LGL Group Inc: Form 10-Q for the period ended Sep 30, 2023

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, 2022, as filed with the SEC on April 17, 2023. The terms the “Company”, “LGL Group”, “LGL”, “we”, “our” or “us” refer to The LGL Group, Inc. and unless otherwise defined herein, capitalized terms used herein shall have the same meanings as set forth in our condensed consolidated financial statements and the notes thereto.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q of the Company and the Company's other communications and statements, other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company intends for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable by law. Such statements include, in particular, statements about the Company's beliefs, plans, objectives, goals, expectations, estimates, projections and intentions. These statements are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond the Company's control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," "target," "goal" and similar expressions are intended to identify forward-looking statements. All forward-looking statements, by their nature, are subject to risks and uncertainties. Therefore, such statements are not intended to be a guarantee of the Company's performance in future periods. The Company's actual future results may differ materially from those set forth in the Company's forward-looking statements. For information concerning these factors and related matters, see "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on April 17, 2023, 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 holding company engaged in services, investment and manufacturing business activities. The Company was incorporated in 1928 under the laws of the State of Indiana, and in 2007, the Company was reincorporated under the laws of the State of Delaware as The LGL Group, Inc. We maintain our executive offices at 2525 Shader Road, Orlando, Florida 32804. Our telephone number is (407) 298-2000. Our Internet address is www.lglgroup.com (http://www.lglgroup.com). Our common stock and warrants are traded on the NYSE American (“NYSE”) under the symbols "LGL" and “LGL WS”, respectively.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries along with any variable interest entity (“VIE”) for which it has been determined to be the primary beneficiary. During June 2023, the Company determined it was the primary beneficiary of LGL Systems Acquisition Holding Company, LLC ("LGL Systems"), disclosing the non-controlling interest relating to the minority shareholders within its consolidated financial statements. The Company does not consolidate its VIE, LGL Systems Nevada Management Partners, LLC (“LGL Nevada”), as the Company had determined it is not the primary beneficiary, and its economic interest is immaterial.

Electronic Instruments Business

We operate our electronic instruments business currently through our subsidiary, Precise Time and Frequency, LLC ("PTF"), a globally positioned producer of industrial Electronic Instruments and commercial products and services. Founded in 2002, PTF operates from our design and manufacturing facility in Wakefield, Massachusetts.

PTF is our sole wholly owned manufacturing operation and 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 including satellite communication, time transfer systems, network synchronization, electricity distribution and metrology.

Merchant Investment Business

The LGL merchant investment business is comprised of various investment vehicles in which LGL is either shareholder, partner, or has general partner interests, and through which LGL invests its capital. As the Company continues to assess further acquisitions of, or investments in, operating businesses broadly, we seek to invest currently available cash and cash equivalents in liquid investments with a view to enhancing returns. LGL core strengths include identifying and acquiring undervalued assets and businesses, often through the purchase of securities, increasing value through management, financial or other operational changes, and managing complex legal, regulatory or financial issues, which may include technical, engineering, environmental, zoning, permitting and licensing issues among others.

During June 2023, LGL Group transferred approximately $21.0 million of cash and cash equivalents to its wholly owned subsidiary, Lynch Capital International, LLC ("Lynch Capital"), for its use within the merchant investment business. During June 2023, Lynch Capital was appointed as sole managing member of LGL Nevada and invested approximately $4,000 into LGL Nevada representing its 1% general partnership interest. In conjunction with this transaction, Lynch Capital invested $1 million into LGL Systems, which is controlled by LGL Nevada. As a result of the subsequent determination that LGL was the primary beneficiary of LGL Systems and was therefore required to consolidate LGL Systems, the Company has recorded $1,872,000 related to non-controlling interests in LGL Systems on its consolidated balance sheets.

LGL Group invested $1 million into LGL Systems during June 2023 through Lynch Capital, with its $1 million in membership interests representing approximately 35% of all membership interests, including approximately $929,000 of affiliated membership interests and a further $961,000 of unaffiliated membership interests. The affiliated members of LGL Systems include Venator Merchant Fund L.P., which is wholly owned by Marc Gabelli. Other affiliated members include Patrick Huvane, LGL's EVP, Tim Foufas, CO-CEO of LGL and an LGL Director, Michael Ferrantino, an LGL Director and its former Co-CEO, and Manjit Kalha, an LGL Director and its current audit committee chairman.

As of September 30, 2023, LGL had investments (classified within Cash and cash equivalents and Marketable securities) with a fair value of approximately $37.8 million, of which $22.9 million was held directly by Lynch Capital for the merchant investment business. The Company accounts for its Marketable securities under ASC 321 and as such, its Marketable securities are reported at fair value on its consolidated balance sheets.

