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 SeptemberJune 30, 20152016
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. 1-106

THE LGL GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware38-1799862
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer Identification No.)
  
  
2525 Shader Rd., Orlando, Florida32804
(Address of principal executive offices)(Zip Code)
(407) 298-2000
(Registrant's telephone number, including area code)
  
(Former name, former address, and former fiscal year if changed since last report)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes ☒
No ☐
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

 
Large accelerated filer ☐
Accelerated filer ☐
 
Non-accelerated filer ☐
(Do not check if a smaller reporting company)
Smaller reporting company ☒

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

Yes ☐
No ☒
 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class Outstanding at NovemberAugust 12, 20152016
Common Stock, $0.01 par value 2,652,7792,665,434


INDEX

THE LGL GROUP, INC.

PART I.
 
FINANCIAL INFORMATION
 
Item 1.
 
Financial Statements (Unaudited)
 
 
 
Condensed Consolidated Balance Sheets:
1
 – As of SeptemberJune 30, 20152016 
 – As of December 31, 20142015 
 
 
Condensed Consolidated Statements of Operations:
2
 – Three and ninesix months ended SeptemberJune 30, 20152016 and 20142015 
 
 
Condensed Consolidated Statements of Comprehensive Loss:Income (Loss):
3
 – Three and ninesix months ended SeptemberJune 30, 20152016 and 2014
Condensed Consolidated Statement of Stockholders' Equity:
4
– Nine months ended September 30, 2015 
 
 
Condensed Consolidated StatementsStatement of Cash Flows:Stockholders' Equity:
54
 – NineSix months ended SeptemberJune 30, 2015 and 20142016 
 
 
Condensed Consolidated Statements of Cash Flows:
5
– Six months ended June 30, 2016 and 2015
Notes to Condensed Consolidated Financial Statements:
6
Item 2.
 
Management's Discussion and Analysis of Financial Condition and
Results of Operations129
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
1812
Item 4.
 
Controls and Procedures
1812
PART II.
 
 
OTHER INFORMATION
 
Item 1.
 
Legal Proceedings
1913
Item 1A.
 
Risk Factors
1913
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
1913
Item 3.
 
Defaults Upon Senior Securities
1913
Item 4.
 
Mine Safety Disclosures
1913
Item 5.
 
Other Information
1913
Item 6.
 
Exhibits
1913
 
SIGNATURES
 
2014



PART I

FINANCIAL INFORMATION

Item 1.Financial Statements.

THE LGL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(Dollars in Thousands)
 September 30, 2015  December 31, 2014  June 30, 2016  December 31, 2015 
ASSETS      (Unaudited)    
Current Assets:          
Cash and cash equivalents $5,941  $5,192  $5,563  $5,553 
Accounts receivable, less allowances of $38 and $43, respectively  2,201   3,266 
Accounts receivable, less allowances of $32 and $34, respectively  3,137   2,606 
Inventories, net (Note C)  3,747   4,198   3,477   3,546 
Prepaid expenses and other current assets  217   278   227   247 
Total Current Assets  12,106   12,934   12,404   11,952 
Property, Plant and Equipment:                
Land  633   633   633   633 
Buildings and improvements  3,928   3,922   3,946   3,938 
Machinery and equipment  16,590   16,314   16,688   16,633 
Gross property, plant and equipment  21,151   20,869   21,267   21,204 
Less: accumulated depreciation  (17,841)  (17,322)  (18,402)  (18,039)
Net property, plant, and equipment  3,310   3,547   2,865   3,165 
Intangible assets, net (Note D)  488   528   448   475 
Other assets, net  213   253   206   211 
Total Assets $16,117  $17,262  $15,923  $15,803 
                
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current Liabilities:                
Accounts payable $1,021  $1,719  $1,208  $987 
Accrued compensation and commissions expense  814   681   779   769 
Accrued warranty expense  146   242   118   126 
Other accrued expenses  337   383   220   194 
Total Current Liabilities  2,318   3,025  $2,325   2,076 
Commitments and Contingencies (Note K)        
Commitments and Contingencies (Note J)        
Stockholders' Equity                
Common stock, $0.01 par value - 10,000,000 shares authorized; 2,732,443 shares issued and 2,652,779 shares outstanding at September 30, 2015 and 2,696,201 shares issued and 2,616,485 shares outstanding at December 31, 2014  27   27 
Common stock, $0.01 par value - 10,000,000 shares authorized; 2,745,098 shares issued and 2,665,434 shares outstanding at June 30, 2016 and December 31, 2015  27   27 
Additional paid-in capital  29,042   28,901   29,093   29,106 
Accumulated deficit  (14,737)  (14,163)  (14,984)  (14,874)
Treasury stock: 79,664 and 79,716 shares held in treasury at cost at September 30, 2015 and December 31, 2014, respectively  (572)  (572)
Treasury stock: 79,664 shares held in treasury at cost at June 30, 2016 and December 31, 2015  (572)  (572)
Accumulated other comprehensive income  39   44   34   40 
Total Stockholders' Equity  13,799   14,237   13,598   13,727 
Total Liabilities and Stockholders' Equity $16,117  $17,262  $15,923  $15,803 
                

See Accompanying Notes to Condensed Consolidated Financial Statements.
1

THE LGL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED

(Dollars in Thousands, Except Per Share Amounts)

  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
  2015  2014  2015  2014 
         
REVENUES  $4,796  $5,581  $15,671  $17,562 
Cost and Expenses:                
Manufacturing cost of sales   3,209   3,849   10,497   12,869 
Engineering, selling and administrative   1,741   2,094   5,822   6,750 
Restructuring expense  —   47   —   444 
OPERATING LOSS   (154)  (409)  (648)  (2,501)
Other Income (Expense):                
Interest expense, net   (16)  (5)  (25)  (21)
Other (expense) income, net   (23)  (78)  112   (48)
Total Other Income (Expense)   (39)  (83)  87   (69)
LOSS BEFORE INCOME TAXES   (193)  (492)  (561)  (2,570)
Income tax provision   (2)  —   (13)  — 
NET LOSS  $(195) $(492) $(574) $(2,570)
Weighted average number of shares used in basic and diluted net loss per common share calculation  2,652,779   2,594,730   2,635,794   2,594,752 
BASIC AND DILUTED NET LOSS PER COMMON SHARE  $(0.07) $(0.19) $(0.22) $(0.99)
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
  2016  2015  2016  2015 
             
