~ Based on management’s testing and evaluation, we determined that we did not design and maintain effective internal control over our step one goodwill impairment testing that we performed in accordance with ASC 350,~~Intangibles – Goodwill and Other~~ as of December 31, 2016 and April 1, 2017. Specifically, the Company’s review control did not operate at a sufficient level of precision to identify the improper assumptions used in our step one goodwill impairment test for our JDL reporting unit. We concluded that this lack of detailed analysis was a material weakness in our internal controls.

In the second quarter of 2017, the Company performed the first step of the previous two-step process, which requires that the fair value of the reporting unit be compared to its book value, including goodwill. If the fair value is higher than the book value, no impairment is recognized. If the fair value is lower than the book value, an impairment adjustment must be recorded. The Company analyzed the reporting unit that had the goodwill and initially concluded that the fair value of that reporting unit was greater than its book value, and the Company was not required to impair the goodwill. Upon further review and after analyzing the Company as a whole, the Company determined that some assumptions it used in the determination of the fair value of the reporting unit required revision, resulting in a determination that the fair value of the reporting unit was less than the book value of the reporting unit. The Company also analyzed the Company as a whole, including the Company’s four separate reporting units. Based on this analysis of comparing the fair value of each reporting unit to the book value and comparing the Company’s overall book value with its market capitalization, the Company determined that the book value exceeded the overall fair value of the reporting units as well as the Company’s overall market value. As a result, the Company recorded an adjustment to record a goodwill impairment charge totaling $1,463,000 during the second quarter of 2017, which reduced our balance sheet amount for goodwill to $0.

~~(a)~~

~~Inherent Limitations on Control Systems~~

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be or have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

~~(b)~~

~~Changes in Internal Control~~

~~Except as noted above, there were no other changes in the Company’s internal control over financial reporting that occurred during the Company’s~~ most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, ~~the Company’s~~our internal control over financial reporting. As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, we concluded that our internal control over financial reporting was effective.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Not Applicable.

Item 1A. Risk Factors

Not Applicable.

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

~~Not Applicable.~~

Issuer Purchases of Equity Securities (registered pursuant to Section 12 of the Exchange Act)

In the three months ending March 31, 2020, the Company repurchased shares of stock as follows:

ISSUER PURCHASES OF EQUITY SECURITIES
Period	(a) Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(b) Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January 2020		—	$	—		—	$	625,583
February 2020		—		—		—		625,583
March 2020		9,557		5.59		9,557		572,182
Total		9,557	$	5.59		9,557	$	572,182

(1)

The total number of shares purchased includes: shares purchased under the Board’s authorization, including market purchases and privately negotiated purchases.

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

Not Applicable.

Item 6. Exhibits.

The following exhibits are included herein:

2.1

Agreement and Plan of Merger dated as of May 8, 2020, by and among (i) Communications Systems, Inc., a Minnesota corporation, (ii) Resilient Corp., a Minnesota corporation and a wholly owned subsidiary of Communications Systems, Inc., and (iii) Ecessa Corporation, a Minnesota corporation.

3.2

Communications Systems, Inc. Bylaws amended through April 10, 2020

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act).

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act).

	32.	Certifications pursuant Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).

	~~101~~	The following financial information from Communications Systems, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017, formatted in eXtensible Business Reporting Language XBRL: (i) Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016; (ii) Condensed Consolidated Statements of Loss and Comprehensive Loss for the three and nine months ended September 30, 2017 and September 30, 2016; (iii) Condensed Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2017; (iv) Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2017 and September 30, 2016, and (v) Notes to Financial Statements.

Signatures

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

		Communications Systems, Inc.

	By	/s/ Roger H.D. Lacey
		Roger H.D. Lacey
Date: ~~November 13, 2017~~May 15, 2020		Chief Executive Officer


		/s/ Mark Fandrich
		Mark Fandrich
Date: ~~November 13, 2017~~May 15, 2020		Chief Financial Officer

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(Unaudited)

	Three Months Ended September 30						Nine Months Ended September 30
	2017			2016			2017			2016

