UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 orFor the Quarterly Period ended January 31, 20182023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 orFor the transition period from __________ to __________
Commission File No. 1-8061
FREQUENCY ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
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) |
Registrant’s telephone number, including area code: 516-794-4500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock (par value $1.00 per share) | FEIM | NASDAQ Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d)15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an “emergingemerging growth company”.company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer | Smaller Reporting Company ☒ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the Registrantregistrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant’sregistrant’s Common Stock, par value $1.00 per share, as of March 12, 201814, 2023 – 8,729,6829,353,440
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
TABLE OF CONTENTS
Page No. | |
Part I. Financial Information: | |
3 | |
4 | |
5 | |
6-7 | |
Notes to Condensed Consolidated Financial Statements (unaudited) | 8-15 |
16-22 | |
23 | |
23 | |
Part II. Other Information: | |
25 | |
25 | |
26 |
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, | January 31, | April 30, | |||||||||||||
2018 | 2017 | 2023 | 2022 | |||||||||||||
(UNAUDITED) | (UNAUDITED) | (As Revised) | ||||||||||||||
ASSETS: | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 6,984 | $ | 2,163 | $ | 12,854 | $ | 11,561 | ||||||||
Marketable securities | 6,240 | 7,815 | - | 9,964 | ||||||||||||
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 | ||||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $111 at January 31, 2023 and April 30, 2022 | 5,129 | 4,291 | ||||||||||||||
Contract assets | 8,266 | 8,857 | ||||||||||||||
Inventories, net | 25,899 | 29,051 | 20,562 | 19,906 | ||||||||||||
Prepaid income taxes | 2,112 | 2,606 | 98 | 269 | ||||||||||||
Prepaid expenses and other | 1,141 | 1,105 | 1,056 | 1,162 | ||||||||||||
Current assets of discontinued operations | 8,477 | 8,165 | ||||||||||||||
Total current assets | 62,810 | 69,855 | 47,965 | 56,010 | ||||||||||||
Property, plant and equipment, at cost, net of accumulated depreciation and amortization | 13,868 | 14,813 | 7,733 | 8,564 | ||||||||||||
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 | ||||||||||||||
Goodwill | 617 | 617 | ||||||||||||||
Cash surrender value of life insurance | 10,295 | 9,855 | ||||||||||||||
Other assets | 2,310 | 2,187 | 888 | 909 | ||||||||||||
Non-current assets of discontinued operations | 531 | 569 | ||||||||||||||
Right-of-Use assets – operating leases | 7,745 | 8,805 | ||||||||||||||
Total assets | $ | 104,341 | $ | 113,319 | $ | 75,243 | $ | 84,760 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable - trade | $ | 2,858 | $ | 2,437 | ||||||||||||
Accounts payable – trade | $ | 1,556 | $ | 1,080 | ||||||||||||
Accrued liabilities | 3,934 | 3,425 | 3,396 | 3,696 | ||||||||||||
Current liabilities of discontinued operations | 2,121 | 2,249 | ||||||||||||||
Loss provision accrual | 2,678 | 4,243 | ||||||||||||||
Operating lease liability, current portion | 1,751 | 1,744 | ||||||||||||||
Contract liabilities | 18,737 | 11,098 | ||||||||||||||
Total current liabilities | 8,913 | 8,111 | 28,118 | 21,861 | ||||||||||||
Deferred compensation | 13,546 | 13,252 | 8,357 | 8,730 | ||||||||||||
Deferred rent and other liabilities | 1,436 | 1,409 | ||||||||||||||
Non-current liabilities of discontinued operations | 1,795 | 1,215 | ||||||||||||||
Deferred taxes | 8 | 8 | ||||||||||||||
Operating lease liability – non-current | 6,261 | 7,353 | ||||||||||||||
Other liabilities | 125 | 120 | ||||||||||||||
Total liabilities | 25,690 | 23,987 | 42,869 | 38,072 | ||||||||||||
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 | ||||||||||||||
Preferred stock - $1.00 par value; authorized 600 shares, no shares issued | - | - | ||||||||||||||
Common stock - $1.00 par value; authorized 20,000 shares, 9,354 shares issued and 9,353 shares outstanding at January 31, 2023; 9,298 shares issued and 9,297 shares outstanding at April 30, 2022 | 9,354 | 9,298 | ||||||||||||||
Additional paid-in capital | 56,289 | 55,767 | 48,893 | 57,956 | ||||||||||||
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 deficit | (25,867 | ) | (20,120 | ) | ||||||||||||
Common stock reacquired and held in treasury - at cost (1 share at January 31, 2023 and April 30, 2022) | (6 | ) | (6 | ) | ||||||||||||
Accumulated other comprehensive income | 2,174 | 2,281 | - | (440 | ) | |||||||||||
Total stockholders’ equity | 78,651 | 89,332 | 32,374 | 46,688 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 104,341 | $ | 113,319 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 75,243 | $ | 84,760 |
See accompanying notes to condensed consolidated financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive LossIncome (Loss)
(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 | ) |
Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Condensed Consolidated Statements of Operations | ||||||||||||||||
Revenues | $ | 10,620 | $ | 12,245 | $ | 27,773 | $ | 38,136 | ||||||||
Cost of revenues | 7,155 | 9,005 | 23,963 | 26,744 | ||||||||||||
Gross margin | 3,465 | 3,240 | 3,810 | 11,392 | ||||||||||||
Selling and administrative expenses | 2,357 | 2,832 | 6,383 | 9,637 | ||||||||||||
Research and development expenses | 783 | 1,129 | 2,492 | 3,861 | ||||||||||||
Operating income (loss) | 325 | (721 | ) | (5,065 | ) | (2,106 | ) | |||||||||
Other income (expense): | ||||||||||||||||
Investment (expense) income, net | (625 | ) | 4 | (600 | ) | 195 | ||||||||||
Interest expense | (18 | ) | (19 | ) | (81 | ) | (59 | ) | ||||||||
Other income (expense), net | 5 | 2 | 5 | 160 | ||||||||||||
Loss before provision for income taxes | (313 | ) | (734 | ) | (5,741 | ) | (1,810 | ) | ||||||||
Provision for income taxes | 3 | 1 | 6 | 3 | ||||||||||||
Net loss | $ | (316 | ) | $ | (735 | ) | $ | (5,747 | ) | $ | (1,813 | ) | ||||
Net loss per common share: | ||||||||||||||||
Basic and diluted loss per share | $ | (0.03 | ) | $ | (0.08 | ) | $ | (0.62 | ) | $ | (0.20 | ) | ||||
Weighted average shares outstanding: | ||||||||||||||||
Basic and diluted | 9,349 | 9,279 | 9,328 | 9,257 | ||||||||||||
Condensed Consolidated Statements of Comprehensive Income (Loss) | ||||||||||||||||
Net loss | $ | (316 | ) | $ | (735 | ) | $ | (5,747 | ) | $ | (1,813 | ) | ||||
Unrealized gain (loss) on marketable securities: | ||||||||||||||||
Change in market value of marketable securities before reclassification, net of tax | 388 | (211 | ) | (179 | ) | (283 | ) | |||||||||
Reclassification adjustment for realized gains (losses) included in net income, net of tax | 603 | 2 | 619 | (4 | ) | |||||||||||
Total unrealized gain (loss) on marketable securities, net of tax | 991 | (209 | ) | 440 | (287 | ) | ||||||||||
Comprehensive income (loss) | $ | 675 | $ | (944 | ) | $ | (5,307 | ) | $ | (2,100 | ) |
See accompanying notes to condensed consolidated financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive (Loss) IncomeCash Flows
(In thousands except per share data)thousands)
(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: | ||||||||
$ | (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 |
Nine Months Ended January 31, | ||||||||
2023 | 2022 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (5,747 | ) | $ | (1,813 | ) | ||
Non-cash charges to earnings | 2,667 | 2,870 | ||||||
Net changes in operating assets and liabilities | 5,028 | 2,913 | ||||||
Net cash provided by operating activities | 1,948 | 3,970 | ||||||
Cash flows from investing activities: | ||||||||
Proceeds on redemption of marketable securities | 10,967 | 1,739 | ||||||
Purchase of marketable securities | (1,382 | ) | (1,846 | ) | ||||
Purchase of fixed assets and other assets | (886 | ) | (1,534 | ) | ||||
Net cash provided by (used in) investing activities | 8,699 | (1,641 | ) | |||||
Cash flows from financing activities: | ||||||||
Payment of Dividend | (9,354 | ) | - | |||||
Net cash used in financing activities | (9,354 | ) | - | |||||
Net increase in cash and cash equivalents | 1,293 | 2,329 | ||||||
Cash and cash equivalents at beginning of period | 11,561 | 9,807 | ||||||
Cash and cash equivalents at end of period | $ | 12,854 | $ | 12,136 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 54 | $ | 59 | ||||
Income taxes | $ | - | 15 | |||||
Cash refunded during the period for: | ||||||||
Income taxes | $ | 176 | $ | - |
See accompanying notes to condensed consolidated financial statements.
