10-Q 1 lgl-10q_20200930.htm 10-Q lgl-10q_20200930.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 September 30, 2020

OR

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

For the transition period from ____________ to ____________

Commission File 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, 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.

 

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 November 9, 2020, the registrant had 5,213,320 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 September 30, 2020

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)

 

 

September 30,

2020

 

 

December 31,

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,276

 

 

$

12,453

 

Marketable securities

 

 

5,646

 

 

 

5,631

 

Accounts receivable, net of allowances of $132 and $109, respectively

 

 

4,644

 

 

 

4,445

 

Inventories, net

 

 

5,430

 

 

 

6,016

 

Prepaid expenses and other current assets

 

 

268

 

 

 

365

 

Total Current Assets

 

 

33,264

 

 

 

28,910

 

Property, plant and equipment:

 

 

 

 

 

 

 

 

Land

 

 

536

 

 

 

536

 

Buildings and improvements

 

 

4,766

 

 

 

4,651

 

Machinery and equipment

 

 

17,742

 

 

 

17,527

 

Gross property, plant and equipment

 

 

23,044

 

 

 

22,714

 

Less:  accumulated depreciation

 

 

(20,220

)

 

 

(19,883

)

Net property, plant, and equipment

 

 

2,824

 

 

 

2,831

 

Equity investment in unconsolidated subsidiary

 

 

3,134

 

 

 

3,334

 

Deferred income taxes, net

 

 

3,046

 

 

 

3,307

 

Intangible assets, net

 

 

366

 

 

 

402

 

Right-of-use lease asset

 

 

452

 

 

 

331

 

Other assets

 

 

 

 

 

102

 

Total Assets

 

$

43,086

 

 

$

39,217

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,249

 

 

$

1,865

 

Accrued compensation and commissions

 

 

1,494

 

 

 

1,832

 

Other accrued expenses

 

 

957

 

 

 

627

 

Total Current Liabilities

 

 

3,700

 

 

 

4,324

 

Contingencies (Note P)

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

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

   5,339,904 shares issued and 5,213,320 shares outstanding at

   September 30, 2020, and 5,014,647 shares issued and 4,933,063 shares

   outstanding at December 31, 2019

 

 

53

 

 

 

50

 

Additional paid-in capital

 

 

44,999

 

 

 

41,576

 

Accumulated deficit

 

 

(5,086

)

 

 

(6,153

)

Treasury stock, 81,584 shares held in treasury at cost at September 30, 2020

   and December 31, 2019

 

 

(580

)

 

 

(580

)

Total Stockholders' Equity

 

 

39,386

 

 

 

34,893

 

Total Liabilities and Stockholders' Equity

 

$

43,086

 

 

$

39,217

 

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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

REVENUES

 

$

8,071

 

 

$

8,588

 

 

$

23,748

 

 

$

23,058

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Manufacturing cost of sales

 

 

5,203

 

 

 

5,049

 

 

 

15,681

 

 

 

13,970

 

Engineering, selling and administrative

 

 

2,159

 

 

 

2,417

 

 

 

6,514

 

 

 

6,676

 

OPERATING INCOME

 

 

709

 

 

 

1,122

 

 

 

1,553

 

 

 

2,412

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest (expense) income, net

 

 

(3

)

 

 

 

 

 

(7

)

 

 

1

 

Loss on equity investment in unconsolidated subsidiary

 

 

(61

)

 

 

 

 

 

(200

)

 

 

 

Other income (expense), net

 

 

155

 

 

 

82

 

 

 

3

 

 

 

352

 

Total other income (expense), net

 

 

91

 

 

 

82

 

 

 

(204

)

 

 

353

 

INCOME BEFORE INCOME TAXES

 

 

800

 

 

 

1,204

 

 

 

1,349

 

 

 

2,765

 

Income tax expense (benefit)

 

 

171

 

 

 

(3,326

)

 

 

282

 

 

 

(3,286

)

NET INCOME

 

$

629

 

 

$

4,530

 

 

$

1,067

 

 

$

6,051

 

Basic per share information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

5,212,652

 

 

 

4,901,698

 

 

 

5,159,452

 

 

 

4,872,461

 

Net income

 

$

0.12

 

 

$

0.92

 

 

$

0.21

 

 

$

1.24

 

Diluted per share information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

