UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017.2020.

OR

☐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 1-14120

BLONDER TONGUE LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:(732) 679-4000

Securities registered pursuant to Section 12(b) of the Act:

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 (section 232.405 of this chapter) 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 check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitionthe definitions of “accelerated“large accelerated filer,” “large accelerated“accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicated 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. Yes ☐     No ☒

Number of shares of common stock, par value $.001, outstanding as of November 6, 2017: 8,121,835

The Exhibit Index appears on page 17.
7, 2020: 10,125,180

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

See accompanying notes to unaudited condensedthe consolidated financial statements

statements.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY

(In thousands)

(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(In thousands) 

(unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

Note 1 -– Company and Basis of Consolidation

Blonder Tongue Laboratories, Inc. (together with its consolidated subsidiaries, the “Company”) is a technology-development and manufacturing company that delivers television signal encoding, transcoding, digital transport, and broadband product solutions to the cable markets the Company serves, including the multi-dwelling unit market, the lodging/hospitality market and the institutional market, including hospitals, prisons and schools, primarily throughout the United States and Canada. The consolidated financial statements include the accounts of Blonder Tongue Laboratories, Inc. and its wholly-owned subsidiaries. Significant intercompany accountsbalances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated interim financial statements as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019 have been prepared in accordance with accounting principles generally accepted accounting principles (in the United States of America (““GAAP”GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X. InS-X of the opinion of management, theSecurities and Exchange Commission (“SEC”). The accompanying unaudited condensed consolidated interim financial statements containinclude all adjustments, consisting primarily of normal recurring accruals,adjustments, which the Company considers necessary for a fair presentation.presentation of the condensed consolidated financial position, operating results, changes in stockholders’ equity and cash flows for the periods presented. The condensed consolidated balance sheet at December 31, 2019 has been derived from audited consolidated financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP for complete financial statements have been condensed or omitted pursuant to Securities and Exchange Commission (“SEC”) rules and regulations. TheseThe accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2019 and notes thereto that were included in the Company’s annual reportAnnual Report on Form 10-K for the year ended December 31, 2016. Operating2019, which was filed with the SEC on April 13, 2020. The results forof the three and nine months ended September 30, 20172020 are not necessarily indicative of the results that mayto be expected for the year ending December 31, 2017.2020 or for any future interim period.

Note 2-2 – Summary of Significant Accounting Policies

(a) Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s significant estimates include stockstock-based compensation and reserves related to accounts receivable, inventoryinventories and deferred tax assets. Actual results could differ from those estimates.

(b) Derivative Financial Instruments

The Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for in accordance with Topic 815 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The accounting treatment of derivative financial instruments requires that the Company record the embedded conversion option at its fair value as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.

The Black-Scholes Model (which approximates the Binomial Lattice Model) was used to estimate the fair value of the conversion options that is classified as a derivative liability on the condensed consolidated balance sheets (See Note 6). The model includes subjective input assumptions that can materially affect the fair value estimates. The expected volatility is estimated based on the most recent historical period of time equal to the weighted average life of the conversion options.

Conversion options are recorded as a discount to the host instrument and are amortized as interest expense over the life of the underlying instrument.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

(c)          Fair Value of Financial Instruments

The Company measures fair value of its financial assets on a three-tier value hierarchy, which prioritizes the inputs, used in the valuation methodologies in measuring fair value:

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The derivative liability is measured at fair value using quoted market prices and estimated volatility factors based on historical quoted market prices for the Company’s common stock, and is classified within Level 3 of the valuation hierarchy.

(d)          Earnings (loss) Per Share

Earnings (loss) per share is calculated in accordance with Accounting Standards Codification (“ASC”) Topic 260 “Earnings Per Share,” which provides for the calculation of “basic” and “diluted” earnings (loss) per share. Basic earnings (loss) per share includes no dilution and is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflect, in periods in which they have a dilutive effect, the effect of potential issuances of common shares.

The following table shows the calculation of diluted shares using the treasury stock method:

The diluted share base excludes incrementalthe following potential common shares related to stock options and convertible debt of 2,053 and 1,121 and 1,875 and 995 for the three-month periods ended September 30, 2017 and 2016, respectively and 1,862 and 1,121 and 2,028 and 995 for the nine-month periods ended September 30, 2017 and 2016, respectively. These shares were excluded due to their antidilutive effect.effect: 

If the convertible debt as described in Note 6 below had been converted as of September 30, 2020, an additional 1,632 shares would be outstanding.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

(c) Adoption of Recent Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, Intangibles—Goodwill and Other (“Topic 350”) Simplifying the Test for Goodwill Impairment. This standard simplifies the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The revised guidance will be applied prospectively and is effective for calendar year-end SEC filers for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this new standard did not have a material impact on the Company’s financial position, results of operations or financial statement disclosure.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (“Topic 326”). ASU 2016-13 changes the impairment model for most financial assets and will require the use of an expected loss model in place of the currently used incurred loss method. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. The update to the standard is effective for interim and annual periods beginning after December 15, 2019. The adoption of this new standard did not have a material impact on the Company’s financial position, results of operations or financial statement disclosure

(d) Accounting Pronouncements Issued But Not Yet Effective

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (“Topic 740”). The list of changes is comprehensive; however the changes will not significantly impact the Company due to the full valuation allowance that is recorded against the Company’s deferred tax assets. Early adoption of ASU 2019-12 is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. The Company will adopt ASU 2019-12 in 2021. The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations or financial statement disclosure.

(e) Liquidity and Ability to Continue as a Going Concern

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic which continues to spread throughout the United States. On March 21, 2020 the Governor of New Jersey declared a health emergency and issued an order to close all nonessential businesses until further notice. As a maker of telecommunication equipment, the Company is deemed to be an essential business. Nonetheless, out of concern for our workers and pursuant to the government order, the Company has reduced the scope of its operations and where possible, certain workers are telecommuting from their homes. While the Company expects this matter to continue to negatively impact its results of operations, cash flows and financial position, the related impact cannot be reasonably estimated at this time.

As disclosed in the Company’s most recent Annual Report on Form 10-K, the Company experienced a decline in sales, a reduction in working capital, a loss from operations and net cash used in operating activities, in conjunction with liquidity constraints. The above factors raised substantial doubt about the Company’s ability to continue as a going concern. As of September 30, 2020, the above factors still exist. Accordingly, there still exists substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

In response to lower than expected sales due to a slowdown in market activities experienced during the prior fiscal year, the Company implemented a multi-phase cost-reduction program during 2019 which reduced annualized expenses, including a decrease in workforce and a decrease in other operating expenses.

The Company’s primary sources of liquidity are its existing cash balances and the amounts available under the MidCap Facility (as defined in Note 5 below). As of September 30, 2020, the Company had approximately $1,877 outstanding under the MidCap Facility and $1,403 of additional availability for borrowing under the MidCap Facility.

If anticipated operating results are not achieved and/or the Company is unable to obtain additional financing, it may be required to take additional measures to reduce costs in order to conserve its cash in amounts sufficient to sustain operations and meet its obligations, which measures could have a material adverse effect on the Company’s ability to achieve its intended business objectives and may be insufficient to enable the Company to continue as a going concern.

Note 3 – New Accounting PronouncementsRevenue Recognition

In July 2017, the FASB issued a two-part ASU No. 2017-11, “Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815): I “Accounting for Certain Financial Instruments With Down Round Features” and II “Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests With a Scope Execution.” The ASU Part I changes the classification analysis of certain equity –linked financial instruments with down round features and the related disclosures. Part II of the amendment recharacterizes the indefinite deferral of certain provisions of Topic 480 and do not have an accounting effect. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluatingrecognizes revenue when it satisfies a performance obligation by transferring the impact thatproduct or service to the adoption of this new standard will have on its consolidated financial position and results of operations.

customer, typically at a point in time.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 superseded the revenue recognition requirements in ASC Topic 604 “Revenue Recognition”Disaggregation of Revenue

The Company is a technology-development and some cost guidance included in ASC Subtopic: 05-35, “Revenue Recognition – Construction-Typemanufacturing company that delivers a wide range of products and Production-Type Contracts.” The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to the cable entertainment and media industry. Digital video headend products (including encoders) are used by a system operator for acquisition, processing, compression, encoding and management of digital video. DOCSIS data products give service providers, integrators, and premises owners a means to deliver data, video, and voice-over-coaxial in locations such as hospitality, MDU’s, and college campuses, using IP technology. HFC distribution products are used to transport signals from the headend to their ultimate destination in a home, apartment unit, hotel room, office or other terminal location along a fiber optic, coax or HFC distribution network. Analog video headend products are used by a system operator for signal acquisition, processing and manipulation to create an analog channel lineup for further transmission. Contract-manufactured products provide manufacturing, research and development and product support services for other companies’ products. CPE products are used by cable operators to provide video delivery to customers occursusing IP technology. NXG is a two-way forward-looking platform that is used to deliver next-generation entertainment services in an amount that reflectsboth enterprise and residential locations. Transcoders convert video files from one format to another to allow the consideration to which the Company expectsvideo to be entitled in exchange for those goods or services. ASU 2014-09 requiresviewed across different platforms and devices. The Company also provides technical services, including hands-on training, system design engineering, on-site field support and complete system verification testing.