REVENUES  $5,231  $5,471  $9,987  $10,875 
Cost and Expenses:                
Manufacturing cost of sales   3,459   3,683   6,716   7,288 
Engineering, selling and administrative   1,746   2,121   3,407   4,081 
OPERATING INCOME (LOSS)   26   (333)  (136)  (494)
Other (Expense) Income:                
Interest expense, net   (7)  (4)  (13)  (9)
Other (expense) income, net   (4)  147   38   135 
Total Other (Expense) Income   (11)  143   25   126 
INCOME (LOSS) BEFORE INCOME TAXES   15   (190)  (111)  (368)
Income tax benefit (provision)   1   (11)  1   (11)
NET INCOME (LOSS)  $16  $(201) $(110) $(379)
Weighted average number of shares used in basic and diluted net income (loss) per common share calculation  2,665,434   2,637,719   2,665,434   2,627,160 
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE  $0.01  $(0.08) $(0.04) $(0.14)
                 

See Accompanying Notes to Condensed Consolidated Financial Statements.
2


THE LGL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSINCOME (LOSS) - UNAUDITED

(Dollars in Thousands)

  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
  2015  2014  2015  2014 
NET LOSS  $(195) $(492) $(574) $(2,570)
Other Comprehensive (Loss) Income:                
Unrealized loss on available-for-sale securities, net of taxes   (4)  (7)  (5)  (4)
TOTAL OTHER COMPREHENSIVE LOSS   (4)  (7)  (5)  (4)
COMPREHENSIVE LOSS  $(199) $(499) $(579) $(2,574)

  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
  2016  2015  2016  2015 
NET INCOME (LOSS)  $16  $(201) $(110) $(379)
Other Comprehensive Loss:                
Unrealized loss on available-for-sale securities, net of taxes   (3)  (14)  (6)  (1)
TOTAL OTHER COMPREHENSIVE LOSS   (3)  (14)  (6)  (1)
COMPREHENSIVE INCOME (LOSS)  $13  $(215) $(116) $(380)

See Accompanying Notes to Condensed Consolidated Financial Statements.
3


THE LGL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - UNAUDITED

(Dollars in Thousands)

 Shares of Common Stock Outstanding  Common Stock  Additional Paid-In Capital  Accumulated Deficit  Treasury Stock  Accumulated Other Comprehensive Income  Total  Shares of Common Stock Outstanding  Common Stock  Additional Paid-In Capital  Accumulated Deficit  Treasury Stock  Accumulated Other Comprehensive Income  Total 
Balance at December 31, 2014  2,616,485  $27  $28,901  $(14,163) $(572) $44  $14,237 
Balance at December 31, 2015  2,665,434  $27  $29,106  $(14,874) $(572) $40  $13,727 
Net loss  —   —   —   (574)  —   —   (574)  —   —   —   (110)  —   —   (110)
Other comprehensive loss  —   —   —   —   —   (5)  (5)  —   —   —   —   —   (6)  (6)
Stock-based compensation  36,294   —   201   —   —   —   201   —   —   (13)  —   —   —   (13)
Warrant dividend issuance costs  —   —   (60)  —   —   —   (60)
Balance at September 30, 2015  2,652,779  $27  $29,042  $(14,737) $(572) $39  $13,799 
Balance at June 30, 2016  2,665,434  $27  $29,093  $(14,984) $(572) $34  $13,598 

See Accompanying Notes to Condensed Consolidated Financial Statements.
4


THE LGL GROUP, INC.INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED

(Dollars in Thousands)

 
Nine Months Ended
September 30,
  
Six Months Ended
June 30,
 
 2015  2014  2016  2015 
OPERATING ACTIVITIES          
Net loss $(574) $(2,570) $(110) $(379)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:        
Adjustments to reconcile net loss to net cash provided by operating activities:        
Depreciation  607   621   369   400 
Amortization of finite-lived intangible assets  51   83   32   35 
Stock-based compensation  201   213   (13)  187 
Impairment of note receivable  43   — 
Gain on disposal of assets  (67)  —   (36)  (67)
Changes in operating assets and liabilities:                
Decrease (increase) in accounts receivable, net  1,065   (245)
(Increase) decrease in accounts receivable, net  (531)  304 
Decrease in inventories, net  424   298   69   406 
Decrease in other assets  42   88   14   50 
(Decrease) increase in trade accounts payable, accrued compensation and commissions expense, accrued warranty expense and other accrued liabilities  (767)  418 
Net cash provided by (used in) operating activities  1,025   (1,094)
Increase (decrease) in trade accounts payable, accrued compensation and commissions expense, accrued warranty expense and other accrued liabilities  249   (522)
Net cash provided by operating activities  43   414 
                
INVESTING ACTIVITIES                
Capital expenditures  (370)  (164)  (76)  (269)
Asset acquisition  —   (748)
Other  94   —   43   94 
Net cash used in investing activities  (276)  (912)  (33)  (175)
                
FINANCING ACTIVITIES        
Net repayments on note payable to bank  —   (1,181)
Restricted cash  —   1,500 
Net cash provided by financing activities  —   319 
        
Increase (decrease) in cash and cash equivalents  749   (1,687)
Increase in cash and cash equivalents  10   239 
Cash and cash equivalents at beginning of period  5,192   7,183   5,553   5,192 
Cash and cash equivalents at end of period $5,941  $5,496  $5,563  $5,431 
                
Supplemental Disclosure:
                
Cash paid for interest $—  $32  $6  $— 
Cash paid for income taxes $11  $—  $27  $5 
                

See Accompanying Notes to Condensed Consolidated Financial Statements.
5

THE LGL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


A.Subsidiaries of the Registrant

The LGL Group, Inc. (together with its subsidiaries, the "Company"), incorporated in 1928 under the laws of the State of Indiana and reincorporated under the laws of the State of Delaware in 2007, is a holding company with subsidiaries engaged in the design and manufacture of highly-engineered, high reliability, frequency and spectrum control products.