FREQUENCY ELECTRONICS, INC. andAND SUBSIDIARIES
Condensed Consolidated Statements of Cash FlowsChanges in Stockholders’ Equity
Three and Nine Months Ended January 31, 2023
(In thousands)thousands except share data)
(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 |
Additional | Treasury stock | Accumulated other | ||||||||||||||||||||||||||||||
Common Stock | paid in | Accumulated | (at cost) | comprehensive | ||||||||||||||||||||||||||||
Shares | Amount | capital | Deficit | Shares | Amount | Income (loss) | Total | |||||||||||||||||||||||||
Balance at April 30, 2022 | 9,298,178 | $ | 9,298 | $ | 57,956 | $ | (20,120 | ) | 1,375 | $ | (6 | ) | $ | (440 | ) | $ | 46,688 | |||||||||||||||
Contribution of stock to 401(k) plan | 16,708 | 17 | 105 | - | - | - | - | 122 | ||||||||||||||||||||||||
Stock-based compensation expense | - | - | (25 | ) | - | - | - | - | (25 | ) | ||||||||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | - | - | 14 | 14 | ||||||||||||||||||||||||
Net loss | - | - | (3,117 | ) | - | - | - | (3,117 | ) | |||||||||||||||||||||||
Balance at July 31, 2022 | 9,314,886 | $ | 9,315 | $ | 58,036 | $ | (23,237 | ) | 1,375 | $ | (6 | ) | $ | (426 | ) | $ | 43,682 | |||||||||||||||
Contribution of stock to 401(k) plan | 18,632 | 18 | 89 | - | - | - | - | 107 | ||||||||||||||||||||||||
Stock-based compensation expense | 750 | 1 | 28 | - | - | - | - | 29 | ||||||||||||||||||||||||
Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price | - | |||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | - | - | - | - | - | (565 | ) | (565 | ) | |||||||||||||||||||||||
Net loss | - | - | (2,314 | ) | - | - | - | (2,314 | ) | |||||||||||||||||||||||
Balance at October 31, 2022 | 9,334,268 | $ | 9,334 | $ | 58,153 | $ | (25,551 | ) | 1,375 | $ | (6 | ) | $ | (991 | ) | $ | 40,939 | |||||||||||||||
Contribution of stock to 401(k) plan | 7,597 | 8 | 46 | - | - | - | - | 54 | ||||||||||||||||||||||||
Stock-based compensation expense | 12,076 | 12 | 48 | - | - | - | - | 60 | ||||||||||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | - | 991 | 991 | |||||||||||||||||||||||||
Dividends paid | (9,354 | ) | - | (9,354 | ) | |||||||||||||||||||||||||||
Net loss | - | - | (316 | ) | - | - | - | (316 | ) | |||||||||||||||||||||||
Balance at January 31, 2023 | 9,353,941 | $ | 9,354 | $ | 48,893 | $ | (25,867 | ) | 1,375 | $ | (6 | ) | $ | - | $ | 32,374 |
See accompanying notes to condensed consolidated financial statements.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Three and Nine Months Ended January 31, 2022
(In thousands except share data)
(Unaudited)
Additional | Treasury stock | Accumulated other | ||||||||||||||||||||||||||||||
Common Stock | paid in | Accumulated | (at cost) | comprehensive | ||||||||||||||||||||||||||||
Shares | Amount | capital | Deficit | Shares | Amount | Income (loss) | Total | |||||||||||||||||||||||||
Balance at April 30, 2021 | 9,226,268 | $ | 9,226 | $ | 57,355 | $ | (11,457 | ) | 1,375 | $ | (6 | ) | $ | 291 | $ | 55,409 | ||||||||||||||||
Contribution of stock to 401(k) plan | 13,251 | 13 | 117 | - | - | - | - | 130 | ||||||||||||||||||||||||
Stock-based compensation expense | 7,500 | 8 | 61 | - | - | - | - | 69 | ||||||||||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | - | - | 79 | 79 | ||||||||||||||||||||||||
Net loss | - | - | - | (1,575 | ) | - | - | - | (1,575 | ) | ||||||||||||||||||||||
Balance at July 31, 2021 | 9,247,019 | $ | 9,247 | $ | 57,533 | $ | (13,032 | ) | 1,375 | $ | (6 | ) | $ | 370 | $ | 54,112 | ||||||||||||||||
Contribution of stock to 401(k) plan | 10,779 | 11 | 100 | - | - | - | - | 111 | ||||||||||||||||||||||||
Stock-based compensation expense | 250 | - | 66 | - | - | - | - | 66 | ||||||||||||||||||||||||
Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price | 6,278 | 6 | (6 | ) | - | - | - | - | - | |||||||||||||||||||||||
Other comprehensive loss, net of tax | - | - | - | - | - | - | (157 | ) | (157 | ) | ||||||||||||||||||||||
Net income | - | - | - | 497 | - | - | - | 497 | ||||||||||||||||||||||||
Balance at October 31, 2021 | 9,264,326 | $ | 9,264 | $ | 57,693 | $ | (12,535 | ) | 1,375 | $ | (6 | ) | $ | 213 | $ | 54,629 | ||||||||||||||||
Contribution of stock to 401(k) plan | 7,045 | 7 | 63 | - | - | - | - | 70 | ||||||||||||||||||||||||
Stock-based compensation expense | 7,953 | 8 | 83 | - | - | - | - | 91 | ||||||||||||||||||||||||
Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price | 5,192 | 6 | (5 | ) | - | - | - | - | 1 | |||||||||||||||||||||||
Other comprehensive loss, net of tax | - | - | - | - | - | - | (209 | ) | (209 | ) | ||||||||||||||||||||||
Net loss | - | - | - | (735 | ) | - | - | - | (735 | ) | ||||||||||||||||||||||
Balance at January 31, 2022 | 9,284,516 | $ | 9,285 | $ | 57,834 | $ | (13,270 | ) | 1,375 | $ | (6 | ) | $ | 4 | $ | 53,847 |
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE A – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management of Frequency Electronics, Inc. (“the Company”(the “Company”), the accompanying unaudited condensed consolidated interim financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly, in all material respects, the condensed consolidated financial position of the Company as of January 31, 20182023 and the results of its operations, changes in stockholders’ equity for the three and nine months ended January 31, 2023 and 2022, and cash flows for the nine and three months ended January 31, 20182023 and January 31, 2017.2022. The April 30, 20172022 condensed consolidated balance sheet was derived from audited financial statements. These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP’). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principlesU.S. GAAP have been condensed or omitted. It is suggested that theseThese condensed consolidated interim financial statements should be read in conjunction with the annual consolidated financial statements included in the Company’s Annual Report and Amended Annual Report on Form 10-K and Form 10-K/A for the fiscal year ended April 30, 2017,2022, filed on July 31, 2017,14, 2022 and December 20, 2022, respectively, with the Securities and Exchange Commission (the “Form 10-K” and the financial statements and notes thereto.“Form 10-K/A”). The results of operations for such interim periods are not necessarily indicative of the operating results for the full fiscal year.