The following table presents the disclosure of sufficient information to enable readersCompany’s disaggregated revenues by revenue source:

All of the Company’s financial statementssales are to understandcustomers located primarily throughout the nature, amount, timingUnited States and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 also requires disclosure of information regarding significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would require the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company to apply ASU 2014-09 to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date of initial application. ASU 2014-09 will be effective for the Company beginning in fiscal 2019 as a result of ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, “which was issued by the FASB in August 2015 and extended the original effective date by one year. In preparation for the adoption of the new standard in the fiscal year beginning January 2019, the Company continues to evaluate contract terms and potential impacts of the five-step model specified by the new guidance. That five-step model includes: (1) determination of whether a contract-an agreement between two or more parties that creates legally enforceable rights and obligations-exists; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when (or as) the performance obligation is satisfied. The Company anticipates adopting the standard using the modified retrospective approach at adoption. The Company is currently evaluating individual customer contracts and will be documenting changes, as needed, to its accounting policies and controls as the Company continues to evaluate the impact of the adoption of this standard. The results of its procedures to date indicate that the adoption of this standard will not have a material impact on its net income; however, the Company continues to evaluate the impact of the adoption on related financial statement disclosures.

There have been four new ASUs issued amending certain aspects of ASU 2014-09, ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross Versus Net),” was issued in March 2016 to clarify certain aspects of the principal versus agent guidance in ASU 2014-09. In addition, ASU 2016-10, “Identifying Performance Obligations and Licensing,” issued in April 2016, amends other sections of ASU 2014-09 including clarifying guidance related to identifying performance obligations and licensing implementation. ASU 2016-12, “Revenue from Contracts with Customers — Narrow Scope Improvements and Practical Expedients” provides amendments and practical expedients to the guidance in ASU 2014-09 in the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU 2014-09. Finally, ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” was issued in December 2016, and provides elections regarding the disclosures required for remaining performance obligations in certain cases and makes other technical corrections and improvements to the standard. With its evaluation of the impact of ASU 2014-09, the Company will also consider the impact on its financial statements related to the updated guidance provided by these four new ASUs.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting (“ASU 2017-09”). This ASU clarifies which changes to the terms or conditions of a share-based payment award require an entry to apply modification accounting in Topic 718. The standard is effective for the Company on January 1, 2018, with early adoption permitted. The impact of this new standard will depend on the extent and nature of future changes to the terms of the Company’s share-based payment awards.Canada.

Note 4 – Inventories

Inventories net of reserves are summarized as follows:

Inventories are stated at the lower of net realizable value or cost, determined by the first-in, first-out (“FIFO”FIFO”) method.method, or net realizable value.

The Company periodically analyzes anticipated product sales based on historical results, current backlog and marketing plans. Based on these analyses, the Company anticipates that certain products will not be sold during the next twelve months. Inventories that are not anticipated to be sold in the next twelve months have been classified as non-current.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

Approximately 59% and 68% of the non-current inventories were comprised of finished goods at September 30, 2017 and December 31, 2016, respectively. The Company has established a program to use interchangeable parts in its various product offerings and to modify certain of its finished goods to better match customer demands. In addition, the Company has instituted additional marketing programs to dispose of the slower moving inventories.

The Company continually analyzes its slow-moving and excess inventories. Based on historical and projected sales volumes for finished goods, historical and projected usage of raw materials and anticipated selling prices, the Company establishes reserves. Inventory that is in excess of current and projected use is reduced by an allowance to a level that approximates its estimate of future demand. Products that are determined to be obsolete are written down to net realizable value.

The Company recorded a provision to reduce the carrying amounts of inventories to their net realizable value in the amount of $91 and $133 and $346 and $863 during the three months ended September 30, 2020 and 2019 and the nine months ended September 30, 2020 and 2019, respectively.

Note 5 – Debt

On December 28, 2016,October 25, 2019, the Company entered into a Loan and Security Agreement (All Assets) (the “SterlingLoan Agreement”) with Sterling National BankMidCap Business Credit LLC (“SterlingMidCap”). The SterlingLoan Agreement provides the Company with a credit facility in an aggregate amount of $8,500 (the “Sterling Facility”) consisting ofcomprising a $5,000 asset-based revolving line of credit (the “Revolver”) and a $3,500 amortizing term loan (the “Term LoanMidCap Facility”). The SterlingMidCap Facility matures in December 2019.on the third anniversary of the Loan Agreement. Interest on the Revolveramounts outstanding under the Loan Agreement is variable, based upon the 30-daythree-month LIBOR rate (1.23% at September 30, 2017) plus a margin of 4.00%. Interest on the Term Loan also is variable, based upon the 30-day LIBOR rate (1.23% at4.75% (5.00% as of September 30, 2017) plus a margin of 4.50%. The Term Loan will amortize at the rate of $19 per2020) subject to re-set each month. On March 30, 2017, the Company and Sterling entered into a certain First Amendment to Loan and Security Agreement (the “First Amendment”), pursuant to which, among other things, the parties amended the definitions of certain items used in the calculation of the fixed charge coverage ratio, deferred the first measurement period of the financial covenants contemplated by the Sterling Agreement, from December 31, 2016 to January 31, 2017, and modified certain terms relating to permitted investments by the Company. At September 30, 2017, the outstanding balances under the Revolver and the Term Loan were $2,427 and $3,344, respectively. All outstanding indebtedness under the SterlingLoan Agreement is secured by all of the assets of the Company and its subsidiaries.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

On April 7, 2020, the Company entered into a certain Consent and Amendment to Loan Agreement and Loan Documents with Midcap (the “MidCap First Amendment”), which amended the MidCap Facility to, among other things, remove the existing $400 availability block, subject to the same being re-imposed at the rate of approximately $7 per month commencing June 1, 2020. The operative provisions relating to the removal of the availability block under the MidCap First Amendment became effective on April 8, 2020, following the receipt by the Company of $600 of loans under the Subordinated Loan Facility (See Note 6).

The SterlingLoan Agreement contains customary covenants, including restrictions on the incurrence of additional indebtedness, encumbrances on the Company’s assets, the payment of cash dividends or similar distributions, the repayment of any subordinated indebtedness and the encumbrance, sale or other disposition of assets.

On April 10, 2020, the Company’s assets.Company received loan proceeds of approximately $1,769 (“PPP Loan”) under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. The PPP Loan and accrued interest are forgivable after twenty-four weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period.

The PPP Loan is evidenced by a promissory note, dated as of April 5, 2020 (the “Note”), between the Company, as Borrower, and JPMorgan Chase Bank, N.A., as Lender (the “Lender”). The interest rate on the Note is 0.98% per annum, with interest accruing on the unpaid principal balance computed on the basis of the actual number of days elapsed in a year of 360 days. No payments of principal or interest are due during the six-month period beginning on the date of the Note (the “Deferral Period”).

As noted above, the principal and accrued interest under the Note evidencing the PPP Loan are forgivable after twenty-four weeks as long the Company has used the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the Company terminates employees or reduces salaries during the twenty-four-week period. The Company used the proceeds for purposes consistent with the PPP. In addition,order to obtain full or partial forgiveness of the PPP Loan, the Company must maintain (i) a fixed charge coverage ratiorequest forgiveness and must provide satisfactory documentation in accordance with applicable Small Business Administration (“SBA”) guidelines. Interest payable on the Note may be forgiven only if the SBA agrees to pay such interest on the forgiven principal amount of the Note. The Company will be obligated to repay any portion of the principal amount of the Note that is not less than 1.1forgiven, together with interest accrued and accruing thereon at the rate set forth above, until such unforgiven portion is paid in full.

Beginning one month following expiration of the Deferral Period, and continuing monthly until 24 months from the date of the Note (the “Maturity Date”), the Company is obligated to 1.0 formake monthly payments of principal and interest to the Lender with respect to any fiscal month (determinedunforgiven portion of the Note, in such equal amounts required to fully amortize the principal amount outstanding on the Note as of the last day of each fiscal month on a rolling twelve-month basis, as calculated for the Deferral Period by the Maturity Date. The Company and its consolidated subsidiaries) and (ii) a leverage ratiois permitted to prepay the Note at any time without payment of not more than 2.0 to 1.0 for any fiscal month (determined as of the last day of each fiscal month, as calculated for the Company and its consolidated subsidiaries). By virtue of the First Amendment, compliance with the foregoing financial covenants was tested commencing as of January 31, 2017.premium.

Note 6 – Subordinated Convertible Debt with Related Parties

On March 28, 2016, the Company and its wholly-owned subsidiary, R.L. Drake Holdings, LLC (“Drake”), as borrowers and Robert J. Pallé, as agent (in such capacity “Agent”) and as a lender, together with Carol M. Pallé, Steven Shea and James H. Williams as lenders (collectively, the “2016 Subordinated Lenders”) entered into a certain Amended and Restated Senior Subordinated Convertible Loan and Security Agreement (the “2016 Subordinated Loan Agreement”), pursuant to which the 2016 Subordinated Lenders agreed to provide the Company with a delayed draw term loan facility of up to $750 (“2016 Subordinated Loan Facility”), under which individual advances in amounts not less than $50 may behave been drawn by the Company. Interest on the outstanding balance under the 2016 Subordinated Loan Facility from time to time, accruesaccrued at 12% per annum (subject to increase under certain circumstances) and iswas payable monthly in-kind by the automatic increase of the principal amount of the loan on each monthly interest payment date, by the amount of the accrued interest payable at that time (“PIK Interest”); provided, however, that at the option of the Company, it may paycould have paid interest in cash on any interest payment date, in lieu of PIK Interest. The 2016 Subordinated Lenders havehad the option of converting the principal balance of the loan, in whole (unless otherwise agreed by the Company), into shares of the Company’s common stock at a conversion price of $0.54 per share (subject to adjustment under certain circumstances). This conversion right was subject to stockholder approval as required by the rules of the NYSE MKT, which approval was obtained on May 24, 2016 at the Company’s annual meeting of stockholders. The obligations of the Company and Drake under the 2016 Subordinated Loan Agreement arewere secured by substantially all of the Company’s and Drake’s assets, including by a mortgage against the Old Bridge PropertyFacility (the “Subordinated Mortgage”). The 2016 Subordinated Loan Agreement terminatesterminated three years from the date of closing, at which time the accreted principal balance of the loan (by virtue of the PIK Interest) plus any other accrued unpaid interest, willwas to be due and payable in full.

