Lgl Group Inc 10-Q for FY2022 Q1
Lgl Group Inc (LGL)
About this 10-Q
Lgl Group Inc filed this 10-Q on May 12, 2022, covering the quarter ended March 31, 2022 (FY2022 Q1).
Headline figures
Quarter ended March 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $8.11M
- up 24.1% from $6.54M a year earlier
- Net income
- $169K
- up 525.9% from net income of $27K a year earlier
- Diluted EPS
- $0.03
- up 200.0% from $0.01 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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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 May 9, 2022, the registrant had
THE LGL GROUP, INC.
Quarterly Report on Form 10-Q for the Quarterly Period Ended March 31, 2022
INDEX
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PART I. |
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Item 1. |
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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. |
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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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March 31, 2022 |
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December 31, 2021 |
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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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Intangible assets, net |
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Deferred income tax assets |
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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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Income taxes payable |
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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 M) |
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Stockholders’ Equity |
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Common stock, $ March 31, 2022, and outstanding at December 31, 2021 |
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Additional paid-in capital |
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Retained earnings |
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Treasury stock, and December 31, 2021 |
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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 March 31, |
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2022 |
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2021 |
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REVENUES |
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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 INCOME (LOSS) |
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Other (expense) income: |
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Interest expense, net |
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Loss on equity investment in unconsolidated subsidiary |
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- |
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Investment income |
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Other (expense) income, net |
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Total other income, net |
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INCOME BEFORE INCOME TAXES |
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Income tax provision |
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NET INCOME |
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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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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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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, 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 |
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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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Balance at March 31, 2022 |
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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, 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 |
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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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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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Three Months Ended March 31, |
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2022 |
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2021 |
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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 (used in) 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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Loss on equity investment in unconsolidated subsidiary |
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- |
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Realized loss on sale of marketable securities |
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- |
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Unrealized gain on marketable securities |
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Deferred income tax expense |
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Changes in operating assets and liabilities: |
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(Increase) decrease in accounts receivable, net |
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Increase in inventories, net |
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Decrease (increase) in prepaid expenses and other assets |
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Increase in accounts payable, accrued compensation, income taxes and commissions and other |
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Net cash (used in) provided by operating activities |
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INVESTING ACTIVITIES |
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Capital expenditures |
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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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Net cash used in investing activities |
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(Decrease) increase in cash and cash equivalents |
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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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Supplemental Disclosure: |
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Income taxes paid |
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$ |
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$ |
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Non-cash subscription agreement (Note C) |
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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)
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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 months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2022. 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 Group”, “LGL”, “we”, “our” or “us”) Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2022.
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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”). Intercompany transactions and accounts have been eliminated in consolidation. 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 IronNet, Inc. (“IronNet” or “IRNT”) (the “IronNet Business Combination”). IronNet is a publicly-traded company on the NYSE American (“NYSE”) under the ticker symbol “IRNT.”
VIE: Our sole interest in a VIE, the Sponsor, was 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 the entity. 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
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The Company provides disaggregated revenue details by segment in Note K – Segment Information, and geographic markets in Note L – Domestic and Foreign Revenues.
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. |
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.
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 at the end of the fiscal quarter ended March 31, 2022. 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.
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.
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C. |
Equity Investment in Unconsolidated Subsidiary |
In November 2019, the Company made its initial investment of $
On September 14, 2021, as a result of its Sponsor investment, the Company received
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 of period end holdings reported as an unrealized gain or loss. See Note D - Marketable Securities.
D. Marketable Securities
The Company accounts for equity securities under ASC 321. Such securities are reported at fair value on the consolidated balance sheets, and the related unrealized gains and losses are reported in the consolidated statements of cash flows as non-cash adjustments to income. Any realized and unrealized appreciation or depreciation on investment securities is reported in the consolidated statements of operations as investment income or (loss). Investment income was $
6
Details of marketable securities held at March 31, 2022 and December 31, 2021 are as follows (in thousands):
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Cumulative |
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Unrealized |
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Fair Value |
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Basis |
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(Loss) Gain |
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IronNet Securities: |
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March 31, 2022 |
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$ |
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$ |
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$ |
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Put options |
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Equity funds and other securities |
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$ |
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IronNet Securities: |
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December 31, 2021 |
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$ |
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$ |
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Put options |
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Equity funds and other securities |
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$ |
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$ |
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( |
) |
The IRNT common shares was 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.
