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 JUNE 30, 2019.MARCH 31, 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 every Interactive Data File required to be submitted 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 such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “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 AugustMay 6, 2019: 9,621,7162020: 9,634,163

The Exhibit Index appears on page 21

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

(unaudited)

See accompanying notes to unaudited condensedthe consolidated financial statementsstatements.

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 STOCKHOLDERS’ 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

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ 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 balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated interim financial statements as of June 30, 2019March 31, 2020 and for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). The accompanying unaudited condensed consolidated interim financial statements include all adjustments, consisting primarily of normal recurring adjustments, which the Company considers necessary for a fair 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, 20182019 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 SEC rules and regulations. The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 20182019 and notes thereto included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2018,2019, which was filed with the SEC on April 1, 2019.13, 2020. The results of the three and six months ended June 30, 2019March 31, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 20192020 or for any future interim period.

Note 2 – Summary of Significant Accounting Policies

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 stock-based compensation and reserves related to accounts receivable, inventories and deferred tax assets. Actual results could differ from those estimates.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

Earnings (loss) per share is calculated in accordance with 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:

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

The diluted share base excludes the following potential common shares due to their antidilutive effect:

In June 2018, the FASB issued ASU No. 2018-07,Compensation – Stock Compensation (“Topic 718”): Improvements to Nonemployee Share-Based Payment Accounting. The guidance in this ASU expands the scope of ASC Topic 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. This amendment will be effective for annual and interim periods beginning after December 31, 2018. The adoption of ASU 2018-07 did not have a material effect on the Company’s financial position, results of operations or financial statement disclosure. 

In February 2016, the FASB issued ASU No. 2016-02,Leases (Topic 842)(“Topic 842”), which establishes a new lease accounting model for lessees. The updated guidance requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. In June 2018, the FASB issued ASU No. 2018-10,Codification Improvements to Topic 842, Leases, which further clarifies how to apply certain aspects of the new lease standard. In July 2018, the FASB issued ASU No. 2018-11, Leases – Targeted Improvements, which provides another transition method that allows entities to apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This transition method option is in addition to the existing transition method of using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Topic 842 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The Company adopted Topic 842 on January 1, 2019, using a transition method option approach as applied to leases existing as of or entered into after the adoption date. Topic 842 provides a number of optional practical expedients and accounting policy elections. The Company elected the package of practical expedients requiring no reassessment of whether any expired or existing contracts are or contain leases, the lease classification of any expired or existing leases, or initial direct costs for any existing leases. Upon adoption, of Topic 842, the Company recognized additional right of use assets and corresponding lease liabilities pertaining to its operating leases on its unaudited condensed consolidated balance sheets. The Company recognized approximately $290 of a right ofto use asset and liability under current operating leases at January 1, 2019. The Company recognized approximately $3,627 of a right of use asset and lease liability in connection with the lease described in Note 10. Operating lease liabilities are based on the net present value of the remaining lease payments over the lease term. In determining the present value of lease payment, the Company used its incremental borrowing rate based on the information available at the date of adoption of Topic 842. As of June 30, 2019, the weighted average remaining lease term is 4.58 years and the weighted average discount rate used to determine the operating lease liabilities was 6.5%. The adoption of the new standard did not have a significant impact on the Company’s results of operations and cash flows.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

In January 2017, the 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 Company is currently evaluating the effectadoption of this new standard willdid not have a material impact on itsthe 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 Company is currently evaluating the effectadoption of this new standard willdid not have a material impact on itsthe Company’s financial position, results of operations or financial statement disclosure.disclosure

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.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

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 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 March 31, 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 is expected to reduce annualized expenses by approximately $2,000, including a decrease in workforce and a decrease in other operating expenses.

The Company’s primary sources of liquidity are its existing cash balances, cash generated from operations and the amounts available under the MidCap Facility (as such terms are defined in Note 5 below). As of March 31, 2020, the Company had approximately $3,070 outstanding under the MidCap Facility (as defined in Note 5 below) and $347 of additional availability for borrowing under the MidCap Facility.