Sales	$	20,412,439		$	25,616,640		$	63,280,980		$	76,594,526
Cost of sales		17,108,532			18,926,042			48,001,368			55,759,167
Gross profit		3,303,907			6,690,598			15,279,612			20,835,359
Operating expenses:
Selling, general and administrative expenses		7,161,323			7,866,009			21,516,625			27,550,271
Pension liability adjustment gains		—			—			—			(4,147,836	)
Impairment loss		—			—			1,617,389			—
Restructuring expense		796,231			—			2,325,861			—
Total operating expenses		7,957,554			7,866,009			25,459,875			23,402,435
Operating loss		(4,653,647	)		(1,175,411	)		(10,180,263	)		(2,567,076	)
Other income (expenses):
Investment and other income		38,869			19,259			78,888			119,395
Gain (Loss) on sale of assets		26,222			(60,088	)		(32,024	)		748,234
Interest and other expense		(42,799	)		(44,228	)		(61,839	)		(94,375	)
Foreign currency translation loss		—			—			—			(4,238,497	)
Other income (expense), net		22,292			(85,057	)		(14,975	)		(3,465,243	)
Loss from operations before income taxes		(4,631,355	)		(1,260,468	)		(10,195,238	)		(6,032,319	)
Income tax (benefit) expense		(109,340	)		3,301			(67,014	)		242,617
Net loss		(4,522,015	)		(1,263,769	)		(10,128,224	)		(6,274,936	)
Other comprehensive income, net of tax:
Additional minimum pension liability adjustments		—			—			—			(4,147,836	)
Unrealized (loss) gain on available-for-sale securities		(240	)		(2,729	)		(3,187	)		35,575
Foreign currency translation adjustment		31,508			15,465			63,724			4,168,590
Total other comprehensive income		31,268			12,736			60,537			56,329
Comprehensive loss	$	(4,490,747	)	$	(1,251,033	)	$	(10,067,687	)	$	(6,218,607	)

Basic net loss per share:	$	(0.50	)	$	(0.14	)	$	(1.13	)	$	(0.71	)
Diluted net loss per share:	$	(0.50	)	$	(0.14	)	$	(1.13	)	$	(0.71	)
Weighted Average Basic Shares Outstanding		8,960,606			8,849,236			8,934,235			8,816,042
Weighted Average Dilutive Shares Outstanding		8,960,606			8,849,236			8,934,235			8,816,042
Dividends declared per share	$	0.04		$	0.04		$	0.12		$	0.36

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)

													Accumulated
							Additional						Other
	Common Stock						Paid-in			Retained			Comprehensive
	Shares			Amount			Capital			Earnings			Loss			Total
BALANCE AT DECEMBER 31, 2016		8,877,379		$	443,869		$	41,279,281		$	20,596,203		$	(686,661	)	$	61,632,692
Net loss											(10,128,224	)					(10,128,224	)
Issuance of common stock under Employee Stock Purchase Plan		18,139			907			79,857									80,764
Issuance of common stock to Employee Stock Ownership Plan		47,248			2,362			216,396									218,758
Issuance of common stock under Executive Stock Plan		22,555			1,128			0									1,128
Share based compensation								327,261									327,261
Other share retirements		(1,805	)		(90	)		(8,369	)		789						(7,670	)
Shareholder dividends											(1,082,394	)					(1,082,394	)
Other comprehensive income														60,537			60,537
BALANCE AT SEPTEMBER 30, 2017		8,963,516		$	448,176		$	41,894,426		$	9,386,374		$	(626,124	)	$	51,102,852

	Foreign Currency Translation			Unrealized (loss)/gain on securities			Accumulated Other Comprehensive Loss
December 31, 2016	$	(704,000	)	$	17,000		$	(687,000	)

Net current period change		64,000			(3,000	)		61,000

September 30, 2017	$	(640,000	)	$	14,000		$	(626,000	)

September 30, 2017

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Cash Equivalents		Short-Term Investments		Long-Term Investments

Cash equivalents:
Money Market funds	$	8,986,000	$	—	$	—	$	8,986,000	$	8,986,000	$	—	$	—
Subtotal		8,986,000		—		—		8,986,000		8,986,000		—		—

Investments:
Certificates of deposit		725,000		—		—		725,000		—		725,000		—
Subtotal		725,000		—		—		725,000		—		725,000		—

Total	$	9,711,000	$	—	$	—	$	9,711,000	$	8,986,000	$	725,000	$	—

December 31, 2016

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cash Equivalents		Short-Term Investments		Long-Term Investments

Cash equivalents:
Money Market funds	$	3,851,000	$	—	$	—		$	3,851,000	$	3,851,000	$	—	$	—
Subtotal		3,851,000		—		—			3,851,000		3,851,000		—		—