Impact of MtronPTI’s Separation

On October 7, 2022, the separation of M-tron Industries, Inc. (“MtronPTI”) was completed (the “Separation”) and MtronPTI became an independent, publicly traded company trading on the NYSE American under the stock symbol "MPTI."

The Separation was achieved through LGL’s distribution (the “Distribution”) of 100% of the shares of the MtronPTI's common stock to holders of LGL's common stock as of the close of business on the record date of September 30, 2022. LGL's stockholders of record received one-half share of MtronPTI's common stock for every share of LGL's common stock. LGL retained no ownership interest in the MtronPTI business following the Separation. The historical financial results of the MtronPTI business for periods prior to the distribution date are reflected in the Company’s consolidated financial statements as discontinued operations.

See Note A – Basis of Presentation in the accompanying notes to the condensed consolidated financial statements for further details of the Separation.

Results of Continuing Operations

Backlog

As of September 30, 2023, our order backlog, which relates to our electronic instruments segment, was $313,000, a decrease of 13.1% from $360,000 at December 31, 2022 and an increase of 144.5% compared to the backlog of $128,000 as of September 30, 2022. The backlog of unfilled orders includes amounts based on signed contracts likely to be fulfilled in the next 12 months but most of the backlog will usually ship within the next 90 days. Order backlog is adjusted quarterly to reflect project cancellations, deferrals, and revised project scope and cost, if any.

Three months ended September 30, 2023 compared to three months ended September 30, 2022 and Nine months ended September 30, 2023 compared to nine months ended September 30, 2022

Electronic Instruments:

Total revenues for the electronic instruments segment were $438,000 for the three months ended September 30, 2023, or 27.3% above revenues of $344,000 for the three months ended September 30, 2022. Total revenues were $1,282,000 for the nine months ended September 30, 2023, or 13.4% above revenues of $1,131,000 for the nine months ended September 30, 2022.

Consolidated gross margin, which is consolidated revenues less manufacturing cost of sales as a percentage of revenues, increased to 55.5% for the three months ended September 30, 2023, from 41.0% for the three months ended September 30, 2022 reflecting the effects of product mix changes. Consolidated gross margin increased to 53.6% for the nine months ended September 30, 2023, from 40.6% for the nine months ended September 30, 2022 reflecting the effects of product mix changes.

Engineering, selling and administrative expense (“ES&A”) costs for the electronic instruments segment were $173,000 for the three months ended September 30, 2023 compared to ES&A costs of $180,000 for the three months ended September 30, 2022 and were $523,000 for the nine months ended September 30, 2023, compared to $512,000 for the nine months ended September 30, 2022.

The electronic instruments segment reported an operating income of $70,000 for the three months ended September 30, 2023, compared to an operating loss of $39,000 for the three months ended September 30, 2022 and an operating income of $164,000 for the nine months ended September 30, 2023, compared to an operating loss of $53,000 for the nine months ended September 30, 2022. The improvement for the three months reflects the impact from higher revenues and improved margins and a slight reduction in administrative costs. For the nine months, the improvement was primarily due to the increased margins.

Merchant Investment:

The Company's merchant investment segment reported $287,000 of interest income during the three months ended September 30, 2023 and $542,000 of interest income during the nine months ended September 30, 2023. The merchant investment segment's assets are primarily invested in highly liquid U.S. Treasury money market funds.

ES&A costs for the merchant investment segment were $64,000 and $152,000 for the three and nine months ended September 30, 2023, respectively.

The merchant investment segment reported an operating income of $223,000 and $390,000 for the three and nine months ended September 30, 2023, respectively.

Corporate:

The Company reported $257,000 of corporate interest income during the three months ended September 30, 2023, compared to $52,000 during the three months ended September 30, 2022. For the nine months ended September 30, 2023, corporate interest income was $475,000 and was $57,000 for the nine months ended September 30, 2022, all of which was related to the Company's investments in U.S. Treasury money market funds. The increase in interest income is primarily related to the increase in interest rates experienced beginning in late 2022 and during 2023 and the change in investments out of mutual funds and into U.S. Treasury money market funds.

The Company reported $4,000 of investment loss during the three months ended September 30, 2023 compared to an investment loss of $2,121,000 during the three months ended September 30, 2022. For the nine months ended September 30, 2023 the Company recorded investment income of $384,000 and a loss of $4,449,000 during the nine months ended September 30, 2022. The loss during the three months and income for the nine months ended September 30, 2023 along with the prior year losses for the three and nine months ended September 30, 2022 were related almost entirely to the Company's investment in IronNet.

Corporate ES&A costs totaled $347,000 and $1,124,000 for the three and nine months ended September 30, 2023, respectively, and $487,000 and $1,498,000 for the three and nine months ended September 30, 2022, respectively. Corporate ES&A represents the costs of managing the Company and its business segments along with the costs of being a public company.

