Lgl Group Inc 10-Q for FY2021 Q3
Lgl Group Inc (LGL)
About this 10-Q
Lgl Group Inc filed this 10-Q on November 15, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $7.5M
- down 7.1% from $8.07M a year earlier
- Net income
- $31.78M
- up 4952.5% from net income of $629K a year earlier
- Diluted EPS
- $5.97
- up 4875.0% from $0.12 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
Commission File No.
THE LGL GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
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(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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.
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
As of November 1, 2021, the registrant had
THE LGL GROUP, INC.
Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 2021
INDEX
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PART I. |
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Item 1. |
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1 |
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2 |
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3 |
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4 |
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5 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II. |
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Item 1. |
20 |
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Item 6. |
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PART I
FINANCIAL INFORMATION
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Item 1. |
Financial Statements. |
The LGL Group, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except par value and share amounts)
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September 30, 2021 |
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December 31, 2020 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Marketable securities |
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Accounts receivable, net of allowances of $ |
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Inventories, net |
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Prepaid expenses and other current assets |
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Total Current Assets |
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Property, plant and equipment: |
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Land |
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Buildings and improvements |
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Machinery and equipment |
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Gross property, plant and equipment |
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Less: accumulated depreciation |
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Net property, plant, and equipment |
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Right-of-use lease assets |
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Equity investment in unconsolidated subsidiary |
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— |
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Intangible assets, net |
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Deferred income tax asset |
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Other assets |
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Total Assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities: |
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Accounts payable |
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Accrued compensation and commissions |
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Other accrued expenses |
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Total Current Liabilities |
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Deferred income tax liability |
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— |
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Long-term lease liabilities |
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Total Liabilities |
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Contingencies (Note O) |
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Stockholders’ Equity |
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Common stock, $ September 30, 2021, and outstanding at December 31, 2020 |
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Additional paid-in capital |
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Retained earnings (accumulated deficit) |
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Treasury stock, and December 31, 2020 |
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Total Stockholders' Equity |
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Total Liabilities and Stockholders' Equity |
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$ |
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$ |
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See Accompanying Notes to Condensed Consolidated Financial Statements.
1
The LGL Group, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except share and per share amounts)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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REVENUES |
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$ |
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$ |
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$ |
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$ |
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Costs and expenses: |
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Manufacturing cost of sales |
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Engineering, selling and administrative |
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OPERATING (LOSS) INCOME |
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Other (expense) income: |
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Interest expense, net |
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Gain (loss) on equity investment in unconsolidated subsidiary |
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Unrealized (loss) gain on marketable securities |
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Other income (expense), net |
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Total other income (expense), net |
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INCOME BEFORE INCOME TAXES |
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Income tax expense |
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NET INCOME |
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$ |
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$ |
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$ |
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$ |
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Basic per share information: |
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Weighted average shares outstanding |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Diluted per share information: |
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Weighted average shares outstanding |
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Net income |
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$ |
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$ |
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$ |
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$ |
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See Accompanying Notes to Condensed Consolidated Financial Statements.
2
The LGL Group, Inc.
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
(In thousands, except share amounts)
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Shares of Common Stock Outstanding |
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Common Stock |
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Additional Paid-In Capital |
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Retained Earnings (Accumulated Deficit) |
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Treasury Stock |
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Total |
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Balance at December 31, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net income, Q1 2021 |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Balance at March 31, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Net loss, Q2 2021 |
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— |
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— |
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— |
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( |
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— |
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( |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Balance at June 30, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net income, Q3 2021 |
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— |
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— |
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— |
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— |
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Exercise of stock options |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Balance at September 30, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Balance at December 31, 2019 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net income, Q1 2020 |
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— |
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— |
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— |
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— |
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Exercise of stock options |
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— |
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— |
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— |
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At-the-market stock sales, net of costs of $ |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Balance at March 31, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net income, Q2 2020 |
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— |
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— |
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— |
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— |
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Exercise of stock options |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Balance at June 30, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net income, Q3 2020 |
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— |
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— |
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— |
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— |
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Exercise of stock options |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Balance at September 30, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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See Accompanying Notes to Condensed Consolidated Financial Statements.
3
The LGL Group, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
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Nine Months Ended September 30, |
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2021 |
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2020 |
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OPERATING ACTIVITIES |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation |
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Amortization of finite-lived intangible assets |
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Stock-based compensation |
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(Gain) loss on equity investment in unconsolidated subsidiary |
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( |
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Unrealized loss (gain) on marketable securities |
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( |
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Non-cash donation of IRNT common stock, net of realized gain |
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— |
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Deferred income tax expense |
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Changes in operating assets and liabilities: |
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Increase in accounts receivable, net |
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( |
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( |
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Decrease in inventories, net |
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(Increase) decrease in prepaid expenses and other assets |
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( |
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Decrease in accounts payable, accrued compensation and commissions and other |
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( |
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Net cash provided by operating activities |
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INVESTING ACTIVITIES |
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Subscription agreement funding |
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( |
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— |
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Capital expenditures |
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( |
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( |
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Proceeds from sale of marketable securities |
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— |
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Purchase of marketable securities |
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( |
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— |
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Net cash used in investing activities |
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( |
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( |
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FINANCING ACTIVITIES |
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Proceeds from at-the-market stock sales |
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— |
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Proceeds from stock option exercise |
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Net cash provided by financing activities |
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(Decrease) increase in cash and cash equivalents |
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( |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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Noncash Investing Activity: |
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Distribution of IRNT securities by Sponsor (unconsolidated subsidiary) |
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$ |
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$ |
— |
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Supplemental Disclosure: |
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Interest paid |
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$ |
— |
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$ |
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Income taxes paid |
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$ |
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$ |
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See Accompanying Notes to Condensed Consolidated Financial Statements.
4
The LGL Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
A. |
Basis of Presentation |
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and the instructions to Form 10-Q. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2021. The information included in this Form 10-Q should be read in conjunction with the information included in The LGL Group, Inc. (the “Company”, “LGL”, “we”, “our” or “us”) Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2021.
|
B. |
Summary of Significant Accounting Policies |
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries except its sole variable interest entity (“VIE”), LGL Systems Acquisition Holding Company, LLC (the “Sponsor”). The VIE served as the sponsor to a special purpose acquisition company, LGL Systems Acquisition Corp. (the “SPAC” or “DFNS”). The SPAC completed a merger with its target company, IronNet Cybersecurity, Inc., on August 26, 2021 and changed its name to Iron Net, Inc. (“IronNet” or “IRNT”) (the “IronNet Business Combination”). IronNet is a publicly-traded company on the New York Stock Exchange (“NYSE”) under the ticker symbol “IRNT.” Intercompany transactions and accounts have been eliminated in consolidation.