COVID-19 Pandemic, and Other Macroeconomic Factors
The full impact of the Company entered into a share purchase agreement with certain foreign counterparties with respectCOVID-19 pandemic continues to a potential saleevolve as of Gillam-FEI (“Gillam”),the date of this report. As such, it is uncertain as to the full magnitude that the pandemic may ultimately have on the Company’s Belgian subsidiary. However, these counterparties have not yet performed their obligations under that agreement. Becausefinancial condition, liquidity, and future financial results. For three and the counterparties have failed to perform their obligations under the share purchase agreementnine months ended January 31, 2023, the Company has a rightbeen impacted by employee absenteeism related to terminate that share purchase agreement. The Company continues to negotiate with these counterparties to effectuate a closingdirect or indirect effects of the transaction contemplatedCOVID-19 pandemic, delays in the receipt of anticipated new contracts from customers administratively affected by the share purchase agreement, but the Company is also discussing a salepandemic and limited availability or delivery delays of the Gillam business with other potential buyers. In April 2017, the Company decided to sell its Gillam business as soon as practicable,parts and began contacting potential buyers other than the counterparty to the stock purchase agreement. The Company believes that the divestment should be completedmaterials from vendors affected by the end ofpandemic. FEI-Zyfer’s operations were particularly affected as evidenced by decreases in sales and gross margin during fiscal year 2018. Accordingly, the Company determined that the assets and liabilities of this reportable segment met the discontinued operations criteria in Accounting Standards Codification 205-20-45 for the year ended April 30, 2017, and Gillam’s results have been classified as discontinued operations in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss.
Nine months | Three months | |||||||||||||||
Periods ended January 31, | ||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(UNAUDITED) | (UNAUDITED) | (UNAUDITED) | (UNAUDITED) | |||||||||||||
(In thousands except par value) | ||||||||||||||||
Revenues | $ | 3,018 | $ | 3,707 | $ | 1,063 | $ | 1,413 | ||||||||
Cost of Revenues | 2,089 | 2,577 | 699 | 956 | ||||||||||||
Gross Margin | 929 | 1,130 | 364 | 457 | ||||||||||||
Selling and administrative expenses | 1,285 | 1,411 | 582 | 461 | ||||||||||||
Research and development expenses | 334 | 315 | 66 | 38 | ||||||||||||
Operating Loss | (690 | ) | (596 | ) | (284 | ) | (42 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Investment (loss) income | ||||||||||||||||
Other income (expense), net | (7 | ) | (3 | ) | (4 | ) | - | |||||||||
Loss before provision for income taxes | (697 | ) | (599 | ) | (288 | ) | (42 | ) | ||||||||
Provision for income taxes | - | - | 1 | - | ||||||||||||
Net Loss | $ | (697 | ) | $ | (599 | ) | $ | (289 | ) | $ | (42 | ) |
The Company may continue to face future COVID-19 related risks, and risks resulting from geopolitical conflicts. The Company is dependent on its workforce to design and manufacture its products. If significant portions of the Company’s workforce are unable to work effectively, or if the U.S. Government, and/or other customers or supplier operations are as follows:curtailed due to illness, quarantines, government actions, facility closures, or other restrictions, the Company’s operations may be negatively impacted. If faced with any of these factors, the Company may be unable to perform fully on its contracts and costs may increase. These cost increases may not be fully recoverable or adequately covered by insurance. For example, in the latter part of fiscal year 2021, the Company experienced some operation disruptions due to the need to vacate certain areas of the facilities for cleaning and disinfecting resulting from employees being potentially exposed to COVID-19 or following positive COVID-19 test results. Also, certain Company vendors have been unable to deliver materials on time due to COVID-19 related impacts to their workforces or their supply chains. These delays impacted the Company’s production costs and schedules. Vendor delivery performance is being closely monitored and alternate sources of supply are generally available and, in some cases, are being established.
January 31, | April 30, | |||||||
2018 | 2017 | |||||||
Cash and cash equivalents | $ | 943 | $ | 575 | ||||
Accounts receivable, net of allowance for doubtful accounts | 2,773 | 3,202 | ||||||
Inventories, net | 4,608 | 3,980 | ||||||
Prepaid expenses and other | 153 | 408 | ||||||
Total current assets of discontinued operations | $ | 8,477 | $ | 8,165 | ||||
Property, plant and equipment, at cost, net of accumulated depreciation and amortization | $ | 520 | $ | 555 | ||||
Investments | 11 | 14 | ||||||
Total non-current assets of discontinued operations | $ | 531 | $ | 569 | ||||
Accounts payable – trade | $ | 788 | $ | 949 | ||||
Accrued liabilities | 1,333 | 1,300 | ||||||
Total current liabilities of discontinued operations | 2,121 | 2,249 | ||||||
Deferred rent and other liabilities | 1,795 | 1,215 | ||||||
Total non-current liabilities of discontinued operations | $ | 1,795 | $ | 1,215 |
In addition to the impacts of the COVID-19 pandemic, the Company’s financial condition, liquidity, and future financial results may also be affected by other macroeconomic factors. For example, due to continuing geopolitical circumstances resulting in increased inflation, energy and commodity prices may continue escalating which may adversely affect the Company’s financial results.
NOTE CB – EARNINGS (LOSS) PER SHARE
Reconciliation of the weighted average shares outstanding for basic and diluted Earnings Per Share areearnings (loss) per share (“EPS”) for the three and nine months ended January 31, 2023 and 2022, respectively, were as follows:
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 January 31, | ||||||||||||||||
Three months | Nine months | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic EPS Shares outstanding (weighted average) | 9,349,198 | 9,278,840 | 9,327,828 | 9,257,107 | ||||||||||||
Effect of Dilutive Securities | ** | ** | ** | ** | ||||||||||||
Diluted EPS Shares outstanding | 9,349,198 | 9,278,840 | 9,327,828 | 9,257,107 |
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
** For the three and nine and three month periodsmonths ended January 31, 2018,2023 and 2022, dilutive securities are excluded from the calculation of earnings per share since the inclusion of such shares would be antidilutive due to the net loss for thethose periods. The exercisable shares excluded are 1,260,250. The effect of dilutive securities for the periods would have been 131,638three and 136,424, respectively. For the nine month periodmonths ended January 31, 2017, dilutive securities are excluded since the inclusion of such shares would be antidilutive due to the net loss for the period.2023 was 243,625 options, respectively. The exercisable shares excluded are 1,261,875. The effect of dilutive securities for the period would have been 184,119.
