10-Q 1 lgl-10q_20190630.htm 10-Q lgl-10q_20190630.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2019

OR

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

For the transition period from ____________ to ____________

Commission File No. 001-00106

THE LGL GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

38-1799862

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer Identification No.)

 

 

2525 Shader Rd., Orlando, Florida

32804

(Address of principal executive offices)

(Zip Code)

 

(407) 298-2000

(Registrant’s telephone number, including area code)

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

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01

 

LGL

 

NYSE American

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes      No  

 

As of August 7, 2019, the registrant had 4,893,228 shares of common stock, $0.01 par value per share, outstanding.

 

 


 

 

THE LGL GROUP, INC.

Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 2019

INDEX

 

 

 

 

 


 

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements.

The LGL Group, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except par value and share amounts)

 

 

June 30,

2019

 

 

December 31,

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,820

 

 

$

15,508

 

Marketable securities

 

 

8,920

 

 

 

3,775

 

Accounts receivable, net of allowances of $90 and $40, respectively

 

 

5,041

 

 

 

3,394

 

Inventories, net

 

 

5,761

 

 

 

4,466

 

Prepaid expenses and other current assets

 

 

271

 

 

 

242

 

Total Current Assets

 

 

29,813

 

 

 

27,385

 

Property, plant and equipment:

 

 

 

 

 

 

 

 

Land

 

 

536

 

 

 

536

 

Buildings and improvements

 

 

4,545

 

 

 

4,029

 

Machinery and equipment

 

 

17,188

 

 

 

17,012

 

Gross property, plant and equipment

 

 

22,269

 

 

 

21,577

 

Less:  accumulated depreciation

 

 

(19,693

)

 

 

(19,491

)

Net property, plant, and equipment

 

 

2,576

 

 

 

2,086

 

Intangible assets, net

 

 

439

 

 

 

477

 

Deferred income taxes, net

 

 

103

 

 

 

127

 

Right-of-use lease asset

 

 

408

 

 

 

 

Total Assets

 

$

33,339

 

 

$

30,075

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,255

 

 

$

1,418

 

Accrued compensation and commissions

 

 

1,211

 

 

 

1,143

 

Other accrued expenses

 

 

749

 

 

 

191

 

Total Current Liabilities

 

 

4,215

 

 

 

2,752

 

Commitments and Contingencies (Note L)

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Common stock, $0.01 par value - 10,000,000 shares authorized;

   4,958,062 shares issued and 4,886,478 shares outstanding at

   June 30, 2019, and 4,912,762 shares issued and 4,831,178 shares

   outstanding at December 31, 2018

 

 

49

 

 

 

49

 

Additional paid-in capital

 

 

41,303

 

 

 

41,023

 

Accumulated deficit

 

 

(11,648

)

 

 

(13,169

)

Treasury stock, 81,584 shares held in treasury at cost at June 30, 2019

   and December 31, 2018

 

 

(580

)

 

 

(580

)

Accumulated other comprehensive income

 

 

 

 

 

 

Total Stockholders' Equity

 

 

29,124

 

 

 

27,323

 

Total Liabilities and Stockholders' Equity

 

$

33,339

 

 

$

30,075

 

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)

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

REVENUES

 

$

7,838

 

 

$

6,157

 

 

$

14,470

 

 

$

12,102

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufacturing cost of sales

 

 

4,706

 

 

 

3,594

 

 

 

8,921

 

 

 

7,310

 

Engineering, selling and administrative

 

 

2,276

 

 

 

2,074

 

 

 

4,259

 

 

 

4,145

 

OPERATING INCOME

 

 

856

 

 

 

489

 

 

 

1,290

 

 

 

647

 

Other Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest (expense) income, net

 

 

-

 

 

 

(6

)

 

 

1

 

 

 

6

 

Other income, net

 

 

117

 

 

 

67

 

 

 

270

 

 

 

91

 

Total Other Income, Net

 

 

117

 

 

 

61

 

 