VIE: Our sole interest in a VIE, the Sponsor, has been accounted for under the equity method of accounting and not consolidated. Determining whether to consolidate a VIE requires judgement in assessing whether an entity is a VIE and if we are the entity’s primary beneficiary. If we are the primary beneficiary of a VIE, we are required to consolidate it. To determine if we are the primary beneficiary, we evaluate whether we have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our evaluation included identification of significant activities and an assessment of our ability to direct those activities, based on operating and other legal agreements as well as governance provisions. As a result of our review, we concluded that we were not the primary beneficiary of the VIE and that consolidation was not warranted.
The Sponsor is managed by LGL Systems Nevada Management Partners LLC (“Nevada GP”), an affiliated entity deemed to be under the significant influence of Marc Gabelli, the Company’s non-executive Chairman of the Board, who is also a greater than
Equity-Method Investments: When the Company does not have a controlling financial interest in an entity but can exert significant influence over the entity’s operating and financial policies, the investment is accounted for either (i) under the equity method of accounting or (ii) at fair value by electing the fair value option available under GAAP. Significant influence generally exists when the Company owns
Revenue Recognition
The Company recognizes revenue from the sale of its products in accordance with the criteria in Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, which are:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
The Company meets these conditions upon the Company’s satisfaction of the performance obligation, usually at the time of shipment to the customer, because control passes to the customer at that time. Our standard terms for customers are net due within
The Company provides disaggregated revenue details by segment in Note M – Segment Information, and geographic markets in Note N – Domestic and Foreign Revenues.
5
The Company offers a limited right of return and/or authorized price protection provisions in its agreements with certain electronic component distributors who resell the Company's products to original equipment manufacturers or electronic manufacturing services companies. As a result, the Company estimates and records a reserve for future returns and other charges against revenue at the time of shipment consistent with the terms of sale. The reserve is estimated based on historical experience with each respective distributor. These reserves and charges are immaterial as the Company does not have a history of significant price protection adjustments or returns. The Company provides a standard assurance warranty that does not create a performance obligation.
Practical Expedients:
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- |
The Company applies the practical expedient for shipping and handling as fulfillment costs. |
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- |
The Company expenses sales commissions as sales and marketing expenses in the period they are incurred. |
Income Taxes
The Company periodically undertakes a review of its valuation allowance, and it evaluates all positive and negative factors that may affect whether it is more likely than not that the Company would realize its future tax benefits from its deferred tax balances.
Impairment of Long-Lived Assets
Long-lived assets, including intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Long-lived assets are grouped with other assets to the lowest level to which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Management assesses the recoverability of the carrying cost of the assets based on a review of projected undiscounted cash flows. If an asset is held for sale, management reviews its estimated fair value less cost to sell. Fair value is determined using pertinent market information, including appraisals or broker's estimates, and/or projected discounted cash flows. In the event an impairment loss is identified, it is recognized based on the amount by which the carrying value exceeds the estimated fair value of the long-lived asset.
During the three and nine months ended September 30, 2021, we performed an assessment to determine if there were any indicators of impairment as a result of the operating conditions resulting from the coronavirus (“COVID-19”) pandemic. We concluded that, while there were events and circumstances in the macro-environment that did impact us, we did not experience any entity-specific indicators of asset impairment and no triggering events occurred. While we do not anticipate any material impairment of our assets in the future as a result of COVID-19, future changes in our projected results could alter that view.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-13, “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments,” which changes the impairment model for most financial assets. The standard replaces the incurred loss model with the current expected credit loss (“CECL”) model to estimate credit losses for financial assets. The provisions of the standard are effective for the Company on January 1, 2023; early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on its financial statements.
|
C. |
Equity Investment in Unconsolidated Subsidiary |
The Company invested $
For the nine months ended September 30, 2021 and 2020, the Company recognized a gain (loss) on equity investment in unconsolidated subsidiary of $
Subsequent to the September 14, 2021 Sponsor distribution, the Company’s IRNT common stock and warrants have been classified as marketable securities, under ASC 321, Investments – Equity Securities (“ASC 321”), with the change in fair value from the date of distribution reported as an unrealized gain or loss. The IRNT common stock is marked to market at September 30, 2021 based on its publicly quoted market price adjusted for liquidity, when applicable. A Monte Carlo simulation model was used to estimate the market price of the IRNT private warrants.
On April 12, 2021, the SEC’s Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (the “Staff Statement”) was released. The SPAC evaluated the applicability and impact of the Staff Statement on its historical financial statements that have been filed with the SEC and determined that restatement was required. In the first quarter of 2021, the SPAC changed its accounting treatment for both its public and private warrants outstanding using liability classification instead of equity classification resulting in a mark to market warrant liability adjustment for each reporting period since
6
issuance in 2019. As previously discussed, prior to the IronNet Business Combination, the Company reported its investment in the Sponsor under the equity method of accounting using HLBV. The SPAC’s mark to market accounting adjustments for the warrant liability did not change the Company’s HLBV due to the warrants requiring no cash settlement as of December 31, 2020 under a hypothetical liquidation; therefore, the SPAC’s restatement did not impact the Company’s carrying amount of its equity investment in the Sponsor.
D. Marketable Securities
The Company accounts for equity securities under ASC 321. Such securities are reported at fair value on the condensed consolidated balance sheets, and the related unrealized gains and losses are reported in the condensed consolidated statements of cash flows as a non-cash activity. Any unrealized appreciation or depreciation on investment securities is reported in the condensed consolidated statements of operations as an unrealized gain or loss on marketable securities. During the nine months ended September 30, 2021 and 2020, unrealized (loss) gain on marketable securities was ($
Details of marketable securities held at September 30, 2021 are as follows (in thousands):
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Cumulative |
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Unrealized |
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IronNet Securities: |
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Fair Value |
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Basis |
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(Loss) Gain |
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||||
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$ |
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$ |
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$ |
( |
) |
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( |
) |
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( |
) |
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( |
) |
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Equity funds and other securities |
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|
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|
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$ |
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$ |
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$ |
( |
) |
|
The IRNT securities were received by the Company as a result of the previously discussed Sponsor distribution. The fair value of these shares determined at the date of distribution represents the basis of these securities.
As a result of the IronNet Business Combination and LGL’s investment in the SPAC sponsor, LGL Systems Acquisition Holding Company, LLC, LGL was distributed
The
|
E. |
Related Party Transactions |
Certain balances held and invested in various mutual funds are managed by a related entity (the "Fund Manager"). The brokerage and fund transactions in 2021 and 2020 were directed solely at the discretion of the Company’s management.