As previously announced, on April 7, 2020, the Company and MidCap agreed to amend the terms of the MidCap Facility to remove the $400 availability block. Removal of the block is subject to certain conditions, including the Company securing additional debt or equity financing of at least $500. The Company has obtained financing that meets the requirements for removal of the block. See Note 11 – Subsequent Events for additional information regarding the amendment of the MidCap Facility and the financing.

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 – Revenue Recognition

The Company recognizes revenue when it satisfies a performance obligation by transferring the product or service to the customer, typically at a point in time.

Disaggregation of Revenue

The following table presents the Company’s disaggregated revenues by revenue source:

All of the Company’s sales are to customers located primarily throughout the United States and Canada.

The Company is a technology-development and manufacturing company that delivers a wide range of products and 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. DataDOCSIS 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 provides manufacturing, research and development and product support services for other companies’ products. Set top boxesCPE products are used by cable operators to provide video delivery to customers using IP technology. NeXgenNXG is a two-way forward lookingforward-looking platform that is used to deliver next generation entertainment services in both enterprise and residential locations. The Company also provides technical services, including hands-on training, system design engineering, on-site field support and complete system verification testing.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

The following table presents the Company’s disaggregated revenues by revenue source:

All of the Company’s sales are to customers located primarily throughout the United States and Canada.

Note 4 – Inventories

Inventories are summarized as follows:

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

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

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 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 $730$389 and $693 during the sixthree months ended June 30, 2019.March 31, 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 providedprovides 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, prior to entering into the Consent (defined below), a $3,500 amortizing term loan (the “Term LoanMidCap Facility”). The SterlingMidCap Facility matures in December 2019.following 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 (2.49% and 2.09% at June 30, 2019 and 2018, respectively) plus a margin of 4.00%. Interest on the Term Loan also is variable, based upon the 30-day LIBOR rate (2.49% and 2.09% at June 30, 2019 and 2018, respectively) plus a margin of 4.50%. The Term Loan amortized at the rate of $19 per4.75%, 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.

On February 1, 2019, in connection with the completion of the sale of the Old Bridge Facility and entry into the Lease (as further described in Note 10), the Company entered into a Consent Under Loan and Security Agreement (the “Consent”) with Sterling, pursuant to which, in consideration for Sterling’s consent to the Company’s sale of the Old Bridge Facility and Sterling’s further agreement to execute and deliver a Discharge of Mortgage and Assignment of Leases and Rents (the “Discharge”) to effect the discharge of Sterling’s mortgage thereon, the Company was required to apply the proceeds of the sale of the Old Bridge Facility to fully pay, satisfy and discharge the Term Loan and to pay down the Revolver balance to zero (with no reduction in the Revolver commitment by Sterling). The Company paid approximately $3,014 to pay off the Term Loan in connection with the Discharge. In addition, the Company paid down the outstanding balance under the Revolver of approximately $2,086. On March 29, 2019, the Company and Sterling entered into a certain Second Amendment to Loan and Security Agreement (the “Second Amendment”), which replaced the existing fixed charge coverage ratio covenant with a minimum liquidity covenant. That covenant obligates the Company to not permit the sum of its unrestricted cash (as described in the Second Amendment) plus availability under the Revolver to drop below $2,000,000 at any time. The outstanding balances under the Revolver were zero and $2,603 at June 30, 2019 and December 31, 2018, respectively. All outstanding indebtedness under the SterlingLoan Agreement is secured by all of the assets of the Company and its subsidiaries.

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 the Company’s assets. In addition, the Company mustis required to maintain (i) the minimum liquidity described above and (ii) a leverage ratioavailability 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). The Company was not in compliance with the fixed charge coverage ratio covenant under the Sterling Agreement at December 31, 2018 and January 31, 2019. Sterling waived this non-compliance in the Second Amendment. The Company was in compliance with its financial covenants as of June 30, 2019.$400.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