As of SeptemberJune 30, 2015,2016, the subsidiaries of the Company are as follows:

  Owned By The LGL Group, Inc. 
M-tron Industries, Inc.  100.0%
M-tron Industries, Ltd.99.9%
Piezo Technology, Inc.  100.0%
Piezo Technology India Private Ltd.  99.0%
M-tron Asia, LLC100.0%
      M-tron Industries, Ltd.100.0%
      GC Opportunities Ltd.  100.0%
M-tron Services, Ltd.  100.0%
Lynch Systems, Inc.  100.0%

The Company operates through its principal subsidiary, M-tron Industries, Inc., which includes the operations of M-tron Industries, Ltd. ("Mtron") and Piezo Technology, Inc. ("PTI") and M-tron Asia, LLC ("Mtron"). The combined operations of Mtron and PTI and their subsidiaries are referred to herein as "MtronPTI."  MtronPTI has operations in Orlando, Florida, Yankton, South Dakota, and Noida, India.  MtronPTI also has sales offices in Sacramento, California, and Hong Kong.

During 2007, the Company sold the operating assets of Lynch Systems, Inc., a subsidiary of the Company, to an unrelated party.

B.Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and ninesix months ended SeptemberJune 30, 2015,2016, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2015.2016.

This interim information should be read in conjunction with the consolidated financial statements and related notes thereto set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.2015, filed with the Securities and Exchange Commission (the "SEC") on March 29, 2016. The accompanying unaudited condensed consolidated financial statements should also be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q.

C.Inventories

Inventories are statedvalued at the lower of actual cost (determinedor market value using the first-in, first-out method), orFIFO (first-in, first-out) method. The Company reduces the value of its inventories to market (estimated realizable value), with adjustments being recorded invalue when the market value is believed to be less than the cost of the item.  The inventory reserve for obsolescence which was $2,991,000 and $2,802,000 as of SeptemberJune 30, 20152016 and December 31, 2014,2015 was $3,129,000 and $3,016,000, respectively.
6

Inventories are comprised of the following (in thousands):

 September 30, 2015  December 31, 2014  June 30, 2016  December 31, 2015 
     
Raw materials $1,437  $1,588  $1,253  $1,418 
Work in process  1,425   1,572   1,372   1,325 
Finished goods  885   1,038   852   803 
Total Inventories, net $3,747  $4,198  $3,477  $3,546 

D.Intangible Assets

Intangible assets are recorded at cost less accumulated amortization. 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.years and is recorded as part of engineering, selling and administrative expenses in the accompanying Condensed Consolidated Statements of Operations. The intangible assets consist of intellectual property and goodwill. The net carrying value of the amortizable intangible assets was $448,000$408,000 and $488,000$435,000 as of SeptemberJune 30, 20152016 and December 31, 2014,2015, respectively. Goodwill, which is not amortizable, was $40,000 as of SeptemberJune 30, 20152016 and December 31, 2014.2015.

The estimated aggregate amortization expense for the remaining portion of 2016 and each of the fivefour succeeding years and thereafter is as follows (in thousands):

2015 $13 
2016  54  $27 
2017  54   54 
2018  54   54 
2019  54   54 
2020  54 
Thereafter  219   165 
Total $448  $408 

E.Stock-Based Compensation

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

The Company estimates the fair value of stock options on the grant date using the Black-Scholes-Merton option-pricing model. The Black-Scholes-Merton option-pricing model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. There is no expected dividend rate. The fair value of grantsHistorical Company information was calculated using historicalthe basis for the expected volatility assumption as the Company believes that the historical volatility over the life of the option is indicative of expected volatility in the future. 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. Accounting Standards Codification ("ASC") 718, Stock Compensation,The Company also requiresestimates forfeitures to be estimated at the time of grant and revised,revises, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Based upon past history of actual performance, forfeiture rates ranging from zero percent to ten percent have been assumed for options granted.
6

Restricted stock awards are grantedmade at a value equal to the market price of the Company's common stock on the date of the grant.

On May 8, 2015,There were no stock option awards or restricted stock awards granted during the Board of Directors granted 37,296 restricted shares of the Company's common stock to Michael J. Ferrantino, Sr., pursuant to the Company's 2011 Incentive Plan. These shares vested in full on the grant date. Total stock-based compensation expense for this grant was $160,000.

On March 12, 2015, the Board of Directors granted a total of 32,000 options to purchase shares of the Company's common stock to members of executive management pursuant to the Company's 2011 Incentive Plan. These stock options have an exercise price of $4.15, a five-year life expiring on March 12, 2020,three and vest as follows: 30% on the first anniversary of the grant date; an additional 30% on the second anniversary of the grant date; and the remaining 40% on the third anniversary of the grant date. These stock options have a grant date fair value of $1.03 per option.
7

Compensation expense related to share-based compensation is recognized over the applicable vesting periods.six months ended June 30, 2016. As of SeptemberJune 30, 2015,2016, there was approximately $60$28,000 of total unrecognized compensation expense related to unvested share-based compensation arrangements.

F.Net LossIncome (Loss) Per Share

The Company computes net lossincome (loss) per share in accordance with ASCAccounting Standards Codification ("ASC") 260, Earnings Per Share ("ASC 260").  Basic net lossincome (loss) per share is computed by dividing net lossincome (loss) by the weighted average number of common shares outstanding during the period. Diluted net lossincome (loss) per share adjusts basic lossincome (loss) per share for the effects of stock options, non-participating restricted common stock, and other potentially dilutive financial instruments, only in the periods in which the effects are dilutive. Shares of restricted stock granted to members of the Board of Directors (the "Board") as a portion of their director fees are deemed to be participating as defined by ASC 260 and therefore are included in the computation of basic lossincome (loss) per share.

Unexercised stockFor the three and six months ended  June 30, 2016 and 2015, there were options to purchase 117,226 shares and 189,023 shares, and 221,635 sharesrespectively, of the Company's common stock for the three and nine months ended September 30, 2015 and 2014, respectively,warrants to purchase 519,241 shares of common stock that were excluded from the diluted lossincome (loss) per share computation because the impact of the assumed exercise of such stock options would have been anti-dilutive during the respective periods.

G.Stockholders' Equity

On August 29, 2011, the Board authorized the Company to repurchase up to 100,000 shares of its common stock in accordance with applicable securities laws. This authorization increased the total number of shares authorized and available for repurchase under the Company's existing share repurchase program to 540,000 shares, at such times, amounts and prices as the Company shall deem appropriate. As of SeptemberJune 30, 2015,2016, the Company had repurchased a total of 79,664 shares of common stock at a cost of $572,000, which shares are currently held in treasury.