At March 31, 2022 and December 31, 2021, the fair value of IRNT securities was determined based on their publicly quoted market price, except certain shares which had trading restrictions at the end of 2021. At December 31, 2021, the Company held
The Company has executed derivatives transactions as part of its plan to minimize the economic risk of IRNT share price volatility to its IRNT holdings. The Company held put options, covering shares of IRNT common stock with a second quarter 2022 expiration date, for
|
E. |
Related Party Transactions |
Certain balances held and invested in various mutual funds are managed by a related entity (the "Fund Manager"). Marc Gabelli, the Company’s non-executive Chairman of the Board, who is also a greater than
As of March 31, 2022, the balance with the Fund Manager totaled $
As of December 31, 2021, the balance with the Fund Manager totaled $
Members of our board of directors (the “Board”) 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 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 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 of the Sponsor on September 27, 2021.
7
|
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.
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total at March 31, 2022 |
|
||||
|
Equity Security |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
Equity Mutual Fund |
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
Commodity Mutual Fund |
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
Derivative Contract Asset |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
U.S. Treasury Mutual Funds |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total at December 31, 2021 |
|
||||
|
Equity Security |
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
Equity Mutual Fund |
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
Commodity Mutual Fund |
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
Derivative Contract Asset |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
U.S. Treasury Mutual Funds |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2022 and December 31, 2021, the Company had investments in
At December 31, 2021, the Company utilized 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 the Company’s year-end IRNT holdings had sale restrictions requiring a discount for lack of marketability and classification as a Level 2 asset. The selling
8
restriction on these
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 March 31, 2022 and December 31, 2021 was $
Inventories are comprised of the following (in thousands):
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
|
Raw materials |
|
$ |
|
|
|
$ |
|
|
|
Work in process |
|
|
|
|
|
|
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
|
Total Inventories, net |
|
$ |
|
|
|
$ |
|
|
|
H. |
Intangible Assets, Net |
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. |
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 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 months ended March 31, 2022 and 2021, there were warrants to purchase
The following table reconciles basic weighted average shares outstanding to diluted weighted average shares outstanding for the three months ended March 31, 2022 and 2021:
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Weighted average shares outstanding - basic |
|
|
|
|
|
|
|
|
|
Effect of diluted securities |
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - diluted |
|
|
|
|
|
|
|
|
|
J. |
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.
The effective tax rate for the three months ended March 31, 2022 and March 31, 2021 was
9
|
K. |
Segment Information |
The Company has
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Revenues |
|
|
|
|
|
|
|
|
|
Electronic components |
|
$ |
|
|
|
$ |
|
|
|
Electronic instruments |
|
|
|
|
|
|
|
|
|
Total consolidated revenues |
|
$ |
|
|
|
$ |
|
|
|
Operating Income (Loss) |
|
|
|
|
|
|
|
|
|
Electronic components |
|
$ |
|
|
|
$ |
|
|
|
Electronic instruments |
|
|
|
|
|
|
|
|
|
Unallocated corporate expense |
|
|
( |
) |
|
|
( |
) |
|
Total operating income (loss) |
|
|
|
|
|
|
( |
) |
|
Interest expense, net |
|
|
( |
) |
|
|
( |
) |
|
Loss on equity investment in unconsolidated subsidiary |
|
|
— |
|
|
|
( |
) |
|
Investment income |
|
|
|
|
|
|
|
|
|
Other (expense) income, net |
|
|
( |
) |
|
|
|
|
|
Total other income, net |
|
|
|
|
|
|
|
|
|
Income Before Income Taxes |
|
$ |
|
|
|
$ |
|
|
Operating income is equal to revenues less cost of sales and operating expenses (engineering, selling and administrative expenses).