Note 6 – Subordinated Convertible Debt with Related Parties

On March 28, 2016, the Company and RLDits 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 could bemay have been drawn by the Company. Interest on the outstanding balance under the 2016 Subordinated Loan Facility from time to time, accrued at 12% per annum (subject to increase under certain circumstances) and was 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 was permitted to paycould have paid interest in cash on any interest payment date, in lieu of PIK Interest. The 2016 Subordinated Lenders had 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 RLDDrake under the 2016 Subordinated Loan Agreement were secured by substantially all of the Company’s and RLD’sDrake’s assets, including by a mortgage against the Old Bridge Facility (the “Subordinated Mortgage”). The 2016 Subordinated Loan Agreement had a maturity dateterminated 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, wouldwas to be due and payable in full. In connection with the Subordinated Loan Agreement, the Company, Drake, the Subordinated Lenders and Sterling 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 were subordinated to the rights of Sterling under the Sterling Agreement and related security documents. The Subordination Agreement precluded the Company from making cash payments of interest in lieu of PIK Interest, in the absence of the prior written consent of Sterling.

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.

In connection with the anticipated completion of the sale of the Old Bridge Facility, (as described in Note 10), on January 24, 2019, the Company and RLD, as Borrower,Drake (with the Lenders andCompany, collectively, the Agent“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 Robert J. Pallé and Carol M. Pallé (collectively, “the Initial Lenders”), remained subject to a commitment to lend BorrowerBorrowers 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 the Company’sCompany common stock in full satisfaction of the Shea Indebtedness.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

Note 7 – Related Party Transactions

Adirectorand shareholder of the Company is a partner of a law firm that serves as outside legal counsel for the Company. During the three and six monththree-month periods ended June 30,March 31, 2020 and 2019, and 2018, this law firm billed the Company approximately $124, $275, $304$152 and $401,$151, respectively for legal services provided by this firm. Included in accounts payable on the accompanying unaudited condensed balance sheetssheet at June 30, 2019 and DecemberMarch 31, 2018,2020 is approximately $61 and zero, respectively,$152 owed to this law firm.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

Note 8 – Concentration of Credit Risk

The following table summarizes credit risk with respect to customers as percentage of sales for the three and six month periods ending June 30, 2019ended March 31, 2020 and 2018, respectively and2019:

The following table summarizes credit risk with respect to customers as a percentage of accounts receivable as of June 30, 2019 and December 31, 2018, respectively:receivable:

The following table summarizes credit risk with respect to vendors as percentage of purchases for the three-month periods ended March 31, 2020 and 2019:

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

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

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 threethree-month period ended March 31, 2020 were $190 and six month periods$188, respectively. Lease costs and cash paid for the three-month period ended June 30,March 31, 2019 were $251$58 and $354,$107, respectively.

Maturities of the lease liabilities are as follows:

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)As of March 31, 2020, the weighted average remaining lease term is 3.74 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 addition, 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 will continuecontinues to occupy and continue to 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, 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 Topic 842 as a sale leaseback as described in Note 2.and leaseback.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

Note 11 – Subsequent Events

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 (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 benefit of the Company’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 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, 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 is subject to stockholder approval as required by the rules of the NYSE American.

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 will terminate if the requisite stockholder approval is obtained.

BLONDER TONGUE LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(unaudited)

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 and Tranche B Conversion Prices.

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation,obligations of the Company did not identifyunder 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 recognized or non-recognized subsequent events thatother accrued unpaid interest, would require adjustmentbe 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 or disclosurewhich 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 condensed consolidated financial statements.absence of the prior written consent of Mid Cap 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 April 10, 2020, the 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 eight 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 eight 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 intends to use the proceeds for purposes consistent with the PPP. 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.

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 onForm 10-K for the year ended December 31, 2018,2019, filed with the Securities and Exchange Commission on April 1, 201913, 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(“IPTVIPTV”)”) 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.

During

In 2019, the Company introducedinitiated a line of Android TVconsumer premise equipment (“CPE”) sales initiative. The products sold in 2019 comprise primarily Android-based IPTV set top boxes. Theseboxes 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 BT 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 designed to help transition cable subscribers coming from traditional PayTV services onto a modern IPTV platform combining access to Over$646,000 and $191,000 in the Top (“OTT”)first three months of 2020 and PayTV video services. The Company expects growth in this business during 2019, and in future years.