Nine months | Three months | |||||||||||||||
Periods ended January 31, | ||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Outstanding options and SARS excluded | ** | ** | ** | 546,625 |
At January 31, 20182023 and April 30, 2017, costs and estimated earnings in excess of billings,2022, contract (liabilities) assets, net, consistconsisted of the following:
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 |
January 31, 2023 | April 30, 2022 | |||||||
(As Revised) | ||||||||
(In thousands) | ||||||||
Contract Assets | $ | 8,266 | $ | 8,857 | ||||
Contract Liabilities | (18,737 | ) | (11,098 | ) | ||||
Net (liability) asset | $ | (10,471 | ) | $ | (2,241 | ) |
Such amounts represent revenue recognized on long-term contracts that hadhave not been billed at the balance sheet dates or represent a liability for amounts billed in excess of the revenue recognized. Amounts are billed to customers pursuant to contract terms, whereas the related revenue is recognized on the percentage of completion basis at the measurement date.terms. In general, the recorded amounts will be billed and collected or revenue recognized within twelve months of the balance sheet date.dates. Revenue on these long-term contracts isare accounted for on the percentage of completionpercentage-of-completion (“POC”) basis. During the ninethree and threenine months ended January 31, 2018,2023, revenue recognized under percentage of completionPOC contracts was approximately $13.7$10.2 million and $2.8$26.8 million, respectively. During the ninethree and threenine months ended January 31, 2017, such2022, revenue recognized under POC contracts was approximately $19.5$11.8 million and $7.1$36.4 million, respectively. If contract losses are anticipated, costs and estimated earnings in excess of billings are reduceda loss provision is recorded for the full amount of such losses when they are determinable.
NOTE D –STOCK TRANSACTIONS
During the three and nine-month periods ended January 31, 2023, the Company made contributions of 32,757 shares7,597 and 7,48742,937 shares, respectively, of its common stock held in treasury to the Company’s profit sharingprofit-sharing plan and trust under Section 401(k) of the Internal Revenue Code. Such contributions are in accordance with the Company’s discretionary match of employee voluntary contributions to this plan. During
On December 20, 2022, the nine months ended January 31, 2018, the Company issued 3,711 shares from treasury upon the exerciseBoard of SARS by certain officers and employeesDirectors of the Company and employee awards for service calculated atdeclared a special cash dividend of $1.00 per share of common stock. The dividend was paid on January 26, 2023, to stockholders of record as of the Company’s discretion.close of business on January 6, 2023. The total amount of the special dividend payment was $9.4 million.
NOTE FE – INVENTORIES, NET
Inventories, which are reported at the lower of cost or market, consistand net realizable value, consisted of the following:
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 |
January 31, 2023 | April 30, 2022 | |||||||
(In thousands) | ||||||||
Raw materials and component parts | $ | 12,264 | $ | 11,683 | ||||
Work in progress | 7,675 | 7,746 | ||||||
Finished goods | 623 | 477 | ||||||
$ | 20,562 | $ | 19,906 |
Inventory reserves included in inventory were $8.0 million and $7.5 million as of January 31, 20182023 and April 30, 2017, approximately $24.8 million2022, respectively. Reserve amounts relate to raw materials and $28.2 million, respectively, of total inventory is locatedcomponent parts and work in the United States and $1.1 million and $0.8 million, respectively, is located in China. The Company buys inventory in bulk quantities which may be used over significant time periods; due to its nature the inventory does not deteriorate.progress.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE F – RIGHT-OF-USE ASSETS AND LEASE LIABILITIES
The Company’s leases primarily represent offices, warehouses, vehicles, and manufacturing and Research and Development (“R&D”) facilities which expire at various times through 2029 and are operating leases. Contractual arrangements are evaluated at inception to determine if the agreement contains a lease. Certain lease agreements contain renewal options, rent abatement, and escalation clauses that are factored into our determination of lease payments when appropriate. Right-of-use (“ROU”) assets and lease liabilities are recorded based on the present
value of future lease payments which will factor in certain qualifying initial direct costs incurred as well as any lease incentives that may have been received. Lease expenses for operating lease payments are recognized on a straight-line basis over the lease term. Lease terms may factor in options to extend or terminate the lease.
The Company elected the practical expedient for short-term leases which allows leases with terms of 12 months or less to be recorded on a straight-line basis over the lease term without being recognized on the consolidated balance sheets.
The table below presents ROU assets and liabilities recorded on the respective consolidated balance sheets as follows:
Classification | January 31, 2023 | April 30, 2022 | |||||||
(unaudited) | |||||||||
Assets | |||||||||
Operating lease ROU assets | Right-of-Use assets leases | $ | 7,745 | $ | 8,805 | ||||
Liabilities | |||||||||
Operating lease liabilities (short-term) | Lease liability, current | 1,751 | 1,744 | ||||||
Operating lease liabilities (long-term) | Lease liability, non-current | 6,261 | 7,353 | ||||||
Total lease liabilities | $ | 8,012 | $ | 9,097 |
Total operating lease expense was $472,000 and $1.4 million for the three and nine months ended January 31, 2023, respectively, the majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses on the unaudited condensed consolidated statements of operations. Total operating lease expense was $500,000 and $1.5 million for the three and nine months ended January 31, 2022, respectively, the majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses in the condensed consolidated statements of operations.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The table below reconciles the undiscounted cash flows for each of the first four fiscal years and total of the remaining fiscal years to the operating lease liabilities recorded on the unaudited condensed consolidated balance sheet as of January 31, 2023:
Fiscal Year Ending April 30, | |||
(in thousands) | |||
Remainder of 2023 | $ | 312 | |
2024 | 1,993 | ||
2025 | 1,832 | ||
2026 | 1,317 | ||
2027 | 937 | ||
Thereafter |
| 3,238 | |
Total lease payments | 9,629 | ||
Less imputed interest |
| (1,617) | |
Present value of future lease payments | 8,012 | ||
Less current obligations under leases |
| (1,751) | |
Long-term lease obligations | $ | 6,261 |
As of January 31, 2023, the weighted-average remaining lease term for all operating leases was 5.79 years. The Company does not generally have access to the rate implicit in the leases and therefore utilized the Company’s borrowing rate as the discount rate. The Company selected a rate that is reflective of companies with similar credit ratings for secured debt. The weighted average discount rate for operating leases as of January 31, 2023 was 6.21%.
NOTE G – SEGMENT INFORMATION
The Company operates under two reportable segments:segments based on the geographic locations of its subsidiaries:
(1) | FEI-NY – operates out of New York and its operations consist principally of precision time and frequency control products used in three principal The FEI-NY segment also includes the operations of the Company’s wholly owned subsidiary, FEI-Elcom. FEI-Elcom, in addition to its own product line, provides design and technical support for the FEI-NY segment’s communication satellite business. |
(2) | FEI-Zyfer – operates out of California and its products incorporate Global Positioning System (GPS) technologies into systems and subsystems for secure communications, both government and commercial, and other locator applications. This segment also provides sales and support for the Company’s wireline telecommunications family of products, including US5G, which are sold in the |
The FEI-NY segment also includes the operations of the Company’s wholly-owned subsidiaries, FEI-Elcom and FEI-Asia. FEI-Asia functions as a manufacturing facility for the FEI-NY segment with historically minimal sales to outside customers. Beginning in late fiscal year 2014, FEI-Asia began shipping higher volumes of product to third parties as a contract manufacturer. FEI-Elcom, in addition to its own product line, provides design and technical support for the FEI-NY segment’s satellite business.
The accounting policies of the two segments are the same as those described in the “Summary of Accounting Policies” in the fiscal year-end financial statements included in the Form 10-K/A. The Company evaluates the performance of its segments and allocates resources to them based on operating profit (loss), which is defined as income before investment (expense) income, interest expense, other income (expense), and taxes. All acquired assets, including intangible assets, are included in the assets of both reporting segments.