5,251,078

 

 

 

4,965,808

 

 

 

5,195,754

 

 

 

4,965,989

 

Net income

 

$

0.12

 

 

$

0.91

 

 

$

0.21

 

 

$

1.22

 

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

 

 

Total

 

Balance at December 31, 2019

 

 

4,933,063

 

 

$

50

 

 

$

41,576

 

 

$

(6,153

)

 

$

(580

)

 

$

34,893

 

Net income, Q1 2020

 

 

 

 

 

 

 

 

 

 

 

183

 

 

 

 

 

 

183

 

Exercise of stock options

 

 

14,000

 

 

 

 

 

 

58

 

 

 

 

 

 

 

 

 

58

 

At-the-market stock sales, net of costs of $346

 

 

263,725

 

 

 

3

 

 

 

3,251

 

 

 

 

 

 

 

 

 

3,254

 

Stock-based compensation

 

 

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

 

10

 

Balance at March 31, 2020

 

 

5,210,788

 

 

$

53

 

 

$

44,895

 

 

$

(5,970

)

 

$

(580

)

 

$

38,398

 

Net income, Q2 2020

 

 

 

 

 

 

 

 

 

 

 

255

 

 

 

 

 

 

255

 

Exercise of stock options

 

 

1,266

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

5

 

Stock-based compensation

 

 

 

 

 

 

 

 

37

 

 

 

 

 

 

 

 

 

37

 

Balance at June 30, 2020

 

 

5,212,054

 

 

$

53

 

 

$

44,937

 

 

$

(5,715

)

 

$

(580

)

 

$

38,695

 

Net income, Q3 2020

 

 

 

 

 

 

 

 

 

 

 

629

 

 

 

 

 

 

629

 

Exercise of stock options

 

 

1,266

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

5

 

Stock-based compensation

 

 

 

 

 

 

 

 

57

 

 

 

 

 

 

 

 

 

57

 

Balance at September 30, 2020

 

 

5,213,320

 

 

$

53

 

 

$

44,999

 

 

$

(5,086

)

 

$

(580

)

 

$

39,386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Net income, Q3, 2019

 

 

 

 

 

 

 

 

 

 

 

4,530

 

 

 

 

 

 

4,530

 

Exercise of stock options

 

 

27,200

 

 

 

 

 

 

122

 

 

 

 

 

 

 

 

 

122

 

Stock-based compensation

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

5

 

Balance at September 30, 2019

 

 

4,913,678

 

 

$

49

 

 

$

41,430

 

 

$

(7,118

)

 

$

(580

)

 

$

33,781

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

3


 

The LGL Group, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

1,067

 

 

$

6,051

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

336

 

 

 

309

 

Amortization of finite-lived intangible assets

 

 

56

 

 

 

56

 

Stock-based compensation

 

 

104

 

 

 

17

 

Loss from equity investment in unconsolidated subsidiary

 

 

200

 

 

 

 

Unrealized gain on marketable securities

 

 

(15

)

 

 

(179

)

Deferred income tax expense

 

 

261

 

 

 

(3,306

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Increase in accounts receivable, net

 

 

(199

)

 

 

(1,508

)

Decrease (increase) in inventories, net

 

 

586

 

 

 

(2,010

)

Decrease (increase) in prepaid expenses and other assets

 

 

179

 

 

 

(110

)

(Decrease) increase in accounts payable, accrued compensation and

   commissions and other accrued liabilities

 

 

(745

)

 

 

1,769

 

Net cash provided by operating activities

 

 

1,830

 

 

 

1,089

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchase of marketable securities, net

 

 

 

 

 

(5,000

)

Capital expenditures

 

 

(329

)

 

 

(826

)

Net cash used in investing activities

 

 

(329

)

 

 

(5,826

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from at-the-market stock sales

 

 

3,254

 

 

 

 

Proceeds from stock option exercise

 

 

68

 

 

 

390

 

Net cash provided by financing activities

 

 

3,322

 

 

 

390

 

Increase (decrease) in cash and cash equivalents

 

 

4,823

 

 

 

(4,347

)

Cash and cash equivalents at beginning of period

 

 

12,453

 

 

 

15,508

 

Cash and cash equivalents at end of period

 

$

17,276

 

 

$

11,161

 

Supplemental Disclosure:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

3

 

 

$

6

 

Cash paid for income taxes

 

$

56

 

 

$

72

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

4


 

The LGL Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

A.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and the instructions to Form 10-Q. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020. The information included in this Form 10-Q should be read in conjunction with the information included in the LGL Group, Inc. (the “Company”, “we”, “our” or “us”) Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2020.

