PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands except par value)

January 31, April 30,
2018 2017
(UNAUDITED)
ASSETS:
Current assets:
Cash and cash equivalents $ 6,984 $ 2,163
Marketable securities 6,240 7,815
Accounts receivable, net of allowance for doubtful accounts
of $187 at January 31, 2018 and at April 30, 2017
7,835 10,986
Costs and estimated earnings in excess of billings, net 4,122 7,964
Inventories, net 25,899 29,051
Prepaid income taxes 2,112 2,606
Prepaid expenses and other 1,141 1,105
Current assets of discontinued operations 8,477 8,165
Total current assets 62,810 69,855
Property, plant and equipment, at cost, net of
accumulated depreciation and amortization
13,868 14,813
Deferred income taxes 10,352 11,902
Goodwill and other intangible assets 617 617
Cash surrender value of life insurance and cash held in trust 13,853 13,376
Other assets 2,310 2,187
Non-current assets of discontinued operations 531 569
Total assets $ 104,341 $ 113,319

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable - trade $ 2,858 $ 2,437
Accrued liabilities 3,934 3,425
Current liabilities of discontinued operations 2,121 2,249
Total current liabilities 8,913 8,111

Deferred compensation 13,546 13,252
Deferred rent and other liabilities 1,436 1,409
Non-current liabilities of discontinued operations 1,795 1,215
Total liabilities 25,690 23,987
Commitments and contingencies
Stockholders’ equity:
Preferred stock - $1.00 par value authorized 600 shares, no shares issued - -
Common stock - $1.00 par value; authorized 20,000 shares, 9,164 shares issued,
8,853 shares outstanding at January 31, 2018; 8,817 shares outstanding at April 30, 2017
9,164 9,164
Additional paid-in capital 56,289 55,767
Retained earnings 12,449 23,712
77,902 88,643
Common stock reacquired and held in treasury -
at cost (311 shares at January 31, 2018 and 347 shares at April 30, 2017)
(1,425 ) (1,592 )
Accumulated other comprehensive income 2,174 2,281
Total stockholders’ equity 78,651 89,332
Total liabilities and stockholders’ equity $ 104,341 $ 113,319

	October 31,			April 30,
	2018			2018
	(UNAUDITED)
ASSETS:
Current assets:
Cash and cash equivalents	$	3,911		$	7,869
Marketable securities		7,341			6,149
Accounts receivable, net of allowance for doubtful accounts of $173 at October 31, 2018 and $181 at April 30, 2018		6,110			4,268
Costs and estimated earnings in excess of billings, net		7,047			5,094
Inventories, net		25,648			26,186
Prepaid income taxes		622			1,459
Prepaid expenses and other		1,001			1,050
Total current assets		51,680			52,075
Property, plant and equipment, at cost, net of accumulated depreciation and amortization		13,486			14,127
Goodwill and other intangible assets		617			617
Cash surrender value of life insurance and cash held in trust		14,251			13,915
Other assets		3,628			2,850
Total assets	$	83,662		$	83,584

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable - trade	$	1,073		$	1,841
Accrued liabilities		3,179			3,416
Total current liabilities		4,252			5,257

Deferred compensation		13,707			13,541
Deferred rent and other liabilities		1,479			1,524
Total liabilities		19,438			20,322
Commitments and contingencies
Stockholders’ equity:
Preferred stock - $1.00 par value authorized 600 shares, no shares issued		-			-
Common stock - $1.00 par value; authorized 20,000 shares, 9,164 shares issued, 8,909 shares outstanding at October 31, 2018; 8,867 shares outstanding at April 30, 2018		9,164			9,164
Additional paid-in capital		56,710			56,439
Retained earnings (accumulated deficit)		572			(65	)
Common stock reacquired and held in treasury - at cost (255 shares at October 31, 2018 and 297 shares at April 30, 2018)		(1,168	)		(1,361	)
Accumulated other comprehensive income		(1,054	)		(915	)
Total stockholders’ equity		64,224			63,262
Total liabilities and stockholders’ equity	$	83,662		$	83,584

See accompanying notes to condensed consolidated financial statements.

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive ~~Loss~~

~~Nine~~(Loss) Income

Six Months Ended ~~January~~October 31,

(In thousands except per share data)

(Unaudited)

2018 2017
Condensed Consolidated Statements of Operations

Revenues $ 31,932 $ 34,411
Cost of revenues 28,060 23,590
Gross margin 3,872 10,821
Selling and administrative expenses 7,796 8,483
Research and development expense 5,071 4,832
Operating loss (8,995 ) (2,494 )

Other income (expense):
Investment income 1,236 387
Interest expense (61 ) (128 )
Other income, net 4 50
Loss before provision (benefit) for income taxes (7,816 ) (2,185 )
Provision (benefit) for income taxes 2,750 (1,392 )
Net loss from continuing operations (10,566 ) (793 )
Loss from discontinued operations, net of tax (697 ) (599 )
Net loss $ (11,263 ) $ (1,392 )

Net loss per common share:
Basic loss from continued operations $ (1.20 ) $ (0.09 )
Basic loss from discontinued operations (0.07 ) (0.07 )
Basic loss per share (1.27 ) (0.16 )
Diluted loss from continued operations (1.20 ) (0.09 )
Diluted loss from discontinued operations (0.07 ) (0.07 )
Diluted loss per share $ (1.27 ) $ (0.16 )

Weighted average shares outstanding:
Basic 8,836 8,780
Diluted 8,836 8,780

Condensed Consolidated Statements of Comprehensive Loss

Net loss $ (11,263 ) $ (1,392 )
Other comprehensive loss:
Foreign currency translation adjustment 623 86
Unrealized (loss) gain on marketable securities:
Change in market value of marketable securities before
reclassification, net of tax of $8 and ($112)
(54 ) 215
Reclassification adjustment for realized gains included in
net income, net of tax of $355 and $5
(688 ) (9 )
Total unrealized (loss) gain on marketable securities, net of tax (742 ) 206

Total other comprehensive (loss) income (119 ) 292
Comprehensive loss $ (11,382 ) $ (1,100 )

	2018			2017
Condensed Consolidated Statements of Operations
Revenues	$	23,153		$	21,360
Cost of revenues		14,860			14,636
Gross margin		8,293			6,724
Selling and administrative expenses		5,182			5,046
Research and development expense		3,257			3,364
Operating loss		(146	)		(1,686	)

Other income (expense):
Investment income		189			1,167
Interest expense		(34	)		(41	)
Other income, net		121			3
Income (loss) before provision for income taxes		130			(557	)
Benefit for income taxes		(23	)		(98	)
Net income (loss) from continuing operations		153			(459	)
Loss from discontinued operations, net of tax		-			(408	)
Net income (loss)	$	153		$	(867	)

Net income (loss) per common share:
Basic and diluted earnings (loss) from continued operations	$	0.02		$	(0.05	)
Basic and diluted loss from discontinued operations	$	0.00		$	(0.05	)
Basic and diluted earnings (loss) per share	$	0.02		$	(0.10	)

Weighted average shares outstanding:
Basic		8,885			8,830
Diluted		9,046			8,830


Condensed Consolidated Statements of Comprehensive Income (Loss)
Net income (loss)	$	153		$	(867	)
Other comprehensive (loss) income:
Foreign currency translation adjustment		(82	)		575
Unrealized loss on marketable securities:
Change in market value of marketable securities before reclassification, net of tax of ($20) in 2017		(55	)		37
Reclassification adjustment for realized gains included in net income, net of tax of $356 in 2017		(2	)		(691	)
Total unrealized loss on marketable securities, net of tax		(57	)		(654	)

Total other comprehensive loss		(139	)		(79	)
Comprehensive income (loss)	$	14		$	(946	)

See accompanying notes to condensed consolidated financial statements.

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) ~~Income~~

Three Months Ended ~~January~~October 31,

(In thousands except per share data)

(Unaudited)

2018 2017
Condensed Consolidated Statements of Operations

Revenues $ 10,572 $ 11,383
Cost of revenues 13,424 8,116
Gross margin (2,852 ) 3,267
Selling and administrative expenses 2,749 2,834
Research and development expense 1,708 1,337
Operating loss (7,309 ) (904 )

Other expense:
Investment income 68 108
Interest expense (19 ) (61 )
Other income, net 1 49
Loss before provision (benefit) for income taxes (7,259 ) (808 )
Provision (benefit) for income taxes 2,848 (1,188 )
Net loss from continuing operations (10,107 ) 380
Loss from discontinued operations, net of tax (289 ) (42 )
Net (loss) income $ (10,396 ) $ 338

Net loss per common share:
Basic (loss) income from continued operations
$ (1.15 ) $ 0.04
Basic loss from discontinued operations (0.03 ) 0.00
Basic (loss) income per share (1.18 ) 0.04
Diluted (loss) income from continued operations (1.15 ) 0.04
Diluted (loss) income from discontinued operations (0.03 ) 0.00
Diluted (loss) income per share $ (1.18 ) $ 0.04

Weighted average shares outstanding:
Basic 8,846 8,797
Diluted 8,846 8,980

Condensed Consolidated Statements of Comprehensive Loss

Net (loss) income $ (10,396 ) $ 338
Other comprehensive income:
Foreign currency translation adjustment 48 (284 )
Unrealized (loss) gain on marketable securities:
Change in market value of marketable securities before
reclassification, net of tax of $27 and ($161)
(88 ) 98
Reclassification adjustment for realized gains included in
net income, net of tax of $5 in 2017
- (9 )
Total unrealized (loss) gain on marketable securities, net of tax (88 ) 89

Total other comprehensive loss (40 ) (195 )
Comprehensive (loss) income $ (10,436 ) $ 143

	2018			2017
Condensed Consolidated Statements of Operations
Revenues	$	12,142		$	9,337
Cost of revenues		8,123			7,134
Gross margin		4,019			2,203
Selling and administrative expenses		2,642			2,335
Research and development expense		1,607			1,734
Operating loss		(230	)		(1,866	)

Other income (expense):
Investment income		144			13
Interest expense		(17	)		(21	)
Other income, net		195			1
Income (loss) before provision for income taxes		92			(1,873	)
Benefit for income taxes		(30	)		(584	)
Net income (loss) from continuing operations		122			(1,289	)
Loss from discontinued operations, net of tax		-			(192	)
Net income (loss)	$	122		$	(1,481	)

Net income per common share:
Basic and diluted earnings (loss) from continued operations	$	0.01		$	(0.15	)
Basic and diluted loss from discontinued operations	$	0.00		$	(0.02	)
Basic and diluted earnings (loss) per share	$	0.01		$	(0.17	)

Weighted average shares outstanding:
Basic		8,893			8,835
Diluted		9,102			8,835


Condensed Consolidated Statements of Comprehensive Income (Loss)
Net income	$	122		$	(1,481	)
Other comprehensive (loss) income:
Foreign currency translation adjustment		(46	)		260
Unrealized loss on marketable securities:
Change in market value of marketable securities before reclassification, net of tax of ($2) in 2017		(47	)		3
Reclassification adjustment for realized gains included in net income, net of tax of $1 in 2017		(2	)		(2	)
Total unrealized loss gain on marketable securities, net of tax		(49	)		1

Total other comprehensive (loss) income		(95	)		261
Comprehensive income (loss)	$	27		$	(1,220	)

See accompanying notes to condensed consolidated financial statements.