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 statementcondensed consolidated statements of incomeoperations or the consolidated balance sheetsheets for each of the periods (in thousands):
Nine months | Three months | Periods ended January 31, | ||||||||||||||||||||||||||||||
Periods ended January 31, | Three months | Nine months | ||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
FEI-NY | $ | 22,184 | $ | 27,176 | $ | 6,444 | $ | 9,461 | $ | 8,420 | $ | 10,855 | $ | 22,954 | $ | 31,399 | ||||||||||||||||
FEI-Zyfer | 12,378 | 9,473 | 4,514 | 2,877 | 2,480 | 1,558 | 5,772 | 7,341 | ||||||||||||||||||||||||
less intersegment revenues | (2,630 | ) | (2,238 | ) | (386 | ) | (955 | ) | (280 | ) | (168 | ) | (953 | ) | (604 | ) | ||||||||||||||||
Consolidated revenues | $ | 31,932 | $ | 34,411 | $ | 10,572 | $ | 11,383 | $ | 10,620 | $ | 12,245 | $ | 27,773 | $ | 38,136 |
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 |
Operating income (loss): | ||||||||||||||||
FEI-NY | $ | 288 | $ | 670 | $ | (3,690 | ) | $ | (1,051 | ) | ||||||
FEI-Zyfer | 105 | (674 | ) | (1,125 | ) | (773 | ) | |||||||||
less intersegment revenues | - | (646 | ) | - | (20 | ) | ||||||||||
Corporate | (68 | ) | (71 | ) | (250 | ) | (262 | ) | ||||||||
Consolidated operating income (loss) | $ | 325 | $ | (721 | ) | $ | (5,065 | ) | $ | (2,106 | ) |
January 31, 2022 | April 30, 2022 | |||||||
(As Revised) | ||||||||
Identifiable assets: | ||||||||
FEI-NY | $ | 39,899 | $ | 40,888 | ||||
FEI-Zyfer | 10,492 | 10,522 | ||||||
less intersegment balances | (126 | ) | (126 | ) | ||||
Corporate | 24,978 | 33,476 | ||||||
Consolidated identifiable assets | $ | 75,243 | $ | 84,760 |
Total revenue recognized over time as POC and Passage of Title (“POT”) was approximately $10.2 million and $0.4 million, respectively, of the $10.6 million reported for the three months ended January 31, 2023. Total revenue recognized over time as POC and POT was approximately $26.8 million and $1.0 million, respectively, of the $27.8 million reported for the nine months ended January 31, 2023. Total revenue recognized over time as POC and POT was approximately $11.8 million and $0.5 million, respectively, of the $12.2 million reported for the three months ended January 31, 2022. Total revenue recognized over time as POC and POT was approximately $36.4 million and $1.7 million, respectively, of the $38.1 million reported for the nine months ended January 31, 2022. The amounts by segment and product line were as follows:
Three Months Ended January 31, | ||||||||||||||||||||||||
2023 | 2022 | |||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
POC | POT | Total | POC | POT Revenue | Total | |||||||||||||||||||
Revenue | Revenue | Revenue | Revenue | Revenue | Revenue | |||||||||||||||||||
FEI-NY | $ | 7,830 | $ | 590 | $ | 8,420 | $ | 10,462 | $ | 393 | $ | 10,855 | ||||||||||||
FEI-Zyfer | 2,387 | 93 | 2,480 | 1,316 | 242 | 1,558 | ||||||||||||||||||
Intersegment | - | (280 | ) | (280 | ) | (1 | ) | (167 | ) | (168 | ) | |||||||||||||
Revenue | $ | 10,217 | $ | 403 | $ | 10,620 | $ | 11,777 | $ | 468 | $ | 12,245 |
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Nine Months Ended January 31, | ||||||||||||||||||||||||
2023 | 2022 | |||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
POC | POT | Total | POC | POT | Total | |||||||||||||||||||
Revenue | Revenue | Revenue | Revenue | Revenue | Revenue | |||||||||||||||||||
FEI-NY | $ | 21,281 | $ | 1,673 | $ | 22,954 | $ | 29,991 | $ | 1,408 | $ | 31,399 | ||||||||||||
FEI-Zyfer | 5,542 | 230 | 5,772 | 6,416 | 925 | 7,341 | ||||||||||||||||||
Intersegment | - | (953 | ) | (953 | ) | (1 | ) | (603 | ) | (604 | ) | |||||||||||||
Revenue | $ | 26,823 | $ | 950 | $ | 27,773 | $ | 36,406 | $ | 1,730 | $ | 38,136 |
Periods ended January 31, | ||||||||||||||||
(in thousands) | ||||||||||||||||
Three months | Nine months | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Revenues by Product Line: | ||||||||||||||||
Satellite Revenue | $ | 4,990 | $ | 7,525 | $ | 12,799 | $ | 20,868 | ||||||||
Government Non-Space Revenue | 4,978 | 4,315 | 12,961 | 14,905 | ||||||||||||
Other Commercial & Industrial Revenue | 652 | 405 | 2,013 | 2,363 | ||||||||||||
Consolidated revenues | $ | 10,620 | $ | 12,245 | $ | 27,773 | $ | 38,136 |
NOTE H – INVESTMENT IN MORION, INC.
The Company has an investment in Morion, Inc., (“Morion”), a privately-heldprivately held Russian company, which manufactures high precision quartz resonators and crystal oscillators. The Company has also licensed certain technology to Morion. During the three and nine months ended January 31, 2023, the Company acquired product from Morion in the aggregate amount of approximately $55,000 and $86,000, respectively. During the three and nine months ended January 31, 2022, the Company acquired product from Morion in the aggregate amount of approximately $95,000 and $215,000, respectively. During the nine months ended January 31, 2022, the Company received dividends from Morion in the amount of approximately $123,000, which is included in other income, net in the condensed consolidated statements of operations as part of the FEI-NY segment.
The Company’s investment consists of 4.6% of Morion’s outstanding shares, accordingly, the Company accounts for its investment in Morion on the cost basis. ThisMorion is a less than wholly owned subsidiary of Gazprombank, a state-owned Russian bank. The U.S. Ukraine-related sanctions regime has since 2014 included a list of sectoral sanctions identifications (“SSI”) pursuant to Executive Order 13662, which prohibits certain transactions, including certain extensions of credit, with an entity designated as an SSI or certain affiliates of an entity designated as an SSI. On July 16, 2014, after the Company’s investment in Morion, Gazprombank was designated as an SSI.
Due to the current Russia-Ukraine conflict and resulting sanctions, the future status of the Company’s equity investment in Morion is uncertain. In response to these conditions, in connection with the preparation of the audited financial statements included in the Form 10-K/A, the Company impaired its investment in Morion in full. The impairment of $796,000 is included in other assetsincome (expense), net, in the accompanying balance sheets. During the nine months ended January 31, 2018 and 2017, the Company acquired product from Morion in the aggregate amountconsolidated statements of approximately $279,000 and $249,000, respectively, and the Company sold product and training services to Morion in the aggregate amount of approximately $192,000 and $10,000, respectively. (See discussion of revenues recognized under the license agreement in the paragraph below.) During the three months ended January 31, 2018 and 2017, the Company acquired product from Morion in the aggregate amount of approximately $108,000 and $45,000, respectively, and the Company sold product and training services to Morion in the aggregate amount of approximately $9,000operations for the same period in 2018. The Company did not have sales of product nor training services to Morion for the three months ended January 31, 2017. At January 31, 2018, approximately $38,000 was payable to Morion. At January 31, 2018 there was no receivable related to Morion. During the nine months ended January 31, 2018 and 2017, the Company received a dividend from Morion in the amount of approximately $85,000 and $100,000, respectively.