During 2019, the Company introduced a line of products known as NeXgen (“NXG”). NXG is a two-way forward looking platform that is used to deliver next generation entertainment services in both enterprise and residential locations. The Company expects growth in this business during 2019 and in future years.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 $2,244,000 and $2,542,000 in the second three months of 2019 and 2018, respectively and $4,190,000 and $5,085,000 in the first six months of 2019 and 2018, respectively. Sales of analog video headend products were $409,000 and $493,000 in the second three months of 2019 and 2018, respectively and $883,000 and $823,000 in the first six months of 2019 and 2018, respectively. AnyAccordingly, any substantial decrease in sales of analog products without a related substantial 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 $1,057,000 and $1,946,000 and sales of analog video headend products were $339,000 and $474,000 in first three 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 of encoder products were approximately $46,000$44,000 and $155,000$28,000 in the secondfirst three months of 20192020 and 2018, respectively and $74,000 and $379,000 in the first six months of 2019, and 2018, respectively. Sales to VBrick for sub-assemblies were not material in the second three months ended March 31,2020 or first six months of 2019, or 2018.respectively.

Results of Operations

SecondFirst three months of 2020 Compared with first three months of 2019 Compared with second three months of 2018

Net Sales. Net sales increased $160,000,decreased $32,000, or 3.0%0.8%, to $5,437,000$4,050,000 in the secondfirst three months of 20192020 from $5,277,000$4,082,000 in the secondfirst three months of 2018.2019. The increasedecrease is primarily attributedattributable to an increase in set top boxes and NXG products, offset by a decrease in sales of data products, digital video headend products contract manufacturedand analog video headend products, offset by an increase in sales of DOCSIS data products, CPE products and HFC distributionNXG products. Sales of set top boxes were $1,002,000 and zero, NXG products were $362,000 and zero, data products were $565,000 and $1,055,000, digital video headend products were $2,244,000$1,057,000 and $2,542,000, contracted manufactured$1,946,000, analog video headend products were $46,000$339,000 and $155,000 and HFC distribution$474,000, DOCSIS data products were $581,000$871,000 and $761,000$540,000, CPE products were $646,000 and $191,000and NXG products were $196,000 and $82,000 in the secondfirst three months of 20192020 and 2018,2019, respectively.

Cost of Goods Sold. Cost of goods sold increased to $3,432,000$3,497,000 for the secondfirst three months of 20192020 from $3,086,000$2,991,000 for the secondfirst three months of 20182019 and increased as a percentage of sales to 63.1%86.4% from 58.5%73.3%. The dollar increase wasis primarily dueattributable to an increaselower margins relating to CPE products as the Company continued to implement its strategic CPE Product initiative, described above under “General,” which began late in sales.the first quarter of 2019, as well as increased overhead costs. The increase as a percentage of sales was primarily attributedis also attributable to an unfavorable change in product mix.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 increased to $745,000$728,000 for the secondfirst three months of 20192020 from $608,000$727,000 in the secondfirst three months of 2018,2019 and increased as percentage of sales to 13.7%17.9% for the secondfirst three months of 20192020 from 11.5%17.8% for the secondfirst three months of 2018.2019. The $137,000$1,000 increase was primarily the result of an increase in occupancy costs of $71,000, offset by a decrease in salaries and fringe benefits due to an increasea decrease in head count of $55,000 and salary adjustmentsa decrease in department supplies of $122,000.$53,000.

General and Administrative Expenses. General and administrative expenses increaseddecreased to $1,327,000$1,187,000 for the secondfirst three months of 2020 from $1,466,000 for the first three months of 2019 from $1,157,000 for the second three months of 2018 and increaseddecreased as a percentage of sales to 24.4%29.3% for the secondfirst three months of 20192020 from 21.9%35.9% for the secondfirst three months of 2018.2019. The $170,000 increase$279,000 decrease was primarily the result of an increasea decrease in salaries and fringe benefits due to an increasea decrease in head countcompensation of $204,000 and salary adjustments of $24,000, an increasea decrease in consulting fees of $94,000$93,000 related to IT outsourcing and increase in legal expense of $25,000 and an increase in occupancy costs of $37,000 related to the Old Bridge lease.outsourcing.