On August 6, 2013, the Company distributed warrants to purchase shares of the Company's common stock as a dividend to holders of the Company's common stock on July 29, 2013, the record date for the dividend. Stockholders received five warrants for each share of the Company's common stock owned on the record date. When exercisable, 25 warrants will entitle their holder to purchase one share of the Company's common stock at an exercise price of $7.50 per share (subject to adjustment).
The warrants are "European style warrants" and will only become exercisable on the earlier of (i) their expiration date, August 6, 2018, 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 $15.00 (subject to adjustment). Once the warrants become exercisable, they may be exercised in accordance with the terms of the warrant agreement between the Company and the warrant agent until their expiration at 5:00 p.m., Eastern Time, on the expiration date.

The warrants are traded separately from the Company's common stockquoted on the NYSE MKTover-the-counter market under the symbol "LGL WS"."LGLPW."

H.Fair Value Measurements
H.Fair Value Measurements

The Company measures financial and non-financial assets and liabilities at fair value in accordance with ASC 820, Fair Value Measurements and Disclosures.  These measurements involve various valuation techniques and assume that the transactions would occur between market participants in the most advantageous market for the Company. 

8
Fair Value Hierarchy

TheGAAP defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. GAAP emphasizes that fair value is intended to be a market-based measurement, as opposed to a transaction-specific measurement.

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 under current market conditions.  Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate the fair value. Assets and liabilities are measured using inputs from three levels of inputs that may be used to measurethe fair value arehierarchy, 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. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and liabilities.volume to provide pricing information on an ongoing basis.

Level 2.Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in less active markets, or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. Level 2 inputs also include non-binding market consensus prices that can be corroborated with observable market data, as well as quoted prices that were adjusted for security-specific restrictions.

Level 3.Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities. Level 3 inputs also include non-binding market consensus prices or non-binding broker quotes that we were unable to corroborate with observable market data.

The following is a summary of valuation techniques utilized by the Company for its significant financial and non-financial assets and liabilities as of SeptemberJune 30, 20152016 and December 31, 2014:2015:

Assets

To estimate the fair value of its equity and U.S. Treasury securities (Level 1), 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).

 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  
Significant Other Observable Inputs
(Level 2)
  
Significant Unobservable Inputs
(Level 3)
  
Total
September 30, 2015
  
Level 1
  Level 2  
Level 3
  
Total
June 30, 2016
 
Equity securities
 $54  $—  $—  $54  $50  $—  $—  $50 
U.S. Treasury securities (cash equivalents) $4,089  $—  $—  $4,089  $4,093  $—  $—  $4,093 

 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  
Significant Other Observable Inputs
(Level 2)
  
Significant Unobservable Inputs
(Level 3)
  
Total
December 31, 2014
  
Level 1
  Level 2  
Level 3
  
Total
December 31, 2015
 
Equity securities
 $60  $—  $—  $60  $56  $—  $—  $56 
U.S. Treasury securities (cash equivalents) $4,089  $—  $—  $4,089  $4,089  $—  $—  $4,089 

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There were no transfers from level 2 to level 3 during the period. There were no level 2 or 3 assets as of June 30, 2016 or December 31, 2015.

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. The Company reviews the carrying value of these assets whenever events and circumstances indicate that the carrying amounts of the assets may not be recoverable. If it is determined that the assets are impaired, the carrying value would be reduced to estimated fair value.

I.Foreign Revenues


For the three and ninesix months ended SeptemberJune 30, 20152016 and 2014,2015, significant foreign revenues from operations (10% or more of foreign sales) were as follows (in thousands):
  
Three Months Ended
September 30,
 
  2015  2014 
Significant Foreign Revenues:    
Malaysia  $451  $674 
China   213   539 
All other foreign countries   416   1,068 
Total foreign revenues  $1,080  $2,281 

 
Nine Months Ended
September 30,
  
Three Months Ended
June 30,
 
 2015  2014  2016  2015 
Significant Foreign Revenues:          
Malaysia  $1,749  $2,354  $782  $700 
China   678   2,155   94   230 
Thailand  37   206 
All other foreign countries   1,729   3,014   546   484 
Total foreign revenues  $4,156  $7,523  $1,459  $1,620 

  
Six Months Ended
June 30,
 
  2016  2015 
Significant Foreign Revenues:      
Malaysia  $1,508  $1,298 
China   157   465 
Thailand  61   330 
All other foreign countries   1,007   983 
Total foreign revenues  $2,733  $3,076 

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

J.Income Taxes

The Company has a total federal net operating loss ("NOL") carry-forward of $9,471,000 as of December 31, 2014. This NOL carry-forward expires through 2034 if not utilized prior to that date. The Company has total state NOL carry-forwards of $21,780,000 as of December 31, 2014. These NOL carry-forwards expire through 2034 if not utilized prior to that date. The Company has research and development tax credit carry-forwards of approximately $1,285,000 at December 31, 2014, that can be used to reduce future U.S. income tax liabilities and expire principally between 2020 and 2034. The Company has foreign tax credit carry-forwards of approximately $359,000 at December 31, 2014, that are available to reduce future U.S. income tax liabilities subject to certain limitations. These foreign tax credit carry-forwards expire at various times between 2018 and 2020. Additionally, the Company has federal alternative minimum tax (AMT) credits of approximately $111,000 at December 31, 2014, that are available to offset future U.S. federal tax liabilities, and have no expiration.

Based on the Company's assessment of the uncertainty surrounding the realization of the favorable U.S. tax attributes in future tax returns in accordance with the provisions of ASC 740, Income Taxes, the Company has determined that a full valuation allowance against its otherwise recognizable U.S. net deferred tax assets is required. The Company has recorded a full valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the ability to realize deferred tax assets in future years, the Company will adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.
10

K.Commitments and Contingencies

In the normal 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 is not involved in any legal proceedings other than routine litigation arising in the normal course of business, none of which the Company believes will have a material adverse effect on the Company's business, financial condition or results of operations.