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

~~Nine~~

Six Months Ended ~~January~~October 31,

(In thousands)

(Unaudited)

2018 2017
Cash flows from operating activities:
Net loss from continuing operations $ (10,566 ) $ (793 )
Net loss from discontinued operations (697 ) (599 )
Net loss (11,263 ) (1,392 )
Non-cash charges to earnings 8,285 3,752
Net changes in operating assets and liabilities 5,771 (856 )
Cash provided by operating activities – continuing operations 2,793 1,504
Cash provided by operating activities – discontinued operations 1,217 1,048
Net cash provided by operating activities 4,010 2,552

Cash flows from investing activities:
Proceeds on redemption of marketable securities 6,477 3,852
Purchase of marketable securities (4,961 ) -
Purchase of fixed assets and other assets (1,032 ) (3,767 )
Cash provided by investing activities – continuing operations 484 85
Cash used in investing activities – discontinued operations (44 ) (32 )
Net cash provided by investing activities 440 53

Cash flows from financing activities:
Tax benefit from exercise of stock-based compensation 1 25
Proceeds from credit line borrowings - 280
Payment of credit line borrowings - (6,280 )
Cash provided by financing activities – continuing operations 1 (5,975 )
Cash used in financing activities – discontinued operations - -
Net cash provided by (used in) financing activities 1 (5,975 )

Net increase (decrease) in cash and cash equivalents before effect of exchange rate changes 4,451 (3,370 )

Effect of exchange rate changes on cash and cash equivalents 738 397

Net increase (decrease) in cash and cash equivalents 5,189 (2,973 )

Cash and cash equivalents at beginning of period 2,738 6,082

Cash and cash equivalents at end of period 7,927 3,109

Less cash and equivalents of discontinued operations at end of period 943 549

Cash and cash equivalents of continuing operations at end of period $ 6,984 $ 2,560

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 61 $ 115
Income Taxes $ 325 $ 335

	2018			2017
Cash flows from operating activities:
Net income (loss) from continuing operations	$	153		$	(459	)
Net loss from discontinued operations		-			(408	)
Net income (loss)		153			(867	)
Non-cash charges to earnings		2,158			1,451
Net changes in operating assets and liabilities		(3,411	)		1,631
Cash (used in) provided by operating activities – continuing operations		(1,100	)		2,215
Cash provided by operating activities – discontinued operations		-			614
Net cash (used in) provided by operating activities		(1,100	)		2,829

Cash flows from investing activities:
Proceeds on redemption of marketable securities		947			6,477
Purchase of marketable securities		(2,206	)		-
Purchase of fixed assets and other assets		(1,337	)		(883	)
Cash (used in) provided by investing activities – continuing operations		(2,596	)		5,594
Cash used in investing activities – discontinued operations		-			(28	)
Net cash (used in) provided by investing activities		(2,596	)		5,566

Cash flows from financing activities:
Tax benefit from exercise of stock-based compensation		-			1
Net cash provided by financing activities		-			1

Net (decrease) increase in cash and cash equivalents before effect of exchange rate changes		(3,696	)		8,396

Effect of exchange rate changes on cash and cash equivalents		(262	)		675

Net (decrease) increase in cash and cash equivalents		(3,958	)		9,071

Cash and cash equivalents at beginning of period		7,869			2,738

Cash and cash equivalents at end of period		3,911			11,809

Less cash and equivalents of discontinued operations at end of period		-			794

Cash and cash equivalents of continuing operations at end of period	$	3,911		$	11,015


Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	34		$	41
Income Taxes	$	-		$	325

See accompanying notes to condensed consolidated financial statements.

Table of Contents

FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Six Months Ended October 31,

(In thousands)

(Unaudited)

					Additional			(Accumulated Deficit)			Treasury stock						Accumulated other
	Common Stock				paid in			Retained			(at cost)						comprehensive
	Shares		Amount		capital			earnings			Shares			Amount			Income (loss)			Total
Balance at April 30, 2018		9,163,940	$	9,164	$	56,439		$	(65	)		297,083		$	(1,361	)	$	(915	)	$	63,262
Opening BS adjustment for adoption of ASU 2014-09									484												484
Adjusted balance at May 1, 2018		9,163,940		9,164		56,439			419			297,083			(1,361	)		(915	)		63,746
Contribution of stock to 401(k) plan						50						(14,339	)		66						116
Stock-based compensation expense						121															121
Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price						-						-			-						-
Other comprehensive income, net of tax																		(44	)		(44	)
Net income									31												31
Balance at July 31, 2018		9,163,940		9,164		56,610			450			282,744			(1,295	)		(959	)		63,970
Contribution of stock to 401(k) plan						58						(10,089	)		46						104
Stock-based compensation expense						123															123
Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price						(81	)					(17,708	)		81						-
Other comprehensive income, net of tax																		(95	)		(95	)
Net income									122												122
Balance at October 31, 2018		9,163,940	$	9,164	$	56,710		$	572			254,947		$	(1,168	)	$	(1,054	)	$	64,224

See accompanying notes to condensed consolidated financial statements.

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

The Company’s ~~Chief Executive Officer~~management measures segment performance based on total revenues and profits generated by each geographic location rather than on the specific types of products, customers or end-users. Consequently, the Company determined that the segments indicated above most appropriately reflect the way the Company’s management views the business.

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The tables below present information about reported segments with reconciliation of segment amounts to consolidated amounts as reported in the statement of ~~income~~operations or the balance sheet for each of the periods (in thousands):

Nine months Three months
Periods ended January 31,
2018 2017 2018 2017
Revenues:
FEI-NY $ 22,184 $ 27,176 $ 6,444 $ 9,461
FEI-Zyfer 12,378 9,473 4,514 2,877
less intersegment revenues (2,630 ) (2,238 ) (386 ) (955 )
Consolidated revenues $ 31,932 $ 34,411 $ 10,572 $ 11,383

Operating loss:
FEI-NY $ (11,312 ) $ (2,596 ) $ (8,554 ) $ (708 )
FEI-Zyfer 2,629 444 1,354 (20 )
Corporate (312 ) (342 ) (109 ) (176 )
Consolidated operating loss $ (8,995 ) $ (2,494 ) $ (7,309 ) $ (904 )

January 31, 2018 April 30, 2017
Identifiable assets:
FEI-NY (approximately $1.9 and $1.7 million in China) $ 56,050 $ 64,828
FEI-Zyfer 9,892 10,427
less intersegment balances (13,138 ) (11,992 )
Corporate 51,537 50,056
Consolidated identifiable assets $ 104,341 $ 113,319

~~Table of Contents~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

	Periods ended October 31,
	Six months						Three months
	2018			2017			2018			2017
Revenues:
FEI-NY	$	18,322		$	15,740		$	9,745		$	6,579
FEI-Zyfer		5,103			7,865			2,542			3,593
less intersegment revenues		(272	)		(2,245	)		(145	)		(835	)
Consolidated revenues	$	23,153		$	21,360		$	12,142		$	9,337

Operating loss:
FEI-NY	$	(402	)	$	(2,758	)	$	(185	)	$	(2,358	)
FEI-Zyfer		458			1,275			72			584
Corporate		(202	)		(203	)		(117	)		(92	)
Consolidated operating loss	$	(146	)	$	(1,686	)	$	(230	)	$	(1,866	)

	October 31, 2018			April 30, 2018
Identifiable assets:
FEI-NY (approximately $1.3 and $1.7 million in China in fiscal years 2019 and 2018, respectively)	$	56,634		$	55,181
FEI-Zyfer		8,885			8,168
less intersegment balances		(11,334	)		(11,888	)
Corporate		29,477			32,123
Consolidated identifiable assets	$	83,662		$	83,584

NOTE H – INVESTMENT IN MORION, INC.

The Company has an investment in Morion, Inc., (“Morion”) a privately-held Russian company, which manufactures high precision quartz resonators and crystal oscillators. The Company’s investment consists of 4.6% of Morion’s outstanding shares, accordingly, the Company accounts for its investment in Morion on ~~the~~a cost basis. This investment is included in other assets in the accompanying balance sheets. During the ~~nine~~six months ended ~~January~~October 31, 2018 and 2017, the Company acquired product from Morion in the aggregate amount of approximately ~~$279,000~~$145,000 and ~~$249,000,~~$170,000, respectively, and the Company sold product and training services to Morion in the aggregate amount of approximately ~~$192,000~~$2,000 and ~~$10,000, respectively. (See discussion of~~$182,000, respectively, included in revenues ~~recognized under the license agreement~~ in the ~~paragraph below.)~~statement of operations as part of the FEI-NY segment. During the three months ended ~~January~~October 31, 2018 and 2017, the Company acquired product from Morion in the aggregate amount of approximately ~~$108,000~~$78,000 and ~~$45,000,~~$106,000, respectively, and the Company sold product and training services to Morion in the aggregate amount of approximately ~~$9,000 for~~$2,000 and $182,000, respectively, included in revenues in the ~~same period in 2018. The Company did not have sales~~statement of ~~product nor training services to Morion for~~operations as part of the ~~three months ended January 31, 2017.~~FEI-NY segment. At ~~January~~October 31, 2018, approximately ~~$38,000~~$5,000 was payable to Morion. At ~~January~~October 31, 2017 there were no payables to Morion. At October 31, 2018 and 2017, there ~~was~~were no ~~receivable~~receivables related to Morion. During the ~~nine~~six months ended ~~January~~October 31, 2018 and 2017, the Company received a dividend from Morion in the amount of approximately ~~$85,000~~$105,000 and ~~$100,000, respectively.~~

$51,000, respectively, included in other income, net in the statement of operations as part of the FEI-NY segment.