 

271

 

 

 

97

 

INCOME BEFORE INCOME TAXES

 

 

973

 

 

 

550

 

 

 

1,561

 

 

 

744

 

Income tax expense

 

 

34

 

 

 

78

 

 

 

40

 

 

 

79

 

NET INCOME

 

$

939

 

 

$

472

 

 

$

1,521

 

 

$

665

 

Basic per share information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

4,888,059

 

 

 

4,698,393

 

 

 

4,857,603

 

 

 

4,697,415

 

Net income

 

$

0.19

 

 

$

0.10

 

 

$

0.31

 

 

$

0.14

 

Diluted per share information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

4,972,418

 

 

 

4,804,165

 

 

 

4,962,110

 

 

 

4,804,621

 

Net income

 

$

0.19

 

 

$

0.10

 

 

$

0.31

 

 

$

0.14

 

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)

 

 

Shares of

Common

Stock

Outstanding

 

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Deficit

 

 

Treasury

Stock

 

 

Accumulated Other Comprehensive Income

 

 

Total

 

Balance at December 31, 2018

 

 

4,831,178

 

 

$

49

 

 

$

41,023

 

 

$

(13,169

)

 

$

(580

)

 

$

-

 

 

$

27,323

 

Net income, Q1, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

582

 

 

 

 

 

 

 

 

 

 

 

582

 

Exercise of stock options

 

 

14,250

 

 

 

 

 

 

71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

71

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

Balance at March 31, 2019

 

 

4,845,428

 

 

$

49

 

 

$

41,100

 

 

$

(12,587

)

 

$

(580

)

 

$

-

 

 

$

27,982

 

Net income, Q2, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

939

 

 

 

 

 

 

 

 

 

 

 

939

 

Exercise of stock options

 

 

41,050

 

 

 

 

 

 

197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

197

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

Balance at June 30, 2019

 

 

4,886,478

 

 

$

49

 

 

$

41,303

 

 

$

(11,648

)

 

$

(580

)

 

$

-

 

 

$

29,124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

4,692,893

 

 

$

47

 

 

$

40,035

 

 

$

(14,609

)

 

$

(580

)

 

$

35

 

 

$

24,928

 

Net income, Q1, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

193

 

 

 

 

 

 

 

 

 

 

 

193

 

Cumulative effect adjustment from

adoption of ASU 2016-01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35

 

 

 

 

 

 

 

(35

)

 

 

 

Exercise of stock options

 

 

5,500

 

 

 

 

 

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

Balance at June 30, 2018

 

 

4,698,393

 

 

$

47

 

 

$

40,064

 

 

$

(14,381

)

 

$

(580

)

 

$

-

 

 

$

25,150

 

Net income, Q2, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

472

 

 

 

 

 

 

 

 

 

 

 

472

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

Issuance costs for rights offering

 

 

 

 

 

 

 

 

 

 

(28

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(28

)

Balance at June 30, 2018

 

 

4,698,393

 

 

$

47

 

 

$

40,042

 

 

$

(13,909

)

 

$

(580

)

 

$

-

 

 

$

25,600

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

3


 

The LGL Group, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

1,521

 

 

$

665

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

202

 

 

 

211

 

Amortization of finite-lived intangible assets

 

 

38

 

 

 

38

 

Recovery of note receivable

 

 

 

 

 

(4

)

Stock-based compensation

 

 

12

 

 

 

13

 

Unrealized gain on marketable securities

 

 

(145

)

 

 

(86

)

Deferred income tax expense

 

 

24

 

 

 

18

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Increase in accounts receivable, net

 

 

(1,647

)

 

 

(487

)

Increase in inventories, net

 

 

(1,295

)

 

 

(427

)

(Increase) decrease in prepaid expenses and other assets

 

 

(29

)

 

 

137

 

Increase in accounts payable, accrued compensation and

   commissions and other accrued liabilities

 

 

1,055

 

 

 

192

 

Net cash (used in) provided by operating activities

 