On April 17, 2018, Robert J. Pallé and Carol Pallé exercised their conversion rights and converted $455 ($350 principal and $105 of accrued interest) of their loan (representing the entire amount of principal and interest outstanding and held by Mr. and Mrs. Pallé on that date) into 842 shares of the Company’s common stock.

On October 9, 2018, James H. Williams exercised his conversion right and converted $67 ($50 principal and $17 of accrued interest) of his loan (representing the entire amount of principal and interest outstanding and held by Mr. Williams on that date) into 125 shares of the Company’s common stock.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

In connection with the anticipated completion of the sale of the Old Bridge Facility, on January 24, 2019, the Company and Drake (with the Company, collectively, the “Borrower”) entered into a Debt Conversion and Lien Termination Agreement (the “Conversion and Termination Agreement”) with Robert J. Pallé (“RJP”) and Carol M. Pallé (collectively, “Initial Lenders”), and Steven L. Shea and James H. Williams (collectively, the “Supplemental Lenders,” and together with the Initial Lenders, collectively, the “Lenders”), and Robert J. Pallé, as Agent for the Lenders (in such capacity, the “Agent”).

As of the date of the Conversion and Termination Agreement, the Borrower was indebted to Steven L. Shea (“Shea”) for the principal and accrued interest relating to a $100 loan advanced by Shea under the 2016 Subordinated Loan Agreement (the “Shea Indebtedness”). In addition, as of the date of the Conversion and Termination Agreement the Initial Lenders remained subject to a commitment to lend Borrowers up to an additional $250 (the “Additional Commitment”).

The Conversion and Termination Agreement provided for (i) the full payment of the Shea Indebtedness (unless such amounts were converted into shares of common stock prior to repayment), (ii) the termination of the Additional Commitment and (iii) the release and termination of all liens and security interests in the collateral under the 2016 Subordinated Loan Documents, including with respect to the Subordinated Mortgages, each to become effective as of the closing of the sale of the Old Bridge Facility. In connection with the execution and delivery of the Conversion and Termination Agreement, Shea provided the Company with a notice of conversion, and upon completion of the sale of the Old Bridge Facility was issued 260 shares of Company common stock in full satisfaction of the Shea Indebtedness.

On April 8, 2020, the Company, as borrower, together with Livewire Ventures, LLC (wholly owned by the Company’s Chief Executive Officer, Edward R. Grauch), MidAtlantic IRA, LLC FBO Steven L. Shea IRA (an IRA account for the benefit of the Company’s Chairman of the Board, Steven Shea), Carol M. Pallé and Robert J. Pallé (Company Director and employed as Managing Director-Strategic Accounts) , Anthony J. Bruno (Company Director), and Stephen K. Necessary (Company Director) , as lenders (collectively, the “Initial Lenders”) and Robert J. Pallé, as Agent for the Lenders (in such capacity, the “Agent”) entered into a certain Senior Subordinated Convertible Loan and Security Agreement (the “Subordinated Loan Agreement”), pursuant to which the lenders from time to time party thereto may provide up to $1,500 of loans to the Company (the “Subordinated Loan Facility”). Interest accrues on the outstanding amounts advanced under the Subordinated Loan Facility at the rate of 12% per annum, compounded and payable monthly, in-kind, by the automatic increase of the principal amount of the loan on each monthly interest payment date, by the amount of the accrued interest payable at that time (“PIK Interest”); provided, however, that at the option of the Company, it may pay interest in cash on any interest payment date, in lieu of PIK Interest.

On April 8, 2020, the Initial Lenders agreed to provide the Company with a Tranche A term loan facility of $800 of which $600 was advanced to the Company on April 8, 2020, $100 was advanced to the Company on April 17, 2020 and $100 of which remains committed and undrawn. The Initial Lenders participating in the Tranche A term loan facility have the option of converting the principal balance of the loan held by each of them, in whole (unless otherwise agreed by the Company), into shares of the Company’s common stock at a conversion price equal to the volume weighted average price of the Common Stock as reported by the NYSE American, during the five trading days preceding April 8, 2020 (the “Tranche A Conversion Price”) which was calculated at $0.593. The conversion right was subject to stockholder approval as required by the rules of the NYSE American, which was obtained on June 11, 2020.

On April 24, 2020, the Company, the Initial Lenders, Ronald V. Alterio (the Company’s Senior Vice President-Engineering, Chief Technology Officer) and certain additional unaffiliated investors (the “Additional Lenders,” and, together with the Initial Lenders, the “Lenders”) entered into the First Amendment to Senior Subordinated Convertible Loan and Security Agreement and Joinder (the “Amendment”). The Amendment provides for the funding of $200 of additional loans under the Subordinated Loan Facility as a Tranche B term loan established under the Subordinated Loan Agreement, with such loans being provided by the Additional Lenders. The Amendment also sets the conversion price of $0.55 (the “Tranche B Conversion Price”) with respect to the right of the Additional Lenders to convert the accreted principal balance of the loans held by each of them into shares of the Company’s common stock. The terms and conditions of the conversion rights applicable to the Initial Lenders and the Additional Lenders are otherwise identical in all material respects, including the terms restricting conversion to an aggregate amount of shares of common stock that would not result in the Company’s non-compliance with NYSE American rules requiring stockholder approval of issuances or potential issuances of shares in excess of the percentage limits specified therein or in an amount that may be deemed to constitute a change of control under such rules. These restrictions terminated as the requisite stockholder approval was obtained on June 11, 2020.

The Subordinated Loan Agreement provides for up to $1,500 of subordinated convertible loans, with $500 to be designated as “Tranche C” term loans thereunder, together with the Tranche A term loans of $800 and the Tranche B term loans of $200, previously committed. Additional loans under the Subordinated Loan Agreement are in all cases subject to the mutual agreement of the Company and the existing Lenders, and neither the Company nor the existing Lenders are obligated to make any additional loans under the Subordinated Loan Agreement. If any Tranche C term loans are advanced under the Subordinated Loan Facility, the conversion price applicable to such loans may be different than the Tranche A Conversion Price and the Tranche B Conversion Price.

The obligations of the Company under the Subordinated Loan Agreement are guaranteed by Drake and are secured by substantially all of the Company’s and Drake’s assets. The Subordinated Loan Agreement has a maturity date three years from the date of closing, at which time the accreted principal balance of the loan (by virtue of the PIK Interest) plus any other accrued unpaid interest, would be due and payable in full. In connection with the Subordinated Loan Agreement, the Company, Drake, the Subordinated Lenders and SterlingMidCap entered into a Subordination Agreement (the “Subordination Agreement”), pursuant to which the rights of the Subordinated Lenders under the Subordinated Loan Agreement and the Subordinated Mortgage are subordinatewere subordinated to the rights of SterlingMidCap under the SterlingMidCap Agreement and related security documents. The Subordination Agreement precludes the Company from making cash payments of interest in lieu of PIK Interest, in the absence of the prior written consent of Sterling.

As of September 30, 2017,MidCap or unless the Subordinated Lenders advanced $500Company is able to meet certain predefined conditions precedent to the Company. In addition, $18 and $52making of PIKany such payments of interest was accrued(or principal), as more fully described in the Subordination Agreement. During the three months and nine months ended September 30, 2017, respectively. The2020, the Company evaluated the conversion option embedded inaccrued $28 and $51, respectively of PIK Interest with respect to the Subordinated Loan Agreement issued in December 2016 in accordance with the provisions of ASC Topic 815,Derivatives and Hedging, and determined that the conversion option had all of the characteristics of a derivative in its entirety and did not qualify for an exception to the derivative accounting rules. Specifically, prior to the adoption of the First Sub-Debt Amendment, pursuant to Section 4.4(e)(ii) of the Subordinated Debt Agreement, the exercise price of the conversion option entitled the Subordinated Lenders to an adjustment of the exercise price in the event that the Company subsequently issued equity securities or equity linked securities at prices more favorable to a new investor than the exercise price of the conversion option embedded in the Subordinated Loan Agreement (the “Price Protection Provision”). Accordingly, the conversion option was not indexed to the Company’s own stock. Due to the derivative treatment of the conversion option, the Company recorded $260 derivative liability at December 31, 2016. On March 21, 2017, the Company, Drake, and the Subordinated Lenders entered into a certain First Amendment to Amended and Restated Convertible Loan and Security Agreement (the “First Sub-Debt Amendment”), pursuant to which the Subordinated Loan Agreement was amended to eliminate the Price Protection Provision, effective as of such date. The First Sub-Debt Amendment also eliminated certain defined terms related to the Price Protection Provision. As a result of the First Sub-Debt Amendment, during the first quarter of 2017, the Company recorded a change in the derivative liability (expense) of $142, the fair value of the liability at the date of the modification and reclassified the aggregate value of the derivative liability at the date of modification in the amount of $402 to additional paid-in capital. Facility.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In addition, during the nine months ended September 30, 2017 and 2016, the Company incurred interest of $229 and $37, respectively, related to these loans. The Company computed the fair value of the derivative liability at the date of modification using the Black-Scholes Model, which approximates a binomial lattice model with the following assumptions: stock price of $0.65, conversion price of $0.54, volatility of 104%, expected term of two years, risk free rate of 1.30% and dividend yield 0%.thousands, except per share data)

(unaudited)

Note 7 – Legal ProceedingsRelated Party Transactions

A director and shareholder of the Company is a partner of a law firm that serves as outside legal counsel for the Company. During the three-month periods ended September 30, 2020 and 2019, this law firm billed the Company approximately $143 and $123, respectively and during the nine-month periods ended September 30, 2020 and 2019, billed the Company approximately $636 and $398, respectively for legal services provided by this firm. Included in accounts payable on the accompanying unaudited condensed balance sheet at September 30, 2020 and December 31, 2019 is approximately $173 and zero owed to this law firm.