As of September 30, 2021, the balance with the Fund Manager totaled $
7
As of December 31, 2020, the balance with the Fund Manager totaled $
Members of our board of directors including Marc Gabelli, John Mega, Timothy Foufas, Manjit Kalha and Michael Ferrantino, and members of our management Patrick Huvane and Michael Ferrantino, are members of the Sponsor. Robert LaPenta was a member of our board of directors until his resignation on September 27, 2021, as he joined IronNet as a board member upon the IRNT Business Combination. Robert LaPenta remains a passive member of the SPAC Sponsor. All except Mr. Kalha also served in various capacities of the SPAC but have all since resigned from the SPAC as of September 29, 2021. Prior to resignation, John Mega was President of the SPAC; Timothy Foufas was Chief Operating Officer of the SPAC; Robert LaPenta was Co-Chief Executive Officer and Chief Financial Officer of the SPAC; Mr. Gabelli was the Chairman and Co-Chief Executive Officer of the SPAC, Michael Ferrantino was a SPAC board member and Patrick Huvane was a SPAC officer. Mr. Foufas, Mr. Huvane and Mr. Gabelli are managing members of the Sponsor. Mr. Huvane became a managing member on September 27, 2021.
|
F. |
Fair Value Measurements |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value guidance identifies three primary valuation techniques: the market approach, the income approach and the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to observable inputs such as quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The maximization of observable inputs and the minimization of the use of unobservable inputs are required.
Classification within the fair value hierarchy is based upon the objectivity of the inputs that are significant to the valuation of an asset or liability as of the measurement date. The three levels within the fair value hierarchy are characterized as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 - Unobservable inputs for the asset or liability for which there is little, if any, market activity for the asset or liability at the measurement date. Unobservable inputs reflect the Company's own assumptions about what market participants would use to price the asset or liability. These inputs may include internally developed pricing models, discounted cash flow methodologies as well as instruments for which the fair value determination requires significant management judgment.
Assets
To estimate the market value of its cash and cash equivalents and marketable securities, the Company obtains current market pricing from quoted market sources or uses pricing for identical securities adjusted for liquidity, when applicable. The Company uses a Monte Carlo simulation model to estimate the market price of its private warrants.
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Level 1 |
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Level 2 |
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Level 3 |
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Total at September 30, 2021 |
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Equity Security |
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$ |
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$ |
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$ |
— |
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$ |
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Equity Mutual Fund |
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— |
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|
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— |
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Warrants |
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— |
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— |
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U.S. Treasury Mutual Fund |
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— |
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— |
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8
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Level 1 |
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Level 2 |
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Level 3 |
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Total at December 31, 2020 |
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||||
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Equity Security |
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$ |
|
|
|
$ |
— |
|
|
$ |
— |
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|
$ |
|
|
|
Equity Mutual Fund |
|
|
— |
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|
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|
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— |
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U.S. Treasury Mutual Fund |
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— |
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— |
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|
There were no transfers from Level 3 during the periods presented. The Company also has assets that may be subject to measurement at fair value on a non-recurring basis, including goodwill and intangible assets and other long-lived assets. There were
As of September 30, 2021 and December 31, 2020, the Company had investments in
The Company utilizes a Level 2 category fair value measurement to value its investment in certain IronNet common stock holdings. Although IronNet common stock has a quoted price in active markets, a portion of it related to our
The
See Note D – Marketable Securities for additional details of the valuation methodology for these securities.
G.Inventories
Inventories are valued at the lower of cost or net realizable value using the FIFO (first-in, first-out) method. The Company reduces the value of its inventories to net realizable value when the net realizable value is believed to be less than the cost of the item. The reserve for excess and obsolete inventory as of September 30, 2021 and December 31, 2020 was $
Inventories are comprised of the following (in thousands):
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September 30, 2021 |
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December 31, 2020 |
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||
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Raw materials |
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$ |
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$ |
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Work in process |
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Finished goods |
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|
|
|
|
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|
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Total Inventories, net |
|
$ |
|
|
|
$ |
|
|
|
H. |
Intangible Assets |
Intangible assets are recorded at cost less accumulated amortization which is included in engineering, selling and administrative expenses on the accompanying condensed consolidated statements of operations. Amortization is computed for financial reporting purposes using the straight-line method over the estimated useful lives of the assets, which range up to
|
I. |
Stock-Based Compensation |
Under the Company’s 2011 Incentive Plan, as amended, restricted stock and stock options have been awarded to certain employees as share-based compensation. Compensation expense is based on the grant-date fair value and recognized over the requisite service period.
As of December 31, 2020, there was approximately $
|
J. |
Earnings Per Share |
The Company computes earnings per share in accordance with ASC 260, Earnings Per Share. Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share
9
adjusts basic earnings per share for the effects of warrants, restricted stock, stock options and other potentially dilutive financial instruments, only in the periods in which the effects are dilutive.
For both the three and nine months ended September 30, 2021, there were warrants to purchase
The following table reconciles basic weighted average shares outstanding to diluted weighted average shares outstanding for the three and nine months ended September 30, 2021 and 2020:
|
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Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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||||
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Weighted average shares outstanding - basic |
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|
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Effect of diluted securities |
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Weighted average shares outstanding - diluted |
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|
K. |
Stockholders’ Equity |
On January 22, 2020, the Company entered into an Open Market Sales Agreement (the “Sales Agreement”) with Jefferies LLC, as sales agent (“Jefferies”), pursuant to which the Company may offer and sell, from time to time, in what is deemed to be an “at the market offering” (“ATM Offering”) through Jefferies, shares of the Company’s common stock, par value $
|
L. |
Income Taxes |
The Company’s quarterly provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items within the period presented. To determine the annual effective tax rate, the Company estimates both the total income (loss) before income taxes for the full year and the jurisdictions in which that income (loss) is subject to tax. The actual effective tax rate for the full year may differ from these estimates if income (loss) before income taxes is greater than or less than what was estimated or if the allocation of income (loss) to jurisdictions in which it is taxed is different from the estimated allocations.
During the third quarter, the Company released its valuation allowance over a portion of its deferred tax assets as the deferred tax assets became more likely than not to be realized from expected gains on IRNT share sales which occurred subsequent to the quarter-end.
We recognize tax benefits related to uncertain tax positions only if it is more likely than not that the tax position will be sustained upon examination by taxing authorities. For those positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. In the ordinary course of business, we are examined by various federal, state, and foreign tax authorities. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes.