 

B.

Summary of Significant Accounting Polices

 

Principles of Consolidation

The Company consolidates entities in which it has a controlling financial interest. Material intercompany transactions and accounts have been eliminated in consolidation. The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a variable interest entity (“VIE”).

A variable interest in a VIE is an investment that will absorb portions of the VIE’s expected losses and/or receive portions of the VIE’s expected residual returns. The Company’s sole VIE represents its interest in the Sponsor (as defined below).

VIE Consolidation Analysis

The enterprise with a controlling financial interest in a VIE is known as the primary beneficiary and consolidates the VIE. The Company determines whether it is the primary beneficiary of a VIE by performing an analysis that principally considers:

 

Which variable interest holder has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance;

 

Which variable interest holder has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE;

 

The VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders;

 

The VIE’s capital structure;

 

The terms between the VIE and its variable interest holders and other parties involved with the VIE; and

 

Related-party relationships.

The Company reassesses its evaluation of whether an entity is a VIE when certain reconsideration events occur. The Company reassesses its determination of whether it is the primary beneficiary of a VIE on an ongoing basis based on current facts and circumstances.

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 20% or more of the entity’s common stock or in-substance common stock.

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. The Company’s 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 L – Segment Information, and geographic markets in Note M – Domestic and Foreign Revenues.

5


 

The Company offers a limited right of return and/or authorized price protection provisions in its agreements with certain electronic component distributors who resell the Company's products to original equipment manufacturers or electronic manufacturing services companies. As a result, the Company estimates and records a reserve for future returns and other charges against revenue at the time of shipment consistent with the terms of sale. The reserve is estimated based on historical experience with each respective distributor. These reserves and charges are immaterial as the Company does not have a history of significant price protection adjustments or returns. The Company provides a standard assurance warranty that does not create a performance obligation.

Practical Expedients:

 

-

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

The Company periodically undertakes a review of its valuation allowance and it evaluates all positive and negative factors that may affect whether it is more likely than not that the Company would realize its future tax benefits from its deferred tax balances.

Impairments 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.

 

As of September 30, 2020, we performed an assessment to determine if there were any indicators of impairment as a result of the operating conditions resulting from the coronavirus pandemic (“COVID-19”). We concluded that while there have been events and circumstances in the macro-environment that have impacted us, we have not experienced any entity-specific indicators of asset impairment.

Recent Accounting Pronouncements

There were no recent accounting pronouncements that are anticipated to significantly affect the Company.

C.

Equity Investment in Unconsolidated Subsidiary

The Company has invested $3.35 million in LGL Systems Acquisition Holding Company, LLC (a partially-owned subsidiary of LGL Group, Inc.), which serves as the sponsor (the “Sponsor”) of LGL Systems Acquisition Corp., a special purpose acquisition company, commonly referred to as a “SPAC”, or blank check company, formed for the purpose of effecting a business combination in the aerospace, defense and communications industries (the “SPAC”). The Company’s investment represents 62.2% of the Sponsor’s initial risk capital. 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 10% stockholder of the Company. The Company has determined that it has significant influence in the Sponsor through Nevada GP but that it is not the primary beneficiary, therefore, accounts for the Sponsor under the equity method of accounting. The equity income (loss) is reported on the basis of a one-quarter lag and was the sole change in the equity investment during both the three and nine month periods ended September 30, 2020.

The Sponsor holds 20% of the shares in the SPAC along with 5,200,000 private warrants at a strike price of $11.50. On November 7, 2019, the SPAC raised $172.5 million through the sale of 17.25 million shares and was listed as a publicly traded company on the NASDAQ Capital Market under the ticker symbol ‘DFNS’. The SPAC’s initial public offering closed on November 12, 2019. Prior to and immediately following the initial public offering, the Sponsor held 4,312,500 shares of the SPAC, which are restricted and non-tradable.

If the SPAC does not complete a business combination within 24 months from the closing of the SPAC’s initial public offering, the proceeds from the sale of the private warrants will be used to fund the redemption of the shares sold in the SPAC’s initial public offering (subject to the requirements of applicable law), and the private warrants will expire worthless.