Note 8 – Concentration of Credit Risk

The following table summarizes credit risk with respect to customers as percentage of sales for the three and nine month periods ended September 30, 2020 and 2019:

The following table summarizes credit risk with respect to customers as percentage of accounts receivable:

The following table summarizes credit risk with respect to vendors as percentage of purchases for the three-month and nine-month periods ended September 30, 2020 and 2019:

The following table summarizes credit risk with respect to vendors as percentage of accounts payable:

Note 9 – Commitments and Contingencies

Leases

The Company leases certain real estate, factory, and office equipment under non-cancellable operating leases at various dates through January 2024. Lease costs and cash paid for the three-month and nine-month periods ended September 30 were as follows:

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

Maturities of the lease liabilities are as follows:

As of September 30, 2020, the weighted average remaining lease term is 3.27 years and the weighted average discount rate used to determine the operating lease liabilities was 6.5%.

Litigation

The Company from time to time is a party to certain proceedings incidental to the ordinary course of its business, none of which, in the opinion of management, is likely to have a material adverse effect on the Company’s business, financial condition, results of operations, or cash flows.

Note 10 – Building Sale and Leaseback

On February 1, 2019, the Company completed the sale of the Old Bridge Facility to Jake Brown Road, LLC (the “Buyer”). In connection with the completion of the sale, the Company and the Buyer (as landlord) entered into a lease (the “Lease”), pursuant to which the Company continues to occupy and conduct its manufacturing, engineering, sales and administrative functions in the Old Bridge Facility.

The sale of the Old Bridge Facility was made pursuant to an Agreement of Sale dated as of August 3, 2018 as amended and extended (collectively, the “Sale Agreement”). Pursuant to the Sale Agreement, at closing on February 1, 2019, the Buyer paid the Company $10,500. In addition, at closing, the Company advanced to the Buyer the sum of $130, representing a preliminary estimate of the Company’s share (as a tenant of the Old Bridge Facility following closing) of property repairs, as contemplated by the Sale Agreement. The Company recognized a gain of approximately $7,175 in connection with the sale.

The Lease has an initial term of five years and allows the Company to extend the term for an additional five years following the initial term. The Company is obligated to pay base rent of approximately $837 for the first year of the Lease with the amount of base rent adjusted for each subsequent year to equal 102.5% of the preceding year’s base rent. The Lease was accounted for under ASU 2018-11, Leases (“Topic 842”) as a sale and leaseback.

Note 811 – Subsequent Events

TheOn October 29, 2020, the unaffiliated Additional Investors as described in Note 6, submitted irrevocable notices of conversion under the Tranche B Term Loan. As a result, $175 of original principal and $11 of PIK interest outstanding under the Tranche B Term Loan were converted into 338 shares of Company has evaluated subsequent events through the filingcommon stock in full satisfaction of its consolidated financial statements with the SEC.their indebtedness.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company’s historical results of operations and liquidity and capital resources should be read in conjunction with the unaudited consolidated financial statements of the Company and notes thereto appearing elsewhere herein. The following discussion and analysis also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors. See “Forward Looking Statements,” below.

Forward-Looking Statements

In addition to historical information this Quarterly Report contains forward-looking statements regarding future events relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995, the Securities Act of 1933 and the Securities Exchange Act of 1934 provide safe harbors for forward-looking statements. In order to comply with the terms of these safe harbors, the Company notes that a variety of factors could cause the Company’s actual results and experience to differ materially and adversely from the anticipated results or other expectations expressed in the Company’s forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of the Company’s business include, but are not limited to, those matters discussed herein in the section entitled Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations. The words “believe,” “expect,” “anticipate,” “project,” “target,” “intend,” “plan,” “seek,” “estimate,” “endeavor,” “should,” “could,” “may” and similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to projections for our future financial performance, our ability to extend or refinance our debt obligations, our anticipated growth trends in our business and other characterizations of future events or circumstance are forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including without limitation, the Company’s Annual Report on Form 10-K for the year ended December 31, 20162019, filed with the Securities and Exchange Commission on April 13, 2020 (See Item 1 – Business; Item 1A – Risk Factors; Item 3 – Legal Proceedings and Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations).

General

The Company was incorporated in November 1988, under the laws of Delaware as GPS Acquisition Corp. for the purpose of acquiring the business of Blonder-Tongue Laboratories, Inc., a New Jersey corporation, which was founded in 1950 by Ben H. Tongue and Isaac S. Blonder to design, manufacture and supply a line of electronics and systems equipment principally for the private cable industry. Following the acquisition, the Company changed its name to Blonder Tongue Laboratories, Inc. The Company completed the initial public offering of its shares of Common Stock in December 1995.

Today, the Company is a technology-development and manufacturing company that delivers a wide range of products and services to the telecommunications, cable entertainment and media industry. For 6570 years, Blonder Tongue/Drake products have been deployed in a long list of locations, including lodging/hospitality, multi-dwelling units/apartments, broadcast studios/networks, education universities/schools, healthcare hospitals/healthcare/hospitals, fitness centers, government facilities/offices, prisons, airports, sports stadiums/arenas, entertainment venues/casinos, retail stores, and small-medium businesses. These applications are variously described as commercial, institutional and/or enterprise environments and will be referred to herein collectively as “CIE”. The customers we serve include business entities installing private video and data networks in these environments, whether they are the largest cable television operators, telco or satellite providers, integrators, architects, engineers or the next generation of Internet Protocol Television (“IPTV”IPTV”) streaming video providers. The technology requirements of these markets change rapidly, and the Company’s research and development team is continually delivering high performance-lowerperformance, lower cost solutions to meet customers’ needs.

The Company’s strategy is focused on providing a wide range of products to meet the needs of the CIE environments described above, (e.g., hotels, including lodging/hospitality, multi-dwelling units/apartments, broadcast studios/networks, universities/schools, healthcare/hospitals, fitness centers, government facilities/offices, prisons, schools, etc.),airports, sports stadiums/arenas, entertainment venues/casinos, retail stores, and small-medium businesses, and to provide offerings that are optimized for an operator’s existing infrastructure, as well as the operator’s future strategy. A key component of this growth strategy is to provide products that deliver the latest technologies (such as IPTV and digital SD4K, UHD, HD and HDSD video content) and have a high performance-to-cost ratio.

In 2019, the Company initiated a consumer premise equipment (“CPE”) sales initiative. The products sold in 2019 comprise primarily Android-based IPTV set top boxes to the Tier 2 and Tier 3 cable and telecommunications service providers. This strategic initiative is designed to secure an in-home position with the Company’s product offerings, more intimate, direct relationships with a wide range of service providers, and increased sales of the Company’s CIE products by the Company’s Premier Distributors to those same service providers. In its first year, the CPE Product initiative achieved sales to over 45 different telco, municipal fiber and cable operators and accounted for approximately 20% of the Company’s 2019 revenues. Sales of CPE products were $1,379,000 and $1,498,000 in the third three months of 2020 and 2019 and $3,051,000 and $2,691,000 in the first nine months of 2020 and 2019, respectively.

The Company has seen a continuing long-term shift in product mix from analog products to digital products and expects this shift to continue. Sales of digital video headend products were $2,100,000 and $2,763,000 in the third three months of 2017 and 2016, respectively and $7,330,000 and $8,889,000 in the first nine months of 2017 and 2016, respectively. Sales of analog video headend products were $324,000 and $559,000 in the third three months of 2017 and 2016, respectively and $1,360,000 and $1,789,000 in the first nine months of 2017 and 2016, respectively. AnyAccordingly, any substantial decrease in sales of analog products without a related increase in digital products or other products could have a material adverse effect on the Company’s results of operations, financial condition and cash flows. Sales of digital video headend products were $801,000 and $1,292,000 and sales of analog video headend products were $323,000 and $366,000 in third three months of 2020 and 2019, respectively. Sales of digital video headend products were $2,603,000 and $5,482,000 and sales of analog video headend products were $838,000 and $1,249,000 in the first nine months of 2020 and 2019, respectively.

Like many businesses throughout the United States and the world, we have been affected by the COVID-19 outbreak. Because there are daily developments regarding the outbreak, we are continually assessing the current and anticipated future effects on our business, including how these developments are impacting or may impact our customers, employees and business partners. In our core CIE business, we have experienced a noticeable decline in sales, as many of our customers have significantly reduced their business operations. In our CPE business we have experienced a more substantial reduction in sales, again as a result of our customers’ significant decrease in their business activities. With uncertainties surrounding the extent to which the COVID-19 outbreak will affect the economy generally, and our customers and business partners in particular, it is impossible for us to predict when conditions will improve to the point that we may reasonably forecast when our sales might return to historical levels. However, we are currently taking steps to significantly reduce our expenses, including adjustments in our staffing (in the form of furloughs) and reductions in manufacturing activities, which we believe will improve our ability to continue our operations at current levels and meet our obligations to our customers.