The effective tax rate for the nine months ended September 30, 2021 and September 30, 2020 was
10
|
M. |
Segment Information |
The Company has
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Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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||||
|
Revenues from Operations |
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Electronic components |
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$ |
|
|
|
$ |
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$ |
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$ |
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|
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Electronic instruments |
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|
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Total consolidated revenues |
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$ |
|
|
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$ |
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$ |
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$ |
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|
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Operating (Loss) Income |
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|
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Electronic components |
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$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Electronic instruments |
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|
|
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|
|
( |
) |
|
|
|
|
|
|
|
|
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Unallocated corporate expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Total operating (loss) income |
|
|
( |
) |
|
|
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|
|
( |
) |
|
|
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|
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Interest expense, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Gain (loss) on equity investment in unconsolidated subsidiary |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Unrealized (loss) gain on marketable securities |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Other income (expense), net |
|
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|
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|
|
|
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|
|
|
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|
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( |
) |
|
Total other income (expense) |
|
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|
|
|
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|
|
|
|
|
|
|
|
( |
) |
|
Income Before Income Taxes |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Operating income is equal to revenues less cost of sales and operating expenses (engineering, selling and administrative expenses).
|
N |
Domestic and Foreign Revenues |
Significant foreign revenues from operations (
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Malaysia |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Hong Kong |
|
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Germany |
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Australia |
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All other foreign countries |
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|
|
|
|
|
|
Total foreign revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Total domestic revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The Company allocates its foreign revenue based on the customer's ship-to location.
|
O. |
Contingencies |
In the ordinary course of business, the Company and its subsidiaries may become defendants in certain product liability, patent infringement, worker claims and other litigation. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable.
|
P. |
Leases |
The Company leases certain manufacturing and office space and equipment. The Company determines if an arrangement is a lease at inception. A contract is, or contains, a lease if the contract conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time in exchange for consideration. Amounts associated with operating leases, which are not short-term, are included in right-of-use lease assets, and other accrued expenses and long-term lease liabilities on the Company’s condensed consolidated balance sheets. Right-of-use lease assets represents the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-
11
of-use lease assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the expected lease term. The Company uses its incremental borrowing rate at the lease commencement date in determining the present value of lease payments. Short-term leases with an initial term of
The Company leases certain property under operating leases with terms that range from one to
Future minimum lease payment obligations under operating leases at September 30, 2021 are as follows (in thousands):
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|
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|
|
|
|
2021 |
|
$ |
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
Total lease payments |
|
|
|
|
|
Less: interest |
|
|
( |
) |
|
Total lease payments |
|
$ |
|
|
Q.Donation
In an effort to continue our stakeholder responsibilities in the context of global corporate citizenship, on September 28, 2021, the Company made a charitable gift of
R.Subsequent Events
On October 1, 2021, the Company’s board of directors approved a spin-off of the MTron/PTI subsidiary. The Company had previously announced its exploration of this potential spin-off transaction and will now proceed with the spin-off, which will be submitted to a shareholder vote for approval. Substantially all the cash and investments will remain in LGL. Our electronic components segment consists entirely of the operations of MTron/PTI. See Note M - Segment Information.
The IRNT S-1 registration statement became effective with the SEC on September 30, 2021 and as a result certain IRNT shares and the warrants held became tradeable in the market. On October 1, 2021, the Company sold
|
|
|
Warrants |
|
|
Shares |
|
|
Cash |
|
||
|
Sponsor investment |
|
|
|
|
|
|
|
|
|
$ |
|
|
Sponsor distribution on September 14, 2021 |
|
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|
Shares donated on September 28, 2021 |
|
|
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( |
) |
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|
Cashless exercise of warrants on October 1, 2021 |
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|
( |
) |
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Shares sold as of October 31, 2021 |
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|
|
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|
( |
) |
|
$ |
|
|
Remaining shares-October 31, 2021 |
|
|
— |
|
|
|
|
|
|
|
|
|
Restricted shares held |
|
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|
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|
Non-restricted held |
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12
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements, the notes thereto and the other unaudited financial data included in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with the audited consolidated financial statements and the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020. The terms “we,” “us,” “our,” and the “Company” refer to The LGL Group, Inc. and unless otherwise defined herein, capitalized terms used herein shall have the same meanings as set forth in our condensed consolidated financial statements and the notes thereto.
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q of the Company and the Company's other communications and statements, other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company intends for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable by law. Such statements include, in particular, statements about the Company's beliefs, plans, objectives, goals, expectations, estimates, projections and intentions. These statements are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond the Company's control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," "target," "goal," and similar expressions are intended to identify forward-looking statements. All forward-looking statements, by their nature, are subject to risks and uncertainties. Therefore, such statements are not intended to be a guarantee of the Company's performance in future periods. The Company's actual future results may differ materially from those set forth in the Company's forward-looking statements. For information concerning these factors and related matters, see "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 29, 2021, this Quarterly Report on Form 10-Q and our other filings with the SEC. However, other factors besides those referenced could adversely affect the Company's results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by the Company herein speak as of the date of this Quarterly Report on Form 10-Q. The Company does not undertake to update any forward-looking statement, except as required by law. As a result, you should not place undue reliance on these forward-looking statements.
OVERVIEW
The Company is a diversified holding company with subsidiaries engaged in the designing, manufacturing and marketing of highly-engineered, high reliability frequency and spectrum control products used to control the frequency or timing of signals in electronic circuits, and in the design of high performance Frequency and Time Reference Standards that form the basis for timing and synchronization in various applications. The Company’s primary markets are aerospace and defense.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries except its sole variable interest entity (“VIE”), LGL Systems Acquisition Holding Company, LLC (the “Sponsor”). The VIE served as the sponsor to a special purpose acquisition company, LGL Systems Acquisition Corp. (the “SPAC” or “DFNS”). The SPAC completed a merger with its target company, IronNet Cybersecurity, Inc., on August 26, 2021 and changed its name to Iron Net, Inc. (“IronNet” or “IRNT”) (the “IronNet Business Combination”). IronNet is a publicly-traded company on the New York Stock Exchange (“NYSE”) under the ticker symbol “IRNT.”
Results of Operations
Backlog
As of September 30, 2021, our order backlog was $21,849,000, an increase of 10.3% from $19,801,000 at December 31, 2020 and an increase of 1.8% compared to the backlog of $21,456,000 as of September 30, 2020. Quarterly bookings of $8,003,000 for the third quarter 2021 increased 13.8% above the third quarter 2020. Orders have shown sequential improvement each quarter throughout the year but continue to remain below average quarterly pre-COVID-19 levels.