L.K.Related Party Transactions

At SeptemberJune 30, 20152016 and December 31, 2014,2015, approximately $4,093,000 and $4,089,000, respectively, was invested in United States Treasury money market funds managed by a related entity (the "Fund Manager") which is related through a common director. One of the Company's directors, who is also a 10% stockholder, currently serves as a director and executive officer of the Fund Manager. The fund transactions during the ninesix months ended SeptemberJune 30, 20152016 and for the year ended December 31, 2014,2015, were directed solely at the discretion of Company management. There are no management fees associated with fund transactions.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

This interim informationThe following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the 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 ourthe Company's Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission on March 31, 2015 (the "2014 Form 10-K"). Information included or incorporated by reference in this Quarterly Report on Form 10-Q may contain forward-looking statements. This information may involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different than the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may," "should," "expect," "anticipate," "estimate," "believe," "intend" or "project" or the negative of these words or other variations on these words or comparable terminology.2015.

Examples of forward-looking statements include, but are not limited to, statements regarding efforts to grow revenue, expectations regarding fulfillment of backlog, future benefits to operating margins and the adequacy of cash resources.  Actual events or results may differ materially from t)hose discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" in the 2014 Form 10-K, and as may updated in our subsequent Quarterly Reports on Form 10-Q. In light of these risks and uncertainties, there can be no assurance that the forward-lookingForward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q willof 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 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 factSection 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 accurate. Further, we doa 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, 2015, filed with the Securities and Exchange Commission (the "SEC") on March 29, 2016, this Report 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 Report. The Company does not undertake any obligation to publicly update any forward-looking statements.statement, except as required by law. As a result, you should not place undue reliance on these forward-looking statements.

Results of Operations

Three months ended SeptemberJune 30, 20152016 compared to three months ended SeptemberJune 30, 20142015

Consolidated Revenues, Gross Margin and Backlog

ConsolidatedTotal revenues for the three months ended SeptemberJune 30, 20152016 were $4,796,000, as compared to $5,581,000 for the three months ended September 30, 2014,$5,231,000, a decrease of $785,000, or 14.1%.4.4% from revenues of $5,471,000 for the same prior year period.  Price compression from offshore manufacturers has continued to reducereduced the number of economically feasible opportunities in the Internet Communications Technology ("ICT") market segment. The Company has moved away from such low margin commodities business and is focused on achieving revenue growth through the development of more complex, higher margin products, particularly in the Aerospace and Defense ("Aero/Defense") market segment.

Consolidated gross margin, which is consolidated revenues less manufacturing cost of sales, as a percentage of revenues increased to 33.1%33.9% from 31.0%32.7% for the three month periodmonths ended SeptemberJune 30, 2015,2016, compared to the same prior year period. The quarter over quarter improvement in gross margin was primarily due to a favorable product mix and continued margin improvement initiatives. The favorable product mix is due to engineering investments the Company has made that have resulted in the development of more complex products that are producing higher margins.

OrderAt June 30, 2016, the Company's order backlog has remained consistent forwas $9,679,000, which was an increase of 7.4% compared to the last four quarters. Order backlog as of September 30, 2015March 31, 2016, which was $8,783,000, as$9,016,000, and an increase of 9.3% compared to the order backlog as of June 30, 2015, which was $8,857,000,$8,857,000. The backlog of unfilled orders includes amounts based on signed contracts as well as agreed letters of intent, which MtronPTI has determined are firm orders and likely to proceed.  Although backlog represents only firm orders that are considered likely to be fulfilled within the 12 months following receipt of the order, backlog as of September 30, 2014, which was $8,693,000.cancellations or scope adjustments may and do occur.

Order backlog is adjusted quarterly to reflect project cancellations, deferrals, revised project scope and cost, and sales of subsidiaries, if any.  The Company expects to fill its entire backlog within the next 12 months, but cannot provide assurances as to what portion of the order backlog will be fulfilled in a given year.

Operating LossIncome (Loss)

The Company had an operating loss of $154,000Operating income was $26,000 for the three months ended SeptemberJune 30, 2015,2016, compared to an operating loss of $409,000($333,000) for the three months ended June 30, 2015.  The improvement is due to a reduction in engineering, selling and administrative costs which were 33.4% of revenue for the three months ended June 30, 2016, compared to 38.8% of revenue for the comparable prior year period, in 2014. The improvement in operating loss was due toand a 2.11.2 percentage point increase in gross margin, andoffset by a 4.4% decrease in engineering, selling and administrative expenses of $353,000 resulting from our 2014 restructuring plan that realigned sales, general and administrative activities and customer support operations across all of our locations in an effort to gain efficiencies.
12
revenue.

Stock-Based Compensation

Stock-basedFor the three months ended June 30, 2016, stock-based compensation expense was approximately $14,000 and $27,000$3,000, compared to $174,000 for the three months ended SeptemberJune 30, 2015 and 2014, respectively.2015. Compensation expense related to stock-based compensation is recognized over the applicable vesting periods and included in engineering, selling and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.periods. As of SeptemberJune 30, 2015,2016, there was approximately $60,000$28,000 of total unrecognized compensation expense related to unvested share-based compensation arrangements.

Income Taxes

The Company recorded a tax benefit (provision) of $1,000 and ($11,000) for the three months ended June 30, 2016 and 2015, respectively.

The Company maintains a full valuation allowance against its deferred tax assets under the provisions of ASC 740, Income Taxes, ("ASC 740") based on the Company's assessment of the uncertainty surrounding the realization of the favorable U.S. tax benefits in future tax returns. When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the ability to realize deferred tax assets in future years, the Company will adjust related valuation allowances in the period in whichthat the change in circumstances occurs, along with a corresponding increase or charge to income.

Other (Expense)Net Income Net(Loss)

For the three months ended SeptemberJune 30, 2015 other expense,2016, the Company reported net was $23,000 compared to $78,000 for the three months ended September 30, 2014. The current period expense consistsincome of foreign currency transaction losses. The prior year period consists of approximately $59,000 of expense related to a legal settlement and a net loss of approximately $28,000 realized on the disposal of assets, partially offset by foreign currency transaction gains.

Net Loss

Net loss for the three months ended September 30, 2015 was $195,000$16,000, compared to a net loss of $492,000($201,000) for the comparable period in 2014. The improvement in net loss was primarily due to a 2.1 percentage point increase in gross margin and a decrease in engineering, selling and administrative expenses of $353,000 resulting from the restructuring plan completed in 2014 that realigned sales, general and administrative activities and customer support operations across all locations in an effort to gain efficiencies.2015. Basic and diluted net lossincome (loss) per share for the three month periods ended SeptemberJune 30, 2016 and 2015, was $0.01 and 2014, was $0.07 and $0.19,($0.08), respectively.