 

D.

Related Party Transactions

Certain cash equivalents and marketable securities held and invested in various mutual funds are managed by g.research (the "Fund Manager"). Marc Gabelli currently serves as an executive officer of the Fund Manager. The brokerage and fund transactions in 2020 and 2019 were directed solely at the discretion of the Company’s management.

6


 

As of September 30, 2020, the balance with the Fund Manager totaled $18,918,000, including $13,281,000 which is classified within cash and cash equivalents on the accompanying unaudited condensed consolidated balance sheets, and $5,636,000 which is classified within marketable securities on the accompanying unaudited condensed consolidated balance sheets. Amounts invested generated $15,000 and $179,000 of unrealized investment income and $52,000 and $167,000 of interest earnings during the first nine months of 2020 and 2019, respectively, that is included within other income (expense), net on the accompanying unaudited condensed 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, 2019, the balance with the Fund Manager totaled $14,536,000, including $8,915,000 which is classified within cash and cash equivalents on the accompanying unaudited condensed consolidated balance sheets, and $5,621,000 which is classified as marketable securities on the accompanying unaudited condensed consolidated balance sheets.

Marc Gabelli serves as Chairman and Chief Executive Officer of the SPAC and has invested in the Sponsor, and is the initial managing member of Nevada GP. Timothy Foufas, a member of the Company’s board of directors, is also a member and investor of the Sponsor and Chief Operating Officer of the SPAC and is a member of Nevada GP. Robert LaPenta, Jr., a member of the Company’s board of directors, is also a member and investor of the Sponsor, Executive Vice President and Chief Financial Officer of the SPAC and is a member of Nevada GP. John Mega, a member of the Company’s board of directors, is also a member and investor of the Sponsor and the President of the SPAC. Patrick Huvane, the Company’s Senior Vice President of Business Development, is a member of both the Company’s and the SPAC’s management team. Michael J. Ferrantino, Jr., a member of the Company’s board of directors, is also a member of the Sponsor and a board member for the SPAC. Under separate arrangement, these people may be eligible to receive incentive compensation should the SPAC complete a successful acquisition. Mr. LaPenta and Mr. Mega were appointed to the Company’s board of directors on August 24, 2020.

E.

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 September 30,

2020

 

Equity Security

 

$

10

 

 

$

 

 

$

 

 

$

10

 

Equity Mutual Fund

 

 

 

 

 

5,636

 

 

 

 

 

 

5,636

 

U.S. Treasury Mutual Fund

 

 

13,281

 

 

 

 

 

 

 

 

 

13,281

 

7


 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total at December 31, 2019

 

Equity Security

 

$

10

 

 

$

 

 

$

 

 

$

10

 

Equity Mutual Fund

 

 

 

 

 

5,621

 

 

 

 

 

 

5,621

 

U.S. Treasury Mutual Fund

 

 

8,915

 

 

 

 

 

 

 

 

 

8,915

 

 

There were no transfers from Level 2 to Level 3 during the periods presented. There were no Level 3 assets as of September 30, 2020 or December 31, 2019. The Company also has assets that may be subject to measurement at fair value on a non-recurring basis, including goodwill and intangible assets, and other long-lived assets. There were no other assets or liabilities subject to fair value on a non-recurring or recurring basis as of September 30, 2020 or December 31, 2019.

F.Inventories

Inventories are valued at the lower of cost or net realizable value using the FIFO (first-in, first-out) method. The Company reduces the value of its inventories to net realizable value when the net realizable value is believed to be less than the cost of the item. The reserve for excess and obsolete inventory as of September 30, 2020 and December 31, 2019 was $1,266,000 and $1,341,000, respectively.

Inventories are comprised of the following (in thousands):

 

 

 

September 30,

2020

 

 

December 31,

2019

 

Raw materials

 

$

2,003

 

 

$

2,134

 

Work in process

 

 

2,655

 

 

 

2,640

 

Finished goods

 

 

772

 

 

 

1,242

 

Total Inventories, net

 

$

5,430

 

 

$

6,016

 

 

G.

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 $326,000 and $362,000 as of September 30, 2020 and December 31, 2019, respectively. Goodwill, which is not amortizable, was $40,000 as of both September 30, 2020 and December 31, 2019.