Research and Development Expenses. Research and development expenses increaseddecreased to $778,000$657,000 in the secondfirst three months of 2020 from $665,000 in the first three months of 2019 from $643,000 in the second three months of 2018 and increaseddecreased as a percentage of sales to 14.3%16.2% for the secondfirst three months of 20192020 from 12.2%16.3% for the secondfirst three months of 2018.2019. This $135,000 increase$8,000 decrease is primarily the result of an increasea decrease in salaries and fringe benefits due to an increase inreduced head count and salary adjustmentsa decrease in compensation of $47,000 and$74,000, offset by an increase in consulting fees of $77,000.$23,000, an increase in occupancy costs of $21,000 related to the Old Bridge lease, and an increase in department supplies of $19,000.

Operating Loss.(Loss) Earnings. Operating loss of $845,000$(2,019,000) for the secondfirst three months of 2020 represents a decrease from the operating income of $5,408,000 for the first three months of 2019. Operating loss represents an increase of $252,000 for the first three months of 2020 from the first three months of 2019, represents an increase from operating lossbefore giving effect to the gain reported on the building sale of $217,000 for$7,175,000 during the second three monthsfirst quarter of 2018.2019. Operating loss(loss) earnings as a percentage of sales was (15.5)(49.9)% in the secondfirst three months of 20192020 compared to (4.1)%132.5% in the secondfirst three months of 2018.2019.

Interest Expense. Interest expense decreased to $46,000$61,000 in the secondfirst three months of 20192020 from $118,000$83,000 in the secondfirst three months of 2018.2019. The decrease is primarily the result of lower average borrowing.borrowing as the Sterling Term Loan was paid off in February 2019 upon the sale leaseback of the Old Bridge Facility.

First six months of 2019 Compared with first six months of 2018

Net Sales. Net sales decreased $1,121,000, or 10.5%, to $9,519,000 in the first six months of 2019 from $10,640,000 in the first six months of 2018. The decrease is primarily attributed to a decrease in sales of data products and digital video headend products, offset by an increase in sales of set top box products. Sales of data products were $1,105,000 and $2,454,000, digital video headend products were $4,190,000 and $5,085,000 and set top box products were $1,193,000 and zero in the first six months of 2019 and 2018, respectively.

Cost of Goods Sold. Cost of goods sold increased to $6,423,000 for the first six months of 2019 from $6,226,000 for the first six months of 2018 and increased as a percentage of sales to 67.5% from 58.5%. The increase was primarily due to an increase in the write down of inventories to net realizable value of $730,000. The increase as a percentage of sales was primarily attributed to the above. Had the write down not occurred, cost of goods sold as a percentage of sales would have been 59.8% for the six months ended June 30, 2019.

Selling Expenses. Selling expenses increased to $1,472,000 for the first six months of 2019 from $1,211,000 in the first six months of 2018 and increased as percentage of sales to 15.5% for the first six months of 2019 from 11.4% for the first six months of 2018. The $261,000 increase was primarily the result of an increase in salaries and fringe benefits due to an increase in head count and salary adjustments of $222,000.

General and Administrative Expenses. General and administrative expenses increased to $2,793,000 for the first six months of 2019 from $2,033,000 for the first six months of 2018 and increased as a percentage of sales to 29.3% for the first six months of 2019 from 19.1% for the first six months of 2018. The $760,000 increase was primarily the result of an increase in salaries and fringe benefits due to an increase in head count and salary adjustments of $414,000, an increase in consulting fees of $187,000 related to IT outsourcing and an increase in travel expenses of $62,000.

Research and Development Expenses. Research and development expenses increased to $1,443,000 in the first six months of 2019 from $1,300,000 in the first six months of 2018 and increased as a percentage of sales to 15.2% for the first six months of 2019 from 12.2% for the first six months of 2018. This $143,000 increase is primarily the result of an increase in salaries and fringe benefits due to an increase in head count and salary adjustments of $91,000 and an increase in consulting fees of $104,000.