Investments:
Certificates of deposit		4,291,000		4,000		(1,000	)		4,294,000		—		4,294,000		—
Corporate Notes/Bonds		1,511,000		—		—			1,511,000		—		1,511,000		—
Subtotal		5,802,000		4,000		(1,000	)		5,805,000		—		5,805,000		—

Total	$	9,653,000	$	4,000	$	(1,000	)	$	9,656,000	$	3,851,000	$	5,805,000	$	—


	Amortized Cost		Estimated Market Value

Due within one year	$	725,000	$	725,000


				Weighted Average
				Grant Date
	Shares			Fair Value
Outstanding – December 31, 2016		149,260		$	9.55
Granted		100,239			4.42
Vested		(9,214	)		12.29
Forfeited		(44,845	)		10.28
Outstanding – September 30, 2017		195,440			6.62


	September 30		December 31
	2017		2016
Finished goods	$	8,406,000	$	12,083,000
Raw and processed materials		6,612,000		10,122,000
	$	15,018,000	$	22,205,000


	JDL Technologies

January 1, 2017	$	1,463,000

Impairment loss		(1,463,000	)

September 30, 2017	$	—

Gross goodwill		1,463,000
Accumulated impairment loss		(1,463,000	)
Balance at September 30, 2017	$	—


	September 30, 2017
	Gross Carrying Amount		Accumulated Amortization			Impairment loss			Foreign Currency Translation			Net

Trademarks	$	98,000	$	(63,000	)	$	—		$	(16,000	)	$	19,000
Customer relationships		491,000		(230,000	)		(154,000	)		(107,000	)		—
Technology		229,000		(187,000	)		—			(42,000	)		—
	$	818,000	$	(480,000	)	$	(154,000	)	$	(165,000	)	$	19,000


Year Ending December 31:
2017	$	3,000
2018		7,000
2019		2,000
2020		2,000
2021		2,000
Thereafter		2,000


	2017			2016
Beginning balance	$	600,000		$	554,000
Amounts charged to expense		43,000			119,000
Actual warranty costs paid		(57,000	)		(75,000	)
Ending balance	$	586,000		$	598,000


				Transition		JDL							Intersegment
	Suttle			Networks		Technologies		Net2Edge			Other		Eliminations			Total
Three Months Ended September 30, 2017
Sales	$	7,536,000		$	9,327,000	$	3,613,000	$	182,000		$	—	$	(245,000	)	$	20,413,000
Cost of sales		8,967,000			5,342,000		2,730,000		122,000			—		(52,000	)		17,109,000
Gross profit		(1,431,000	)		3,985,000		883,000		60,000			—		(193,000	)		3,304,000
Selling, general and administrative expenses		2,239,000			3,809,000		471,000		836,000			—		(193,000	)		7,162,000
Impairment loss		—			—		—		—			—		—			—
Restructuring expense		796,000			—		—		—			—		—			796,000
Operating (loss) income	$	(4,466,000	)	$	176,000	$	412,000	$	(776,000	)	$	—	$	—		$	(4,654,000	)

Depreciation and amortization	$	525,000		$	158,000	$	76,000	$	9,000		$	—	$	—		$	768,000

Capital expenditures	$	52,000		$	174,000	$	—	$	3,000		$	23,000	$	—		$	252,000

Assets	$	21,389,000		$	12,593,000	$	4,809,000	$	1,258,000		$	21,239,000	$	(27,000	)	$	61,261,000


September 30, 2017

	Level 1		Level 2		Level 3		Total Fair Value

Cash equivalents:
Money Market funds	$	8,986,000	$	—	$	—	$	8,986,000
Subtotal		8,986,000		—		—		8,986,000

Short-term investments:
Certificates of deposit		—		725,000		—		725,000
Subtotal		—		725,000		—		725,000

Total	$	8,986,000	$	725,000	$	—	$	9,711,000

	Suttle Sales by Customer Group
		2017		2016
Communication service providers	$	6,912,000	$	9,441,000
International		173,000		368,000
Distributors		451,000		611,000
	$	7,536,000	$	10,420,000

	Suttle Sales by Product Group
	2017		2016
Structured cabling and connecting system products	$	7,230,000	$	9,649,000
DSL and other products		306,000		771,000
	$	7,536,000	$	10,420,000

	Transition Networks Sales by Region
	2017		2016
North America	$	7,404,000	$	9,469,000
Rest of World		1,301,000		1,512,000
Europe, Middle East, Africa (“EMEA”)		622,000		808,000
	$	9,327,000	$	11,789,000