The backlog of unfilled orders includes amounts based on signed contracts as well as agreed letters of intent which we have determined are firm orders likely to be fulfilled in the next 12 months.
Order backlog is adjusted quarterly to reflect project cancellations, deferrals, revised project scope and cost, and sales of subsidiaries, if any. We expect to fill substantially all of our order backlog within the next twelve months but cannot provide assurances as to what portion of the order backlog will be fulfilled in a given year.
13
Three months ended September 30, 2021 compared to three months ended September 30, 2020
Consolidated Revenues and Gross Margin
Total revenues were $7,501,000, or 7.1% below revenues of $8,071,000 for the three months ended September 30, 2020. The revenue decline reflects strong third quarter 2020 defense product shipments after experiencing production delays in the prior quarter from the India plant shutdown as well as lower 2021 shipments to the avionics market.
Consolidated gross margin, which is consolidated revenues less manufacturing cost of sales as a percentage of revenues, improved to 36.2% from 35.5% for the three months ended September 30, 2020. Margin improvement was from favorable product mix and cost reductions including the elimination of certain previously required redundancies to preserve manufacturing capabilities in response to the COVID-19 impacts on our business.
Operating (Loss) Income
The Company reported an operating loss of ($746,000). Operating income, without the $1,318,000 non-cash charitable donation of IRNT common stock, was $572,000 and compared to operating income of $709,000 for the third quarter of 2020. The decline was from the impact of lower revenue partly offset by improved margins.
Gain (Loss) on Equity Investment in Unconsolidated Subsidiary
The Company recognized a gain on equity investment in unconsolidated subsidiary of $60,205,000 compared to a loss of ($61,000) for the three months ended September 30, 2020. As more fully described above, the substantial increase reflects the impact of the Company’s investment in the Sponsor from the IronNet Business Combination which is reported under the equity method of accounting through the September 14, 2021 distribution of IRNT common shares and private warrants.
Unrealized (Loss) Gain on Marketable Securities
During the three months ended September 30, 2021, loss on marketable securities was ($18,867,000). Excluding the loss of ($19,779,000) from the change in fair value of IRNT security holdings from the date of Sponsor distribution through the end of the third quarter, and the $940,000 gain from derivative transactions related to IRNT securities, the ($28,000) unrealized loss compared to the $122,000 gain for the third quarter of 2020 resulted from unfavorable investment performance.
Investment gains and losses have caused and are expected to continue to cause significant volatility in our earnings, particularly with respect to our IronNet securities.
Other Income (Expense), Net
Other income (expense), net was $237,000. Excluding the $258,000 realized gain from IRNT shares donated, other income (expense) was ($21,000) compared to $33,000 for the three months ended September 30, 2020 reflecting the impact of unfavorable currency changes.
Income Tax Expense
We recorded a tax expense of $9,049,000 and $171,000 for the three months ended September 30, 2021 and 2020, respectively. The substantially higher tax expense was driven by the increased income from our Sponsor investment as a result of the IronNet Business Combination, partially offset by unrealized losses in IRNT stock held by the Company from September 14, 2021. The expense is based on an estimated annual effective tax rate across the jurisdictions in which we operate.
Net Income
Net income was $31,780,000 compared to $629,000 for the three months ended September 30, 2020. The increase was from the aforementioned gain from our Sponsor investment as a result of the IronNet Business Combination, partially offset by unrealized losses in IRNT stock through September 30, 2021. Diluted net income per share for the three months ended September 30, 2021 and 2020 was $5.97 and $0.12, respectively.
Nine months ended September 30, 2021 compared to nine months ended September 30, 2020
Consolidated Revenues and Gross Margin
Total revenues were $20,919,000, a decrease of $2,829,000, or 11.9%, from revenues of $23,748,000 for the nine months ended September 30, 2020. Revenues were significantly impacted by the decline in shipments to the avionics market which was somewhat offset by strong space business performance. The comparison also reflects the pre-COVID-19 conditions during the first quarter of 2020.
Consolidated gross margin, which is consolidated revenues less manufacturing cost of sales as a percentage of revenues, improved to 36.3% from 34.0% for the nine months ended September 30, 2020. Margin improvement was from favorable product mix and cost reductions including the elimination of certain previously required redundancies to preserve manufacturing capabilities in response to the COVID-19 impacts on our business. The Company’s India operation was shut down for over six weeks during the first nine months of 2020.
14
Operating (Loss) Income
The Company reported an operating loss of ($190,000). Operating income, without the $1,318,000 non-cash charitable donation of IRNT common stock, was $1,128,000 compared to operating income of $1,553,000 for the nine months ended September 30, 2020. This decline reflects reduced revenues somewhat offset by the above-described profitability improvements.
Gain (Loss) on Equity Investment in Unconsolidated Subsidiary
The Company recognized a gain on equity investment in unconsolidated subsidiary of $59,453,000 compared to a loss of ($200,000) for the nine months ended September 30, 2020. As more fully described above, the substantial increase reflects the impact of the IronNet Business Combination.
Unrealized (Loss) Gain on Marketable Securities
During the nine months ended September 30, 2021, unrealized loss on marketable securities was ($18,665,000). Excluding the loss of ($19,779,000) from the change in fair value of IRNT security holdings from the date of Sponsor distribution through the end of the third quarter, and the $940,000 gain from derivative transactions related to IRNT securities, the $174,000 unrealized gain compared to $15,000 for the nine months ended September 30, 2020 resulted from favorable investment performance.
Investment gains and losses have caused and are expected to continue to cause significant volatility in our earnings, particularly with respect to our IronNet securities.
Other Income (Expense), Net
Other income (expense), net was $280,000. Excluding the $258,000 realized gain from IRNT shares donated, other income (expense) of $22,000 compared to ($12,000) for the nine months ended September 30, 2020 reflecting favorable currency changes.
Income Tax Expense
We recorded a tax expense of $9,080,000 and $282,000 for the nine months ended September 30, 2021 and 2020, respectively. The substantially higher tax expense was driven by the increased income from our Sponsor investment as a result of the IronNet Business Combination. The expense is based on an estimated annual effective tax rate across the jurisdictions in which we operate.
Net Income
Net income was $31,789,000, compared to $1,067,000 for the nine months ended September 30, 2020. The increase was from the aforementioned gain from our Sponsor investment as a result of the IronNet Business Combination, partially offset by unrealized losses in IRNT stock through September 30, 2021. Diluted net income per share for the nine months ended September 30, 2021 and 2020 was $5.96 and $0.21, respectively.