The Company’s manufacturing is allocated primarily between its facility in Old Bridge, New Jersey the (“Old Bridge Facility”) and a key contract manufacturermanufacturing located in the People’s Republic of China (“PRC”). as well as South Korea and Taiwan. The Company currently manufactures most of its digital products, including the NXG product line and latest encoder, transcoder and EdgeQAM collections at the Old Bridge Facility. Since 2007 the Company has been manufacturingtransitioned and continues to manufacture certain high volume, labor intensive products, including many of the Company’s analog and other products, in the PRC, pursuant to a manufacturing agreementagreements that governsgovern the production of products that may from time to time be the subject of purchase orders submitted by (and in the discretion of) the Company. Although the Company does not currently anticipate the transfer of any additional products to the PRC or other countries for manufacture, the Company may do so if business and market conditions make it advantageous to do so. Manufacturing products both at the Company’s Old Bridge Facility as well as in the PRC, South Korea and Taiwan enables the Company to realize cost reductions while maintaining a competitive position and time-to-market advantage.

The Company may, from time to time, provide manufacturing, research and development and product support services for other companies’ products. In 2015, the Company entered into an agreement with VBrick Systems, Inc. (“VBrick”) to provide procurement, manufacturing, warehousing and fulfillment support to VBrick for a line of high endhigh-end encoder products and sub-assemblies. Sales to VBrick purchases of theseencoder products were approximately $244,000$28,000 and $465,000$319,000 in the third three months of 20172020 and 2016, respectively2019 and $599,000$101,000 and $994,000$393,000 in the first nine months of 20172020 and 2016,2019, respectively. Sales to VBrick for sub-assemblies were not material in the three months and nine months ended September 30, 2020 or 2019, respectively.

Results of Operations

Third three months of 20172020 Compared with third three months of 20162019

Net SalesSales..Net sales increased $144,000,decreased $1,107,000, or 2.7%21.0%, to $5,576,000$4,171,000 in the third three months of 20172020 from $5,432,000$5,278,000 in the third three months of 2016.2019. The increasedecrease is primarily attributedattributable to an increasea decrease in sales of data products offset by a decrease in digital video headend products, analog headend products, HFC distributionDOCSIS data products and contract manufacturedmanufacturing products offset by an increase in transcoder products. Sales of data products were $1,782,000 and $315,000, digital video headend products were $2,100,000$801,000 and $2,763,000, analog headend$1,292,000, DOCSIS data products were $324,000$235,000 and $559,000, HFC distribution$884,000, contract manufacturing products were $838,000$28,000 and $1,046,000$319,000 and contract manufacturedtranscoder products were $244,000$543,000 and $465,000zero in the third three months of 20172020 and 2016,2019, respectively.

Cost of Goods Sold.Cost of goods sold decreased to $3,399,000$3,436,000 for the third three months of 20172020 from $3,531,000$3,747,000 for the third three months of 2016 and decreased2019 but increased as a percentage of sales to 61.0%82.4% from 65.0%71.0%. The dollar decrease wasis primarily dueattributable to a more favorable product mix.lower sales. The decreaseincrease as a percentage of sales wasis primarily attributedattributable to an overall reduction insales of lower margin products as part of the amount of manufacturing overhead capitalized, as well as a more favorableCompany’s product mix.

Selling Expenses. Selling expenses decreased to $631,000$614,000 for the third three months of 20172020 from $645,000$781,000 in the third three months of 2016,2019 and decreased as percentage of sales to 11.3%14.7% for the third three months of 20172020 from 11.9%14.8% for the third three months of 2016.2019. The $14,000$167,000 decrease was primarily the result of a decrease in salary expense (includingsalaries and fringe benefits) of $36,000benefits due to a decrease in headcounthead count of $92,000 and a decrease in royaltyadvertising and trade show expenses of $60,000.

General and Administrative Expenses. General and administrative expenses increased to $1,203,000 for the third three months of 2020 from $1,185,000 for the third three months of 2019 and increased as a percentage of sales to 28.8% for the third three months of 2020 from 22.5% for the third three months of 2019. The $18,000 increase was primarily the result of an increase in director fees of $68,000 and an increase in legal fees of $60,000 offset by a decrease in salaries and fringe benefits due to a decrease in compensation of $85,000.

Research and Development Expenses. Research and development expenses decreased to $600,000 in the third three months of 2020 from $848,000 in the third three months of 2019 and decreased as a percentage of sales to 14.4% for the third three months of 2020 from 16.1% for the third three months of 2019. This $248,000 decrease is primarily the result of a decrease in consulting fees of $110,000, a decrease in department supplies of $51,000 and a decrease in occupancy costs of $41,000.

Operating (Loss) Earnings. Operating loss of $(1,682,000) for the third three months of 2020 represents an increase from the operating loss of $(1,283,000) for the third three months of 2019. Operating (loss) earnings as a percentage of sales was (40.3)% in the third three months of 2020 compared to (24.3)% in the third three months of 2019.

Other Expense, net. Other expense increased to $105,000 in the third three months of $39,0002020 from $51,000 in the third three months of 2019. The increase is primarily the result of higher interest expense due to higher average borrowing on the MidCap Facility and PIK Interest on the Subordinated Loan Facility.

First nine months of 2020 Compared with first nine months of 2019

Net Sales. Net sales decreased $2,745,000, or 18.6%, to $12,052,000 in the first nine months of 2020 from $14,797,000 in the first nine months of 2019. The decrease is primarily attributable to a decrease in sales of digital video headend products, contract manufacturing products and analog video headend products offset by an increase in sales of transcoder products and CPE products. Sales of digital video headend products were $2,603,000 and $5,482,000, contract manufactured products were $101,000 and $393,000, analog video products were $838,000 and $1,249,000, transcoder products were $937,000 and $33,000 and CPE products were $3,051,000 and $2,691,000 in the first nine months of 2020 and 2019, respectively.

Cost of Goods Sold. Cost of goods sold decreased to $9,529,000 for the first nine months of 2020 from $10,170,000 for the first nine months of 2019 but increased as a percentage of sales to 79.1% from 68.7% The dollar decrease is primarily attributable to reduced sales as well as lower margins relating to CPE products as the Company continued to implement its strategic CPE Product initiative, described above under “General,” which began late in the first quarter of 2019. The increase as a percentage of sales is also attributable to sales of CPE products as part of the CPE Product initiative, as those products have a higher cost of goods sold than the Company’s other products.

Selling Expenses. Selling expenses decreased to $1,916,000 for the first nine months of 2020 from $2,253,000 in the first nine months of 2019 but increased as percentage of sales to 15.9% for the first nine months of 2020 from 15.2% for the first nine months of 2019. The $337,000 decrease was primarily the result of a decrease in salaries and fringe benefits due to a decrease in head count of $277,000, a decrease in department supplies of $23,000$130,000 and a decrease in advertising and trade show expenses of $80,000 offset by an increase in sales commissionsoccupancy costs of $29,000.$233,000.

General and Administrative Expenses. General and administrative expenses decreased to $956,000$3,551,000 for the third threefirst nine months of 20172020 from $959,000$3,978,000 for the third threefirst nine months of 2016 and decreased2019, but increased as a percentage of sales to 17.1%29.5% for the third threefirst nine months of 20172020 from 17.7%26.9% for the third threefirst nine months of 2016.2019. The $3,000$427,000 decrease was primarily the result of a decrease in salaries and fringe benefits due to a decrease in compensation of $343,000, a decrease of travel and entertainment of $156,000, and a decrease in consulting fees of $189,000 related to IT outsourcing, offset by an increase in occupancy costs of $88,000 and an increase in legal expensescosts of $37,000, an increase in salary expense (including fringe benefits) of $27,000 due to an increase in headcount, and principally offset by a decrease in building reconfiguration expenses of $58,000, amongst other decreases.

$113,000.

Research and Development Expenses. Research and development expenses decreased to $605,000$1,865,000 in the third threefirst nine months of 20172020 from $711,000$2,291,000 in the third threefirst nine months of 2016 and decreased2019, but remained constant as a percentage of sales to 10.9%of 15.5% for the third threefirst nine months of 2017 from 13.1% for the third three months of 2016.2020 and 2019, respectively. This $106,000$426,000 decrease is primarily the result of a decrease in amortization expense of $69,000 relatingsalaries and fringe benefits due to certain license fees becoming fully amortized,reduced head count and a decrease in depreciationcompensation of $15,000,$169,000, a decrease in consulting fees of $159,000 and a decrease in occupancy costs of salary expense (including fringe benefits) of $21,000 due to reduced headcount.$105,000.

Operating Loss.(Loss) Earnings. Operating loss of $15,000$(4,809,000) for the third threefirst nine months of 20172020 represents a reductiondecrease from the operating lossincome of $414,000$3,280,000 for the third threefirst nine months of 2016.2019. Operating loss represents an increase of $914,000 for the first nine months of 2020 from the first nine months of 2019, before giving effect to the gain reported on the building sale of $7,175,000 during the first quarter of 2019. Operating (loss) earnings as a percentage of sales was (0.3%) in the third three months of 2017 compared to (7.6%) in the third three months of 2016.

Interest Expense. Interest expense increased to $138,000 in the third three months of 2017 from $107,000 in the third three months of 2016. The increase is attributable to amortization of loan fees of approximately $35,000 offset by a decrease in borrowings under the Revolver.

