LGL GROUP INC - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2020

OR

For the transition period from ____________ to ____________

Commission File No. 001-00106

THE LGL GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

(407) 298-2000

(Registrant’s telephone number, including area code)

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

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

Yes  ☒    No  ☐

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

Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, 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

The LGL Group, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except par value and share amounts)

See Accompanying Notes to Condensed Consolidated Financial Statements.

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The LGL Group, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except share and per share amounts)

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)

See Accompanying Notes to Condensed Consolidated Financial Statements.

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The LGL Group, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

See Accompanying Notes to Condensed Consolidated Financial Statements.

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The LGL Group, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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.

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:

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.

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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:

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.

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.

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.

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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.

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).

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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):

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.

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).

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

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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:

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.

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.

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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):

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

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

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

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.

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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.

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.

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.

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 are included in right-of-use lease assets, and other accrued expense in the Company’s consolidated balance sheet. 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 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 the Company recognizes 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 the Company’s sole discretion. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Future minimum lease payment obligations under operating leases are as follows (in thousands):

On October 23, 2020, the Company filed a registration statement on Form S-1 (File No. 333-249639) with the SEC, as amended by Amendment No. 1 to Form S-1 filed with the SEC on November 2, 2020, relating to a dividend of warrants to purchase shares of its common stock. Pursuant to the warrant dividend, each holder of the Company's common stock will receive one warrant for each share of common stock owned and 5 warrants will entitle their holder to purchase one share of the Company's common stock at an exercise

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price of $12.50. The warrants will be "European style warrants" and will only be exercisable on the earlier of (i) their expiration date, which will be the fifth anniversary of their issuance, and (ii) such date that the 30-day volume weighted average price per share, or VWAP, of the Company's common stock is greater than or equal to $17.50. On October 27, 2020 the Company’s board of directors declared a dividend of the warrants described above to holders of record of its common stock as of November 9, 2020. The warrants are expected to be issued on or around November 16, 2020, and the Company intends for the warrants to be listed and traded on the NYSE American under the symbol LGL WS on or around such date, subject to NYSE American approval.

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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, 2019. The terms “we,” “us,” “our,” and the “Company” refer to The LGL Group, Inc. and unless otherwise defined herein, capitalized terms used herein shall have the same meanings as set forth in our condensed consolidated financial statements and the notes thereto.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q of the Company and the Company's other communications and statements, other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company intends for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable by law. Such statements include, in particular, statements about the Company's beliefs, plans, objectives, goals, expectations, estimates, projections and intentions. These statements are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond the Company's control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," "target," "goal," and similar expressions are intended to identify forward-looking statements. All forward-looking statements, by their nature, are subject to risks and uncertainties. Therefore, such statements are not intended to be a guarantee of the Company's performance in future periods. The Company's actual future results may differ materially from those set forth in the Company's forward-looking statements. For information concerning these factors and related matters, see "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on March 30, 2020, 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.

Results of Operations

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 set forth below and those listed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2019 and this Quarterly Report on Form 10-Q. However, due to the COVID-19 pandemic in the U.S. and globally, our business and operations have been impacted and may be further impacted.

COVID-19

The global outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the U.S. government in March 2020 and has negatively impacted the U.S. and global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and created significant disruption of the financial markets.

As a result of the COVID-19 pandemic, the Company’s operations in India were closed from 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 staffed and operating at normal capacity. Despite the second quarter revenue decrease associated with the foregoing suspension of operations in India, the impact of the COVID-19 outbreak has not had a significant impact on the Company. Our updated 2020 annual projection shows some decline, although also not significant. However, the ultimate effect on our future results could be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19, the success of actions taken to contain or treat COVID-19, and reactions by consumers, companies, governmental entities and capital markets.

