Equity Investment in Unconsolidated Subsidiary

3 Months Ended

Mar. 31, 2021

Equity Method Investments And Joint Ventures [Abstract]

Equity Investment in Unconsolidated Subsidiary

C. Equity Investment in Unconsolidated Subsidiary

On November 6, 2019, the Company invested $3.35 million in LGL Systems Acquisition Holding Company, LLC, a partially owned subsidiary that serves as the Sponsor of LGL Systems Acquisition Corp., (“the SPAC” or “DFNS”). The SPAC is a publicly-traded company on the NYSE under the ticker symbol “DFNS” which was formed for the purpose of effecting a business combination in the aerospace, defense and communications industries. The Sponsor holds 100% of the SPAC’s Class B common shares, which are restricted and non-tradable, and 5,200,000 private warrants. The Sponsor purchased the private warrants in a private placement that closed simultaneously with the consummation of the SPAC’s initial public offering (“SPAC IPO”). Each private warrant is exercisable to purchase one share of common stock of the SPAC at an exercise price of $11.50 per share. The Company contributed 62.2% of the Sponsor’s risk capital to effect the SPAC IPO.

The SPAC IPO closed on November 12, 2019; proceeds from the SPAC IPO totaled $172.5 million. If the SPAC does not complete a business combination within 24 months from the closing of the SPAC IPO, the proceeds from the sale of the private warrants will be used to fund the redemption of the shares sold in the SPAC IPO (subject to the requirements of applicable law); and the private warrants will expire worthless. The Sponsor holds 20% of the total common shares (Class A and Class B) in the SPAC along with the 5,200,000 private warrants.

The Company subscribed to a $2.725 million investment into the Sponsor in March 2021 which it funded in May 2021.The investment will be part of the Sponsor syndication of $5.66 million organized to participate in a $125 million private placement (“PIPE”) purchase of 12,500,000 shares of DFNS Class A common stock.

The PIPE is in connection with the recent announcement by DFNS and IronNet Cybersecurity, Inc. (“IronNet”) of the definitive business combination agreement reached between IronNet and DFNS. The PIPE and business combination are expected to close in the third quarter of 2021, after the required approval by the shareholders of DFNS and the fulfillment of certain other conditions. While the syndicated PIPE investment increases the Company’s commitment to the pro forma IronNet company, its position is not expected to be material to the pro forma capitalization. Upon completion of the business combination, which is subject to regulatory and other approvals, the combined company will be renamed IronNet Cybersecurity, Inc. and will be listed on the NYSE and trade under the ticker symbol “IRNT”.

The Sponsor is managed by LGL Systems Nevada Management Partners LLC (“Nevada GP”), an affiliated entity deemed to be under the significant influence of Marc Gabelli, the Company’s non-executive Chairman of the Board, who is also a greater than 10% stockholder of the Company. The Company has determined that it is not the primary beneficiary of the Sponsor, as Nevada GP has the power to direct the activities of the Sponsor that most significantly impact the Sponsor’s economic performance through an operating agreement. The Company, therefore, accounts for the Sponsor under the equity method of accounting. For the three months ended March 31, 2021 and 2020, the Company recognized a loss on equity investment in unconsolidated subsidiary of $76,000 and $39,000, respectively. The Company has recognized a cumulative loss of $354,000 on its investment in the unconsolidated Sponsor as of March 31, 2021.

On April 12, 2021, the SEC’s Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (the “Staff Statement”) was released. The SPAC evaluated the applicability and impact of the Staff Statement on its historical financial statements that have been filed with the SEC and determined that restatement was required.  The SPAC changed its accounting treatment for both its public and private warrants outstanding using liability classification instead of equity classification resulting in a mark to market warrant liability adjustment for each reporting period since issuance in 2019.  The Company reports its investment in the Sponsor under the equity method of accounting using hypothetical liquidation at book value (“HLBV”). HLBV determines the amount that would be received by the Company if the partnership were liquidated at book value at the end of each measurement period. The SPAC’s mark to market accounting adjustments for the warrant liability does not change the Company’s HLBV due to the warrants requiring no cash settlement as of December 31, 2020 under a hypothetical liquidation; therefore, the SPAC’s restatement did not impact the Company’s carrying amount of its equity investment in the Sponsor as of March 31, 2021, or any previously reported period.