|
L. |
Domestic and Foreign Revenues |
Significant foreign revenues from operations (
|
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Malaysia |
|
$ |
|
|
|
$ |
|
|
|
Hong Kong |
|
|
|
|
|
|
|
|
|
All other foreign countries |
|
|
|
|
|
|
|
|
|
Total foreign revenues |
|
$ |
|
|
|
$ |
|
|
|
Total domestic revenue |
|
$ |
|
|
|
$ |
|
|
The Company allocates its foreign revenue based on the customer's ship-to location.
|
M. |
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.
|
N. |
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
10
, 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 represent 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-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 March 31, 2022 are as follows (in thousands):
|
|
|
|
|
|
|
2022 |
|
$ |
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
Total lease payments |
|
|
|
|
|
Less: interest |
|
|
( |
) |
|
Total lease payments |
|
$ |
|
|
O.Spin-Off
In late 2021, the Company’s Board approved progressing with the Spin-Off (as defined below) of M-tron Industries, Inc. (together with its subsidiaries, “MtronPTI”) which is currently a wholly-owned subsidiary of the Company. On May 11, 2022, the Company filed a Definitive Proxy Statement with the SEC indicating its intention to secure stockholder approval of the transaction. A special meeting of stockholders to vote on the Spin-Off will be held on June 21, 2022. If approved by the Company’s stockholders, the Spin-Off will separate the business activities and investments of the Company and create two separate, publicly-traded companies: (1) the Company, which will continue to own and operate Precise Time and Frequency, LLC and hold substantially all the Company’s cash and marketable securities, and (2) MtronPTI, which includes the operations of Piezo Technology, Inc. and M-tron Asia, LLC (the “Spin-Off”).
The Spin-Off, if approved by the Company’s stockholders, is expected to be effected through a pro rata issuance of shares of MtronPTI’s common stock to the Company’s stockholders structured as a tax-free distribution. Stockholders of the Company will receive
Management believes that, if completed, the potential Spin-Off of MtronPTI would enable stockholders to more clearly evaluate the performance and future potential of each entity on a standalone basis, while allowing each entity to pursue its own distinct business strategy and capital allocation policy. Separating MtronPTI as an independent, publicly-owned company positions both MtronPTI and LGL Group to create value for their respective stockholders. The Spin-Off would permit each company to tailor its strategic plans and growth opportunities, more efficiently raise and allocate resources, including capital raised through debt or equity offerings, provide flexibility to use its own stock as currency for incentive compensation and potential acquisitions and provide investors a more targeted investment opportunity.
If stockholder approval of the Spin-Off transaction is obtained, the Company anticipates reporting MtronPTI as a discontinued operation. There can be no assurance that the potential Spin-Off transaction will be completed in the manner described above, or at all.
P. Subsequent Events
As previously discussed, the Company holds certain shares of IRNT common stock received in connection with the IronNet Business Combination. IronNet filed a registration statement with the SEC effective September 23, 2021 to register these and other IRNT securities. IronNet filed its Annual Report on Form 10-K with the SEC on May 2, 2022 and is required to file a post-effective amendment to the aforementioned registration statement. On May 3, 2022, IronNet notified the Company that effective immediately, the Company’s will be unable to sell its related IRNT common stock holdings pursuant to the registration statement until notified by IronNet. The Company expects the restrictions will be lifted upon the SEC’s declaration of the effectiveness of the amended registration statement.
On May 5, 2022, the Company sold its put options held at March 31, 2022 covering
11
|
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, 2021. The terms the “Company”, “LGL Group”, “LGL”, “we”, “our” or “us” 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, 2021, filed with the SEC on March 28, 2022, 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 IronNet, Inc. (“IronNet” or “IRNT”) (the “IronNet Business Combination”). IronNet is a publicly-traded company on the NYSE American (“NYSE”) under the ticker symbol “IRNT.”