Operating Loss. Operating loss of $2,612,000 for the first six months of 2019 represents an increase from operating loss of $130,000 for the first six months of 2018. Operating loss as a percentage of sales was (27.4)% in the first six months of 2019 compared to (1.2)% in the first six months of 2018.

Interest Expense. Interest expense decreased to $129,000 in the first six months of 2019 from $268,000 in the first six months of 2018. The decrease is primarily the result of lower average borrowing.

Liquidity and Capital Resources

As of June 30, 2019March 31, 2020 and December 31, 2018,2019, the Company’s working capital was $8,613,000$1,913,000 and $2,114,000,$3,805,000, respectively. The increasedecrease in working capital was primarily due to the receiptreduction in accounts receivable and inventories along with an increase in the line of proceeds from the sale of the Old Bridge Facility after paying off the Term Loan and paying down the Revolver under the Sterling Facility.credit.

The Company’s net cash used in operating activities for the six-monththree-month period ended June 30,March 31, 2020 was $842,000 primarily due to a net loss of $2,080,000 offset by a decrease in accounts receivable of $321,000 and a decrease in inventories of $829,000. The Company’s net cash used in operating activities for the three-month period ended March 31, 2019 was $4,375,000,$3,024,000 primarily due to non-cash adjustments of $(6,589,000)$(6,834,000) and an increase in inventories of $1,302,000, offset by net earnings of $4,434,000. The Company’s net cash provided by operating activities for the six-month period ended June 30, 2018 was $1,319,000 primarily due to an increasea decrease in accounts payable, accrued compensation and other accrued expenses of $661,000 and a reduction in accounts receivable$1,087,000, offset by net earnings of $1,004,000, offset, in part, by a reduction in inventories of $331,000.$5,325,000.

Cash used in investing activities for the three-month period ended March 31, 2020 was $6,000, all of which was attributable to capital expenditures. Cash provided by investing activities for the six-monththree-month period ended June 30,March 31, 2019 was $9,687,000,$9,754,000, of which $9,765,000 was attributable to proceeds on the sale of the Old Bridge Facility, offset by $21,000$1,000 was attributable to additional license fees and $57,000$10,000 was attributable to capital expenditures.

Cash used in investingprovided by financing activities was $355,000 for the six-month period ended June 30, 2018first three months of 2020, which was $52,000,comprised of which $47,000 was attributable to capital expendituresnet borrowing of line of credit of $365,000 and $5,000 was attributable to additional license fees.

repayments of debt of $10,000. Cash used in financing activities was $5,659,000$5,661,000 for the first sixthree months of 2019, which was comprised of net repayments of borrowings on the Revolver under the Sterling Facility of $2,603,000 and repayments of long-term debt of $3,063,000 offset by proceeds from the exercise of stock options of $7,000. Cash used in financing activities was $991,000 for the first six months of 2018, which was comprised of net repayments of line of credit of $865,000 and repayments of debt of $126,000.$3,058,000.

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 have been its existing cash balances, cash generated from operations and amounts available under the Sterling Facility and the Subordinated LoanMidCap Facility. In connection with the completion of the sale of the Old Bridge Facility, as described below, the Subordinated Loan Facility was terminated. On a going-forward basis,At March 31, 2020, the Company expects its primary sources of liquidity will be its existing cash balances (including amounts the Company received upon completion of the sale of the Old Bridge Facility, as described below), cash generated from operations and amountshad $343,000 available under the SterlingMidCap Facility. The Company was not in compliance with the fixed charge coverage ratio under the Sterling Agreement at December 31, 2018 and January 31, 2019. Sterling has waived this non-compliance, and the Company and Sterling have agreed to an amendment to the Sterling Agreement (the “Second Amendment”), which replaced the existing fixed charge coverage ratio covenant with a minimum liquidity covenant. That covenant obligates the Company to not permit the sum of its unrestricted cash (as described in the Second Amendment) plus availability under the Revolver to drop below $2,000,000 at any time. The Company was in compliance with its covenants as of June 30, 2019.As of June 30, 2019, the Company had zero outstanding under the Revolver, $1,691,000 of availability for borrowing under the Revolver and $212,000 cash on hand.The minimum liquidity covenant will effectively reduce the amount that the Company is able to borrow under the Sterling Facility. The Sterling Facility matures in December 2019. We currently intend to seek to extend the Sterling facility, but if we are unable to do so, we would seek new debt financing arrangements. We cannot assure you that new debt financing will be available to us on acceptable terms or at all.