Non-Recurring Items: Equity Investment in Unconsolidated Subsidiary
As of September 30, 2021
The Company previously invested $6.1 million in LGL Systems Acquisition Holdings, LLC, the sponsor of LGL Systems Acquisition Corp. Inc., a NYSE listed special purpose acquisition company (“SPAC”) trading under the symbol “DFNS” which later completed a business combination with IronNet Cybersecurity, Inc. and began trading on the NYSE under the symbol “IRNT”. As a result of the IronNet Business Combination and LGL’s investment in the SPAC sponsor, on September 14, 2021, the Company received 1,572,529 IRNT common shares and 2,065,000 IRNT private warrants, as part of the Sponsor’s distribution to certain of its members, with an aggregate fair value of $65.3 million. Of these common shares, 1,300,000 shares were restricted from sale for at least six months from the date of closing and are subject to the applicable shareholder lock-up agreements. In an effort to continue its stakeholder responsibilities in the context of global corporate citizenship, the company made a charitable gift on September 28, 2021 of 50,000 of these restricted IRNT shares, leaving a balance of 1,250,000 restricted shares at September 30, 2021.
Prior to the distribution on September 14, 2021, the Company reported its original $6.1 million investment in the Sponsor under the equity method of accounting, recognizing a cumulative Sponsor gain as of September 30, 2021 of $59.2 million since its initial 2019 investment. After the distribution, the Company’s IRNT common stock and warrants have been classified as marketable securities, with the change in fair value from the date of distribution reported as an unrealized loss of $19.8 million at September 30, 2021.
The favorable impact of the Sponsor investment increased the Company’s third quarter 2021 other income by $40.4 million consisting of a $60.2 million gain on equity investment and a $19.8 million unrealized loss during the third quarter of 2021. The unrealized loss reflects mark to market accounting treatment and not the actual realized economic return on our $6.1 million investment in the Sponsor of the SPAC. SPACs characteristically exhibit significant stock price volatility from a shortage of tradeable shares coupled with post-merger derivative transactions, and so we expect mark to market accounting to continue to cause significant volatility in our reported earnings from our large IronNet holdings until sold. An independent committee of the board was established to oversee the orderly liquidation of the investment. The Company has executed and may continue to execute derivatives transactions as part of its plan to minimize the economic risk of IRNT share price volatility to its IRNT holdings, though the Company cannot ensure that this
15
investment will be hedged against price variance in the future. The company held derivative positions relating to its IRNT holdings at September 30, 2021 with an unrealized gain of $940,000.
Through October 31, 2021
On October 1, 2021, we gave Continental Stock Transfer notice to convert all of our IRNT warrants to IRNT common stock in a cashless exercise alternative granted to private warrant holders and received 1,271,406 IRNT common shares by October 5, 2021. As of October 31, 2021, we had sold 1,405,315 shares of our IRNT common stock for approximately $16.9 million and still held 1,388,620 IRNT common shares in our portfolio, including 1,250,000 restricted shares and 138,620 common shares that are unrestricted. The Company’s deferred tax assets related to net operating loss and tax credit carryforwards of approximately $2.5 million will be utilized to reduce our taxes payable on our gains realized on IRNT share sales.
Reconciliations of GAAP to Non-GAAP Measures
To supplement our consolidated financial statements presented on a GAAP (generally accepted accounting principles) basis, the Company used certain non-GAAP measures as presented in the following Non-GAAP proforma Statements of Operations. The Non-GAAP statements have been prepared to exclude transactions associated with our investment in Sponsor (collectively the “Sponsor Transactions”). The Sponsor Transactions include: 1) the Company’s third quarter 2021 $1,318,000 non-cash donation of 50,000 IRNT shares and related realized gain of ($258,000); 2) $60,205,000 and $59,453,000 gain on equity investment in unconsolidated subsidiary for the three and nine months ended September 30, 2021, respectively; and 3) ($19,779,000) unrealized loss on the mark to market of IRNT securities held at September 30, 2021, which was offset by $940,000 of unrealized gains from the Company’s derivative strategy to mitigate the risk from share price volatility in IRNT. The Sponsor Transactions include the ($61,000) and ($200,000) loss on equity investment in unconsolidated subsidiary for the three and nine months ended September 30, 2020, respectively.
|
|
|
GAAP |
|
|
Non-GAAP Adjustment for Sponsor Transactions |
|
|
Non-GAAP Proforma without Sponsor Transactions |
|
|
GAAP |
|
|
Non-GAAP Adjustment for Sponsor Transactions |
|
|
Non-GAAP Proforma without Sponsor Transactions |
|
||||||
|
|
|
For the Three Months Ended |
|
|
For the Three Months Ended |
|
||||||||||||||||||
|
|
|
September 30, 2021 |
|
|
September 30, 2020 |
|
||||||||||||||||||
|
REVENUES |
|
$ |
7,501 |
|
|
$ |
- |
|
|
$ |
7,501 |
|
|
$ |
8,071 |
|
|
$ |
- |
|
|
$ |
8,071 |
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing cost of sales |
|
|
4,782 |
|
|
|
— |
|
|
|
4,782 |
|
|
|
5,203 |
|
|
|
— |
|
|
|
5,203 |
|
|
Engineering, selling and administrative |
|
|
3,465 |
|
|
|
1,318 |
|
|
|
2,147 |
|
|
|
2,159 |
|
|
|
— |
|
|
|
2,159 |
|
|
OPERATING (LOSS) INCOME |
|
|
(746 |
) |
|
|
(1,318 |
) |
|
|
572 |
|
|
|
709 |
|
|
|
— |
|
|
|
709 |
|
|
Gain (loss) on equity investment in unconsolidated subsidiary |
|
|
60,205 |
|
|
|
60,205 |
|
|
|
— |
|
|
|
(61 |
) |
|
|
(61 |
) |
|
|
— |
|
|
Unrealized (loss) gain on marketable securities |
|
|
(18,867 |
) |
|
|
(18,839 |
) |
|
|
(28 |
) |
|
|
122 |
|
|
|
— |
|
|
|
122 |
|
|
Interest expense, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
|
— |
|
|
|
(3 |
) |
|
Other income (expense), net |
|
|
237 |
|
|
|
258 |
|
|
|
(21 |
) |
|
|
33 |
|
|
|
— |
|
|
|
33 |
|
|
Income (loss) before income taxes |
|
$ |
40,829 |
|
|
$ |
40,306 |
|
|
$ |
523 |
|
|
$ |
800 |
|
|
$ |
(61 |
) |
|
$ |
861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended |
|
|
For the Nine Months Ended |
|
||||||||||||||||||
|
|
|
September 30, 2021 |
|
|
September 30, 2020 |
|
||||||||||||||||||
|
REVENUES |
|
$ |
20,919 |
|
|
$ |
- |
|
|
$ |
20,919 |
|
|
$ |
23,748 |
|
|
$ |