NineSix months ended SeptemberJune 30, 20152016 compared to ninesix months ended SeptemberJune 30, 20142015

Consolidated Revenues, Gross Margin and Backlog

ForTotal revenues for the ninesix months ended SeptemberJune 30, 2015 consolidated revenues2016 were $15,671,000 as compared to $17,562,000 for the nine-month period ended September 30, 2014,$9,987,000, a decrease of $1,891,000 or 10.8%.8.2% from revenues of $10,875,000 for the same prior year period.  Price compression from offshore manufacturers has continued to reducereduced the number of economically feasible opportunities in the ICT market segment. The Company has moved away from such low margin commodities business and is focused on achieving revenue growth through the development of more complex, higher margin products, particularly in the Aero/Defense market segment.
For the nine months ended September 30, 2015 consolidated
9
Consolidated gross margin, which is consolidated revenues less manufacturing cost of sales, as a percentage of revenues increasedwas 32.8% for the six months ended June 30, 2016, compared to 33.0% from 26.7% for the comparablesix months ended June 30, 2015. The slight decline in margin from the prior year period in 2014was primarily due to a favorable product mix and continued margin improvement initiatives. The favorable product mix is due to engineering investments the Company has made that have resulted inaffect of lower overall revenues on the developmentfixed portion of more complex products that are producing higher margins. The gross margin in 2014manufacturing costs.

At June 30, 2016, the Company's order backlog was also negatively impacted by$9,679,000, which was an increase in warranty expense of $366,000 related to two isolated product defects.
Order backlog has remained consistent for the last four quarters. Order backlog as of September 30, 2015 was $8,783,000, as10.0% compared to the order backlog as of December 31, 2014,2015, which was $8,793,000, and to the order backlog as of September 30, 2014, which was $8,693,000.$8,799,000.

13
Operating Loss

The Company had an operatingOperating loss of $648,000($136,000) for the ninesix months ended SeptemberJune 30, 2015,2016 improved by $358,000 compared to an operating loss of $2,501,000($494,000) for the comparable period in 2014, an improvement of $1,853,000.2015.  The improvement in operating loss wasis due to a 6.3 percentage point increase in gross margin, and a decreasereduction in engineering, selling and administrative expensescosts which were 34.1% of $928,000 as a result of the restructuring plan completed in 2014 that realigned sales, general and administrative activities and customer support operations across all of our locations in an effort to gain efficiencies. Operating lossrevenue for the ninesix months ended SeptemberJune 30, 2014, also included $444,0002016, compared to 37.5% of restructuring expense.revenue for the comparable prior year period, offset by the 8.2% decrease in revenue.

Stock-Based Compensation

Stock-basedFor the six months ended June 30, 2016, stock-based compensation expense was approximately $201,000  and $213,000 for($13,000) due to the nineeffect of forfeitures. For the six  months ended SeptemberJune 30, 2015, and 2014, respectively, and is included in engineering, selling and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.

On May 8, 2015, the Board of Directors granted 37,296 restricted shares of the Company's common stock to Michael J. Ferrantino, Sr., pursuant to the Company's 2011 Incentive Plan. These shares vested in full on the grant date. Total stock-based compensation expense for this grant was $160,000.

On March 12, 2015,$187,000. Compensation expense related to stock-based compensation is recognized over the Boardapplicable vesting periods. As of Directors granted aJune 30, 2016, there was approximately $28,000 of total of 32,000 optionsunrecognized compensation expense related to purchase shares of the Company's common stock to members of executive management. These stock options have an exercise price of $4.15, a five-year life expiring on March 12, 2020, and vest as follows: 30% on the first anniversary of the grant date; an additional 30% on the second anniversary of the grant date; and the remaining 40% on the third anniversary of the grant date. These stock options have a grant date fair value of $1.03 per option.

Other (Expense) Income, Net

For the nine months ended September 30, 2015, other income, net was $112,000 compared to other expense, net of $48,000 for the nine months ended September 30, 2014. The current period consists of approximately $159,000 of net insurance proceeds received for damaged equipment and inventory, partially offset by foreign currency transaction gains. The prior year expense consists of foreign currency transaction losses.unvested share-based compensation arrangements.

Income Taxes

The Company recorded a tax benefit (provision) of $1,000 and ($11,000) for the three months ended June 30, 2016 and 2015, respectively.

The Company maintains a full valuation allowance against its deferred tax assets under the provisions of ASC 740,Income Taxes, based on the Company's assessment of the uncertainty surrounding the realization of the favorable U.S. tax benefits in future tax returns.  When assessing the need for valuation allowances, the Company considers future taxable income and ongoing prudent and feasible tax planning strategies.  Should a change in circumstances lead to a change in judgment about the ability to realize deferred tax assets in future years, the Company will adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.

Net Loss

ForNet loss for the nine-month periodsix months ended SeptemberJune 30, 2015, the Company had a net loss of $574,0002016 improved to ($110,000), compared to a net loss of $2,570,000($379,000) for the comparable period in 2014. The improvement in net loss was primarily due to a 6.3 percentage point increase in gross margin and a decrease in engineering, selling and administrative expenses of $928,000 as a result of the restructuring plan completed in 2014 that realigned sales, general and administrative activities and customer support operations across all locations in an effort to gain efficiencies. Net loss for the nine months ended September 30, 2014, also included $444,000 of restructuring expense.2015. Basic and diluted net loss per share for the ninesix month periods ended SeptemberJune 30, 2016 and 2015 was ($0.04) and 2014, was $0.22 and $0.99,($0.14), respectively.

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Liquidity and Capital Resources

Cash and cash equivalents increased by $749,000,$10,000, to $5,941,000$5,563,000 at SeptemberJune 30, 2015,2016 from $5,192,000$5,553,000 at December 31, 2014.2015.

Cash provided by operating activities was $1,025,000$43,000 and $414,000 for the ninesix months ended SeptemberJune 30, 2016 and 2015, compared to cash used in operating activities of $1,094,000 for the same period in 2014.respectively.  The $2,119,000 improvement$371,000 decrease was primarily attributabledue to a $1,996,000 reduction in year over yearthe non-cash adjustments for stock-based compensation and net losses and a reductionchanges in working capital, adjustments.offset by an improvement in net loss.