On February 1, 2019, the Company completed the sale of the Old Bridge Facility to Jake Brown Road, LLC (the “Buyer”). In addition, 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 will continuecontinues to occupy and continue to 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 (the “Initial Sale Agreement”), as amended by an Extension Letter Agreement dated as of September 20, 2018, the Second Amendment to Agreement of Sale dated as of October 8, 2018 and the Third Amendment to Agreement of Sale dated as of January 30, 2019 (the Initial Sale Agreement together with the Extension Letter Agreement, Second Amendment to Agreement of Sale and Third Amendment to Agreement of Sale, collectively, the “Sale Agreement”). Pursuant to the Sale Agreement, at closing, the Buyer paid the Company $10,500,000. In addition, at closing, the Company advanced to the Buyer the sum of $130,000, 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.

On February 1, 2019, in connection with the completion of the sale of the Old Bridge Facility and entry into the Lease, the Company entered into a Consent Under Loan and Security Agreement (the “Consent”) with Sterling National Bank (“Sterling”), pursuant to which, in consideration for Sterling’s consent to the Company’s sale of the Old Bridge Facility and Sterling’s further agreement to execute and deliver a Discharge of Mortgage and Assignment of Leases and Rents (the “Discharge”) to effect the discharge of Sterling’s mortgage on the Old Bridge Facility, the Company was required to apply the proceeds of the sale of the Old Bridge Facility to fully pay, satisfy and discharge the Term Loan and to pay down the Revolver balance to $0.00 (with no reduction in the Revolver commitment by Sterling). The Company paid approximately $3,014,000 to pay off the Term Loan in connection with the Discharge. In addition, the Company paid down the outstanding balance under the Revolver of approximately $2,086,000.

On January 24, 2019, the Company and RLD (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 previously disclosed, the Borrower, the Lenders and the Agent were parties to a First Amendment to Amended and Restated Senior Subordinate Convertible Loan and Security Agreement, dated as of March 21, 2017 (as amended to date, the “Subordinated Loan Agreement”), pursuant to which the Lenders provided the Borrower with commitments to lend Borrower up to $750,000 in the form of loans convertible, under the terms provided in the Subordinated Loan Agreement, into shares of the Company’s Common Stock. The obligations of Borrower to pay, satisfy and discharge the obligations under the Subordinated Loan Agreement were secured by security interests in and liens upon certain specified collateral, including certain mortgages in favor of the Lenders and the Agent (the “Subordinated Mortgages,” and together with the Subordinated Loan Agreement and all other agreements, documents and instruments related thereto, collectively, the “Subordinated Loan Documents”).

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 $100,000 loan advanced by Shea under the 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 $250,000 (the “Additional Commitment”).

In connection with the anticipated completion of the sale of the Old Bridge Facility, on January 24, 2019, the Borrower, the Lenders and the Agent entered into the Conversion and Termination Agreement to provide 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 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 by the Borrower, the Lenders and the Agent, Shea provided the Company with a notice of conversion, and upon completion of the sale of the Old Bridge Facility was issued 259,983 shares of Company Common Stock in full satisfaction of the Shea Indebtedness.

As previously disclosed, 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 $836,855.50approximately $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 $836,855.00 wouldapproximately $837,000 was offset, in part, by the anticipated 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”“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.