 

(264

)

 

 

270

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchase of marketable securities, net

 

 

(5,000

)

 

 

-

 

Capital expenditures

 

 

(692

)

 

 

(202

)

Net cash used in investing activities

 

 

(5,692

)

 

 

(202

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from stock option exercise

 

 

268

 

 

 

22

 

Net cash provided by financing activities

 

 

268

 

 

 

22

 

(Decrease) increase in cash and cash equivalents

 

 

(5,688

)

 

 

90

 

Cash and cash equivalents at beginning of period

 

 

15,508

 

 

 

13,250

 

Cash and cash equivalents at end of period

 

$

9,820

 

 

$

13,340

 

Supplemental Disclosure:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

6

 

 

$

17

 

Cash paid for income taxes

 

$

58

 

 

$

34

 

Non-Cash Disclosure:

 

 

 

 

 

 

 

 

Right-of-use assets offset by operating lease liabilities

 

$

408

 

 

$

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

4


 

The LGL Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

A.

Subsidiaries of the Registrant

The LGL Group, Inc. (the “Company”), incorporated in 1928 under the laws of the State of Indiana and reincorporated under the laws of the State of Delaware in 2007, 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.

As of June 30, 2019, the subsidiaries of the Company were as follows:

 

 

Owned By

The LGL

Group, Inc.

 

Mtron Systems Acquisition Holdings Company, LLC

 

 

100.0

%

Mtron Systems Acquisition Corp.

 

 

100.0

%

M-tron Systems Holdings, LLC

 

 

100.0

%

M-tron Industries, Inc.

 

 

100.0

%

Piezo Technology, Inc.

 

 

100.0

%

Piezo Technology India Private Ltd.

 

 

99.9

%

M-tron Asia, LLC

 

 

100.0

%

M-tron Industries, Ltd.

 

 

100.0

%

GC Opportunities Ltd.

 

 

100.0

%

M-tron Services, Ltd.

 

 

100.0

%

Precise Time and Frequency, LLC

 

 

100.0

%

Lynch Systems, Inc.

 

 

100.0

%

 

The Company operates through its two principal subsidiaries, M-tron Industries, Inc. (“MtronPTI”), which includes the operations of Piezo Technology, Inc. (“PTI”) and M-tron Asia, LLC (“Mtron”), and Precise Time and Frequency, LLC (“PTF”). The Company operates in two identified segments. The first segment, the electronic components segment, is focused on the design and manufacture of highly-engineered, high reliability frequency and spectrum control products. These electronic components ensure reliability and security in aerospace and defense communications, low noise and base accuracy for laboratory instruments, and synchronous data transfers throughout the wireless and Internet infrastructure. The second segment, the electronic instruments segment, is focused on the design and manufacture of high performance Frequency and Time Reference Standards that form the basis for timing and synchronization in various applications. The Company has operations in Orlando, Florida, Yankton, South Dakota, Wakefield, Massachusetts and Noida, India and sales offices in Austin, Texas and Hong Kong.

The Company recently added three subsidiaries as part of an effort to reorganize the subsidiaries and to plan potential available strategies for acquisitions. These were Mtron Systems Acquisition Holdings Company, LLC, Mtron Systems Acquisition Corp., and Mtron Systems Holdings, LLC.

B.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. 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 six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019.

This interim information should be read in conjunction with the audited consolidated financial statements and related notes thereto set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (the “SEC”) on March 21, 2019. The accompanying unaudited condensed consolidated financial statements should also be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q.

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.

5


 

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 30 days, with a few exceptions, none regularly exceeding 60 days.

The Company provides disaggregated revenue details by segment in Note J – Segment Information, and geographic markets in Note K – 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:

 

-

The Company applies the practical expedient for shipping and handling as fulfillment costs.

 

-

The Company expenses sales commissions as sales and marketing expenses in the period they are incurred.