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In accordance with the Department of Defense (“DoD”) guidance issued in March 2020 designating the Defense Industrial Base as a critical infrastructure workforce, our U.S. production facilities have continued to operate in support of essential products and services required to meet national security commitments to the U.S. government and the U.S. military; however, facility closures or work slowdowns or temporary stoppages have occurred and could occur in the future. In addition, other countries have different practices and policies that can affect our international operations and the operations of our suppliers and customers. In some cases, our facilities are not operating under full staffing as a result of COVID-19, which could have a longer-term impact. Customer visits and representative training are being impacted by travel restrictions as a result of COVID-19, which could delay new design wins and future business with our customers.

The Company has taken measures to protect the health and safety of our employees, work with our customers to minimize potential disruptions and support our community in addressing the challenges posed by this global pandemic. The extent of the impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our contracts in the expected timeframe, will depend on future developments, including the duration and spread of the pandemic and related actions taken by the U.S. government, state and local government officials, and international governments to prevent disease spread, all of which are uncertain and cannot be predicted.

An extended period of global supply chain disruption caused by the response to COVID-19 could impact our ability to perform on our contracts. To date, we have identified a number of suppliers that have potential delivery impacts due to COVID-19 and, if we are not able to implement alternatives or other mitigations, contract deliveries could be adversely impacted.

Delays in inspection, acceptance and payment by our customers, many of whom are teleworking, could also affect our sales and cash flows. This is particularly an issue with respect to classified work that is unable to be done remotely. Limitations on government operations can also impact regulatory approvals such as export licenses that are needed for international sales and deliveries. In addition, we could experience delays in new contract starts or awards of future work as well as the uncertain impact of contract modifications to respond to the national emergency. Government funding priorities may change as a result of the costs of COVID-19. If significant portions of our workforce are unable to work effectively, including because of illness, quarantines, absenteeism, government actions, facility closures, travel restrictions or other restrictions in connection with the COVID-19 pandemic, our operations will be impacted. We may be unable to perform fully on our contracts and our costs may increase as a result of the COVID-19 outbreak. These cost increases, including costs for employees whose jobs cannot be performed remotely, may not be fully recoverable under our contracts, or adequately covered by insurance. The impact of COVID-19 could worsen if there is an extended duration of any COVID-19 outbreak or a resurgence of COVID-19 infection in affected regions after they have begun to experience improvement.

The continued spread of COVID-19 has also led to disruption and volatility in the global capital markets, which depending on future developments could impact our capital resources and liquidity in the future. COVID-19 has also caused volatility in the equity capital markets. We are monitoring the impacts of COVID-19 on the fair value of our assets. While we do not currently anticipate any material impairments on our assets as a result of COVID-19, future changes in expectations for sales, earnings and cash flows related to intangible assets and goodwill below our current projections could cause these assets to be impaired. While these are our current assumptions, this is an emerging situation and these could change, which could affect our outlook.

Backlog

As of September 30, 2020, our order backlog was $21,456,000, which is a decrease of 7.9% compared to the backlog of $23,285,000 as of September 30, 2019, and 1.8% below the backlog of $21,857,000 at December 31, 2019. The decrease reflects the Company’s 2020 slower booking rate during the COVID-19 pandemic, particularly related to the avionics market, as well as higher year to date shipments despite the second quarter India operations shutdown. The backlog of unfilled orders includes amounts based on signed contracts as well as agreed letters of intent which we have determined are firm orders likely to be fulfilled in the next 12 months.

Order backlog is adjusted quarterly to reflect project cancellations, deferrals, revised project scope and cost, and sales of subsidiaries, if any. We expect to fill our entire order backlog within the next twelve months but cannot provide assurances as to what portion of the order backlog will be fulfilled in a given year.