Cash used in investing activities for the ninesix months ended SeptemberJune 30, 2016 and 2015 was ($33,000) and 2014 was $276,000 and $912,000,($175,000), respectively. The decrease was primarily due to the January 31, 2014 acquisition of certain of Trilithic, Inc.'s filter product line assets for cash consideration, including acquisition costs, of $748,000, partially offset by an increasea reduction in current period capital expenditures of $206,000.expenditures.

Cash provided by financing activities was $0 for the nine months ended SeptebmberAt June 30, 2015, compared with $319,000 for the comparable period in 2014. The change was due to net repayments on the note payable to our credit facility provider of $1,181,000 offset by a decrease in restricted cash during the comparable period in 2014.

As of September 30, 2015,2016, the Company's consolidated working capital was $9,788,000$10,079,000, compared to $9,909,000$9,876,000 at December 31, 2014. As of September2015.  At June 30, 2015,2016, the Company had current assets of $12,106,000,$12,404,000, current liabilities of $2,318,000$2,325,000 and a ratio of current assets to current liabilities of 5.225.34 to 1.00.  At December 31, 2014,2015, the Company had current assets of $12,934,000,$11,952,000, current liabilities of $3,025,000$2,076,000 and a ratio of current assets to current liabilities of 4.285.76 to 1.00.  Management continues to focus on efficiently managing working capital requirements to match operating activity levels.

On September 30, 2014, MtronPTI entered into a Loan Agreement (the "CNB Loan Agreement"), with City National Bank of Florida ("City National"). The CNB Loan Agreement provides for a revolving line of credit in the amount of $3.0 million (the "CNB Revolver"), which bears interest at a variable rate equal to 30-day LIBOR plus 200 basis points to be set on the first day of each month. Under the terms of themonth, and expires on September 30, 2016. The CNB Loan Agreement andalso provides that MtronPTI will pay City National a fee equal to 0.75% per year on the CNB Revolving Promissory Note (as defined below), MtronPTI may borrow under the CNB Revolver until September 30, 2016, unless the term of the CNB Revolving Promissory Note is extended.

daily unused amount. The Company's obligations under the CNB Loan Agreement are secured only by cash collateral and do not require any other liens. The CNB Loan Agreement provides that MtronPTI will pay City National a fee equal to 0.75% per year on the daily unused amount of the CNB Revolving Promissory Note.

In connection with the CNB Loan Agreement, MtronPTI also entered into a Cash Collateral Agreement with City National (the "CNB Cash Collateral Agreement") and delivered a Revolving Promissory Note in the principal amount of $3.0 million to City National (the "CNB Revolving Promissory Note").

The CNB Cash Collateral Agreement provides that MtronPTI will hold cash collateral equal to any amounts outstanding under the CNB Revolver in a non-interest bearing deposit account with City National. Provided that MtronPTI is not in default of any of its obligations under the CNB Loan Agreement, the CNB Revolving Promissory Note or the CNB Cash Collateral Agreement, the funds collateralizing the CNB Revolver are restricted only to the extent of the outstanding principal amount under the CNB Revolver. As of SeptemberAt June 30, 20152016 and December 31, 2014,2015, there was no balance outstanding under the CNB Revolver and no associated restricted cash.

The CNB Loan Agreement, the CNB Revolving Promissory Note and the CNB Cash Collateral Agreement provide for customary events of default, including but not limited to payment defaults, breach of other obligations under the CNB Loan Agreement, the CNB Revolving Promissory Note and the CNB Cash Collateral Agreement, bankruptcy or insolvency, material default with respect to any obligation owed to City National and default with respect to other material indebtedness.

The Company believes that existing cash and cash equivalents and cash generated from operations will be sufficient to meet its ongoing working capital and capital expenditure requirements for the next 12 months.  However, the Company has entered into discussions with City National to renew the CNB Loan Agreement, and may seek additional capital to fund future growth in its business, to provide flexibility to respond to dynamic market conditions, or to fund its strategic growth objectives.
15

The 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 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

OurThe Company's accounting policies and condensed consolidated financial statements have been prepared in accordanceestablished to conform with accounting principles generally accepted in the United States of America.GAAP. The preparation of suchfinancial statements in conformity with GAAP requires usthe Company to makeuse judgment in the application of accounting policies, including making estimates and assumptions thatassumptions. These judgments affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities asand disclosure of contingent assets and liabilities at the dates of the datefinancial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that the Company has made these estimates and assumptions in an appropriate manner and in a way that accurately reflects the Company's financial condition. The Company continually tests and evaluates these estimates and assumptions using its historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If the Company's judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. OurAdditionally, other companies may utilize different estimates are basedthat may impact comparability of the Company's results of operations to those of companies in similar businesses. The Company believes the following critical accounting policies govern the significant judgments and estimates used in the preparation of the financial statements, which should be read in conjunction with the more complete discussion of accounting policies and procedures included in Note A – Accounting and Reporting Policies to the consolidated financial statements in the Company's Annual Report on historical experience and other assumptions that we consider to be reasonable givenForm 10-K for the circumstances. Actual results may vary from our estimates.year ended December 31, 2015.

The Company's most critical accounting policies include revenue recognition, accounts receivable allowance, valuation of inventories, accounting for warranty obligations, accounting for income taxes, and accounting for stock-based compensation.

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Revenue Recognition

The Company recognizes revenue from the sale of its productproducts in accordance with the criteria in ASC 605, Revenue Recognition, which are:

‒Persuasive evidence that an arrangement exists;

‒Delivery has occurredoccurred;

‒The seller's price to the buyer is fixed and determinable; and

‒Collectability is reasonably assured.

The Company meets these conditions upon shipment because title and risk of loss passes to the customer at that time.  However, 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.  The amount of the reserve at SeptemberJune 30, 2016 and December 31, 2015 is not material to the financial statements.

The Company recognizes revenue related to transactions with a right of return and/or authorized price protection provisions when the following conditions are met:

‒The seller's
Seller's price to the buyer is fixed or determinable at the date of sale;

‒The buyerBuyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product;

‒The buyer'sBuyer's obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product;

‒The buyerBuyer acquiring the product for resale has economic substance apart from that provided by the seller;

‒The sellerSeller does not have obligations for future performance; and

‒The amount of future returns can be reasonably estimated.