First nine months of 2017 Compared with first nine months of 2016

Net Sales. Net sales increased $656,000, or 3.9%, to $17,713,000(39.9)% in the first nine months of 2017 from $17,057,0002020 compared to 22.2% in the first nine months of 2016. The increase is primarily attributed2019.

Other Expense, net. Other expense increased to an increase in sales of data products offset by a decrease in digital video headend products, analog headend products and contract manufactured products. Sales of data products were $5,168,000 and $1,592,000, digital video headend products were $7,330,000 and $8,889,000, analog video headend products were $1,360,000 and $1,789,000 and contract manufactured products were $599,000 and $994,000$252,000 in the first nine months of 2017 and 2016, respectively.

Cost of Goods Sold. Cost of goods sold increased to $11,010,000 for the first nine months of 20172020 from $10,471,000 for the first nine months of 2016 and increased as a percentage of sales to 62.2% from 61.4%. The increase as a percentage of sales was primarily attributed to an overall reduction in the amount of manufacturing overhead capitalized, as well as a less favorable product mix, whereby the data products yield a lower gross margin.

Selling Expenses. Selling expenses decreased to $1,941,000 for the first nine months of 2017 from $1,961,000$180,000 in the first nine months of 2016, and decreased as percentage of sales to 11.0% for the first nine months of 2017 from 11.5% for the first nine months of 2016. The $20,000 decrease was primarily the result of a decrease in salary expense (including fringe benefits) of $77,000 due to a decrease in headcount and a decrease in royalty expense of $68,000 offset by an increase in department supplies of $108,000.

General and Administrative Expenses. General and administrative expenses decreased to $2,802,000 for the first nine months of 2017 from $2,906,000 for the first nine months of 2016 and decreased as a percentage of sales to 15.8% for the first nine months of 2017 from 17.0% for the first nine months of 2016. The $104,000 decrease was primarily the result of an increase in legal fees of $112,000 and an increase in salaries (including fringe benefits) of $32,000, offset by decreased travel and entertainment expense of $66,000 due to decreased business travel and a decrease in building reconfiguration expenses of $64,000 amongst other cost containment measures.

Research and Development Expenses. Research and development expenses decreased to $1,877,000 in the first nine months of 2017 from $2,098,000 in the first nine months of 2016 and decreased as a percentage of sales to 10.6% for the first nine months of 2017 from 12.3% for the first nine months of 2016. This $221,000 decrease is primarily the result of a decrease in amortization expense of $150,000 relating to certain license fees becoming fully amortized, a decrease in depreciation of $43,000 and a decrease in salaries (including fringe benefits) of $32,000 due to a decrease in headcount.

Operating Income (Loss). Operating income of $83,000 for the first nine months of 2017 represents an improvement from the operating loss of $379,000 for the first nine months of 2016. Operating income as a percentage of sales was 0.5% in the first nine months of 2017 compared to a loss of (2.2%) in the first nine months of 2016.

Interest Expense. Interest expense increased to $581,000 in the first nine months of 2017 from $281,000 in the first nine months of 2016.2019. The increase is primarily the result of higher interest expense due to higher average borrowing on the accretion ofMidCap Facility and PIK Interest on the debt discount related to the former derivative liability of $177,000 and $105,000 of amortization of deferred loan fees both non-cash expenses.Subordinated Loan Facility.

Liquidity and Capital Resources

As of September 30, 20172020 and December 31, 2016,2019, the Company’s working capital was $4,113,000$1,996,000 and $3,464,000,$3,805,000, respectively. The increasedecrease in working capital iswas primarily due to improved operations, an increase ofthe reduction in inventories of $426,000 and an increaseaccounts receivable offset by a decrease in accounts receivablepayable and the line of $353,000.credit.

The Company’s net cash used in operating activities for the nine-month period ended September 30, 20172020 was $250,000$2,149,000 primarily due to a net loss of $640,000, an increase of$5,061,000 offset by a decrease in inventories of $426,000$3,245,000. The Company’s net cash used in operating activities for the nine-month period ended September 30, 2019 was $5,003,000, primarily due to non-cash adjustments of $(5,979,000) and an increase in accounts receivableinventories of $353,000$1,739,000, offset by non cash adjustmentsnet earnings of $1,246,000.

$3,100,000.

Cash used in investing activities for the nine-month period ended September 30, 20172020 was $160,000,$163,000, of which $60,000$138,000 was attributable to capital expenditures and $25,000 was attributable to additional license fees. Cash provided by investing activities for the nine-month period ended September 30, 2019 was $9,519,000, of which $9,765,000 was attributable to proceeds on the sale of the Old Bridge Facility, offset by $41,000 attributable to additional license fees and $100,000 was$205,000 attributable to capital expenditures.

Cash provided by financing activities was $141,000$1,815,000 for the first nine months of 2017,2020, which was comprised of proceeds from long term debt of $1,769,000, proceeds from the Subordinated Loan Facility (as described below) of $900,000 and proceeds from the exercise of stock options of $3,000 offset by net repayments of the line of credit of $828,000 and repayments of debt of $29,000. Cash used in financing activities was $4,706,000 for the first nine months of 2019, which was comprised of net repayments of borrowings on the Revolver under the Sterling Facility of $307,000$1,800,000, repayments of long-term debt of $3,037,000 offset by repaymentsproceeds from the exercise of long term debtstock options of $166,000.$131,000.

For a full description of the Company’s senior secured indebtedness under the SterlingMidCap Facility and the Company’s senior subordinated convertible indebtedness under the Subordinated Loan Facility, and their respective effectsits effect upon the Company’s condensed consolidated financial position and results of operations, see Note 5 – Debt and Note 6 – Subordinated Convertible Debt with Related Parties of the Notes to Condensed Consolidated Financial Statements.

The Company’s primary sources of liquidity arehave been its existing cash balances cash generated from operations and amounts available under the Sterling Facility and the Subordinated LoanMidCap Facility. As ofAt September 30, 2017,2020, the Company had approximately $2,427,000 outstanding$1,403,000 available under the Revolver and $813,000 of additional availability for borrowing under the Revolver, as well as $605,000 outstanding under the Subordinated Loan Facility and $250,000 of additional availability for borrowing under the Subordinated LoanMidCap Facility.

Prior to 2016,On February 1, 2019, the Company incurred significantcompleted the sale of the Old Bridge Facility to Jake Brown Road, LLC (the “Buyer”). In connection with the completion of the sale, the Company and the Buyer (as landlord) entered into a lease (the “Lease”), pursuant to which the Company continues to occupy and conduct its manufacturing, engineering, sales and administrative functions in the Old Bridge Facility.

The Lease has an initial term of five years and allows the Company to extend the term for an additional five years following the initial term. The Company is obligated to pay base rent of approximately $837,000 for the first year of the Lease, with the amount of the base rent adjusted for each subsequent year to equal 102.5% of the preceding year’s base rent. Without regard to any reduction in the Company’s lease expense derived from its sublease to a third party of the Sublease Space (defined below), for the first year of the Lease, the base rent of approximately $837,000 was offset, in part, by the annualized saving of interest and depreciation expense of approximately $469,000 and the cash debt service of approximately $562,000. The Lease further provides for a security deposit in an amount equal to eight months of base rent, which may be reduced to three months of base rent upon certain benchmarks being met. It was determined in the first quarter 2020 that the applicable benchmark relevant to the six-month period ended August 1, 2019 was met and as a result the landlord released a portion of the security deposit equal to one month’s base rent to the Company, leaving an aggregate security deposit held by the landlord, in an amount equal to seven months of base rent. The landlord may, once during the lease term or any renewal thereof, require the Company to relocate to another facility made available by the landlord that meets the Company’s specifications for a replacement facility within a defined geographical area, by providing notice which confirms that all of the Company’s specifications for a replacement facility will be met, that all costs relating to such relocation will be paid by the landlord, and that security for the repayment of those relocation costs has been established. The Company will also be provided a six month overlap period (the “Overlap Period”) during which the Company may operate in the Old Bridge Facility with rent therein being abated, but with rent being paid at the replacement facility, to mitigate interruptions of the Company’s on-going business while the move occurs. If the Company declines to be relocated to the facility proposed by the landlord, the Lease will terminate 18 months from the date of the landlord’s notice, but the Company will continue to be entitled to receive the same benefits in terms of reimbursement of its relocation costs and an Overlap Period during which no rent will be due at the Old Bridge Facility, while the Company moves its operations to an alternative facility that it has identified.

On December 31, 2019, the Company entered into a two-year sublease to a third party for 32,500 square feet of the Old Bridge Facility (the “Sublease Space”) commencing on March 1, 2020, the rental proceeds from which will inure to the benefit of the Company. The sublease also provides for a one-year renewal option. The sublease provides rental income approximately $284,000 in the first year and approximately $293,000 in the second year of the sublease.

As disclosed in the Company’s most recent Annual Report on Form 10-K, the Company experienced a decline in sales, a reduction in working capital, a loss from operations and net cash used in operating losses and did not have the necessary financing arrangementsactivities, in place to support its capital resource needs.conjunction with liquidity constraints. These factors contributed toraised substantial doubt about the Company’s substantial doubt of its ability to continue as a going concern, which were set forthconcern. As of September 30, 2020, the above factors still exist. Accordingly, there still exists substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

Beginning in the middle of 2019, the Company experienced a significant decline in its Form 10-Knet sales of core or legacy products, which have not recovered to historical norms, but which have stabilized at reduced levels. The Company does not anticipate that sales will recover to historical norms during 2020. In light of these developments and as detailed below, the Company has taken significant steps during the past year, implemented in several phases, in order to manage operations through what has been a period of diminished sales levels.