Morion operates as a subsidiary of Gazprombank, a state-owned Russian bank. On ~~October 22, 2012,~~July 16, 2014, after the Company entered into an agreement to license its rubidium oscillator production technology to Morion. The agreement required the Company to sell certain fully-depreciated production equipment previously owned by the Company and to provide training toCompany’s investment in Morion, employees to enable Morion to produce a minimum of 5,000 rubidium oscillators per year. Morion will pay the Company approximately $2.7 million for the license and the equipment plus 5% royalties on third party sales for a 5-year period following an initial production run. During the same 5-year period, the Company commits to purchase from Morion a minimum of approximately $400,000 worth of rubidium oscillators per year although Morion is not obligated to sell that amountGazprombank became subject to the Company. During the fiscal year ended April 30, 2016, sales to Morion included $375,000 for product and training services under this agreement. Per the amended agreement, the balance of $1 million for the transfer of the license will be due once the United StatesU. S. Department of ~~State (the “State Department”) approves the removal~~Treasury’s prohibition against U. S. persons from providing it with new financing.

Table of ~~certain provisions of the original agreement. The State Department has approved the technology transfer called for under the agreement.~~Contents

~~On March 29, 2016, the Company renegotiated the $1 million amendment under the original agreement dated October 22, 2012~~

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to $602,000 due to the U.S. Government easing of export regulations. Of this amount $392,500 was billed and paid during fiscal year 2016 and the balance of $210,000 was billed during fiscal year 2017 and was subsequently collected. During the nine months ended January 31, 2018 and 2017, sales to Morion include $192,000 and $10,000, respectively, under this agreement.

Condensed Consolidated Financial Statements

(Unaudited)

NOTE I – FAIR VALUE OF FINANCIAL INSTRUMENTS

The cost, gross unrealized gains, gross unrealized losses, and fair market value of available-for-sale securities at ~~January~~October 31, 2018 and April 30, ~~2017,~~2018, respectively, ~~are~~were as follows (in thousands):

January 31, 2018
Cost Gross Unrealized Gains Gross Unrealized Losses Fair Market Value
Fixed income securities $ 6,275 $ 46 $ (81 ) $ 6,240
Equity securities - - - -
$ 6,275 $ 46 $ (81 ) $ 6,240

April 30, 2017
Cost Gross Unrealized Gains Gross Unrealized Losses Fair Market Value
Fixed income securities $ 1,516 $ 60 $ - $ 1,576
Equity securities 5,230 1,248 (239 ) 6,239
$ 6,746 $ 1,308 $ (239 ) $ 7,815

~~Table of Contents~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

	October 31, 2018
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Fixed income securities	$	7,522	$	3	$	(184	)	$	7,341

	April 30, 2018
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Market Value
Fixed income securities	$	6,274	$	10	$	(135	)	$	6,149

The following table presents the fair value and unrealized losses, aggregated by investment type and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

Less than 12 months 12 Months or more Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
January 31, 2018
Fixed Income Securities $ 4,879 $ (81 ) $ 98 $ - $ 4,977 $ (81 )
Equity Securities - - - - - -
$ 4,879 $ (81 ) $ 98 $ - $ 4,977 $ (81 )
April 30, 2017
Fixed Income Securities $ - $ - $ - $ - $ - $ -
Equity Securities 219 (9 ) 1,024 (230 ) 1,243 (239 )
$ 219 $ (9 ) $ 1,024 $ (230 ) $ 1,243 $ (239 )

	Less than 12 months					12 Months or more				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
October 31, 2018
Fixed Income Securities	$	6,023	$	(177	)	$	-	$	-	$	6,023	$	(177	)
April 30, 2018
Fixed Income Securities	$	5,334	$	(135	)	$	-	$	-	$	5,334	$	(135	)

The Company regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. The Company does not believe that its investments in marketable securities with unrealized losses at ~~January~~October 31, 2018 ~~are~~were other-than-temporary due to market volatility of the security’s fair value, analysts’ expectations, and the Company’s ability to hold the securities for a period of time sufficient to allow for any anticipated recoveries in market value.

During the ~~nine~~six and three months ended ~~January~~October 31, 2018, the Company sold or redeemed available-for-sale securities in the amounts of ~~$6.5 million,~~$947,110 and $325,110, respectively, realizing gains of approximately ~~$1 million.~~$2,000 in both periods. During the ~~nine~~six and three months ended ~~January~~October 31, 2017, the Company sold or redeemed available-for-sale securities in the amount ~~$3.9~~$6.5 million and $204,000, respectively, realizing gains of approximately ~~$14,000.~~

$1.0 million and $4,000, respectively.

Maturities of fixed income securities classified as available-for-sale at ~~January~~October 31, 2018 ~~are~~were as follows at(at cost, ~~(in~~in thousands):

Current	$	1,114
Due after one year through five years		2,898
Due after five years through ten years		3,510
	$	7,522

Table of Contents

Current $ 450
Due after one year through five years 2,214
Due after five years through ten years 3,611
$ 6,275

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The fair value accounting framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities ~~(level~~(Level 1 measurements) and the lowest priority to unobservable inputs ~~(level~~(Level 3 measurements). ~~The three levels of the fair value hierarchy are described below:~~

~~Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.~~

~~Level 2 Inputs to the valuation methodology include:~~

~~- Quoted prices for similar assets or liabilities in active markets;~~

~~- Quoted prices for identical or similar assets or liabilities in inactive markets~~

~~- Inputs other than quoted prices that are observable for the asset or liability; and~~

~~- Inputs that are derived principally from or corroborated by observable market data by correlation or other means.~~

~~Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement.~~

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. All of the Company’s investments in marketable securities are valued on a Level 1 basis.

~~Table of Contents~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

NOTE J – RECENT ACCOUNTING PRONOUNCEMENTS

In January 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under ASU 2017-04 goodwill impairment will be tested by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2019, with early adoption permitted. The Company will not be adopting ASU 2017-04 ~~early, and~~early. Although the Company is still in the process of determining the effect that ASU 2017-04 may have, ~~however, the Company~~it expects the new standard towill likely not have ~~an immaterial~~a material effect on its financial ~~statements.~~

~~In August 2016, the FASB issued ASU 2016-15,~~ ~~Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments~~ (“ASU 2016-15”) which clarifies how certain cash receipts and payments should be presented in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017 and early adoption is permitted. The update is not expected to have a material impact on the financial statements when ~~it becomes effective~~adopted in ~~the first quarter of~~ fiscal ~~year 2019.~~

2021.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which replaces the incurred loss impairment methodology in current ~~generally accepted accounting principles (“GAAP”)~~GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance is effective for fiscal years beginning after December 15, 2019. The Company is evaluating the effect, if any, the update will have on the financial statements when adopted in fiscal ~~year~~ 2021.

In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) (“ASU 2016-02”). The objective of the update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard requires a modified retrospective transition approach for leases existing ~~leases.~~at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The amendments of ASU 2016-02 are effective for fiscal years beginning after December ~~31,~~15, 2018 and early adoption is permitted. ~~While the~~The Company does not intend to adopt this update early and is currently ~~evaluating~~re-evaluating the impact of this standard on its consolidated financial statements, due to the ~~Company has minimal leases~~new lease amendment dated July 25, 2018, for the Company’s headquarters in New York, and expects that adoption will materially increase our assets and liabilities on the consolidated financial statements related to recording right-of-use assets and corresponding lease liabilities when adopted beginning in fiscal ~~year 2019,~~2020.

In August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (Topic 820) (“ASU 2018-13”) which modifies the disclosure requirement on fair value measurements. The new ~~standard~~guidance is effective for fiscal years beginning after December 15, 2019. The Company is evaluating the effect, if any, the update will have ~~an immaterial effect~~ on the ~~Company’s financials.~~financial statements when adopted in fiscal 2021.

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Newly Adopted Accounting Standards

Revenue from Contracts with Customers

In May 2014, the FASB issued ASU No. 2014-09,, Revenue from Contracts with Customers (Topic 606). (“ASU 2014-09”), as amended, which establishes new guidance for revenue recognition. ASU 2014-09 eliminates most of the existing industry-specific revenue recognition guidance and significantly expands related disclosures. Additionally, it supersedes some cost guidance in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts, and creates a new Subtopic 340-40, Other Assets and Deferred Costs-Contracts with Customers. The ~~required disclosures~~Company determines revenue recognition through the following steps: identification of the contract, or contracts, with the customer; identification of the performance obligations in the contract; determination of the transaction price; allocation of the transaction price to the performance obligations in the contract; and recognize revenue when, or as, the entity satisfies a performance obligation. The core principle of the guidance is that the Company will recognize revenue upon the transfer of the promised goods and services to its customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services. The new guidance requires significant additional judgement and estimation (as compared to the previous guidance) that may include, ~~both quantitative~~but is not limited to, identifying performance obligations and ~~qualitative information about~~estimating the amount of variable consideration, if any, to include in the transaction price, and allocation of the transaction price to the performance obligations. The new standard allows for two methods of adoption, either by (i) retrospectively to each prior reporting period presented (“full retrospective method”) or (ii) retrospectively with the cumulative effect of initially applying the new guidance recognized at the date of initial application (“modified-retrospective method”). The Company adopted ASU 2014-09 in the first quarter of fiscal 2019 using the modified-retrospective method, which resulted in a cumulative effect increase of $484,000, including the adoption of ASC 340-40 as noted below, as of the date of adoption on May 1, 2018, to retained earnings. The adoption of ASU 2014-09 effected all new and open contracts as of the adoption date.

In connection with the adoption of Topic 606 on May 1, 2018, the Company also adopted the guidance in ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers (“ASC 340-40”), with respect to capitalization and amortization of incremental costs of obtaining a contract. The new cost guidance requires the capitalization of all incremental costs incurred to obtain a contract with a customer that it would not have incurred if the contract had not been obtained, provided it expects to recover the costs. The Company expects that sales commissions as a result of obtaining customer contracts are recoverable, and therefore the Company defers and capitalizes them as contract costs. As a result of this new guidance, the Company capitalizes sales commissions for which the expected amortization period is greater than one year. The Company classifies the unamortized portion of deferred commissions as current or noncurrent assets based upon the timing of when the Company expects to recognize the expense. The current and ~~uncertainty~~noncurrent portion of deferred commissions are included in prepaid expenses and other current assets, respectively, in the Company’s Condensed Consolidated Balance Sheet. Adoption of ASC 340-40 resulted in a cumulative effect adjustment of $87,000 to total assets, $109,000 to total liabilities, and a $22,000 reduction to retained earnings, as of the date of adoption, on May 1, 2018.

The Company’s new accounting policies as a result of adopting ASU 2014-09 are discussed below.