Income Tax (Benefit) Expense

We recorded a tax expense of $69,000 and $132,000 for the three and nine months ended September 30, 2023 and a tax benefit of $648,000 and $1,402,000 for the three and nine months ended September 30, 2022, respectively. The tax expense or benefit is based on an estimated annual effective tax rate across the jurisdictions in which we operate.

Income from Discontinued Operations, net

Income from discontinued operations, net of tax was $488,000 and $1,753,000 for the three and nine months ended September 30, 2022. These amounts represent the income which was formerly earned by the discontinued operation, less the costs directly related to the spin-off and is presented net of the related tax effect.

Net Income Attributed to Noncontrolling Interest

Net income attributed to noncontrolling interest was $22,000 for the three and nine months ended September 30, 2023. Net income from noncontrolling interest relates to the income from LGL Systems, which is managed within our merchant investment business.

Net Income (Loss) Attributable to LGL Group

Net income (loss) attributable to LGL Group was income of $108,000 and $135,000 for the three and nine months ended September 30, 2023, respectively, compared to losses of $1,459,000 and $3,088,000 for the three and nine months ended September 30, 2022, respectively. The income in 2023 relates primarily due to an increase in interest income due to higher interest rates, impacted by investment loss and gain, as noted above. For 2022, the net loss resulted from the investment performance. Basic and diluted net income per share for the nine months ended September 30, 2023 and 2022 was income of $0.03 and loss of $0.58, respectively.

Liquidity and Capital Resources

As of September 30, 2023 and December 31, 2022, cash and cash equivalents were $40,777,000 and $21,507,000, respectively.

Cash provided by (used in) operating activities for the nine months ended September 30, 2023 and 2022 was $454,000 provided by operations and $831,000 used by operations, respectively.

Cash provided by (used in) investing activities for the nine months ended September 30, 2023 and 2022 was $18,816,000 provided by investing activities and $6,015,000 used in investing activities, respectively. The amount shown for the nine months ended September 30, 2023 reflects the sale of 198,500 IRNT shares for $61,000. During the second quarter of 2023, we sold substantially all of our investments and placed them into U.S. Treasury money market funds.

As of September 30, 2023, our consolidated working capital was $40,891,000 compared to $38,753,000 as of December 31, 2022. As of September 30, 2023, we had current assets of $41,502,000, current liabilities of $611,000 and a ratio of current assets to current liabilities of 67.92 to 1.00. As of December 31, 2022, we had current assets of $39,340,000, current liabilities of $587,000 and a ratio of current assets to current liabilities of 67.02 to 1.00. As the Company continues to assess further acquisitions of, or investments in, operating businesses broadly, we seek to invest currently available cash and cash equivalents in liquid investments with a view to enhancing returns. We believe that existing cash and cash equivalents, marketable securities and cash generated from operations will provide sufficient liquidity to meet our ongoing working capital and capital expenditure requirements for the next 12 months from the date of this filing.

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

Critical Accounting Estimates

Our accompanying condensed consolidated financial statements are prepared in conformity with GAAP, which requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying footnotes. These estimates are made and evaluated on an on-going basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could differ from those estimates, perhaps in material adverse ways, and those estimates could be different under different assumptions or conditions. For a discussion of the Company’s critical accounting estimates, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022.

Factors Which May Influence Results of Operations

We are not aware of any material trends or uncertainties, other than national economic conditions affecting our industry generally, that may reasonably be expected to have a material impact, favorable or unfavorable, on our revenues or income other than those listed below and those listed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on April 17, 2023.

Inflation and Rising Interest Rates

During 2022, inflation in the United States accelerated and, as of the date of this Report, is currently expected to continue at an elevated level in the near-term. Rising inflation may have an adverse impact on our manufacturing cost of sales along with engineering, selling and administrative expenses, as these costs could increase at a rate higher than our revenue. The U.S. Federal Reserve raised the federal funds rate a total of seven times throughout 2022, and four times in 2023, resulting in a current range from 5.25% to 5.50% as of the filing date of this Quarterly Report on Form 10-Q. The Federal Reserve may continue to increase the federal funds rate throughout 2023 to, among other things, control inflation. Rising interest rates are expected to benefit LGL due to a significant portion of its portfolio currently being invested in U.S. Treasury money market funds.

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 co-chief executive officers and chief accounting 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, 2023 was conducted under the supervision and with the participation of our management, including our co-chief executive officers and chief accounting 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 co-chief executive officer and chief accounting officer concluded that our disclosure controls and procedures, as of September 30, 2023, 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, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

We are not aware of any material trends or uncertainties, other than national economic conditions affecting our industry generally, that may reasonably be expected to have a material impact, favorable or unfavorable, on our revenues or income other than those listed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2022.