Intangible assets are reviewed for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

H.

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. On March 27, 2020, the Company issued 45,000 restricted shares to its Interim President and Chief Executive Officer, with a vesting period of 3.75 years.

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 September 30, 2020, there was approximately $407,000 of total unrecognized compensation expense related to unvested share-based compensation arrangements, primarily related to restricted stock awards. This cost will be recognized over the weighted average remaining life of these awards (2.25 years for restricted stock awards and 1.8 years for stock options).

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 stock options and other potentially dilutive financial instruments, only in the periods

8


 

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 both the three and nine month periods ended September 30, 2020 there were 25,000 options to purchase shares of common stock excluded from the diluted earnings per share computation because the impact of the assumed exercise of such stock options would have been anti-dilutive during the respective periods.

The following table reconciles basic weighted average shares outstanding to diluted weighted average shares outstanding for the three and nine months ended September 30, 2020 and 2019:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Weighted average shares outstanding - basic

 

 

5,212,652

 

 

 

4,901,698

 

 

 

5,159,452

 

 

 

4,872,461

 

Effect of diluted securities

 

 

38,426

 

 

 

64,110

 

 

 

36,302

 

 

 

93,528

 

Weighted average shares outstanding - diluted

 

 

5,251,078

 

 

 

4,965,808

 

 

 

5,195,754

 

 

 

4,965,989

 

 

J.

Stockholders’ Equity

ATM Offering

On January 22, 2020, the Company entered into an Open Market Sale Agreement (the “Sales Agreement”) with Jefferies LLC, as sales agent (“Jefferies”), pursuant to which the Company may offer and sell, from time to time in what is deemed to be an “at the market” offering (“ATM Offering”), through Jefferies, shares of the Company’s common stock, par value $0.01 per share, having an aggregate offering price of up to $15,000,000 (the “Shares”). Shares sold under the Sales Agreement are issued pursuant to the shelf registration statement on Form S-3 (File No. 333-235767), filed by the Company with the SEC on December 31, 2019, which was declared effective on January 8, 2020. The Company filed a prospectus supplement with the SEC on January 23, 2020 in connection with the offer and sale of the Shares pursuant to the Sales Agreement. During February and March of 2020, there were 263,725 shares sold under this Sales Agreement, at an average price per share of $13.65 and generating net proceeds of approximately $3,492,000 after brokerage charges of $108,000 were deducted and paid to Jefferies. Form S-3 and at-the-market (“ATM”) registration costs were approximately $238,000 and were charged to additional paid-in capital. The Sales Agreement and ATM Offering remain in effect in accordance with their terms.

 

K.

Income Taxes

The Company periodically undertakes a review of its valuation allowance and evaluates all positive and negative factors that may affect whether it is more likely than not that the Company would realize its future tax benefits from its deferred tax balances. In the quarter ended September 30, 2019, the Company also released substantially all the valuation allowance related to the Company’s U.S. deferred tax assets ($3.3 million).

The income tax provision for interim periods is generally determined based upon the expected effective income tax rate for the full year and the tax rate applicable to certain discrete transactions in the interim period. To determine the annual effective income tax rate, the Company must estimate both the total income (loss) before income tax for the full year and the jurisdictions in which that income (loss) is subject to tax. The actual effective income tax rate for the full year may differ from these estimates if income (loss) before income tax 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. In the quarter ended September 30, 2019, the Company also released substantially all the valuation allowance related to the Company’s U.S. deferred tax assets ($3.3 million).

The estimated annualized effective income tax rate for the nine months ended September 30, 2020 and September 30, 2019 was 20.9% and 24.8% (excluding impact of valuation reserve reversal), respectively. Differences between the Company’s effective income tax rate and the U.S. federal statutory rate are primarily the impact of state taxes, foreign taxes, non-deductible expenses, and excess tax benefits or expense on share-based compensation.

9


 

L.