In November 2019, the Company made its initial investment of $3,350,000 in the Sponsor of the SPAC and subscribed to an additional investment of $2,725,000 in March 2021 which was funded in May 2021. The incremental investment was part of the Sponsor syndication to participate in a private placement in connection with the IronNet Business Combination. On September 14, 2021, as a result of its Sponsor investment, the Company received 1,572,529 shares of IRNT common stock and 2,065,000 IRNT private warrants exchangeable into shares of IRNT common stock, representing an aggregate fair value of $65.3 million. While LGL continues to hold an interest in the Sponsor, it is immaterial. Subsequent to the September 14, 2021 Sponsor distribution, the Company’s IRNT securities 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 gain or loss.
Results of Operations
Backlog
As of March 31, 2022, our order backlog was $36,991,000, an increase of 24.1% from $29,797,000 at December 31, 2021 and an increase of 81.4% compared to the backlog of $20,388,000 as of March 31, 2021. The Company attained record backlog levels as of March 31, 2022. Quarterly bookings were $15,302,000 for the first quarter 2022 and $15,169,000 for the fourth quarter 2021. This record booking trend during the last two quarters reflects strong defense orders including $9.8 million from two major missile defense
12
programs, much of which is expected to ship subsequent to 2022. Strong orders from the recovering avionics market also drove the increase in first quarter 2022 bookings over first quarter 2021 bookings. 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 largely 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.
Three months ended March 31, 2022 compared to three months ended March 31, 2021
Consolidated Revenues and Gross Margin
Total revenues were $8,108,000, or 24.1% above revenues of $6,536,000 for the three months ended March 31, 2021. The revenue increase reflects the recovering avionics market and strong defense product shipments.
Consolidated gross margin, which is consolidated revenues less manufacturing cost of sales as a percentage of revenues, improved to 37.6% from 32.7% for the three months ended March 31, 2021 reflecting the increased business volume.
Operating Income (Loss)
The Company reported operating income of $221,000 compared to an operating loss of ($60,000) for the first quarter of 2021. The increase reflects higher revenue and margins partly offset by inflationary pressures, increased stock compensation expense and $111,000 of Spin-Off (as defined below) costs in the first quarter of 2022.
Loss on Equity Investment in Unconsolidated Subsidiary
The Company recognized a loss on equity investment in unconsolidated subsidiary of $76,000 for the three months ended March 31, 2021. Subsequent to the September 14, 2021 Sponsor distribution, the Company’s investment in the Sponsor is immaterial and the IRNT securities have been classified as marketable securities with the change in fair value from the date of distribution reported as investment income on marketable securities.
Investment Income
The Company reported $45,000 of investment income compared to $127,000 during the three months ended March 31, 2021. The decline was related to non-IRNT related investment performance partly offset by a $31,000 net gain (realized and unrealized) related to IRNT securities. 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 (Expense) Income, Net
Other (expense) income, net was ($16,000) compared to $45,000 for the three months ended March 31, 2021 reflecting the impact of unfavorable currency changes.
Income Tax Expense
We recorded a tax expense of $74,000 and $6,000 for the three months ended March 31, 2022 and 2021, respectively. The expense is based on an estimated annual effective tax rate across the jurisdictions in which we operate.
Net Income
Net income was $169,000 compared to $27,000 for the three months ended March 31, 2021. The increase was primarily from the previously discussed increased business volume partly offset by certain unfavorable operating costs. Diluted net income per share for the three months ended March 31, 2022 and 2021 was $0.03 and $0.01, respectively.
Liquidity and Capital Resources
As of March 31, 2022 and December 31, 2021, cash and cash equivalents were $21,652,000 and $29,016,000, respectively. In the first quarter 2021, the Company utilized $6,603,000 for investment activities related to marketable securities.
Cash (used in) provided by operating activities for the three months ended March 31, 2022 and 2021 was ($554,000) and $402,000, respectively. The $956,000 decrease was from higher receivable and inventory levels in support of business growth as well as advanced procurement of certain inventory components to address supply chain issues.