FREQUENCY ELECTRONICS, INC. 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 States Department of State (the “State Department”) approves the removal of certain provisions of the original agreement. The State Department has approved the technology transfer called for under the agreement.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 31, 20182023 and April 30, 2017,2022, respectively, arewere 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 |
January 31, 2023 | ||||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | |||||||||||||
Fixed income securities | $ | - | $ | - | $ | - | $ | - | ||||||||
April 30, 2022 | ||||||||||||||||
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | |||||||||||||
Fixed income securities | $ | 10,403 | $ | 23 | $ | (462 | ) | $ | 9,964 |
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 | Fair Value | Unrealized | Fair Value | Unrealized | |||||||||||||||||||
January 31, 2023 | ||||||||||||||||||||||||
Fixed Income Securities | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
April 30, 2022 | ||||||||||||||||||||||||
Fixed Income Securities | $ | 2,349 | $ | (146 | ) | $ | 5,573 | $ | (316 | ) | $ | 7,922 | $ | (462 | ) |
The Company regularly reviews its investment portfolioliquidated all holdings related 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 atMarketable Securities during the three months ended January 31, 2018 are other-than-temporary due to market volatility of2023.
During the security’s fair value, analysts’ expectations,three and the Company’s ability to hold the securities for a period of time sufficient to allow for any anticipated recoveries in market value.
Current | $ | 450 | ||
Due after one year through five years | 2,214 | |||
Due after five years through ten years | 3,611 | |||
$ | 6,275 |
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).
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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’sasset 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 theThe Company’s investments in marketablemoney market, business account, and U.S. securities arewere valued on a Level 1 basis.
NOTE J – RECENT ACCOUNTING PRONOUNCEMENTS
In January 2017, the Financial Accounting Standards Board (the “FASB”(“FASB”) issued Accounting Standards Update (“ASU”)ASU No. 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, 2019,2022, with early adoption permitted. The Company will not be adopting ASU 2017-04 early, and is in the process of determining the effect that ASU 2017-04 may have, however,have. However, the Company expects the new standard to have an immaterial effect on its financial statements.
NOTE K – CREDIT FACILITY
As of January 30, 2017,31, 2023, the Company repaid the principal balance due onretired its credit facility dated June 6, 2013, with JPMorgan ChaseUBS 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.USA. The Company did not incur any early termination fees associated withis considering a new facility, but has sufficient cash to fund 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 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.
NOTE L – VALUATION ALLOWANCE ON DEFERRED TAX ASSETS–DEFERRED INCOME TAXES
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
As required by the authoritative guidance on accounting for income taxes, we evaluate the realization of deferred tax assets in the jurisdiction from which they arise, weon a jurisdictional basis at each reporting date. 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 valueAccounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the Company’s net deferred tax assets assumeswill not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets will not be realizable, we establish a valuation allowance. As of January 31, 2023, and April 30, 2022, the Company will be able to generate sufficient future taxable income in certain jurisdictions, based on estimates and assumptions.maintained a full valuation allowance against its deferred tax assets. 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 reduceadjust its existing valuation allowance resulting in lesschanges to deferred income tax expense. The Company evaluates the realizability of 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.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Item 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
“Safe Harbor”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 orpursuant to 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. AllForward-looking 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 ofinherently involve risks and uncertainties and a number of factorsthat could cause the Company’s actual results to differ materially from those expressed in the forward-looking statements referred to above.statements. Factors that would cause or contribute to such differences include but are not limited to, the risks associated with health epidemics and pandemics, including the COVID-19 pandemic and similar outbreaks, such as their impact on our financial condition and results of operations and on our ability to continue manufacturing and distributing our products, and the impact of health epidemics and pandemics on general economic conditions, including any resulting recession, our inability to integrate operations and personnel, actions by significant customers or competitors, general domestic and international economic conditions, reliance on key customers, 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 detailedthe outcome of any litigation and arbitration proceedings. The factors listed above are not exhaustive. Other sections of this Form 10-Q and in Part I, Item 1A (Risk Factors) of the Form 10-K/A include additional factors that could materially and adversely impact the Company’s periodic report filings withbusiness, financial condition and results of operations. Moreover, the SecuritiesCompany operates in a very competitive and Exchange Commission. Readers are cautionedrapidly changing environment. New factors emerge from time to time and it is not possible for management to place undue reliancepredict the impact of all these factors on the Company’s business, financial condition or results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements which relate only to events as a prediction of actual results. Any or all 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 forward-looking statements contained in this Form 10-Q and any other public statement made by the Company undertakes noor its management may turn out to be incorrect. The Company expressly disclaims any obligation to update theseor revise any forward-looking statements, after the date such 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 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 reasonedreasonable estimates including estimating the cost to complete a contract, the realizable value of its inventory orand 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 three and nine months ended January 31, 2023.
Revenue Recognition
Revenue is recognized when a performance obligation is satisfied, which generally require billingsis 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 achievementthe contract. The transaction price is allocated to each performance obligation and is recognized as revenue upon satisfaction of milestones rather than delivery of product,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 end user is the government. The Company’s contracts typically include one performance obligation which is satisfied by shipped projects and completed services/reports required in the contract. Control over these performance obligations passes to the customer over time and therefore these revenues are reported in operating results over time using the percentage of completion 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 salesrevenues 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 percentagerate (“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.
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. The Company’s products generally carry a one-year warranty, but may vary based on the contract terms.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Significant judgment is used in evaluating the financial information for certain contracts to determine an appropriate budget and Expensesestimated cost. The Company evaluates this information continuously and bases its judgments on historical experience, design specifications, and expected costs for material and labor. The Company evaluates the amount of development risk associated with new contracts which entail the development of new or significantly modified products and incorporates additional costs to cover these risks. These are estimates based on the Company’s best judgement, but because this entails estimations based on products not heretofore developed, there is risk that the estimates may ultimately prove to be incorrect and that costs are impacted.
Contract costs include all direct material, direct labor, costs, manufacturing overhead and other direct and indirect costs related to contract performance. Selling, general and administrative costs are expensedcharged to expense as incurred.
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 are established for slow-moving materials based on percentage of usage over a ten-year period, obsolete items on a gradual basis over five years with no usage and costs incurred on programs for which production-level orders cannot be determined as probable. Such write downswrite-downs are based upon management’s experience and expectationsestimates for future business. Any changes arising from revised expectationsestimates are reflected in cost of salesrevenues in the period the revision is made.
COVID-19 Pandemic Update, and have current prices that are readily available. In general, investments in fixed income securities are onlyOther Macroeconomic Factors
Refer to Footnote A in the commercial paperaccompanying financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
RESULTS OF OPERATIONS
The table below sets forth for the respective periods of fiscal years 2018three and 2017 (which end on April 30, 2018nine months ended January 31, 2023 and 2017, respectively)2022, 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 | % |
Three months | Nine months | |||||||||||||||
Periods ended January 31, | ||||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Revenues | ||||||||||||||||
FEI-NY | 79.3 | % | 88.6 | % | 82.6 | % | 82.3 | % | ||||||||
FEI-Zyfer | 23.4 | 12.7 | 20.8 | 19.2 | ||||||||||||
Less intersegment revenues | (2.7 | ) | (1.3 | ) | (3.4 | ) | (1.5 | ) | ||||||||
100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||
Cost of revenues | 67.4 | 73.5 | 86.3 | 70.1 | ||||||||||||
Gross margin | 32.6 | 26.5 | 13.7 | 29.9 | ||||||||||||
Selling and administrative expenses | 22.2 | 23.2 | 23.0 | 25.3 | ||||||||||||
Research and development expenses | 7.4 | 9.2 | 9.0 | 10.1 | ||||||||||||
Operating income (loss) | 3.0 | (5.9 | ) | (18.3 | ) | (5.5 | ) | |||||||||
Other income (loss), net | (6.0 | ) | (0.1 | ) | (2.4 | ) | 0.7 | |||||||||
Provision for income taxes | - | - | - | - | ||||||||||||
Net loss | (3.0 | )% | (6.0 | )% | (20.7 | )% | (4.8 | )% |
Revenues
Three months | Nine months | |||||||||||||||||||||||||||||||
Periods ended January 31, | ||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Segment | 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||
FEI-NY | $ | 8,420 | $ | 10,855 | $ | (2,435 | ) | (22.4 | )% | $ | 22,954 | $ | 31,399 | $ | (8,445 | ) | (26.9 | )% | ||||||||||||||
FEI-Zyfer | 2,480 | 1,558 | 922 | 59.2 | 5,772 | 7,341 | (1,569 | ) | (21.4 | ) | ||||||||||||||||||||||
Intersegment revenues | (280 | ) | (168 | ) | (112 | ) | 66.7 | (953 | ) | (604 | ) | (349 | ) | 57.8 | ||||||||||||||||||
$ | 10,620 | $ | 12,245 | $ | (1,625 | ) | (13.3 | )% | $ | 27,773 | $ | 38,136 | $ | (10,363 | ) | (27.2 | )% |
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 | )% |
For the ninethree months ended January 31, 2018,2023 revenues from commercial and U.S. Government communication satellite programs decreased approximately $5.4 million over the same period of fiscal year 2017, and accounted for approximately 36%47% of consolidated revenues compared to approximately 49%62% of consolidated revenues during this same period in the prior fiscal 2017.year. Revenues on these contracts are recognized primarily under the percentage of completionPOC 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 million over the same period of fiscal 2017, and accounted for approximately 44%47% of consolidated revenues compared to approximately 37% in fiscal 2017. Other commercial and industrial revenues in the fiscal year 2018 period accounted for approximately 20% of consolidated revenues compared to 14% in the prior year. Intersegment revenues are eliminated in consolidation.