- |
|
|
$ |
23,748 |
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing cost of sales |
|
|
13,334 |
|
|
|
— |
|
|
|
13,334 |
|
|
|
15,681 |
|
|
|
— |
|
|
|
15,681 |
|
|
Engineering, selling and administrative |
|
|
7,775 |
|
|
|
1,318 |
|
|
|
6,457 |
|
|
|
6,514 |
|
|
|
— |
|
|
|
6,514 |
|
|
OPERATING (LOSS) INCOME |
|
|
(190 |
) |
|
|
(1,318 |
) |
|
|
1,128 |
|
|
|
1,553 |
|
|
|
— |
|
|
|
1,553 |
|
|
Gain (loss) on equity investment in unconsolidated subsidiary |
|
|
59,453 |
|
|
|
59,453 |
|
|
|
— |
|
|
|
(200 |
) |
|
|
(200 |
) |
|
|
— |
|
|
Unrealized (loss) gain on marketable securities |
|
|
(18,665 |
) |
|
|
(18,839 |
) |
|
|
174 |
|
|
|
15 |
|
|
|
— |
|
|
|
15 |
|
|
Interest expense, net |
|
|
(9 |
) |
|
|
— |
|
|
|
(9 |
) |
|
|
(7 |
) |
|
|
— |
|
|
|
(7 |
) |
|
Other income (expense), net |
|
|
280 |
|
|
|
258 |
|
|
|
22 |
|
|
|
(12 |
) |
|
|
— |
|
|
|
(12 |
) |
|
Income (loss) before income taxes |
|
$ |
40,869 |
|
|
$ |
39,554 |
|
|
$ |
1,315 |
|
|
$ |
1,349 |
|
|
$ |
(200 |
) |
|
$ |
1,549 |
|
16
Liquidity and Capital Resources
As of September 30, 2021 and December 31, 2020, cash and cash equivalents were $15,593,000 and $18,331,000, respectively. In the first quarter of 2020, we raised approximately $3,254,000 as a result of sales of securities under our ATM Offering. In the second quarter 2021, we funded $2,725,000 for the Sponsor’s PIPE investment related to the SPAC.
Cash provided by operating activities for the nine months ended September 30, 2021 and 2020 was $227,000 and $1,830,000, respectively. The $1,603,000 decrease was primarily due to the Company’s unfavorable changes in working capital accounts.
Cash used in investing activities for the nine months ended September 30, 2021 and 2020 was $2,996,000 and $329,000, respectively. The $2,667,000 increase reflects $2,725,000 of funding for the Company’s PIPE subscription agreement in connection with the third quarter IronNet Business Combination and $430,000 of higher capital expenditures for production equipment to improve cost and efficiency. Investing activities related to marketable securities generated net cash of $488,000 during 2021.
For the nine months ended September 30, 2021, financing activities represented $31,000 received by the Company for the exercise of stock options. For the nine months ended September 30, 2020, the $3,322,000 of cash provided by financing activities represented $3,254,000 received by the Company from the first quarter 2020 sale of securities under our ATM Offering and $68,000 of proceeds from the exercise of stock options.
As of September 30, 2021, our consolidated working capital was $74,170,000 compared to $30,384,000 as of December 31, 2020. As more fully described in Note D - Marketable Securities to the accompanying condensed consolidated financial statements, on September 14, 2021, as part of the Sponsor’s distribution to certain of its members, the Company received 1,572,529 IRNT common shares and 2,065,000 IRNT warrants substantially increasing the Company’s working capital. As of September 30, 2021, the value of the Company’s marketable securities increased by $45,037,000 over the value as of December 31, 2020 as a result of the IRNT security holdings.
As of September 30, 2021, we had current assets of $77,126,000, current liabilities of $2,956,000 and a ratio of current assets to current liabilities of 26.09 to 1.00. As of December 31, 2020, we had current assets of $33,781,000, current liabilities of $3,397,000 and a ratio of current assets to current liabilities of 9.94 to 1.00. Management continues to focus on efficiently managing working capital requirements to match operating activity levels and will seek to deploy the Company’s working capital where it will generate the greatest returns.
The Company’s MTronPTI subsidiary has a loan agreement for a revolving line of credit with Synovus Bank for up to $3.5 million bearing interest at the London Inter-bank Offered Rate (LIBOR) 30-day rate plus 2.50%, with a floor of 0.50%. The loan agreement has a maturity date of May 12, 2022 and contains certain financial covenants. Borrowings under the loan agreement are secured by all of the property of two of the Company’s subsidiaries, M-tron Industries, Inc. and Piezo Technology, Inc. At September 30, 2021, the Company had no borrowings outstanding under its revolving line of credit with Synovus Bank.
We believe that existing cash and cash equivalents, marketable securities, cash generated from operations and availability under our revolving credit agreement will provide sufficient liquidity to meet our ongoing working capital and capital expenditure requirements for the next 12 months from the date of this filing. The Company’s management continues to explore growth organically and thorough diversified mergers and acquisitions and believes the relationship with the SPAC has enhanced its strategic profile in this context.
Our board of directors has adhered to a practice of not paying cash dividends. This policy takes into account our long-term growth objectives, including our anticipated investments for organic growth, potential technology acquisitions or other strategic ventures, and stockholders' desire for capital appreciation of their holdings. No cash dividends have been paid to the Company's stockholders since January 30, 1989, and none are expected to be paid for the foreseeable future.
On October 1, 2021, the Company’s board approved a spin-off of the MTronPTI subsidiary. The Company had previously announced its exploration of this potential spin-off transaction and will now proceed with the spin-off, which will be submitted to a shareholder vote for approval. Substantially all the cash and investments will remain in LGL. Our electronic components segment consists entirely of the operations of MTron/PTI. See Note M - Segment Information. LGL continues to strive for profitable growth internally and by acquisition. LGL believes that spin-off would enable shareholders to more clearly evaluate the performance and future potential of each entity on a standalone basis, while allowing each to pursue its own distinct business strategy and capital allocation policy. Separating MTronPTI as an independent, publicly owned company positions the business to increase value to both MtronPTI and LGL Group. The spin-off permits each company to tailor its strategic plans and growth opportunities, more efficiently raise and allocate resources, including capital raised through debt or equity offerings, flexibly use its own stock as currency for employee incentive compensation and potential acquisitions and provide investors a more targeted investment opportunity.