The

On December 31, 2019, the Company anticipates subleasingentered into a two-year sublease to a third party up to 40,000for 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 activities, in conjunction with liquidity constraints. These factors raised substantial doubt about the Company’s ability to sublease allcontinue as a going concern. As of March 31, 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 net 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 Sublease Space,Company entered into a certain Consent and Amendment to Loan Agreement and Loan Documents with Midcap (the “MidCap First Amendment”), which amended the specific termsMidCap Facility to, among other things, remove the existing $400,000 availability block, subject to the same being re-imposed at the rate of any subleaseapproximately $7,000 per month commencing June 1, 2020. The operative provisions relating to the removal of the Sublease Spaceavailability 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 benefit of the Company’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 rentthe accrued interest payable at that will be derived therefrom cannot be predictedtime (“PIK Interest”); provided, however, that at this time. The landlordthe 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 upa Tranche A term loan facility of $800,000, of which $600,000 was advanced to six monthsthe Company on April 8, 2020, $100,000 was advanced to the Company on April 17, 2020 and $100,000 of free rentwhich 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 is subject to stockholder approval as required by the rules of the NYSE American, and is expected to be 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 First Amendment to Senior Subordinated Convertible Loan and Security Agreement and Joinder (the “Amendment”). The Amendment provides for the Sublease Space,funding of $200,000 of additional loans as a Tranche B term loan under the Company undertakesSubordinated Loan Facility 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 identifythe 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 suitable tenant or tenants therefor. The provisionchange of free rent forcontrol under such rules. These restrictions will terminate if the Sublease Space expiredrequisite stockholder approval is obtained, which is expected to occur on July 31, 2019.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 these registration rights, the Lenders can request that the Company include for sale, in any registration statement filed by the Company under the Securities Act of 1933, as amended (the “Securities Act”) for the offer and sale of 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 and Tranche B Conversion Prices.

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 Mid Cap 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 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 eight 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 eight 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 intends to use 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 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 funding provided under the Subordinated Loan Agreement and available as a result of the release of the 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 to the current time, the Company has been experiencing specific COVID-19 associated reductions in sales due to customers requesting to delay specific purchases, and/or some order shipments, and due to a portion of the Company’s customers being partially closed or operating with reduced staffing levels due in part to a range of government mandates 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 deviation from expected/forecasted levels and had now grown to a 45% to 55% deviation. In addition, one of our major customers who accounted for approximately 10% of net sales during the three-month period March 31, 2020, informed the Company that pending orders for delivery in May and June are currently on hold. It is possible that sales may continue to decline further in May and June 2020, as closures and government mandates reach larger portions of the U.S. Currently 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 or are expected to re-open by the end of May 2020. The Company has reacted to these unprecedented circumstances, as many enterprises have had to do over the course of March and April 2020, with a range of actions to compensate for anticipated temporary revenue short falls, including exceptional short-term operating expense reductions, limited employee furloughs and supplier payment renegotiations, with the specific intent of managing the Company’s working capital and minimizing the overall financial impact to the Company. The Company has finalized some of these supplier renegotiations and is still in process with other suppliers to allow for payment extensions in some cases and alterations of shipment and receive dates of incoming parts and inventory in other cases.

The Company’s primary long-term obligations are for payment of interest and principal on the SterlingMidCap Facility, which expires on December 28, 2019.October 25, 2022. The Company expects to use cash generated from operations and the Sale Agreement proceeds 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 $57,000 6,000 and $81,000$263,000 in the sixthree months ended June 30, 2019March 31, 2020 and the year ended December 31, 2018,2019, respectively.The Company expects to use cash generated from operations, amounts available under the SterlingMidCap Facility, proceeds fromamounts available under the Sale AgreementSubordinated Loan Facility, and purchase-money financing to meet any anticipated long-term capital expenditures.

The Company believes that it has sufficient liquidity and capital resources to sustain its planned operations for at least the next 12 months from the filing date of this Form 10-Q.

Critical Accounting Estimates

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

Recent Accounting Pronouncements

See Notes 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 June 30, 2019.March 31, 2020.

During the quarter ended June 30, 2019,March 31, 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, 2018.2019. There are no material changes from the risk factors included in Form 10-K for the year ended December 31, 2018.2019.

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

None.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

The exhibits are listed in the Exhibit Index appearing at page 2123 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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