Income Taxes

Based on our assessment of the uncertainty surrounding the realization of the favorable tax attributes in future tax returns in accordance with the provisions of ASC 740, Income Taxes, we have determined that it is more likely than not that certain deferred tax assets generated from foreign net operating losses can be utilized in the foreseeable future and a valuation allowance for these assets is not required. We also determined that a full valuation against the remaining U.S. net deferred tax assets is required and have recorded a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized.

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 probable than not that the Company would realize its future tax benefits. As positive factors continue to be present given our recent economic performance, the potential result would be a full or partial release of the valuation allowance on the deferred tax asset initially recognized in prior periods. The net balance of the deferred tax asset was approximately $4.8 million and $5.2 million as of June 30, 2019 and December 31, 2018, respectively, with a related valuation allowance of $4.7 million and $5.1 million, respectively. Any release of the valuation allowance would be recognized in the statements of operations.

Other Comprehensive Income

Our comprehensive income for the six months ended June 30, 2019 and June 30, 2018 consisted entirely of net income. Therefore a consolidated statement of comprehensive income is not presented for the six months ended June 30, 2019 and June 30, 2018.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)”, to require lessees to recognize all leases, with limited exceptions, on the balance sheet. The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Subsequently, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842”, ASU 2018-11, “Targeted Improvements”, ASU 2018-20, “Narrow-Scope Improvements for Lessors”, and ASU 2019-01, “Codification Improvements”, to clarify and amend the guidance in ASU 2016-02. The Company’s adoption of the ASUs effective January 1, 2019 resulted in the recording of lease assets and lease liabilities of $142,000 on the consolidated balance sheet during Q1 of 2019 and did not have a material impact on the condensed consolidated statements of operations or the condensed consolidated statements of cash flows.

C.

Related Party Transactions

Certain balances held and invested in various mutual funds are managed by a related entity (the "Fund Manager"), which is related through a director who is also a greater than 10% stockholder and currently serves as an executive officer of the Fund Manager. The brokerage and fund transactions in 2019 and 2018 were directed solely at the discretion of the Company’s management.

6


 

As of June 30, 2019, the balance with the Fund Manager totaled $17,735,000, including $8,827,000 which is classified within cash and cash equivalents on the accompanying unaudited consolidated balance sheets, and $8,908,000 which is classified within marketable securities on the accompanying unaudited consolidated balance sheets. Amounts invested generated $265,000 of realized and unrealized investment income during 2019 that is included within other income, net on the accompanying unaudited consolidated statements of operations. Fund management fees are anticipated to average less than 0.35% of the asset balances under management on an annual basis.

As of December 31, 2018, the balance with the Fund Manager totaled $16,270,000, including $12,506,000 which is classified within cash and cash equivalents on the accompanying unaudited consolidated balance sheets, and $3,764,000 which is classified as marketable securities on the accompanying unaudited consolidated balance sheets.

D.

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 marketable securities, the Company obtains current market pricing from quoted market sources or uses pricing for identical securities. Assets measured at fair value on a recurring basis are summarized below (in thousands).

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total at June 30,

2019

 

Marketable Equity Security

 

$

12

 

 

$

 

 

$

 

 

$

12

 

Equity Mutual Fund

 

 

 

 

 

8,908

 

 

 

 

 

 

8,908

 

U.S. Treasury Mutual Fund

 

 

8,827

 

 

 

 

 

 

 

 

 

8,827

 

 

 

$

8,839

 

 

$

8,908

 

 

$

 

 

$

17,747

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total at December 31, 2018

 

Marketable Equity Security

 

$

11

 

 

$

 

 

$

 

 

$

11

 

Equity Mutual Fund

 

 

 

 

 

3,764

 

 

 

 

 

 

3,764

 

U.S. Treasury Mutual Fund

 

 

12,506

 

 

 

 

 

 

 

 

 

12,506

 

 

 

$

12,517

 

 

$

3,764

 

 

$

 

 

$

16,281

 

 

There were no transfers from level 2 to level 3 during the periods presented. There were no level 3 assets as of June 30, 2019 or December 31, 2018. The Company also has assets that may be subject to measurement at fair value on a non-recurring basis, including

7


 

goodwill and intangible assets, and other long-lived assets. There were no liabilities subject to fair value on a non-recurring or recurring basis as of June 30, 2019 or December 31, 2018.