Revenue Recognition

Revenue is recognized when a performance obligation is satisfied, which is when the expected goods or services are transferred to the customer, in an amount that reflects the consideration to which the Company expects to receive. A performance obligation is a distinct product or service that is transferred to the customer based on the contract. The transaction price is allocated to each performance obligation and is recognized as revenue upon satisfaction of that performance obligation. The company derives revenue from contracts with customers by units sold with specific specifications and frequencies that are used by a specific customer and contracts where the ~~significant judgments used. Entities can retrospectively apply ASU 2014-09~~end user is the government. The Company’s contracts typically include multiple performance obligations which are satisfied either by shipped projects or ~~use an alternative transition~~the completion of milestones as defined in the contract. The transaction price is allocated either (i) based on the sale price of each item shipped or (ii) as defined by the milestones stated in the contract.

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Revenues under larger, long-term contracts which generally require billings based on achievement of milestones rather than delivery of product, are reported in operating results using the Percentage of Completion (“POC”) method. ~~In July 2015, the FASB approved a one-year deferral~~On fixed-price contracts, which are typical for commercial and U.S. Government satellite programs and other long-term U.S. Government projects, and which require initial design and development of the ~~effective date of ASU 2014-09. ASU 2014-09~~product, revenue is ~~effective for public companies for annual reporting periods beginning~~recognized on ~~or after December 15, 2017, and~~ the ~~Company, must adopt the ASU on May 1, 2018, for fiscal year 2019. The Company~~cost-to-cost method. Under this method, revenue is ~~currently evaluating the impact that ASU 2014-09 may have on its financial statements when the statement is adopted for its fiscal year 2019. The Company has completed an evaluation~~recorded based upon ~~our various~~the ratio that incurred costs bear to total estimated contract ~~types. If ASU 2014-09 does require adjustments~~costs with related cost of sales recorded as the costs are incurred. Each month management reviews estimated contract costs through a process of aggregating actual costs incurred and estimating additional costs to completion based upon the current available information and status of the contract. The effect of any change in the estimated gross margin rate (“GM Rate”) for a contract is reflected in revenues in the period in which the change is known. Provisions for the full amount of anticipated losses on contracts are made in the period in which they become determinable.

On production-type orders, revenue is recorded as units are delivered with the related cost of sales recognized on each shipment based upon a percentage of estimated final program costs. Changes in job performance on long-term contracts and production-type orders may result in revisions to costs and income and are recognized in the period in which revisions are determined to be required. Provisions for anticipated losses on customer orders are made in the period in which they become determinable.

For customer orders in the Company’s FEI-Zyfer segment or smaller contracts or orders in the FEI-NY segment, sales of products and services to customers are reported in operating results based upon (i) shipment of the product or (ii) performance of the services pursuant to terms of the customer order. When payment is contingent upon customer acceptance of the installed system, revenue is deferred until such acceptance is received and installation completed.

In connection with the adoption of Topic 606, there were changes to the timing of the Company’s revenue recognition associated with the significant portion of our business that was not being accounted for as percentage of completion in prior years for contracts where the end customer was the U.S. Government. These production-type contracts under which revenue was previously recorded as Passage of Title (“POT”) are currently being recognized as POC following adoption of this ASU. As a result, the Company ~~expects that~~will begin recognizing revenue earlier under these contracts. The Company’s products generally carry a one-year warranty, but may vary based on the ~~initial prospective adjustments~~contract terms.

Significant judgment is used in evaluating the financial information for certain contracts related to ~~retained earnings required~~the adoption of this ASU to ~~bring~~determine an appropriate budget and estimated cost. The Company evaluates this information continuously and bases its judgments on historical experience, design specifications, and expected costs for material and labor.

Practical Expedients

The Company expenses sales commissions as sales and marketing expenses in the period they are incurred if the expected amortization period is one year or less.

The Company expenses costs, other than sales commissions, to obtain a contract in the period for which they are incurred as these amounts would have been incurred even if the contract had not been obtained.

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Disaggregation of Revenue

Total revenue related to the adoption ASU 2014-09 and recognized over time as POC was approximately $20.4 million of the $23.2 million reported for the six months ended October 31, 2018, and $11.2 million of the $12.1 million reported for the three months ended October 31, 2018. The amounts by segment and product line are as follows:

	Six Months Ended October 31, 2018
	(In thousands)
	POC Revenue			POT Revenue			Total Revenue
FEI-NY	$	17,199		$	1,123		$	18,322
FEI-Zyfer		3,233			1,870			5,103
Intersegment		(36	)		(236	)		(272	)
Revenue	$	20,396		$	2,757		$	23,153

	Three Months Ended October 31, 2018
	(In thousands)
	POC Revenue			POT Revenue			Total Revenue
FEI-NY	$	9,120		$	625		$	9,745
FEI-Zyfer		2,058			484			2,542
Intersegment		(30	)		(115	)		(145	)
Revenue	$	11,148		$	994		$	12,142

	Periods ended October 31,
	Six months				Three months
	2018		2017		2018		2017
	(In thousands)
Revenue by Product Line:
Satellite Revenue	$	11,302	$	8,998	$	5,768	$	3,799
Government Non-Space Revenue		10,420		7,706		5,639		3,158
Other Commercial & Industrial Revenue		1,431		4,656		735		2,380
Consolidated revenues	$	23,153	$	21,360	$	12,142	$	9,337

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The cumulative effect of changes made to the Condensed Consolidated Balance Sheet as of May 1, 2018 was as follows (in thousands):

	Balance at April 30, 2018			Adjustments				Balance at May 1, 2018
ASSETS
Costs and estimated earnings in excess of billings, net	$	5,094		$	1,435		(a)	$	6,529
Inventories, net		26,186			(929	)	(b)		25,257
Prepaid expenses and other		1,050			77		(c)		1,127
Total current assets		52,075			583				52,658
Other assets		2,850			10		(d)		2,860
Total assets		83,584			593				84,177

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accrued liabilities	$	3,416		$	97		(e)	$	3,513
Total current liabilities		5,257			97				5,354
Deferred rent and other liabilities		1,524			12		(f)		1,536
Total liabilities		20,322			109				20,431
(Accumulated deficit) Retained Earnings		(65	)		484		(g)		419
Total stockholders’ equity		63,262			484				63,746
Total liabilities and stockholders’ equity		83,584			593				84,177

Notes:

(a) Adjustment to unbilled accounts receivable for additional revenue recognized for which amounts have not been invoiced due to adoption of Topic 606

(b) Adjustment for additional allocated inventory costs related to additional revenue recognized due to adoption of Topic 606

(c) Adjustment for short-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40

(d) Adjustment for long-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40

(e) Adjustment to record short-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40

(f) Adjustment to record long-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40

(g) The cumulative effect of initially adopting Topic 606 and ASC 340-40 using the modified-retrospective method as an adjustment to the beginning balance of (Accumulated deficit) Retained earnings.

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The impact of adopting the standard on the Company’s consolidated financial statements ~~into compliance may be material. While future differences, if any, between current GAAP accounting~~for the six and ~~under ASU 2014-09 are~~three months ended October 31, 2018 were as follows (in thousands):

Condensed Consolidated Balance Sheet

	As Reported		Adjustments				Balances Without Adoption of ASU 2014-09
ASSETS
Costs and estimated earnings in excess of billings, net	$	7,047	$	3,487		(a)	$	3,560
Inventories, net		25,648		(1,994	)	(b)		27,642
Prepaid expenses and other		1,001		46		(c)		955
Total current assets		51,680		1,539				50,141
Other assets		3,628		5		(d)		3,623
Total assets		83,662		1,544				82,118

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accrued liabilities	$	3,179		61		(e)		3,118
Total current liabilities		4,252		61				4,191
Deferred rent and other liabilities		1,479		12		(f)		1,467
Total liabilities		19,438		73				19,365
Retained Earnings (Accumulated deficit)		572		1,471		(g)		(899	)
Total stockholders’ equity		64,224		1,471				62,753
Total liabilities and stockholders’ equity		83,662		1,544				82,118

Notes:

(a) Cumulative adjustment to unbilled accounts receivable for additional revenue recognized for which amounts have not ~~expected~~been invoiced due to ~~be material,~~adoption of Topic 606

(b) Cumulative adjustment for additional allocated inventory costs related to additional revenue recognized due to adoption of Topic 606

(c) Cumulative adjustment for short-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40

(d) Cumulative adjustment for long-term capitalization of sales commissions, net of amortized amounts, due to adoption of ASC 340-40

(e) Cumulative adjustment to record short-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40

(f) Cumulative adjustment to record long-term liability of sales commissions, net of amounts paid, due to adoption of ASC 340-40

(g) The cumulative effect of initially adopting for Topic 606 and ASC 340-40 using the ~~differences will depend on~~modified-retrospective method as an adjustment to the ~~timing~~balance of ~~transactions in any single reporting period.~~Retained earnings (Accumulated deficit).

Condensed Consolidated Statement of Operations

Six Months Ended October 31, 2018:	As Reported			Adjustments			Balances Without Adoption of ASU 2014-09
Revenues	$	23,153		$	2,052		$	21,101
Cost of revenues		14,860			1,065			13,795
Gross profit		8,293			989			7,304
Selling and administrative expenses		5,182			0	(a)		5,182
Operating profit (loss)		(146	)		988			(1,134	)
Income (loss) before provision for income taxes		130			988			(858	)
Net income (loss)		153			988			(835	)

Note:

(a) Additional expense related the amortization of sales commissions due to the adoptions of ASC 340-40

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Three Months Ended October 31, 2018:	As Reported			Adjustments				Balances Without Adoption of ASU 2014-09
Revenues	$	12,142		$	1,242			$	10,900
Cost of revenues		8,123			838				7,285
Gross profit		4,019			403				3,616
Selling and administrative expenses		2,642			(9	)	(a)		2,651
Operating profit (loss)		(230	)		413				(643	)
Income (loss) before provision for income taxes		92			413				(321	)
Net income (loss)		122			413				(291	)

Note:

(a) Additional expense related the amortization of sales commissions due to the adoptions of ASC 340-40

NOTE K – CREDIT FACILITY

On January 30, 2017, the Company repaid the principal balance due on its credit facility, dated June 6, 2013, with JPMorgan Chase Bank, N.A. Subsequently, the Company voluntarily terminated this credit facility with JPMorgan Chase Bank, N.A to reduce the fees and expenses associated with maintaining that facility. The Company did not incur any early termination fees associated with its voluntary termination of this credit facility. If, in the future, the Company determines that it would be beneficial to have a credit facility in place, the Company believes that alternative facilities are available. As ~~at January~~of October 31, 2018, the Company had available credit at variable terms based on its securities holdings under an advisory arrangement, under which no borrowings have been made.