During the past year, the Company has focused on implementing a turnaround strategy, under which since August 2019 it has been implementing operational and financial processes to improve liquidity, cash flow and profitability.

As part of its efforts to improve liquidity and provide operating capital, on April 7, 2020, the Company entered into a certain Consent and Amendment to Loan Agreement and Loan Documents with Midcap (the “MidCap First Amendment”), which amended the MidCap Facility to, among other things, remove the existing $400,000 availability block, subject to the same being re-imposed at the rate of approximately $7,000 per month commencing June 1, 2020. The operative provisions relating to the removal of the availability block under the MidCap First Amendment became effective on April 8, 2020, following the receipt by the Company of $600,000 of loans under the Subordinated Loan Facility (defined below).

On April 8, 2020, the Company, as borrower, together with Livewire Ventures, LLC (wholly owned by the Company’s Chief Executive Officer, Edward R. Grauch), MidAtlantic IRA, LLC FBO Steven L. Shea IRA (an IRA account for the fiscal year ended December 31, 2015 and in subsequent quarterly reports on Form 10-Q prior to consummationbenefit of the Sterling Facility. During 2016, management addressed going concern remediation through enteringCompany’s Chairman of the Board, Steven Shea), Carol M. Pallé and Robert J. Pallé, Anthony J. Bruno, and Stephen K. Necessary, as lenders (collectively, the “Initial Lenders”) and Robert J. Pallé, as Agent for the Lenders (in such capacity, the “Agent”) entered into a certain Senior Subordinated Convertible Loan and Security Agreement (the “Subordinated Loan Agreement”), pursuant to which the lenders from time to time party thereto may provide up to $1,500,000 of loans to the Company (the “Subordinated Loan Facility”). Interest accrues on the outstanding amounts advanced under the Subordinated Loan Facility at the rate of 12% per annum, compounded and payable monthly, in-kind, by the automatic increase of the principal amount of the loan on each monthly interest payment date, by the amount of the accrued interest payable at that time (“PIK Interest”); provided, however, that at the option of the Company, it may pay interest in cash on any interest payment date, in lieu of PIK Interest.

On April 8, 2020, the Initial Lenders agreed to provide the Company with a Tranche A term loan facility of $800,000, of which $600,000 was advanced to the Company on April 8, 2020, $100,000 was advanced to the Company on April 17, 2020 and $100,000 remains committed and undrawn. The Initial Lenders participating in the Tranche A term loan facility have the option of converting the principal balance of the loan held by each of them, in whole (unless otherwise agreed by the Company), into shares of the Company’s common stock, at a conversion price equal to the volume weighted average price of the Common Stock as reported by the NYSE American, during the five trading days preceding April 8, 2020 (the “Tranche A Conversion Price”) which was calculated at $0.593. The conversion right was subject to stockholder approval as required by the rules of the NYSE American, and was obtained on June 11, 2020 at the Company’s annual meeting of stockholders.

On April 24, 2020, the Company, the Initial Lenders and Ronald V. Alterio (the Company’s Senior Vice President-Engineering, Chief Technology Officer) and certain additional unaffiliated investors (the “Additional Lenders,” and, together with the Initial Lenders, the “Lenders”) entered into the SterlingFirst Amendment to Senior Subordinated Convertible Loan and Security Agreement and Joinder (the “Amendment”). The Amendment provides for the funding of $200,000 of additional loans as a Tranche B term loan under the Subordinated Loan Facility (a long term obligation dueestablished under the Subordinated Loan Agreement, with such loans being provided by the Additional Lenders. The Amendment also sets the conversion price of $0.55 (the “Tranche B Conversion Price”) with respect to the right of the Additional Lenders to convert the accreted principal balance of the loans held by each of them into shares of the Company’s common stock. The terms and conditions of the conversion rights applicable to the Initial Lenders and the Additional Lenders are otherwise identical in December 2019), which refinanced its prior Santander Agreement (whichall material respects, including the terms restricting conversion to an aggregate amount of shares of common stock that would not result in the Company’s non-compliance with NYSE American rules requiring stockholder approval of issuances or potential issuances of shares in excess of the percentage limits specified therein or in an amount that may be deemed to constitute a change of control under such rules. These restrictions terminated as the requisite stockholder approval was dueobtained on June 11, 2020 at the Company’s annual meeting of stockholders.

The Amendment also adds certain “piggyback” registration rights in favor of the Lenders. Pursuant to expire in December 2016). In addition,these registration rights, the Lenders can request that the Company reduced operating expenses to approximately $9,028,000include for sale, in 2016 from approximately $10,555,000 in 2015. Net losses were reduced dramatically and cash flows from operations also improved, as cash generated from operating activities was approximately $771,000 in 2016 compared to cash used in operating activities of approximately $(798,000) in 2015. At December 31, 2016 and September 30, 2017,any registration statement filed by the Company had approximately $3,464,000under the Securities Act of 1933, as amended (the “Securities Act”) for the offer and $4,113,000sale of working capital, respectively.shares of its common stock (subject to certain exceptions), the shares of common stock issuable to the Lenders pursuant to their conversion rights under the Subordinated Loan Agreement (including any additional shares issued as a dividend or other distribution with respect to, or in exchange for or in replacement of, such shares). The rights of the Lenders to have their shares included in a registration statement are subject to their agreement to the terms of any applicable underwriting agreement, in the case of an underwritten offering (including any limitation on the amount of the Lenders’ shares to be included in the offering) and to their furnishing to the Company such information regarding the Lenders, the shares being sold, and the Lenders’ intended method of disposition of such shares as is necessary to effect the registration of their shares. The Company will bear the expenses of registration pursuant to these registration rights; provided, however, that the Lenders will bear all underwriting discounts, selling commissions, stock transfer taxes and the fees of their counsel. The right of the Lenders to request registration or inclusion of their shares pursuant to these registration rights terminate at such time as Rule 144 under the Securities Act, or another similar exemption under the Securities Act, is available for the sale of the Lenders’ shares.

The Subordinated Loan Agreement provides for up to $1,500,000 of subordinated convertible loans, with $500,000 to be designated as “Tranche C” term loans thereunder, together with the Tranche A term loans of $800,000 and the Tranche B term loans of $200,000, previously committed. Additional loans under the Subordinated Loan Agreement are in all cases subject to the mutual agreement of the Company and the existing Lenders, and neither the Company nor the existing Lenders are obligated to make any additional loans under the Subordinated Loan Agreement. If any Tranche C term loans are advanced under the Subordinated Loan Facility, the conversion price applicable to such loans may be different than the Tranche A Conversion Price and the Tranche B Conversion Price.

The obligations of the Company under the Subordinated Loan Agreement are guaranteed by Drake and are secured by substantially all of the Company’s and Drake’s assets. The Subordinated Loan Agreement has a maturity date three years from the date of closing, at which time the accreted principal balance of the loan (by virtue of the PIK Interest) plus any other accrued unpaid interest, would be due and payable in full. In connection with the Subordinated Loan Agreement, the Company, Drake, the Lenders and MidCap entered into a Subordination Agreement (the “Subordination Agreement”), pursuant to which the rights of the Lenders under the Subordinated Loan Agreement were subordinated to the rights of MidCap under the MidCap Agreement and related security documents. The Subordination Agreement precludes the Company from making cash payments of interest in lieu of PIK Interest, in the absence of the prior written consent of MidCap or unless the Company is able to meet certain predefined conditions precedent to the making of any such payments of interest (or principal), as more fully described in the Subordination Agreement.

On October 29, 2020, certain unaffiliated Additional Investors as described above, submitted irrevocable notices of conversion under the Tranche B Term Loan. As a result, $175,000 of continued improvementsoriginal principal and $11,000 of PIK interest under the Tranche B Term Loan were converted into 338,000 shares of Company common stock in full satisfaction of their indebtedness

On April 10, 2020, the Company received loan proceeds of approximately $1,769,000 (“PPP Loan”) under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. The PPP Loan and accrued interest are forgivable after twenty-four weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period.

The PPP Loan is evidenced by a promissory note, dated as of April 5, 2020 (the “Note”), between the Company, as Borrower, and JPMorgan Chase Bank, N.A., as Lender (the “Lender”). The interest rate on the Note is 0.98% per annum, with interest accruing on the unpaid principal balance computed on the basis of the actual number of days elapsed in a year of 360 days. No payments of principal or interest are due during the six-month period beginning on the date of the Note (the “Deferral Period”).

As noted above, the principal and accrued interest under the Note evidencing the PPP Loan are forgivable after twenty-four weeks as long the Company has used the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the Company terminates employees or reduces salaries during the eight-week period. The Company used the proceeds for purposes consistent with the PPP. While the Company currently believes that its use of the PPP Loan proceeds will meet the conditions for forgiveness of the PPP Loan, we cannot assure you that we will not take actions that could cause the Company to be ineligible for forgiveness of the PPP Loan, in whole or in part. In order to obtain full or partial forgiveness of the PPP Loan, the Company must request forgiveness and must provide satisfactory documentation in accordance with applicable Small Business Administration (“SBA”) guidelines. Interest payable on the Note may be forgiven only if the SBA agrees to pay such interest on the forgiven principal amount of the Note. The Company will be obligated to repay any portion of the principal amount of the Note that is not forgiven, together with interest accrued and accruing thereon at the rate set forth above, until such unforgiven portion is paid in full.