The Company reviews goodwill and the carrying value of long-lived assets at least annually or whenever events and circumstances indicate that the carrying amounts of the assets may not be recoverable. If it is determined that the assets are impaired, the carrying value would be reduced to estimated fair value.

E.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 inventory reserve for obsolescence as of June 30, 2019 and December 31, 2018 was $1,434,000 and $1,266,000, respectively.

Inventories are comprised of the following (in thousands):

 

 

 

June 30,

2019

 

 

December 31,

2018

 

Raw materials

 

$

2,394

 

 

$

1,719

 

Work in process

 

 

2,269

 

 

 

1,807

 

Finished goods

 

 

1,098

 

 

 

940

 

Total Inventories, net

 

$

5,761

 

 

$

4,466

 

 

F.

Intangible Assets

Intangible assets are recorded at cost less accumulated amortization which is included in engineering, selling and administrative expenses in the accompanying unaudited 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 10 years. The intangible assets consist of intellectual property and goodwill. The net carrying value of the amortizable intangible assets was $399,000 and $437,000 as of June 30, 2019 and December 31, 2018, respectively. Goodwill, which is not amortizable, was $40,000 as of both June 30, 2019 and December 31, 2018.

G.

Stock-Based Compensation

The Company measures the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes the cost over the requisite service period, typically the vesting period.

The Company estimates the fair value of stock options on the grant date using the Black-Scholes-Merton option-pricing model. The Black-Scholes-Merton option-pricing model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. There is no expected dividend rate. Historical Company information was the basis for the expected volatility assumption as the Company believes that the historical volatility is indicative of expected volatility over the life of the option. The risk-free interest rate is based on the U.S. Treasury zero-coupon rates with a remaining term equal to the expected term of the option.

Compensation expense related to share-based compensation is recognized over the applicable vesting periods. As of June 30, 2019, there was approximately $20,000 of total unrecognized compensation expense related to unvested share-based compensation arrangements that will be recognized over a weighted average period of 1.1 years.

H.

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 stock options and other potentially dilutive financial instruments, only in the periods in which the effects are dilutive. The dilutive effect of share-based awards is reflected in earnings per share by application of the treasury stock method, which includes consideration of unamortized share-based compensation expense required under the Compensation – Stock Compensation Topic of the ASC.

For the six months ended June 30, 2019 there were 6,067 options to purchase shares of the Company's common stock, for the three and six months ended June 30, 2018 there were 18,983 options to purchase shares, and for the six months ended June 30, 2018, there were warrants to purchase 519,241 shares of common stock that were excluded from the diluted earnings per share computation because the impact of the assumed exercise of such stock options or warrants would have been anti-dilutive during the respective periods.

8


 

The following table reconciles basic weighted average shares outstanding to diluted weighted average shares outstanding for the three and six months ended June 30, 2019 and 2018:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Weighted average shares outstanding - basic

 

 

4,888,059

 

 

 

4,698,393

 

 

 

4,857,603

 

 

 

4,697,415

 

Effect of diluted securities

 

 

84,359

 

 

 

105,772

 

 

 

104,507

 

 

 

107,206

 

Weighted average shares outstanding - diluted

 

 

4,972,418

 

 

 

4,804,165

 

 

 

4,962,110

 

 

 

4,804,621

 

 

I.

Stockholders’ Equity

Share Repurchase Program

On August 29, 2011, the Company’s board of directors (the “Board”) authorized the Company to repurchase up to 100,000 shares of its common stock in accordance with applicable securities laws. This authorization increased the total number of shares authorized and available for repurchase under the Company's existing share repurchase program to 540,000 shares, at such times, amounts and prices as the Company shall deem appropriate. As of June 30, 2019, the Company had repurchased a total of 81,584 shares of common stock at a cost of $580,000, which shares are currently held in treasury.