Cash used in investing activities for the three months ended March 31, 2022 and 2021 was $6,810,000 and $55,000, respectively. The $6,755,000 increase reflects the purchase of $7,000,000 of marketable securities and proceeds from the sale of IRNT shares and related derivatives of $397,000 during the first quarter 2022. Higher capital expenditures of $152,000 over prior year were for investment in production equipment to improve cost and efficiency.
As of March 31, 2022, our consolidated working capital was $51,611,000 compared to $51,410,000 as of December 31, 2021. As of March 31, 2022, we had current assets of $56,108,000, current liabilities of $4,497,000 and a ratio of current assets to current liabilities of 12.48 to 1.00. As of December 31, 2021, we had current assets of $55,836,000, current liabilities of $4,426,000 and a ratio of current assets to current liabilities of 12.62 to 1.00. Management continues to focus on efficiently managing working capital
13
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 March 31, 2022, 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 and cash generated from operations 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.
Our Board 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 acquisitions 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.
Spin-Off
In late 2021, the Company’s Board approved progressing with the Spin-Off (as defined below) of MtronPTI. On May 11, 2022, the Company filed a Definitive Proxy Statement with the SEC indicating its intention to secure stockholder approval of the transaction. A special meeting of stockholders to vote on the Spin-Off will be held on June 21, 2022. If approved by the Company’s stockholders, the Spin-Off will separate the business activities and investments of the Company and create two separate, publicly-traded companies: (1) the Company, which will continue to own and operate Precise Time and Frequency, LLC and hold substantially all the Company’s cash and marketable securities, and (2) MtronPTI, which includes the operations of Piezo Technology, Inc. and M-tron Asia, LLC (the “Spin-Off”). If completed, upon effectiveness of the transaction, LGL stockholders would own shares of both companies.
Management believes that the Spin-Off of MtronPTI would enable stockholders to more clearly evaluate the performance and future potential of each entity on a standalone basis, while allowing each entity to pursue its own distinct business strategy and capital allocation policy. Separating MtronPTI as an independent, publicly-owned company positions both MtronPTI and LGL Group to create value for their respective stockholders. The Spin-Off would permit each company to tailor its strategic plans and growth opportunities, more efficiently raise and allocate resources, including capital raised through debt or equity offerings, provide flexibility to use its own stock as currency for incentive compensation and potential acquisitions and provide investors a more targeted investment opportunity.
See Note O - Spin-Off in the accompanying notes to consolidated financial statements for further details of the transaction.
Critical Accounting Estimates
For a discussion of the Company’s critical accounting estimates, 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, 2021.
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, 2021.
COVID-19
The COVID-19 pandemic (“COVID”) has had and may continue to have an adverse impact on our operations and financial performance, as well as on the operations and financial performance of many of the customers and suppliers in industries that we serve. The COVID pandemic continues to present business challenges, and we continue to experience impacts related to COVID, primarily in higher raw material prices, disruptions in global supply chains, delays in supplier deliveries, delays in deliveries to customers, travel restrictions, quarantine restrictions, labor shortages and employee absences.
As a result of COVID, 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 revenue and bookings declined, and cost-saving measures were taken.
In accordance with the Department of Defense 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.
The ultimate impact of COVID on our operations and financial performance depends on many factors that are not within our control, including, but not limited to, duration of the pandemic, potential subsequent waves of COVID infection or potential new variants, the
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effectiveness and adoption of COVID vaccines and therapeutics, governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic (including shutdown orders, border closings, restrictions on travel and transport and workplace restrictions) and resulting supplier impacts. In addition, to the extent global vaccination programs do not achieve intended results and a longer period of economic and global supply chain and related disruption continues, the more adverse the impact will be on our business operations, financial performance and results of operations.
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 March 31, 2022 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 March 31, 2022, 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 March 31, 2022 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 March 31, 2022 (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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3.6 |
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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: May 12, 2022 |
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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: May 12, 2022 |
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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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