~~Table of Contents~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

NOTE L – VALUATION ALLOWANCE ON DEFERRED TAX ASSETS

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover deferred tax assets in the jurisdiction from which they arise, we consider all positive and negative evidence, including the reversal of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of recent operations. ~~The carrying value~~Based on the weighting of all evidence, both positive and negative, most notably the ~~Company’s net~~three year cumulative loss, we established a full valuation allowance against our U.S. deferred tax assets ~~assumes that~~during the ~~Company will be able to generate sufficient future taxable income in certain jurisdictions, based on estimates and assumptions.~~quarter ended April 30, 2018. If these estimates and assumptions change in the future, the Company may be required to ~~record additional valuation allowances against its deferred tax assets resulting in additional income tax expense in the consolidated statement of operations, or conversely, to further reduce~~adjust its existing valuation allowance resulting in ~~less~~changes to deferred income tax expense. The Company evaluates the ~~realizability~~likelihood of realizing its deferred tax assets ~~and assesses the need for additional valuation allowance~~ quarterly. The valuation allowance of approximately $6.8 million as of January 31, 2018 is intended to provide for uncertainty regarding the ultimate realization of U.S. state investment credits carryovers, and foreign net operating loss and tax credit carryovers.

On December 22, 2017, the legislation commonly known as the Tax Cuts and Jobs Act (the “TCJA” or the “Tax Act”) was enacted into law. ~~The Tax Act makes comprehensive changes~~In response to the ~~U.S. tax code, including, but not limited to: (1) reducing~~TCJA, the U.S. ~~federal corporate tax rate from 35% to 21%; (2) changing the rules related to uses~~Securities and ~~limitations of net operating loss~~Exchange Commission (“~~NOLs”~~SEC”) carryforwards created in tax years beginning after December 31, 2017 as well as the repeal of the current carryback provisions for NOLs arising in tax years ending after December 31, 2017; (3) immediate full expensing of certain qualified property; (4) creation of a new limitation on deductible interest expense; (5) elimination of the corporate minimum tax and (6) repeal of the deduction for income attributable to domestic production activities.

In accordance with ASC 740, “Income Taxes”, the Company is required to record the effects of tax law changes in the period enacted. During the three months ended January 31, 2018, we revalued our U.S. deferred tax assets at the lower federal corporate tax rate of 21%, which resulted in a noncash charge to income tax expense of approximately $4.8 million. For fiscal year taxpayers, the rate change is administratively effective at the beginning of the Company’s fiscal year, using a blended rate for the annual period. As such, the Company’s blended U.S. statutory tax rate for fiscal 2018 is approximately 29.7%. However, our U.S. deferred tax assets inclusive of the fiscal 2018 tax losses will be realized in future tax years at the lower corporate tax rate of 21%.

~~The SEC~~ issued Staff Accounting Bulletin No. 118 (“~~SAB”~~SAB 118”) ~~118,~~, which provides guidance on accounting for the tax effects of ~~the~~ TCJA. The purpose of SAB 118 ~~provides a measurement~~was to address any uncertainty or diversity of view in applying ASC Topic 740, Income Taxes in the reporting period ~~that should not extend beyond one year from~~in which the TCJA ~~enactment date for companies to complete~~was enacted. SAB 118 addresses situations where the accounting ~~under ASC 740. To the extent that a company’s accounting~~is incomplete for certain income tax effects of the TCJA ~~is incomplete but is able~~upon issuance of a company’s financial statements for the reporting period which include the enactment date. SAB 118 allows for a provisional amount to ~~determine~~be recorded if it is a reasonable estimate ~~it must record~~of the impact of the TCJA. Additionally, SAB 118 allows for a measurement period to finalize the impacts of the TCJA, not to extend beyond one year from the date of enactment.

The Company’s accounting for certain elements of the TCJA was incomplete as of April 30, 2018, and remains incomplete as of October 31, 2018. However, the Company was able to make reasonable estimates of the effects and, therefore, recorded provisional ~~estimate in~~estimates for these items during the ~~financial statements. We have recorded a provisional reduction~~periods ended January 31, 2018 and April 30, 2018. There were no changes to ~~our U.S. deferred tax assets to reflect~~ the ~~new U.S. federal corporate tax rate.~~

estimates during the six and three months ended October 31, 2018.

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:

The statements in this quarterly report on Form 10-Q regarding future earnings and operations and other statements relating to the future constitute “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1933 or the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “believe,” “may,” “will,” “could,” “should,” “would,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “objective,” “seek,” “strive,” “might,” “likely result,” “build,” “grow,” “plan,” “goal,” “expand,” “position,” or similar words, or the negatives of these words, or similar terminology, identify forward-looking statements. All statements by the Company that address activities, events or developments that the Company expects or anticipates will occur in the future, including all statements by the Company regarding its expected financial position, revenues, cash flows and other operating results, business position, legal proceedings or similar matters, are forward-looking statements. These statements are based on assumptions that the Company believes are reasonable, but are subject to a wide range of risks and uncertainties, and a number of factors could cause the Company’s actual results to differ materially from those expressed in the forward-looking statements referred to above. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company’s products in the marketplace, competitive factors, new products and technological changes, product prices and raw material costs, dependence upon third-party vendors, competitive developments, changes in manufacturing and transportation costs, changes in contractual terms, the availability of capital, and other risks detailed in the Company’s periodic report filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which relate only to events as of the date on which the statements are made and which reflect management’s analysis, judgments, belief, or expectation only as of such date. ~~By making these~~Any and all of the forward-looking statements contained in this Form 10-Q and any other public statement by the Company ~~undertakes no~~or its management may turn out to be incorrect. The Company expressly disclaims any obligation to update ~~these statements after the date such~~or revise any forward-looking statement, ~~was first made.~~

whether as a result of new information, future events or otherwise, except as required by law.

Critical Accounting Policies and Estimates

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended April 30, ~~2017,~~2018, filed on July ~~31, 2017.~~30, 2018. The Company believes its most critical accounting policies to be the recognition of revenue and costs on production contracts, income taxes, and the valuation of inventory. Each of these areas requires the Company to make use of reasoned estimates including estimating the cost to complete a contract, the net realizable value of its inventory or the market value of its products. Changes in estimates can have a material impact on the Company’s financial position and results of operations.

The Company’s significant accounting policies did not change during the six and three months ended October 31, 2018, except for those impacted by the newly adopted accounting standard below.

Revenue Recognition

Revenue is recognized when a performance obligation is satisfied, when the expected goods or services are transferred to the customer, in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. A performance obligation is a distinct product or service that is transferred to the customer’s control based on the contract. The transaction price is allocated to each performance obligation and is recognized as revenue upon satisfaction of that performance obligation. The company derives revenue either as (i) units with specifications and frequencies that can be used by multiple customers (POT) or (ii) units with specific specifications and frequencies that are used by a specific customer or for government end use (POC).

In prior years a significant portion of our business that was not being accounted for as POC was from contracts where the end customer is the U.S. Government. These production-type contracts under which revenue was previously recorded as POT are currently being recognized as POC following adoption of ASU 2014-09 as noted in Note J to the condensed consolidated financial statements in Part I, Item I of this form 10-Q (“Note J”). As a result, the Company will begin recognizing revenue earlier under these contracts.

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

Revenues under larger, long-term contracts which generally require billings based on achievement of milestones rather than delivery of product, are reported in operating results using the ~~percentage of completion~~POC method. On fixed-price contracts, which are typical for commercial and U.S. Government satellite programs and other long-term U.S. Government projects, and which require initial design and development of the product, revenue is recognized on the cost-to-cost method. Under this method, revenue is recorded based upon the ratio that incurred costs bear to total estimated contract costs with related cost of sales recorded as the costs are incurred. Each month management reviews estimated contract costs through a process of aggregating actual costs incurred and estimating additional costs to completion based upon the current available information and status of the contract. The effect of any change in the estimated ~~gross margin percentage~~GM Rate for a contract is reflected in revenues in the period in which the change is known. Provisions for the full amount of anticipated losses on contracts are made in the period in which they become determinable.

On production-type orders, revenue is recorded as units are delivered with the related cost of sales recognized on each shipment based upon a percentage of estimated final program costs.

Changes in job performance on long-term contracts and production-type orders may result in revisions to costs and income and are recognized in the period in which revisions are determined to be required. Provisions for anticipated losses on customer orders are made in the period in which they become determinable.

~~Table of Contents~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~(Continued)~~

Costs and Expenses

Contract costs include all direct material costs, direct labor costs, manufacturing overhead and other direct costs related to contract performance. Selling, general and administrative costs are expensed as ~~incurred.~~

incurred, except as otherwise noted in Note J above in relation to the adoption of ASU 2014-09.

Inventory

In accordance with industry practice, inventoried costs contain amounts relating to contracts and programs with long production cycles, a portion of which will not be realized within one year. Inventory ~~write downs~~write-downs are established for slow-moving or obsolete items and costs incurred on programs for which production-level orders cannot be determined as probable. Such ~~write downs~~write-downs are based upon management’s experience and expectations for future business. Any changes arising from revised expectations are reflected in cost of sales in the period the revision is made.

Marketable Securities

All of the Company’s investments in marketable securities are Level 1 securities which trade on public markets and have current prices that are readily available. In general, investments in fixed income securities are only in the commercial paper of financially sound corporations or the bonds of U.S. Government agencies. Although the value of such investments may fluctuate significantly based on economic factors, the Company’s own financial strength enables it to wait for the securities to either recover their value or to mature such that any interim unrealized gains or losses are deemed to be temporary.