Post-September 30, 2021 IRNT-Related Liquidity and Share Price Risk
As of October 31, 2021, after originally investing $6.1 million, we sold 1,405,315 shares of our IRNT common stock for approximately $16.9 million, or approximately $12 per share, retaining 1,388,620 IRNT common shares in our portfolio including the 1,250,000 restricted shares. An independent committee of the board of directors was established to oversee the orderly liquidation of the IRNT investment. The Company has executed and may continue to execute derivatives transactions as part of its plan to minimize the economic risk of IRNT share price volatility to its IRNT holdings though the Company cannot ensure that this investment will be
17
hedged against price variance in the future. The Company’s deferred tax assets related to net operating loss and tax credit carryforwards of approximately $2.5 million can be utilized to reduce taxes payable on our gains realized on IRNT share sales.
The Company’s IRNT securities held at September 30, 2021 were marked to fair value of $44.4 million. With the conversion of the private warrants on October 1, 2021, the Company’s total of 2,793,935 IRNT common shares resulted in a calculated average fair value of $15.90 on September 30, 2021. Sales of securities above or below this price will result in an accounting realized gain or loss in future periods, and any positions will be marked to market at the end of each period they are still held, with a discount for lack of marketability placed on any restricted shares.
Factors Which May Influence Results of Operations
We are not aware of any material trends or uncertainties, other than national economic conditions affecting our industry generally, that may reasonably be expected to have a material impact, favorable or unfavorable, on our revenues or income other than those listed below and those listed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2020. However, due to the COVID-19 pandemic in the U.S. and globally and the various associated effects, our business and operations have been impacted and may be further impacted, as further discussed below.
COVID-19
The global outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the U.S. government in March 2020 and has negatively impacted the U.S. and global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and created significant disruption of the financial markets.
As a result of the COVID-19 pandemic, the Company’s operations in India were closed on March 23, 2020 and resumed limited operations on May 7, 2020 with a reduced level of staffing. By the end of June 2020, the Company’s India facilities were fully operational. Post COVID-19 revenue and bookings declined; and cost saving measures were taken. Despite the decline in revenue and bookings associated with the foregoing suspension of operations in India and other COVID-19 impacts on our business, the Company does not anticipate COVID-19 having a significant ongoing impact on the Company’s future results. However, the ultimate effect on our future results could be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19, the success of actions taken to contain or treat COVID-19 and its variants including the widespread availability and use of effective vaccines, and reactions by consumers, employees, companies, governmental entities and capital markets.
In accordance with the Department of Defense (“DoD”) guidance issued in March 2020 designating the Defense Industrial Base as a critical infrastructure workforce, our U.S. production facilities have continued to operate in support of essential products and services required to meet national security commitments to the U.S. Government and the U.S. military; however, facility closures or work slowdowns or temporary stoppages have occurred and could occur in the future. In addition, other countries have different practices and policies that can affect our international operations and the operations of our suppliers and customers. In some cases, our facilities are not operating under full staffing as a result of COVID-19. Customer visits and representative training are being impacted by travel restrictions as a result of COVID-19, which could delay new design wins and future business with our customers.
The Company has taken measures to protect the health and safety of our employees, work with our customers to minimize potential disruptions and support our community in addressing the challenges posed by this global pandemic. The extent of the impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our contracts in the expected timeframe, will depend on future developments, including the duration and spread of the pandemic and related actions taken by the U.S. Government, state and local government officials and international governments to prevent disease spread, all of which are uncertain and cannot be predicted.
An extended period of global supply chain disruption caused by the response to COVID-19 could impact our ability to perform on our contracts. To date, we have identified a number of suppliers that have potential delivery impacts due to COVID-19 and, if we are not able to implement alternatives or other mitigations, contract deliveries could be adversely impacted.
Delays in inspection, acceptance and payment by our customers, many of whom are teleworking, could also affect our sales and cash flows. This is particularly an issue with respect to classified work that is unable to be done remotely. Limitations on government operations can also impact regulatory approvals such as export licenses that are needed for international sales and deliveries. In addition, we could experience delays in new contract starts or awards of future work as well as the uncertain impact of contract modifications to respond to the national emergency. Government funding priorities may change as a result of the costs of the COVID-19 pandemic. If significant portions of our workforce are unable to work effectively, including because of illness, quarantines, absenteeism, government actions, facility closures, travel restrictions or other restrictions in connection with the COVID-19 pandemic, our operations will be impacted. We may be unable to perform fully on our contracts and our costs may increase as a result of the COVID-19 outbreak. These cost increases, including costs for employees whose jobs cannot be performed remotely, may not be fully recoverable under our contracts, or adequately covered by insurance. The impact of COVID-19 could worsen if there is an extended
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duration of any COVID-19 outbreak or a resurgence of COVID-19 infection in affected regions after they have begun to experience improvement.
COVID-19 has also led to disruption and volatility in the global capital markets, which depending on future developments could impact our capital resources and liquidity in the future. COVID-19 has also caused volatility in the equity capital markets. We are monitoring the impacts of COVID-19 on the fair value of our assets. While we do not currently anticipate any material impairments on our assets as a result of COVID-19, future changes in expectations for sales, earnings and cash flows related to intangible assets and goodwill below our current projections could cause these assets to be impaired. While these are our current assumptions, this is an emerging situation and these could change, which could affect our outlook.
Critical Accounting Policies
For a discussion of the Company’s critical accounting policies, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4.Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of September 30, 2021 was conducted under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of September 30, 2021, were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II
OTHER INFORMATION
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Item 1.Legal Proceedings. |
In the ordinary course of business, we may become subject to litigation or claims. We are not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or to which our properties are subject.
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Item 6.Exhibits. |
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021 (and are numbered in accordance with Item 601 of Regulation S-K):
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Exhibit No. |
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Description |
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3.1 |
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3.2 |
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3.3 |
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3.4 |
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3.5 |
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31.1* |
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31.2* |
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32.1** |
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32.2** |
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101.INS* |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH* |
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Inline XBRL Taxonomy Extension Schema Document |
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101.CAL* |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF* |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB* |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE* |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104* |
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The cover page for the Company’s Quarterly Report on Form 10-Q has been formatted in Inline XBRL and contained in Exhibit 101
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* Filed herewith
** In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
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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.
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THE LGL GROUP, INC. |
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Date: November 15, 2021 |
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By: |
/s/ Mike J. Ferrantino |
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Mike J. Ferrantino |
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President and Chief Executive Officer (Principal Executive Officer) |
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Date: November 15, 2021 |
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By: |
/s/ James W. Tivy |
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James W. Tivy |
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Chief Financial Officer (Principal Financial Officer) |
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