Segment Information

The Company has two reportable business segments, electronic components and electronic instruments. 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 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 following table sets forth activity broken down by reportable business segment (in thousands):

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues from Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronic components

 

$

7,860

 

 

$

8,218

 

 

$

22,905

 

 

$

22,011

 

Electronic instruments

 

 

211

 

 

 

370

 

 

 

843

 

 

 

1,047

 

Total consolidated revenues

 

$

8,071

 

 

$

8,588

 

 

$

23,748

 

 

$

23,058

 

Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronic components

 

$

1,064

 

 

$

1,493

 

 

$

2,249

 

 

$

3,147

 

Electronic instruments

 

 

(41

)

 

 

93

 

 

 

33

 

 

 

257

 

Unallocated corporate expense

 

 

(314

)

 

 

(464

)

 

 

(729

)

 

 

(992

)

Total operating income

 

 

709

 

 

 

1,122

 

 

 

1,553

 

 

 

2,412

 

Interest (expense) income, net

 

 

(3

)

 

 

 

 

 

(7

)

 

 

1

 

Loss on equity investment in unconsolidated subsidiary

 

 

(61

)

 

 

 

 

 

(200

)

 

 

 

Other income (expense), net

 

 

155

 

 

 

82

 

 

 

3

 

 

 

352

 

Total other income (expense)

 

 

91

 

 

 

82

 

 

 

(204

)

 

 

353

 

Income Before Income Taxes

 

$

800

 

 

$

1,204

 

 

$

1,349

 

 

$

2,765

 

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

M.

Domestic and Foreign Revenues

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

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Malaysia

 

$

722

 

 

$

1,109

 

 

$

2,303

 

 

$

2,788

 

Hong Kong

 

 

213

 

 

 

234

 

 

 

824

 

 

 

668

 

   Australia

 

 

162

 

 

 

1

 

 

 

655

 

 

 

13

 

All other foreign countries

 

 

369

 

 

 

872

 

 

 

1,777

 

 

 

2,261

 

Total foreign revenues

 

$

1,466

 

 

$

2,216

 

 

$

5,559

 

 

$

5,730

 

Total domestic revenue

 

$

6,605

 

 

$

6,372

 

 

$

18,189

 

 

$

17,328

 

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

N.

Revolving Credit Agreement

On May 12, 2020, M-tron Industries, Inc. (“MtronPTI”) and Piezo Technology, Inc. (“PTI”), (collectively, the “Borrowers”), both operating subsidiaries of the Company, entered into a loan agreement for a revolving line of credit with Synovus Bank, an unaffiliated entity, as the lender (“Lender”), for up to $3.5 million (the “Loan Agreement”), such amount to be used for working capital and general operations. The Loan Agreement is evidenced by a promissory note dated May 12, 2020 that matures on May 12, 2022 (the “Note”), and a corresponding security agreement (the “Security Agreement”). The Note bears interest at the London Inter-bank Offered Rate (LIBOR) 30-day rate plus 2.50%, with a floor of 0.50%. Upon discontinuance or lack of availability of the LIBOR rate, Lender is required to determine a comparable equivalent replacement rate. Accrued interest-only payments are due on a monthly basis until the maturity date. The Borrowers may prepay all or any portion of the loans under the Loan Agreement at any time, without fee, premium or penalty. The Loan Agreement also includes a clean-up provision whereby during each 12-month period, the outstanding balance must remain at zero for 30 consecutive days. At September 30, 2020, the Company had no outstanding borrowings under its revolving line of credit with Synovus Bank.

 

10


 

The Loan Agreement contains various affirmative and negative covenants that are customary for lines of credit and transactions of this type which the Company is in compliance with, including limitations on the incurrence of debt and liabilities by the Borrowers, as well as financial reporting requirements. The Loan Agreement also imposes certain financial covenants based on the following criteria, which are specifically defined in the Loan Agreement: (a) Debt Service Coverage Ratio; and (b) the ratio of Total Liabilities to Total Net Worth.

 

In the event of default, the Lender has the right to terminate its commitment to make loans pursuant to the Loan Agreement and to accelerate the payment on any unpaid principal amount of all outstanding loans and interest thereon. All loans pursuant to the Loan Agreement are secured by a continuing and unconditional first priority security interest in and to any and all property of the Borrowers.

O.

Payroll Protection Program

On April 15, 2020, PTI, MtronPTI, and Precise Time and Frequency LLC (“PTF”), all operating subsidiaries of the Company, entered into loans with City National Bank of Florida, a national banking association, as the lender, in an aggregate principal amount of $1,907,500 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act. On May 14, 2020, the Company returned all amounts pursuant to such loans and such loans were thereby terminated.