Beginning one month following expiration of the Deferral Period, and continuing monthly until 24 months from the date of the Note (the “Maturity Date”), the Company is obligated to make monthly payments of principal and interest to the Lender with respect to any unforgiven portion of the Note, in such equal amounts required to fully amortize the principal amount outstanding on the Note as of the last day of the Deferral Period by the Maturity Date. The Company is permitted to prepay the Note at any time without payment of any premium.

In other efforts to alleviate the liquidity pressures and reposition the Company to generate positive cash flow at a lower level of net sales, since August 2019, the Company has implemented a multi-phase cost-reduction program which reduced cash expenses during 2019 by approximately $200,000 per month and which is anticipated to provide annualized cash savings of approximately $2,400,000 during 2020, compared to the Company’s operations, liquidity, capital resources and working capital,costs as they existed prior to the commencement of the cost reduction program. Although the Company believes it has made and will continue to make progress under these programs and the ability to sustain its operations and satisfy its obligations in the normal course of business for at least one year from the issuance date of this filing.

The Company’s primary long-term obligations are for payment of interest and principal on the Sterling Facility, which expires on December 28, 2019, andfunding provided under the Subordinated Loan Facility, which expires on March 28, 2019. RepaymentAgreement and available as a result of the Subordinated Loan Facility is subject to the prior payment, satisfaction and dischargerelease of the Sterling Facility. availability block under the MidCap Facility, the Company operates in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that our planned improvements will be successful.

Additionally, beginning during the last week of February 2020 and extending currently, the Company has been experiencing specific COVID-19 associated reductions in sales due to customers requesting to delay specific purchases and/or previously anticipated purchase orders and shipments. A portion of the Company’s customers are either fully or partially closed or operating with reduced staffing levels due in part to a range of government mandates or corporate policies such as shelter-in-place, the closure of non-essential businesses, and other restrictions. This initial short-term reduction in sales began in the range of 15% to 30% week by week deviations from expected/forecasted levels in March and then grew to a range of 45% to 55% deviations from expected/forecasted levels during the April to August time period. One of our major customers who accounted for approximately 10% of net sales during the three-month period ended March 31, 2020, and who previously informed the Company that pending orders for delivery in May and June were on hold, has more recently advised the Company that a portion of those orders may remain on hold until Q4 2020. It is possible that sales may continue to decline further in future periods during 2020 and beyond, as upticks in cases of COVID-19 continue to be reported around the country, which may result in renewed closures and governmental mandates restricting or further delaying efforts to return to business as usual. While the majority of the Company’s customers remain open for business and have informed the Company of their current intentions to remain open through the current circumstances, and despite a portion of the Company’s customers having reopened during Q3 2020, recent spikes in reported COVID-19 cases have resulted in certain customers deferring or delaying previously planned meetings and business discussions. The Company has reacted to these unprecedented circumstances, as many enterprises have had to do over the course of March through October 2020, with a range of actions designed to compensate for anticipated temporary revenue shortfalls, manage the Company’s working capital and minimize the overall financial impact of this disruption, including implementation of exceptional short-term operating expense reductions, such as temporary manufacturing shut-downs, employee furloughs and supplier payment renegotiations. The Company has finalized several supplier renegotiations and is still in process with other suppliers to allow for alterations of shipment and receive dates of incoming parts and inventory in other cases.

The Company expects to use cash generated from operations to meet its long-term debt obligations. The Company also expects to make financed and unfinanced long-term capital expenditures from time to time in the ordinary course of business, which capital expenditures were $100,000$ 138,000 and $37,000$263,000 in the nine months ended September 30, 20172020 and the year ended December 31, 2016,2019, respectively. The Company expects to use cash generated from operations, amounts available under the SterlingMidCap Facility, andamounts available under the Subordinated Loan Facility, and purchase-money financing to meet any anticipated long-term capital expenditures.

Critical Accounting Estimates

See the Notes to Condensed Consolidated Financial Statements for a description of where estimates are required.

NewRecent Accounting Pronouncements

See Note 3Notes 2(d) and (e) of the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements, including the anticipated dates of adoption and the effects on the Company’s consolidated financial position and results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains a system of disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is 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. The Company carried out an evaluation, under the supervision and with the participation of management, including the principal executive officer and principal financial officer, of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective at September 30, 2017.2020.

During the quarter ended September 30, 2017,2020, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is a party to certain proceedings incidental to the ordinary course of its business, none of which, in the current opinion of management, is likely to have a material adverse effect on the Company’s business, financial condition, results of operations, or cash flows.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Risk Factors” included in the Company’s Form 10-K for the year ended December 31, 2019. The below is a material change from the risk factors included in Form 10-K for the year ended December 31, 2019.

We are subject to the continued listing requirements of the NYSE American. If we are unable to comply with such requirements, our common stock would be delisted from the NYSE American, which would limit investors’ ability to effect transactions in our common stock and subject us to additional trading restrictions.

Our common stock is currently listed on NYSE American. In order to maintain our listing, we must maintain certain share prices, financial and share distribution targets, including maintaining a minimum amount of stockholders’ equity and a minimum number of public shareholders. In addition to these objective standards, NYSE American may delist the securities of any issuer for other reasons involving the judgment of NYSE American. On June 10, 2020 we received written notification from NYSE American that we are not in compliance with the continued listing standard under Section 1003(a)(iii) of the NYSE American Company Guide (“Company Guide”), which requires a listed company to have stockholders’ equity of at least $6 million if it has reported losses from continuing operations and/or net losses in its five most recent fiscal years. In accordance with NYSE American requirements, we have submitted a plan addressing how we intend to regain compliance with Section 1003(a)(iii) by December 10, 2021, the deadline for us to regain compliance.

On August 27, 2020, we received notice that our plan to regain compliance with Section 1003(a)(iii) of the Company Guide had been accepted and that we had been granted a plan period through December 10, 2021. As a result, the listing of our common stock on NYSE American is being continued during the plan period pursuant to an extension. However, during the plan period we will be subject to periodic review by NYSE Regulation staff, including quarterly monitoring, to determine if we are making progress consistent with the plan. If we are not in compliance with the continued listing standards by December 10, 2021, or if NYSE Regulation determines that we are not making sufficient progress consistent with our plan, delisting proceedings will be instituted against us, as appropriate.

Due largely to the continuing effects of the COVID-19 pandemic, we did not meet certain elements of the near-term milestones we had included as part of the compliance plan we submitted to the NYSE American. As a result, it is possible that NYSE Regulation will determine that we are not making sufficient progress consistent with our plan and may request that we submit a revised plan or may initiate delisting proceedings against us. We cannot assure you that we will make sufficient progress to regain compliance with Section 1003(a)(iii) by December 10, 2021 under our initial plan or any revision we make to such plan or that NYSE Regulation will accept any revisions we propose to make to our initial plan, or that delisting proceedings may not be instituted against us based on our not meeting certain elements of the near-term milestones we had included as part of the compliance plan we submitted. If delisting proceedings are instituted against us, we would have the right to appeal any delisting determination.

If NYSE American delists our common stock from trading on the exchange and we are not able to list our securities on another national securities exchange, we expect our common stock would qualify to be quoted on an over-the-counter market. If this were to occur, we could experience a number of adverse consequences, including:

In addition, the National Securities Markets Improvement Act of 1996 generally preempts the states from regulating the sale of “covered securities.” Our common stock qualify as “covered securities” because they are listed on NYSE American. If our common stock were no longer listed on NYSE American, our securities would not be “covered securities” and we would be subject to regulation in each state in which we offer our securities.

Our financial condition and results of operations have been and may continue to be adversely affected by health events such as the recent Coronavirus or COVID-19 outbreak.

Our business has been materially and adversely affected by the outbreak of the Coronavirus or COVID-19 and may in the future be materially and adversely affected by other epidemics and pandemic outbreaks. COVID-19, which has been declared by the World Health Organization to be a “pandemic,” has spread to many countries, including the United States, and is impacting domestic and worldwide economic activity. A public health epidemic or pandemic, including COVID-19, poses the risk that the Company or its employees, customers, suppliers and other business partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities. Since being declared a “pandemic”, COVID-19 has interfered with our ability to meet with certain customers and has impacted and may continue to impact many of our customers. There are developments regarding the COVID-19 outbreak on a daily basis that may impact our customers, employees and business partners. As a result, it is not possible at this time to estimate the duration or the scope of the impact COVID-19 could have on the Company’s business. However, the continued spread of COVID-19 and actions taken by our customers, suppliers and business partners, actions we take to protect the health and welfare of our employees, and measures taken by governmental authorities in response to COVID-19 could disrupt our manufacturing activities, the shipment of our products, the supply chain and purchasing decisions of our customers. The Company has experienced and is continuing to experience a significant reduction in sales as a result of the decreased business activities of our customers related to the COVID-19 outbreak and it remains unclear when or whether our customers will resume their activities at a level where our sales to them will return to historical levels. In addition, government officials in our region have imposed measures that restrict “non-essential” business activities, and although we are currently considered to be involved in an “essential” business activity, it is possible that those measures or others may be extended to cover “essential” business activities. If such restrictions were to be imposed, it is likely that we would not be able to continue all or a portion of our manufacturing, shipping and billing operations. Similar restrictions affecting the places where our customers do business would likely further reduce their business activities. These and other developments may have a material adverse impact on our business.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 5. OTHER INFORMATION

NoneNone.

ITEM 6. EXHIBITS

The exhibits are listed in the Exhibit Index appearing at page 1722 herein.

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, thereunto duly authorized.

EXHIBIT INDEX

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