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

RESULTS OF OPERATIONS

The table below sets forth for the ~~respective periods of fiscal years~~six and three months ended October 31, 2018 and 2017 ~~(which end on April 30, 2018 and 2017, respectively)~~ the percentage of consolidated revenues represented by certain items in the Company’s condensed consolidated statements of ~~operations:~~

Nine months Three months
Periods ended January 31,
2018 2017 2018 2017
Revenues
FEI-NY 69.5 % 79.0 % 61.0 % 83.1 %
FEI-Zyfer 38.8 27.5 42.7 25.3
Less intersegment revenues (8.3 ) (6.5 ) (3.7 ) (8.4 )
100.0 100.0 100.0 100.0
Cost of revenues 87.9 68.6 127.0 71.3
   Gross margin 12.1 31.4 (27.0 ) 28.7
Selling and administrative expenses 24.4 24.6 26.0 24.9
Research and development expenses 15.9 14.0 16.2 11.7
   Operating loss (28.2 ) (7.2 ) (69.2 ) (7.9 )
Other income, net 3.7 0.9 0.5 0.8
Provision (benefit) for income taxes 8.6 (4.0 ) 27.0 (10.4 )
(Loss) from continued operations (33.1 ) (2.3 ) (95.7 ) 3.3
(Loss) from discontinued operations, net assets (2.2 ) (1.7 ) (2.7 ) (0.3 )
   Net (loss) income (35.3 )% (4.0 )% (98.4 )% 3.0 %

~~Table of Contents~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~(Continued)~~

operations or notes to the condensed consolidated financial statements:

	Six months						Three months
	Periods ended October 31,
	2018			2017			2018			2017
Revenues
FEI-NY		79.1	%		73.7	%		80.3	%		70.5	%
FEI-Zyfer		22.0			36.8			20.9			38.5
Less intersegment revenues		(1.1	)		(10.5	)		(1.2	)		(9.0	)
		100.0			100.0			100.0			100.0
Cost of revenues		64.2			68.5			66.9			76.4
Gross margin		35.8			31.5			33.1			23.6
Selling and administrative expenses		22.4			23.6			21.8			25.0
Research and development expenses		14.1			15.8			13.2			18.6
Operating loss		(0.7	)		(7.9	)		(1.9	)		(20.0	)
Other income (loss), net		1.2			5.3			2.7			(0.1	)
Benefit for income taxes		(0.1	)		(0.5	)		(0.2	)		(6.3	)
Income (Loss) from continued operations		0.6			(2.1	)		1.0			(13.8	)
(Loss) from discontinued operations, net of tax		0.0			(1.9	)		0.0			(2.1	)
Net income (loss)		0.6	%		(4.0	)%		1.0	%		(15.9	)%

Revenues

Nine months Three months
Periods ended January 31,
Segment 2018 2017 Change 2018 2017 Change
FEI-NY $ 22,184 $ 27,176 $ (4,992 ) (18.4 )% $ 6,444 $ 9,461 $ (3,017 ) (31.9 )%
FEI-Zyfer 12,378 9,473 2,905 30.7 4,514 2,877 1,637 56.9
Intersegment revenues (2,630 ) (2,238 ) (392 ) 17.6 (386 ) (955 ) 569 (59.6 )
$ 31,932 $ 34,411 $ (2,479 ) (7.2 )% $ 10,572 $ 11,383 $ (811 ) (7.1 )%

	Six months											Three months
	Periods ended October 31,
Segment	2018			2017			Change					2018			2017			Change
FEI-NY	$	18,322		$	15,740		$	2,582		16.4	%	$	9,745		$	6,579		$	3,166		48.1	%
FEI-Zyfer		5,103			7,865			(2,762	)	(35.1	)		2,542			3,593			(1,051	)	(29.3	)
Intersegment revenues		(272	)		(2,245	)		1,973		(87.9	)		(145	)		(835	)		690		(82.6	)
	$	23,153		$	21,360		$	1,793		8.4	%	$	12,142		$	9,337		$	2,805		30.0	%

For the ~~nine~~six months ended ~~January~~October 31, 2018, revenues from commercial and U.S. Government satellite programs ~~decreased~~increased approximately ~~$5.4~~$2.3 million over the same period of the previous fiscal year, ~~2017,~~ and accounted for approximately ~~36%~~49% of consolidated revenues compared to approximately ~~49%~~42% during this same period in fiscal ~~2017.~~2018. Revenues on these contracts are recognized primarily under the ~~percentage of completion~~POC method. Revenues from the satellite market are recorded in the FEI-NY segment. Revenues from non-space U.S. Government/Department of Defense (“DOD”) customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, increased ~~$1.0~~$2.7 million over the same period of fiscal ~~2017,~~2018, and accounted for approximately ~~44%~~45% of consolidated revenues compared to approximately ~~37%~~36% during this same period in fiscal ~~2017.~~2018. Other commercial and industrial revenues in ~~the~~this fiscal ~~year 2018~~2019 period accounted for approximately ~~20%~~6% of consolidated revenues compared to ~~14%~~22% in the prior year. Intersegment revenues are eliminated in consolidation.

For the three months ended ~~January~~October 31, 2018 revenues from commercial and U.S. Government satellite programs ~~decreased~~increased approximately ~~$3.8~~$2.0 million over the same period of fiscal ~~year 2017,~~2018, and accounted for approximately ~~23%~~48% of consolidated revenues compared to approximately ~~55%~~41% during this same period in fiscal ~~2017.~~2018. Revenues from non-space U.S. Government/DOD customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, increased ~~$2.3~~$2.5 million over the same period of fiscal ~~2017,~~2018, and accounted for approximately ~~59%~~46% of consolidated revenues compared to approximately 34% during this same period in fiscal ~~2017.~~2018. Other commercial and industrial revenues for the three months ended ~~January~~October 31, ~~2017~~2018 accounted for approximately ~~18%~~6% of consolidated revenues compared to ~~11%~~26% during this same period in the prior year.

Table of Contents

~~Based on current backlog, satellite payload revenue for FY2018 is expected to be lower when compared to FY2017, both in total revenue~~

FREQUENCY ELECTRONICS, INC. and ~~as a percent of overall revenue. The Company anticipates a significant increase in satellite related bookings and accordingly, with increasing revenues to follow in the coming fiscal year.~~ SUBSIDIARIES

(Continued)

Gross Margin

	Six months										Three months
	Periods ended October 31,
	2018			2017			Change				2018			2017			Change
	$	8,293		$	6,724		$	1,569	23.3	%	$	4,019		$	2,203		$	1,816	82.4	%
GM Rate		35.8	%		31.5	%						33.1	%		23.6	%

For the foreseeable future satellite payloads will continue to be a major business area for the Company and represent a significant portion of the company’s overall revenue. Revenues from non-space programs are also anticipated to increase in the coming fiscal year as a result of bids either in progress or from proposals previously submitted.

~~Gross margin~~

Nine months Three months
Periods ended January 31,
2018 2017 Change 2018 2017 Change
$ 3,872 $ 10,821 $ (6,949 ) (64.2 )% $ (2,852 ) $ 3,267 $ (6,119 ) (187.3 )%
GM Rate 12.1 % 31.4 % (27.0 %) 28.7 %

~~For the nine~~six and three month period ended ~~January~~October 31, ~~2017~~2018 gross margin and ~~gross margin rate decreased~~GM Rate increased over the same period in fiscal ~~2017.~~2018. The increase to both the gross margin and ~~gross margin rate decrease is primarily~~GM Rate was due to ~~a $5.0 million inventory write downs,~~increased revenues, lower ~~revenues, increased~~ repair ~~costs~~cost and ~~unabsorbed manufacturing overhead costs.~~

~~Table of Contents~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~(Continued)~~

product mix.

Selling and ~~administrative expenses~~Administrative Expenses

Nine months Three months
Periods ended January 31,
2018 2017 Change 2018 2017 Change
$ 7,796 $ 8,483 $ (687 ) (8.1 )% $ 2,749 $ 2,834 $ (85 ) (3.0 )%

Six months								Three months
Periods ended October 31,
2018		2017		Change				2018		2017		Change
$	5,182	$	5,046	$	136	2.7	%	$	2,642	$	2,335	$	307	13.2	%

For the ~~nine~~six months ended ~~January~~October 31, 2018 and 2017, selling and administrative (“SG&A”) expenses were approximately ~~24%~~22% and ~~25%~~24%, respectively, of consolidated revenues. For the three months periods ended ~~January~~October 31, 2018 and 2017, SG&A expenses were approximately ~~26%~~22% and 25% respectively, of consolidated revenues. The ~~majority of~~increase in SG&A expenses during the ~~reduction occurred in corporate deferred compensation expense,~~six and three months ended October 31, 2018, as compared to the six and three months ended October 31, 2017, was due to additional personnel related expenses and professional fees, ~~and stock option expense.~~

partially offset by reductions in various other SG&A accounts.

Research and ~~development expense~~Development Expense

Nine months Three months
Periods ended January 31,
2018 2017 Change 2018 2017 Change
$ 5,071 $ 4,832 $ 239 4.9 % $ 1,708 $ 1,337 $ 371 27.7 %

Six months									Three months
Periods ended October 31,
2018		2017		Change					2018		2017		Change
$	3,257	$	3,364	$	(107	)	(3.2	)%	$	1,607	$	1,734	$	(127	)	(7.3	)%

Research and development (“R&D”) expenditures represent investments intended to keep the Company’s products at the leading edge of time and frequency technology and enhance future competitiveness. The R&D rate for the ~~nine~~six month period ending ~~January~~October 31, 2018 was ~~16%~~14% compared to ~~14%~~16% of sales for the same period of the previous fiscal year. The R&D rate for the three month period ending ~~January~~October 31, 2018 was ~~16%~~13% compared to ~~12%~~19% of sales for the same period of the previous fiscal year. Customer funded R&D development recorded in revenues is expected to add substantially to overall R&D activity in the full current fiscal year compared to fiscal 2018.

Operating Income (Loss)

Six months										Three months
Periods ended October 31,
2018			2017			Change				2018			2017			Change
$	(146	)	$	(1,686	)	$	1,540	(91.3	)%	$	(230	)	$	(1,866	)	$	1,636	(87.7	)%

The Company expects the level of activity related to R&D to continue through the current year and beyond to address new large opportunities in secure communications/command and control applications, next generation satellite payload product and additional DOD and commercial markets.

~~Operating loss~~

Nine months Three months
Periods ended January 31,
2018 2017 Change 2018 2017 Change
$ (8,995 ) $ (2,494 ) $ (6,501 ) 260.7 % $ (7,309 ) $ (904 ) $ (6,405 ) 708.5 %

The Company reported approximately $8.3 million of non-cash charges to earnings compared to $3.8 million of non-cash charges, during the nine months ended January 31, 2018 and 2017 respectively. The nine and three month periods ending January 31, 2018 include a $5.0 million inventory write down. The Company recorded decreasedhad increased revenue, gross margin, and ~~gross margin rate~~GM Rate in the six and three months ending ~~January~~October 31, 2018 ~~leading to increased losses for the nine months ending January 31, 2018~~resulting in reduced operating loss as compared to the same periods of the preceding fiscal year.