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Accounts Receivable Allowance

Accounts receivable on a consolidated basis consists principally of amounts due from both domestic and foreign customers.  Credit is extended based on an evaluation of the customer's financial condition and collateral is not generally required.  In relation to export sales, the Company generally requires letters of credit supporting a significant portion of the sales price prior to production to limit exposure to credit risk.  Certain credit sales are made to industries that are subject to cyclical economic changes.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments.  Estimates are based on historical collection experience, current trends, credit policy and relationship between accounts receivable and revenues.  In determining these estimates, the Company examines historical write-offs of its receivables and reviews each client's account to identify any specific customer collection issues.  If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payment, additional allowances might be required.  The Company's failure to estimate the losses for doubtful accounts accurately and ensure that payments are received on a timely basis could have a material adverse effect on its business, financial condition and results of operations.

Inventory Valuation

Inventories are stated at the lower of cost (based on a first-in, first-out method),using the FIFO (first-in, first-out) method and market value (net realizable value).value.

The Company maintains a reserve for inventory obsolescence based on estimated losses that result from inventory that becomes obsolete as of period end. In determining these estimates, the Company performs an analysis on demand and usage for each inventory item over historical time periods.  Based on that analysis, the Company reserves a percentage of the inventory amount within each time period based on historical demand and usage patterns of specific items in inventory.

Warranties

The Company offers a standard one-year warranty. The Company tests its products prior to shipment in order to ensure that they meet each customer's requirements based upon specifications received from each customer at the time its order is received and accepted. The Company's customers may request to return products for various reasons, including but not limited to the customers' belief that the products are not performing to specification. The Company's return policy states that it will accept product returns only with prior authorization and if the product does not meet customer specifications, in which case the product would be replaced or repaired. To accommodate the Company's customers, each request for return is reviewed, and if and when it is approved, a return materials authorization ("RMA") is issued to the customer. Each month the Company records a specific warranty reserve for approved RMAs covering products that have not yet been returned. The Company does not maintain a general warranty reserve because, historically, valid warranty returns resulting from a product not meeting specifications or being non-functional have been immaterial.

Income Taxes

Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. The future recoverability of the Company's net deferred tax assets is dependent upon the generation of future taxable income prior to the expiration of the loss carry forwards. The Company maintains a full valuation allowance against the Company's net deferred tax assets.  The valuation allowance was calculated in accordance with the provisions of ASC 740, Income Taxes, which requires an assessment of both positive and negative evidence when measuring the need for a valuation allowance.  We intendThe Company intends to maintain a valuation allowance until sufficient positive evidence exists to support its reversal.

17
Stock-Based Compensation

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

The Company estimates the fair value of stock options on the grant date using the Black-Scholes-Merton option-pricing model. The Black-Scholes-Merton option-pricing model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. There is no expected dividend rate. Historical Company information was the basis for the expected volatility assumption as the Company believes that the historical volatility over the life of the option is indicative of expected volatility in the future. 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. The Company also estimates forfeitures at the time of grant and revises, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Based upon past history of actual performance, forfeiture rates ranging from zero percent to twentyten percent have been assumed for options granted.

Stock awards are made at a value equal to the market price of the Company's common stock on the date of the grant.

11
Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.


Item 3.Quantitative and Qualitative Disclosures About Market Risk.
Item 3.Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.


Item 4.Controls and Procedures.
Item 4.Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As ofThe Company maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the end ofCompany's reports under the period covered by this report,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 the Company, including the Company's principal executive officer and principal financial officer, evaluatedas appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, the Company recognizes that no controls and procedures, no matter how well designed and operated, can provide absolute assurance of achieving the desired control objectives.

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of June 30, 2016 was conducted under the supervision and with the participation of the Company's management, including the Company's principal executive officer and principal financial officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"))Act). Based on theirthis evaluation, of the Company's disclosure controls and procedures, the Company's principal executive officer and principal financial officer with the participation of the Company's management, have concluded that the Company's disclosure controls and procedures, as of June 30, 2016, were effective as of September 30, 2015, to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (b) accumulated and communicated to management, including the Company's principal executive officer and principal financial officer, as appropriate to allow for timely decisions regarding required disclosure.at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

During the fiscal quarter ended SeptemberJune 30, 2015,2016, there were no changes in the Company's internal controls over financial reporting, or in other factors that could significantly affect these controls, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

18
12

PART II

OTHER INFORMATION

Item 1.Legal Proceedings.
Item 1. Legal Proceedings.

None.

Item 1A.Risk Factors.
Item 1A. Risk Factors.

None.Not applicable.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.Defaults Upon Senior Securities.
Item 3. Defaults Upon Senior Securities.

None.

Item 4.Mine Safety Disclosures.
Item 4.Mine Safety Disclosures.

None.

Item 5.Other Information.
Item 5. Other Information.

None.
Item 6.Exhibits.
Item 6. Exhibits.

The following is a listexhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016 (and are numbered in accordance with Item 601 of exhibits filed as part of this Form 10-Q:Regulation S-K):
Exhibit No. 
 
Description
   
 31.13.1   Certificate of Incorporation of The LGL Group, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the SEC on August 31, 2007).
3.2  The LGL Group, Inc. By-Laws (incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed with the SEC on August 31, 2007).
3.3  The LGL Group, Inc. Amendment No. 1 to By-Laws (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the SEC on June 17, 2014).
4.1  Warrant Agreement, dated as of July 30, 2013, by and among The LGL Group, Inc., Computershare Inc. and Computershare Trust Company, N.A. (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 14, 2013).
31.1 *Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 31.2 *Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 32.1 **Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 32.2 **Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS *XBRL Instance Document**Document
101.SCH *XBRL Taxonomy Extension Schema Document
101.CAL *XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF *XBRL Taxonomy Extension Definition Linkbase Document
101.LAB *XBRL Taxonomy Extension Label Linkbase Document
101.PRE *XBRL Taxonomy Extension Presentation Linkbase Document

19

*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.

13

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.

  THE LGL GROUP, INC.
   
   
Date: NovemberAugust 12, 20152016
 By:/s/ Michael J. Ferrantino, Sr.
   Michael J. Ferrantino, Sr.
   
President and Chief Executive Officer
(Principal Executive Officer)
    
    
Date: NovemberAugust 12, 20152016
 By:/s/ Patti A. Smith
   Patti A. Smith
   
Chief Financial Officer
(Principal Financial and Accounting Officer)
    
    

2014