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 | % |
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
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 | )% |
For the nine months ended January 31, 20182023 revenues from commercial and 2017,U.S. Government communication satellite programs accounted for approximately 46% of consolidated revenues compared to approximately 55% of consolidated revenues during this same period in the prior fiscal year. Revenues from non-space U.S. Government/DOD customers accounted for approximately 47% of consolidated revenues for the nine months ended January 31, 2023 compared to approximately 39% of consolidated revenue during the same period of fiscal year 2022. Other commercial and industrial revenues for the nine months ended January 31, 2023 accounted for approximately 7% of consolidated revenue compared to approximately 6% for the nine months ended January 31, 2022. The decrease in revenue for the nine months ended January 31, 2023 was predominately in the satellite market, however, the decline in revenue from non-space U.S. Government/DOD customers also contributed to the decrease in revenue. The decrease is partly due to timing of awards of contracts as well as technical difficulties that were reported at the end of our prior fiscal year, which have been mostly resolved.
Gross Margin
Three months | Nine months | |||||||||||||||||||||||||||||||
Periods ended January 31, | ||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||||||||||
$ | 3,465 | $ | 3,240 | $ | 225 | 6.9 | % | $ | 3,810 | $ | 11,392 | $ | (7,582 | ) | (66.6 | )% | ||||||||||||||||
GM Rate | 32.6 | % | 26.5 | % | 13.7 | % | 29.9 | % |
For the three months ended January 31, 2023, gross margin and GM Rate increased compared to the same respective periods in the prior fiscal year. The increase in the gross margin and GM Rate was due to higher engineering costs associated with programs in their development phase in the prior year period versus their production phase during the current year period. For the nine months ended January 31, 2023, gross margin and GM Rate decreased compared to the same period in the prior fiscal year. The decrease in gross margin and GM Rate was due to increased engineering costs on development phase programs that experienced particularly complex technical challenges that have since been resolved, minor technical challenges that have been, or will be, resolved reasonably quickly, and the negative cost impacts on some programs due to supply chain delays, influenced by COVID during the nine months ended January 31, 2023. Gross margin was also negatively affected by under absorption of costs due to the decrease in sales during the three month and nine month periods ended January 31, 2023.
Selling, General, and Administrative Expenses
Three months | Nine months | |||||||||||||||||||||||||||||
Periods ended January 31, | ||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||
2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||||||||
$ | 2,357 | $ | 2,832 | $ | (475 | ) | (16.8 | )% | $ | 6,383 | $ | 9,637 | $ | (3,254 | ) | (33.8 | )% |
For the three months ended January 31, 2023 and 2022, selling, general, and administrative (“SG&A”) expenses were approximately 24%22% and 23%, respectively, of consolidated revenues. The decrease in SG&A expenses for the three months ended January 31, 2023 as compared to the prior year period was largely due to a decrease in payroll and associated costs related to the previously announced workforce reduction.
For the nine months ended January 31, 2023 and 2022, SG&A expenses were approximately 23% and 25%, respectively, of consolidated revenues. ForThe decrease in SG&A expenses for the threenine months periods ended January 31, 2018 and 2017, SG&A expenses were approximately 26% and 25% respectively, of consolidated revenues. The majority of2023 as compared to the prior year period was largely due to decrease in professional fees, as well as a one-time reduction occurred in corporateto deferred compensation expense, professional fees,expense. The Company continues to monitor expenses looking for additional cost-effective reductions going forward.
FREQUENCY ELECTRONICS, INC. and stock option expense.SUBSIDIARIES
(Continued)
Research and development expenseDevelopment Expenses
Nine months | Three months | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three months | Three months | Nine months | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Periods ended January 31, | Periods ended January 31, | Periods ended January 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | Change | 2018 | 2017 | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2023 | 2023 | 2022 | Change | 2023 | 2022 | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
$ | 5,071 | $ | 4,832 | $ | 239 | 4.9 | % | $ | 1,708 | $ | 1,337 | $ | 371 | 27.7 | % | 783 | $ | 1,129 | $ | (346 | ) | (30.6 | )% | $ | 2,492 | $ | 3,861 | $ | (1,369 | ) | (35.5 | )% |
R&D”)&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 monththree-month period endingended January 31, 20182023 was 16%7% of sales compared to 14%9% of sales for the same period of the previousprior fiscal year. The R&D rate for the three monthnine-month period endingended January 31, 20182023 was 16%9% of sales compared to 12%10% of sales for the same period of the previousprior fiscal year. The Company expects the level of activity related todecrease in R&D expenditures for both periods of fiscal year 2023 was primarily due to the resolution of fiscal 2022 technical challenges to projects that are now in the production phase. The Company plans to continue throughto invest in R&D in the current yearfuture to keep its products at the state of the art.
Operating Income (Loss)
Three months | Nine months | |||||||||||||||||||||||||||||
Periods ended January 31, | ||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||
2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||||||||
$ | 325 | $ | (721 | ) | $ | 1,046 | NM | $ | (5,065 | ) | $ | (2,106 | ) | $ | (2,959 | ) | NM |
For the three months ended January 31, 2023, operating income increased due to a combination of increased gross margin, 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.
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 | % |
Other incomeIncome (Expense), net
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 | )% |
Three months | Nine months | |||||||||||||||||||||||||||||||
Periods ended January 31, | ||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||||||||||
Investment (expense) income, net | $ | (625 | ) | $ | 4 | $ | (629 | ) | NM | $ | (600 | ) | $ | 195 | $ | (795 | ) | NM | ||||||||||||||
Interest expense | (18 | ) | (19 | ) | 1 | (5.3 | )% | (81 | ) | (59 | ) | (22 | ) | 37.3 | % | |||||||||||||||||
Other income (expense), net | 5 | 2 | 3 | NM | 5 | 160 | (155 | ) | (96.9 | )% | ||||||||||||||||||||||
$ | (638 | ) | $ | (13 | ) | $ | (625 | ) | NM | $ | (676 | ) | $ | 296 | $ | (972 | ) | NM |
Investment (expense) income is derived primarily from the Company’s holdings and sale of marketable securities. Earnings on these securities may varyDuring the three months ended January 31, 2023, the Company liquidated its holdings and as a result there was an approximate $784,000 loss recognized.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Income Tax Provision
Three months | Nine months | |||||||||||||||||||||||||||||
Periods ended January 31, | ||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||
2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||||||||
$ | 3 | $ | 1 | $ | 2 | 200.0 | % | $ | 6 | $ | 3 | $ | 3 | 100.0 | % |
Three months | Nine months | |||||||||||||||
Periods ended January 31, | ||||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Effective tax rate on pre-tax book loss: | (1.1 | )% | (0.1 | )% | (0.1 | )% | (0.2 | )% |
The estimated annual effective tax rate for the fiscal year ending April 30, 2023 is 0.01%. This calculation reflects estimated income tax expense based on fluctuating interest rates, dividend payout levels, andour current year annual pretax income forecast which is offset by the timing of purchases or sales of securities. estimated change in the current year valuation allowance. The Company maintains a full valuation allowance against its deferred tax assets.