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

Other ~~income~~Income (Expense)

Nine months Three months
Periods ended January 31,
2018 2017 Change 2018 2017 Change
Investment income $ 1,236 $ 387 $ 849 219.4 % $ 68 $ 108 $ (40 ) (37.0 )%
Interest expense (61 ) (128 ) 67 (52.3 )% (19 ) (61 ) 42 (68.9 )%
Other income, net 4 50 (46 ) (92.0 )% 1 49 (48 ) (98.0 )%
$ 1,179 $ 309 $ 870 281.6 % $ 50 $ 96 $ (46 ) (47.9 )%

	Six months											Three months
	Periods ended October 31,
	2018			2017			Change					2018			2017			Change
Investment income	$	189		$	1,167		$	(978	)	(83.8	)%	$	144		$	13		$	131	NM	%
Interest expense		(34	)		(41	)		7		(17.1	)%		(17	)		(21	)		4	(19.0	)%
Other income (expense), net		121			3			118		NM	%		195			-			195	NM	%
	$	276		$	1,129		$	(853	)	(75.6	)%	$	322		$	(8	)	$	330	NM	%

Investment income is derived primarily from the Company’s holdings of marketable securities. Earnings on these securities ~~may~~ vary based on fluctuating interest rates, dividend payout levels, and the timing of purchases or sales of securities. ~~For the three months ending January 31, 2018 investment income was lower than in the same period of fiscal year 2017, mainly due to in~~In the quarter ending July 31, 2017 the Company divested of all its holdings in equities securities in its investment account, which were converted to cash. ~~The Company has re-invested approximately $4.9 million of the cash generated from the sale of equities into fixed income securities.~~ As a result, the Company recorded gains of approximately $1.0 million during the ~~three~~six months ended ~~July~~October 31, 2017 as compared to nonegligible gain or loss in the same period of fiscal ~~year 2017.~~

2019. The ~~decrease~~change in ~~interest expense for the nine months ended January 31, 2017 compared to the same period of fiscal year 2017 is~~other income (expense) was the result of ~~there being no credit line borrowings during~~ the ~~nine months ending January 31, 2017.~~

proceeds of a life insurance policy of a retired key employee.

Income ~~tax (benefit)~~Tax Provision (Benefit)

Nine months Three months
Periods ended January 31,
2018 2017 Change 2018 2017 Change
$ 2,750 $ (1,392 ) $ 4,142 NM % $ 2,848 $ (1,188 ) $ 4,036 NM %
Effective tax rate on pre-tax book income:
(35.2 )% 63.7 % (39.2 )% 147 %

~~We have recorded a provisional reduction to our U.S. deferred tax assets to reflect~~

	Six months										Three months
	Periods ended October 31,
	2018			2017			Change				2018			2017			Change
	$	(23	)	$	(98	)	$	75	(76.5	)%	$	(30	)	$	(584	)	$	554	(94.9	)%
Effective tax rate on pre-tax book income:
		(17.7	)%		17.6	%						(32.6	)%		31.2	%

For the ~~new U.S. federal corporate tax rate. As a result, income tax expense for the three~~six months ended ~~January 31, 2018 includes a discrete income tax expense of approximately $4.8 million for the reduction in our net deferred tax assets.~~

The effective tax rate for the nine months ended January 31,2018 was (35.2) % compared to 63.7% in the nine months ended January 31, 2017. For the three months ended January 31, 2018 and 2017, the effective tax rates were (39.2) % and 147%, respectively. The current year effective tax rate primarily reflects the impact of the TCJA, deductible permanent differences and R&D credits included in the computation of U.S. federal and state income taxes.

The change in the effective tax rates in the nine and three months ended January 31, 2018 compared to prior periods is primarily due to changes in the earnings mix between U.S. and non-domestic operations, and discrete deferred income tax provisions related to the enactment of the TCJA and stock compensation in connection with the adoption of ASU 2016-09 in the first quarter of fiscal 2018. The new guidance requires all of the tax effects related to stock compensation be recorded discretely through income tax expense. Consequently, for the nine months ended January 31, 2018, the Company recorded a continuing operations income tax provision of $2,750, which includes a current year tax benefit of $2,255 which is reduced by a discrete income tax provision of $5,005. For the three months ended JanuaryOctober 31, 2018, the Company recorded an income tax ~~provision of $2,848, which includes a current tax~~ benefit of ~~$2,085~~$(22,600), which ~~is reduced by~~included a discrete income tax provision of ~~$4,933.~~

$36,700. The calculation of the overall income tax provision for the six months ended October 31, 2018 primarily consisted of foreign taxes and a discrete income tax provision related to the accrual of interest for unrecognized tax benefits. For the six months ended October 31, 2017, the Company recorded an income tax benefit of $(98,000).

For the three months ended October 31, 2018, the Company recorded an income tax benefit of $(29,700), which included a discrete income tax provision of $18,400. The calculation of the overall income tax provision for the three months ended October 31, 2018 primarily consisted of foreign taxes and a discrete income tax provision related to the accrual of interest for unrecognized tax benefits. For the three months ended October 31, 2017, the Company recorded an income tax benefit of $(584,000).

The effective tax rate for the six months ended October 31, 2018 was an income tax benefit of (17.7)% compared to an income tax provision of 17.6% in the comparable prior period. The effective rate for the six months ended October 31, 2018 differs from the U.S. statutory rate of 21% primarily due to the mix of domestic and foreign earnings, a discrete income tax provision related to the accrual of interest for unrecognized tax benefits, and domestic losses for which the Company is not recognizing an income tax benefit.

The effective tax rate for the three months ended October 31, 2018 was an income tax benefit of (32.6)% compared to an income tax provision of 31.2% in the comparable prior period. The effective rate for the three months ended October 31, 2018 differs from the U.S. statutory rate of 21% primarily due to the mix of domestic and foreign earnings, a discrete income tax provision related to the accrual of interest for unrecognized tax benefits, and domestic losses for which the Company is not recognizing an income tax benefit.

Based on the weighting of all evidence, both positive and negative, most notably the three-year cumulative loss, we established a full valuation allowance against our U.S. deferred tax assets during the quarter ended April 30, 2018. If these estimates and assumptions change in the future, the Company may be required to adjust its existing valuation allowance resulting in changes to deferred income tax expense. The Company evaluates the likelihood of realizing its deferred tax assets quarterly.

Table of Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

On December 22, 2017, the legislation commonly known as the Tax Cuts and Jobs Act was enacted into law. In response to the TCJA, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of TCJA. The purpose of SAB 118 was to address any uncertainty or diversity of view in applying ASC Topic 740, Income Taxes in the reporting period in which the TCJA was enacted. SAB 118 addresses situations where the accounting is incomplete for certain income tax effects of the TCJA upon issuance of a company’s financial statements for the reporting period which include the enactment date. SAB 118 allows for a provisional amount to be recorded if it is a reasonable estimate of the impact of the TCJA. Additionally, SAB 118 allows for a measurement period to finalize the impacts of the TCJA, not to extend beyond one year from the date of enactment.

The Company’s accounting for certain elements of the TCJA was incomplete as of the period ended April 30, 2018, and remains incomplete as of October 31, 2018. However, the Company was able to make reasonable estimates of the effects and, therefore, recorded provisional estimates for these items during the periods ended January 31, 2018 and April 30, 2018. There were no changes to the estimates during the six months ended October 31, 2018.

Discontinued Operations

Nine months Three months
Periods ended January 31,
2018 2017 Change 2018 2017 Change
Net Loss $ (697 ) $ (599 ) $ (98 ) 16.4 % $ (289 ) $ (42 ) $ (247 ) NM %

	Six months										Three months
	Periods ended October 31,
	2018		2017			Change					2018		2017		Change
Net Loss	$	0	$	(408	)	$	(408	)	100	%	$	0	$	192	$	192	100	%

The above table represents the net loss for the Gillam segment accounted for as discontinued operations as presented in Note B to the condensed consolidated financial ~~statements. For~~statements I Part I, Item 1 of this Form 10-Q. On April 26, 2018, the ~~9 months ended January 31,~~Company sold Gillam to a European entity, in a stock purchase agreement, for $1.0 million in cash received on April 27, 2018, ~~as compared~~and a note payable in three years for an additional $1.0 million. The loss recorded due to the ~~same periods~~sale of Gillam was approximately $359,000. The calculation of the loss was the carrying amount of the investment on FEI-NY’s books less the retained earnings and remaining equity amounts of Gillam reduced by the cash received and the value of the note receivable. As such Gillam’s results have been classified as discontinued operations in the accompanying Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for fiscal ~~year 2017, gross margin decreased approximately 18%. SG&A expenses and R&D expenses decreased by approximately $126,000 and $19,000 respectively, compared to the prior fiscal year.~~

2018.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s balance sheet continues to reflect a strong working capital position of ~~$53.9~~$47.4 million at ~~January~~October 31, 2018 and ~~$61.7~~$46.8 million at April 30, ~~2017.~~2018. Included in working capital at ~~January~~October 31, 2018 and April 30 ~~2017,~~2018, is ~~$13.2~~$11.3 million and ~~$10.0~~$14.0 million, respectively, ~~consisting~~ of cash, cash equivalents, and ~~marketable securities.~~short-term investments. The Company’s current ratio at ~~January~~October 31, 2018 ~~is 7.1~~was 12.1 to 1.

Cash ~~provided by~~used in operations for the ~~nine~~six months ended ~~January~~October 31, 2018 ~~were $2.8~~was $1.1 million compared to ~~$1.5~~$2.8 million provided by operations in the comparable fiscal ~~year 2017~~2018 period. The ~~increase~~decrease in cash flow in the fiscal ~~year~~2019 period ended October 31, 2018 ~~period~~ resulted primarily from an increase in accounts ~~receivable collections,~~receivables and a decrease in accounts payables offset by a decrease in inventory, compared to the balances as of the end of the previous fiscal ~~year.~~2018 period ended October 31, 2017. For the ~~nine-month~~six month periods ended ~~January~~October 31, 2018 and 2017, the Company incurred approximately ~~$8.3~~$2.2 million and ~~$3.8~~$1.5 million, respectively, of non-cash operating expenses including depreciation and amortization, inventory reserve adjustments, and accruals for employee benefit ~~programs and gain on sale of marketable securities.~~

programs.

Net cash used in investing activities for the six months ended October 31, 2018, was $2.6 million compared to $5.6 million provided by investing activities ~~for the nine months ended January 31, 2018, was $0.5 million compared to $85,000~~ in the same period of fiscal ~~year 2017.~~2018. During the fiscal ~~year 2018~~2019 period, marketable securities were sold or redeemed in the amount of ~~$6.5 million~~$947,000 compared to ~~$3.9~~$6.5 million of such redemptions during the fiscal ~~year 2017~~2018 period. For the fiscal ~~year 2018, $5.0~~2019 period, approximately $2.2 million of marketable securities were purchased. There were no marketable securities purchased for the same period in ~~2017.~~fiscal 2018. In the ~~nine~~six months ended ~~January~~October 31, 2018 and 2017, the Company acquired property, plant and equipment in the amount of approximately ~~$1.0~~$1.3 million and ~~$3.7 million,~~$883,000, respectively. The Company discontinued investing in equity securities in fiscal 2018 as part of its cash management strategy. The Company may continue to invest cash equivalents as dictated by its investment and acquisition strategies.