J.

Segment Information

The Company has two reportable business segments from operations: electronic components, which includes all products manufactured and sold by MtronPTI, and electronic instruments, which includes all products manufactured and sold by PTF. The Company's foreign operations in Hong Kong and India are subsidiaries of MtronPTI. The following table sets forth activity broken down by reportable business segment (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues from Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronic components

 

$

7,462

 

 

$

5,834

 

 

$

13,793

 

 

$

11,565

 

Electronic instruments

 

 

376

 

 

 

323

 

 

 

677

 

 

 

537

 

Total consolidated revenues

 

$

7,838

 

 

$

6,157

 

 

$

14,470

 

 

$

12,102

 

Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronic components

 

$

1,096

 

 

$

621

 

 

$

1,654

 

 

$

1,171

 

Electronic instruments

 

 

71

 

 

 

40

 

 

 

164

 

 

 

42

 

Unallocated corporate expense

 

 

(311

)

 

 

(172

)

 

 

(528

)

 

 

(566

)

Total operating income

 

 

856

 

 

 

489

 

 

 

1,290

 

 

 

647

 

Interest income, net

 

 

-

 

 

 

(6

)

 

 

1

 

 

 

6

 

Other income, net

 

 

117

 

 

 

67

 

 

 

270

 

 

 

91

 

Total other income

 

 

117

 

 

 

61

 

 

 

271

 

 

 

97

 

Income Before Income Taxes

 

$

973

 

 

$

550

 

 

$

1,561

 

 

$

744

 

Operating income is equal to revenues less cost of sales and operating expenses, excluding investment income, interest expense, and income taxes.

K.

Domestic and Foreign Revenues

Significant foreign revenues from operations (10% or more of foreign sales) were as follows (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Malaysia

 

$

854

 

 

$

772

 

 

$

1,679

 

 

$

1,467

 

Hong Kong

 

 

167

 

 

 

128

 

 

 

434

 

 

 

233

 

All other foreign countries

 

 

784

 

 

 

647

 

 

 

1,401

 

 

 

1,281

 

Total foreign revenues

 

$

1,805

 

 

$

1,547

 

 

$

3,514

 

 

$

2,981

 

Total domestic revenue

 

$

6,033

 

 

$

4,610

 

 

$

10,956

 

 

$

9,121

 

The Company allocates its foreign revenue based on the customer's ship-to location.

9


 

L.

Commitments and 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.

M.

Leases

We lease certain manufacturing and office space and equipment. We determine 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 are included in right-of-use lease assets, and other accrued expense in our consolidated balance sheet. Right-of-use lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our 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 lease term. We use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The incremental borrowing rate for operating leases that commenced in the period is determined by using the prior quarter end’s incremental borrowing rates. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and we recognize lease expense for these leases on a straight-line basis over the lease term.

Certain leases include one or more options to renew, with renewal terms that can extend the lease term from one to 10 years or more, and the exercise of lease renewal options under these leases is at our sole discretion. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

During the six months ended June 30, 2019 we renewed a lease on one of our facilities resulting in the addition of $318,000 in right-of-use lease assets in exchange for operating lease liabilities.

Future minimum lease payment obligations under operating leases are as follows:

 

 

 

June 30,

2019

 

 

December 31,

2018

 

2019 (six months at June 30, 2019)

 

$

58

 

 

$

117

 

2020

 

 

92

 

 

 

35

 

2021

 

 

88

 

 

 

26

 

2022

 

 

64

 

 

 

 

2023

 

 

64

 

 

 

 

Thereafter

 

 

63

 

 

 

 

Total lease payments

 

 

429

 

 

 

178

 

Less: interest

 

 

(21

)

 

 

(8

)

Total lease payments

 

$

408

 

 

$

170

 

 

10


 

Item 2.

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