Equity Investment in Unconsolidated Subsidiary

In November 2019, we invested $3.35 million into LGL Systems Acquisition Holdings Company, LLC, a subsidiary that serves as the Sponsor of LGL Systems Acquisition Corp (NYSE: DFNS), a special purpose acquisition company, commonly referred to as a “SPAC” or a blank check company, formed for the purpose of effecting a business combination in the aerospace, defense and communications industries. Prior to a business combination, the Sponsor holds 100% of the shares of Class B convertible common stock outstanding of DFNS (the “B shares”) along with 5,200,000 private warrants at a strike price of $11.50. The B shares equal 20% of the outstanding common stock of the SPAC. Upon the successful completion of an acquisition, the proforma ownership of the new company will vary depending on the business combination terms.

The Company is expected to own approximately a 43.57% interest in the Sponsor through its direct investment. Assuming the terms of the business combination are identical in capital structure as that of DFNS, the Company anticipates its economic interest will include approximately 8.7% of the SPAC’s proforma equity immediately following a successful business combination. There can be no assurances that this scenario and the resulting ownership will occur, as changes may be made depending upon business combination terms.

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There is no assurance that the SPAC will be successful in completing a business combination or that any business combination will be successful. The Company can lose its entire investment in the SPAC if a business combination is not completed within 24 months from the closing of the SPAC’s initial public offering. 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.

Three months ended September 30, 2020 compared to three months ended September 30, 2019

Consolidated Revenues and Gross Margin

Total revenues for the three months ended September 30, 2020 were $8,071,000, a decrease of $517,000, or 6.0%, from revenues of $8,588,000 for the three months ended September 30, 2019. The revenue decline resulted from a $409,000 reduction in sales of purchased products, decreased crystal and oscillator sales of $397,000 and decreased sales of time and frequency instruments of $159,000. These declines were partly offset by an increase in filter sales of $448,000. The lower sales levels reflect the production interruption from the second quarter 2020 COVID-19 related shutdown of the Company’s India operations and the lag in shipments as we resumed full operations.

Consolidated gross margin, which is consolidated revenues less manufacturing cost of sales as a percentage of revenues, decreased to 35.5% for the three months ended September 30, 2020 from 41.2% for the three months ended September 30, 2019. The decrease reflects product mix changes and costs related to the avionics production work slowdown.

Operating Income

Operating income of $709,000 for the three months ended September 30, 2020 declined $413,000 from operating income of $1,122,000 for the three months ended September 30, 2019. This decline was primarily due to the decline in revenues and the reduction in gross margin noted above.

Other Income, Net

For the three months ended September 30, 2020, other income (expense), net was $155,000 compared to $82,000 for the three months ended September 30, 2019. These balances are primarily comprised of income from our investment portfolio.

Income Tax Expense (Benefit)

We recorded a tax expense (benefit) of $171,000 and ($3,326,000) for the three months ended September 30, 2020 and 2019, respectively. The expense is based on an estimated annual effective rate across the jurisdictions in which we operate. The benefit in the quarter ended September 30, 2019 is primarily due to release of substantially all of the valuation allowance of the Company’s U.S. deferred tax assets.

Net Income

Net income for the three months ended September 30, 2020 was $629,000, compared to $4,530,000 for the three months ended September 30, 2019.  The decrease was largely due to the 2019 tax benefit ($3.3 million).  The remaining net income decline ($0.6) reflected the lower revenue, unfavorable product mix and costs related to the avionics production slowdown.  Diluted net income per share for the three months ended September 30, 2020 and 2019 was $0.12 and $0.91, respectively.

Nine months ended September 30, 2020 compared to nine months ended September 30, 2019

Consolidated Revenues and Gross Margin

Total revenues for the nine months ended September 30, 2020 were $23,748,000, an increase of $690,000, or 3.0%, from revenues of $23,058,000 for the nine months ended September 30, 2019. The revenue increase resulted from higher filter sales of $1,831,000 partly offset by decreased crystal and oscillator sales of $530,000, a $406,000 reduction in sales of purchased products and decreased sales of time and frequency instruments of $205,000. Sales growth was slowed by the production interruption from the second quarter 2020 COVID-19 related shutdown of the Company’s India operations and the lag in shipments as we resumed full operations.