~~Net~~

There was no cash provided by financing activities for the ~~nine~~six months ended ~~January~~October 31, 2018 ~~and 2017 was $1,000~~ compared to ~~approximately $6.0 million used~~$1,000 provided in ~~financing activities. During~~ the ~~three~~six months ended ~~January~~October 31, ~~2017, the Company repaid the Note payable~~2017.

Table of ~~$6 million related to the Line of Credit with JPMorgan that has subsequently been terminated.~~Contents

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

The Company has been authorized by its Board of Directors to repurchase up to $5 million worth of shares of its common stock for treasury whenever appropriate opportunities arise but it has neither a formal repurchase plan nor commitments to purchase additional shares in the future.

As of ~~January~~October 31, 2018, the Company has repurchased approximately $4 million of its common stock out of the $5 million authorization. For the ~~nine~~six months ended ~~January~~October 31, 2018 and 2017, there were no ~~repurchase~~repurchases of shares.

The Company will continue to expend resources to develop, improve and acquire products for space applications, guidance and targeting systems, and communication systems which management believes will result in future growth and profitability. During fiscal ~~year 2017,~~2018, the Company secured partial customer funding for a portion of its R&D efforts. The customer funds received in connection therewith appear in revenues and are not included in R&D expenses. For fiscal ~~year 2018,~~2019, the Company ~~anticipates securing~~has secured significant additional customer funding for ~~a portion of~~ its ~~research and development~~R&D activities, and will allocate internal funds depending on market conditions and identification of new opportunities as in fiscal year ~~2017.~~2018. The Company expects internally generated cash will be adequate to fund these development efforts. The Company may also pursue acquisitions to expand its range of products and may use internally generated cash and external funding in connection with such acquisitions.

~~Table of Contents~~

~~FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES~~

~~(Continued)~~

As of ~~January~~October 31, 2018, the Company’s consolidated funded backlog iswas approximately ~~$16~~$38 million compared to ~~$28~~$30 million at April 30, ~~2017,~~2018, the end of fiscal ~~year 2017.~~2018. Approximately 80% of this backlog is expected to be realized in the next twelve months. Included in the backlog at ~~January~~October 31, 2018 iswas approximately ~~$7.6~~$8.5 million under cost-plus-fee ~~contracts which the Company believes represent firm commitments from its customers for which the Company has not received full funding to-date.~~contracts. The Company excludes from backlog any contracts or awards for which it has not received authorization to proceed and ~~on fixed price contracts excludes any unfunded portion.~~associated funding. The Company expects these contracts to become fully funded over ~~time and will add to its backlog at that~~ time.

The Company believes that its liquidity is adequate to meet its operating and investment needs through at least ~~March 19,~~December 14, 2019 and the foreseeable future.

Based upon the Company’s decision to sell its Gillam business and the associated presentation as Discontinued Operations, the Company believes that the effect on cash flow will be neutral. However, it is expected to have a positive cash effect when the intended sale is concluded. The Company is in active negotiation, with a potential foreign buyer, with a view toward completion of a transaction before April 30, 2018.

The Company’s international business is subject to changes in demand or pricing resulting from fluctuations in currency exchange rates ~~primarily in the Euro to U.S. Dollar exchange rate and~~ in the Chinese Renminbi to U.S. Dollar exchange rate.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements, other than operating leases, that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on their evaluation, the Company’s chief executive officer and chief financial officer have concluded that, as of ~~January~~October 31, 2018, the Company’s disclosure controls and procedures were effective to ensure that information relating to the Company, including its consolidated subsidiaries, required to be included in its reports that it filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Changes in Internal Control Over Financial Reporting. There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the ~~three months~~fiscal quarter ended ~~January~~October 31, 2018 to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

PART II. OTHER INFORMATION

Item 6. Exhibits

31.1 -	Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 -	Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32 -	Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~101-~~ 101	The following materials from the Frequency Electronics, Inc. Quarterly Report on Form 10-Q for the quarter ended ~~January~~October 31, 2018 formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive ~~Loss,~~(Loss) Income, (iii) Condensed Consolidated Statements of Cash Flows and (iv) Notes to Condensed Consolidated Financial Statements.

Table of Contents

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.

FREQUENCY ELECTRONICS, INC.

(Registrant)

Date: ~~March 19,~~December 14, 2018 BY /s/ Steven L. Bernstein

Steven L. Bernstein

Chief Financial Officer

Signing on behalf of the registrant and as principal financial officer

Delaware	11-1986657
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y.	11553
(Address of principal executive offices)	(Zip Code)

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐ ~~(Do not check if a smaller reporting company)~~	Smaller Reporting Company ☒
Emerging growth company ☐

Part I. Financial Information:	Page No.

Item 1 - Financial Statements:

Condensed Consolidated Balance Sheets – ~~January~~October 31, 2018 (unaudited) and April 30, ~~2017~~2018	3

~~Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) Nine Months Ended January 31, 2018 and 2017~~	4

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income ~~(unaudited) Three~~Six Months Ended ~~January~~October 31, 2018 and 2017 (unaudited)	5 4

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income Three Months Ended October 31, 2018 and 2017 (unaudited)	5

Condensed Consolidated Statements of Cash Flows ~~(unaudited) Nine~~Six Months Ended ~~January~~October 31, 2018 and 2017 (unaudited)	6

Condensed Consolidated Statements of Changes in Stockholders’ Equity Six Months Ended October 31, 2018 (unaudited)	7

Notes to Condensed Consolidated Financial Statements (unaudited)	~~7-14~~ 8-19

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~15-21~~ 20-26

Item 3 - Quantitative and Qualitative Disclosures About Market Risk	21 26

Item 4 - Controls and Procedures	21 26

Part II. Other Information:

Item 6 - Exhibits	22 27

Signatures	23 28

	Nine months				Three months
	Periods ended January 31,
	2018		2017		2018		2017
Weighted average shares outstanding:
Basic		8,835,685		8,780,069		8,846,083		8,797,218
Effect of dilutive securities		**		**		**		182,769
Diluted		8,835,685		8,780,069		8,846,083		8,979,987

	Periods ended October 31,
	Six months				Three months
	2018		2017		2018		2017
Weighted average shares outstanding:
Basic		8,884,810		8,830,486		8,893,203		8,834,945
Effect of dilutive securities		161,028		**		208,836		**
Diluted		9,045,838		8,830,486		9,102,039		8,834,945

	January 31,			April 30,
	2018			2017
	(UNAUDITED)
ASSETS:
Current assets:
Cash and cash equivalents	$	6,984		$	2,163
Marketable securities		6,240			7,815
Accounts receivable, net of allowance for doubtful accounts of $187 at January 31, 2018 and at April 30, 2017		7,835			10,986
Costs and estimated earnings in excess of billings, net		4,122			7,964
Inventories, net		25,899			29,051
Prepaid income taxes		2,112			2,606
Prepaid expenses and other		1,141			1,105
Current assets of discontinued operations		8,477			8,165
Total current assets		62,810			69,855
Property, plant and equipment, at cost, net of accumulated depreciation and amortization		13,868			14,813
Deferred income taxes		10,352			11,902
Goodwill and other intangible assets		617			617
Cash surrender value of life insurance and cash held in trust		13,853			13,376
Other assets		2,310			2,187
Non-current assets of discontinued operations		531			569
Total assets	$	104,341		$	113,319

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable - trade	$	2,858		$	2,437
Accrued liabilities		3,934			3,425
Current liabilities of discontinued operations		2,121			2,249
Total current liabilities		8,913			8,111

Deferred compensation		13,546			13,252
Deferred rent and other liabilities		1,436			1,409
Non-current liabilities of discontinued operations		1,795			1,215
Total liabilities		25,690			23,987
Commitments and contingencies
Stockholders’ equity:
Preferred stock - $1.00 par value authorized 600 shares, no shares issued		-			-
Common stock - $1.00 par value; authorized 20,000 shares, 9,164 shares issued, 8,853 shares outstanding at January 31, 2018; 8,817 shares outstanding at April 30, 2017		9,164			9,164
Additional paid-in capital		56,289			55,767
Retained earnings		12,449			23,712
		77,902			88,643
Common stock reacquired and held in treasury - at cost (311 shares at January 31, 2018 and 347 shares at April 30, 2017)		(1,425	)		(1,592	)
Accumulated other comprehensive income		2,174			2,281
Total stockholders’ equity		78,651			89,332
Total liabilities and stockholders’ equity	$	104,341		$	113,319

	Periods ended October 31, 2017
	Six months			Three months
	(UNAUDITED)			(UNAUDITED)
	(In thousands)
Revenues	$	1,955		$	943
Cost of Revenues		1,390			674
Gross Margin		565			269
Selling and administrative expenses		703			346
Research and development expenses		268			118
Operating Loss		(406	)		(195	)
Other income (expense):
Investment (loss) income
Other income (expense), net		(3	)		(2	)
Loss before provision for income taxes		(409	)		(197	)
Benefit for income taxes		1			5
Net Loss	$	(408	)	$	(192	)

	January 31, 2018			April 30, 2017
	(In thousands)
Costs and estimated earnings in excess of billings	$	4,806		$	8,890
Billings in excess of costs and estimated earnings		(684	)		(926	)
Net asset	$	4,122		$	7,964

Operating loss:
FEI-NY	$	(11,312	)	$	(2,596	)	$	(8,554	)	$	(708	)
FEI-Zyfer		2,629			444			1,354			(20	)
Corporate		(312	)		(342	)		(109	)		(176	)
Consolidated operating loss	$	(8,995	)	$	(2,494	)	$	(7,309	)	$	(904	)

	Less than 12 months					12 Months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
January 31, 2018
Fixed Income Securities	$	4,879	$	(81	)	$	98	$	-		$	4,977	$	(81	)
Equity Securities		-		-			-		-			-		-
	$	4,879	$	(81	)	$	98	$	-		$	4,977	$	(81	)
April 30, 2017
Fixed Income Securities	$	-	$	-		$	-	$	-		$	-	$	-
Equity Securities		219		(9	)		1,024		(230	)		1,243		(239	)
	$	219	$	(9	)	$	1,024	$	(230	)	$	1,243	$	(239	)

Current	$	450
Due after one year through five years		2,214
Due after five years through ten years		3,611
	$	6,275

	January 31, 2018		April 30, 2017
	(In thousands)
Raw Materials and Component Parts	$	14,477	$	17,702
Work in Progress		7,868		7,340
Finished Goods		3,554		4,009
	$	25,899	$	29,051

	October 31, 2018		April 30, 2018
	(In thousands)
Raw Materials and Component Parts	$	13,618	$	16,206
Work in Progress		9,840		8,216
Finished Goods		2,190		1,764
	$	25,648	$	26,186