Consolidated gross margin, which is consolidated revenues less manufacturing cost of sales as a percentage of revenues, decreased to 34.0% for the nine months ended September 30, 2020 from 39.4% for the nine months ended September 30, 2019. The decrease reflects product mix changes and costs related to the avionics production work slowdown and the India operation shutdown during the second quarter of 2020.

Stock-Based Compensation

For the nine months ended September 30, 2020 and 2019, stock-based compensation expense was $104,000 and $17,000, respectively. Compensation expense related to stock-based compensation is recognized over the applicable vesting periods.

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Operating Income

Operating income of $1,553,000 for the nine months ended September 30, 2020 declined $859,000 from operating income of $2,412,000 for the nine months ended September 30, 2019. This decline was primarily due to the reduction in gross margin noted above.

Other Income, Net

For the nine months ended September 30, 2020, other income (expense), net was $3,000, compared to $352,000 for the nine months ended September 30, 2019. These balances are comprised of income from our investment portfolio partly offset by 2020 currency losses related to our India operations.

Income Tax Expense (Benefit)

We recorded a tax expense (benefit) of $282,000 and ($3,286,000) for the nine months ended September 30, 2020 and 2019, respectively. The tax expense is based on an estimated effective annual rate across the jurisdictions in which we operate. The benefit in the nine months ended September 30, 2019 is primarily due to our release of substantially all of the valuation allowance of the Company’s U.S. deferred tax assets.

Net Income

Net income for the nine months ended September 30, 2020 was $1,067,000 compared to $6,051,000 for the nine months ended September 30, 2019.  The decrease was largely due to the tax benefit in 2019 ($3.3 million).  The remaining net income decline ($1.7 million) reflected the lower margin from unfavorable product mix and cost impacts of the avionics production slowdown and second quarter India operations shutdown. Diluted net income per share for the nine months ended September 30, 2020 and 2019 was $0.21 and $1.22, respectively.

Liquidity and Capital Resources

As of September 30, 2020 and December 31, 2019, cash and cash equivalents were $17,276,000 and $12,453,000, respectively. In the first quarter of 2020, we raised approximately $3,254,000 as a result of sales of securities under our ATM Offering.

Cash provided by operating activities for the nine months ended September 30, 2020 and 2019 was $1,830,000 and $1,089,000, respectively. The $741,000 increase was primarily due to favorable changes in working capital accounts of $1,680,000 (including the impact of recent discontinuance of certain consignment inventory offerings to our customers) and deferred taxes of $3,567,000 partly offset by the Company’s year-over-year decrease in net income of $4,984,000.

Cash used in investing activities for the nine months ended September 30, 2020 and 2019 was $329,000 and $5,826,000, respectively. The use of cash for the nine months ended September 30, 2020 was due to $329,000 in capital expenditures. The use of cash for the nine months ended September 30, 2019 included a $5,000,000 investment in marketable securities and capital expenditures of $826,000.

For the nine months ended September 30, 2020, the $3,322,000 of cash provided by financing activities represented $3,254,000 received by the Company from the first quarter 2020 sale of securities under our ATM Offering and $68,000 of proceeds from the exercise of stock options. For the nine months ended September 30, 2019, financing activities represented $390,000 received by the Company for the exercise of stock options.

As of September 30, 2020, our consolidated working capital was $29,564,000, compared to $24,586,000 as of December 31, 2019. As of September 30, 2020, we had current assets of $33,264,000, current liabilities of $3,700,000 and a ratio of current assets to current liabilities of 8.99 to 1.00. As of December 31, 2019, we had current assets of $28,910,000, current liabilities of $4,324,000 and a ratio of current assets to current liabilities of 6.69 to 1.00. Management continues to focus on efficiently managing working capital requirements to match operating activity levels and will seek to deploy the Company’s working capital where it will generate the greatest returns.

As more fully described in Note N, Revolving Credit Agreement, to the accompanying unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q, on May 12, 2020, MtronPTI and PTF, both operating subsidiaries of the Company, entered into 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 MtronPTI and PTI. At September 30, 2020, the Company had no borrowings outstanding under its revolving line of credit with Synovus Bank.

We believe that existing cash and cash equivalents, marketable securities, cash generated from operations and availability under our revolving credit agreement will provide sufficient liquidity to meet our ongoing working capital and capital expenditure requirements for the next 12 months from the date of this filing. However, we are continuing to monitor the outbreak of COVID-19 and its impact on our customers and suppliers, as well as our industry as a whole. The magnitude and duration of the pandemic and its impact on our operations and liquidity is uncertain as of the filing date of this Quarterly Report on Form 10-Q as this continues to evolve globally.

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However, if the outbreak continues, such impacts could grow and become material. To the extent that our customers and suppliers continue to be impacted by the COVID-19 outbreak, such impacts could materially disrupt our business operations.

Our board of directors has adhered to a practice of not paying cash dividends. This policy takes into account our long-term growth objectives, including our anticipated investments for organic growth, potential technology acquisitions or other strategic ventures, and stockholders' desire for capital appreciation of their holdings. No cash dividends have been paid to the Company's stockholders since January 30, 1989, and none are expected to be paid for the foreseeable future.

Critical Accounting Policies

For a discussion of the Company’s critical accounting policies, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4.Controls and Procedures.

Evaluation of Disclosure Controls and Procedures 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of September 30, 2020 was conducted under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of September 30, 2020, were effective.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2020 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

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.

There have been no significant changes to the Company’s risk factors from those previously reported in our Annual Report on Form 10-K for the year ended December 31, 2019, other than as noted below.

Risks Related to Our Business

The ongoing effects of the COVID-19 pandemic and associated global economic disruption and uncertainty have affected, and may further affect, our business, results of operations and financial condition.

As previously indicated in our Annual Report on Form 10-K for the year ended December 31, 2019, our results of operations are affected by certain economic factors, including the closure of our facilities located in Noida, India on March 23, 2020. This facility resumed limited operations on May 7, 2020 and was in full operation at the end of June 2020. The broader implications of the COVID-19 pandemic on our results of operations and overall financial performance remain uncertain as well as the extent to which it will affect our revenues and earnings. Although we believe we have sufficient liquidity and capital resources to effectively continue operations for the foreseeable future, continued deterioration of worldwide credit and financial markets may limit our ability to raise capital and financing may not be available to us in sufficient amounts, on acceptable terms, or at all. If we are unable to access sufficient capital on acceptable terms, our business could be adversely impacted.

In an effort to protect the health and safety of our employees, we implemented various measures to reduce the impact of COVID-19 across our organization, while also working to maintain business continuity. Consistent with government guidelines and mandates, these initiatives included the adoption of social distancing policies, work-at-home arrangements, and suspending employee travel. Currently, while a few of our administrative employees are working remotely from home in an effort to reduce the spread of the virus, most of our employees are unable to work from home as we are primarily a manufacturer of products for the defense and aerospace industries and our employees work must be performed within a controlled environment. A decline in the health and safety of our employees, including key employees, or material disruptions to their ability to work either remotely or at one of our manufacturing facilities, could negatively affect our ability to operate our business normally and have a material adverse impact on our results of operations or financial condition.

To the extent that the COVID-19 virus continues to spread and affect the employee base or operations of our materials providers, disruptions in or the inability to provide materials to us could negatively impact our business operations.

Please see additional discussion in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.

On August 29, 2011, the Company’s board of directors 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. There is no expiration date for this program. As of September 30, 2020, the Company has repurchased a total of 81,584 shares of common stock under this program at a cost of $580,000, which shares are currently held in treasury; however, no shares were repurchased by the Company during the nine months ended September 30, 2020.

The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 (and are numbered in accordance with Item 601 of Regulation S-K):

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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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