For the three months endingended January 31, 2018 investment income was lower than in the same period of fiscal year 2017, mainly due to 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,2023, the Company recorded gainsa discrete income tax provision of approximately $1.0 million during$3,345 primarily related to an accrual of interest for unrecognized tax benefits. For the three months ended JulyJanuary 31, 2017 as compared to no gain or loss in2022, the same periodCompany recorded an income tax provision of fiscal year 2017.$894.
For the nine months ended January 31, 2017 compared2023, the Company recorded a discrete income tax provision of $5,812 primarily related to the same periodan accrual of fiscal year 2017 is the result of there being no credit line borrowings duringinterest for unrecognized tax benefits. For the nine months endingended January 31, 2017.
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 | % |
The effective tax rate for the three months ended January 31, 2018 includes a discrete2023 was an income tax expenseprovision of approximately $4.8 million(1.1)% on pretax loss of $313,000 compared to an income tax provision of (0.1)% on pretax loss of $734,000 in the comparable prior fiscal year period. The effective tax rate for the reduction in our net deferredthree months ended January 31, 2023 differs from the U.S. federal statutory rate of 21% primarily due to domestic losses for which the Company is not recognizing an income tax assets.benefit.
The effective tax rate for the nine months ended January 31,201831, 2023 was (35.2) an income tax provision of (0.1)% on pretax loss of $5.7 million compared to 63.7%an income tax provision of (0.2)% on pretax loss of $1.8 million in the nine months ended January 31, 2017. For the three months ended January 31, 2018 and 2017, thecomparable prior fiscal year period. 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 Inflation Reduction Act of $2,848, which2022 (the “Act”) was signed into U.S. law on August 16, 2022. The Act includes various tax provisions,
including an excise tax on stock repurchases, expanded tax credits for clean energy incentives, and a currentcorporate alternative minimum tax benefitthat generally applies to U.S. corporations with average adjusted annual financial statement income over a three-year period in excess of $2,085 which is reduced by a discrete income tax provision of $4,933.
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 | % |
LIQUIDITY AND CAPITAL RESOURCES
The Company’s consolidated balance sheet continuessheets continue to reflect a strong working capital position of $53.9approximately $20.0 million at January 31, 20182023 and $61.7$34.2 million at April 30, 2017.2022. Included in working capital at January 31, 20182023 and April 30, 2017, is $13.22022 was $12.9 million and $10.0$21.5 million, respectively, consisting of cash, cash equivalents, and marketable securities. The Company’s current ratio at January 31, 2018 is 7.12023 was 1.7 to 1.1 compared to 2.6 to 1 as of April 30, 2022.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Net cash provided by operationsoperating activities for the nine monthsnine-month period ended January 31, 2018 were $2.82023 was approximately $1.9 million compared to $1.5 millionand net cash provided by operating activities for the nine-month period ended January 31, 2022 was approximately $4.0 million. The decrease in the comparable fiscal year 2017 period. The increaseoperating cash flow in the first nine months of fiscal year 2018 period resulted primarily from2023 was mainly due to an increase in accounts receivable collections, compared to the balances as of the end of the previous fiscal year.net loss and contract liabilities, partially offset by a decrease in non-cash adjustments and contract assets. For the nine-month periods ended January 31, 20182023 and 2017,2022, the Company incurred approximately $8.3$2.7 million and $3.8$2.9 million, respectively, of non-cash operating expenses including ROU assets and liabilities for leases, loss provision accrual, depreciation and amortization, inventory reserve adjustments, deferred compensation, and accruals for employee benefit programs and gain on sale of marketable securities.programs.
Net cash provided by investing activities for the nine-month period ended January 31, 2023 was approximately $8.7 million compared to net cash used in investing activities of approximately $1.6 million for the nine-month period ended January 31, 2022. During the nine months ended January 31, 2018, was $0.5 million compared to $85,000 in the same period of fiscal year 2017. During the fiscal year 2018 period,2023, marketable securities were sold or redeemed in the amount of $6.5$11.0 million compared to $3.9$1.7 million of such redemptions during the fiscal year 2017 period. For the fiscal year 2018, $5.0 million of marketable securities were purchased. There were no marketable securities purchased for the same period in 2017. Inof fiscal year 2022. During the nine months ended January 31, 2018 and 2017,2023 approximately $1.4 million of marketable securities were purchased compared to $1.9 million for the same period of fiscal year 2022. The Company acquired property, plant, and equipment in the amount of approximately $1.0$886,000 and $1.5 million for the nine-month periods ended January 31, 2023 and $3.7 million,2022, respectively. The Company may continue to invest cash equivalents as dictated by its investment and acquisition strategies.
Net cash used in financing activities for the nine months ended January 31, 2023 was approximately $9.4 million related to a dividend payout. There was no cash used in or provided by financing activities for the nine months ended January 31, 2018 and 2017 was $1,000 compared to approximately $6.0 million used in financing activities. During the three months ended January 31, 2017, the Company repaid the Note payable of $6 million related to the Line of Credit with JPMorgan that has subsequently been terminated.2022.
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 wheneverwhen appropriate opportunities arise but it has neither a formal repurchase plan nor commitments to purchase additional shares in the future.arise. As of January 31, 2018,2023, the Company has repurchased approximately $4 million of its common stock out of the $5 million authorization. For the nine months ended January 31, 20182023 and 2017,2022 there were no repurchaserepurchases of shares.
The Company will continue to expend resources for research and development 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, 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, the Company anticipates securing additional customer funding for a portion of its research and developmentR&D activities and will allocate internal funds depending on market conditions and identification of new opportunities as in fiscal year 2017.opportunities. The Company expects internally generated cash will be adequate to fund these developmentR&D 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.
As of January 31, 2018,2023, the Company’s consolidated funded backlog iswas approximately $16$54 million compared to $28$40 million at April 30, 2017,2022, the end of fiscal year 2017.2022. Approximately 80%82% of this backlog is expected to be realized in the next twelve months. Included in the backlog atAs of January 31, 2018 is approximately $7.6 million2023, there were no amounts included in backlog under cost-plus-feecost-plus fixed-fee contracts which the Company believes represent firm commitments from its customers for which the Company hasthat have not received full funding to-date.been funded. The Company excludes from backlog any contracts or awards for which it has not received authorization to proceed and onproceed. On fixed price contracts, the Company excludes any unfunded portion. The Company expects theseOver time, as partially funded contracts to become fully funded, over time andthe Company will add the additional funding to its backlog. The backlog at that time.is subject to change for various reasons, including possible cancellation of orders, change orders, terms of the contracts and other factors beyond the Company’s control. Accordingly, the backlog is not necessarily indicative of future revenues or profits (losses) which may be realized when the results of such contracts are reported.
The Company believes that its liquidity is adequate to meet its operating and investment needs through at least March 19, 201917, 2024 and the foreseeable future.
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.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Item 3. Quantitative and Qualitative Disclosures Aboutabout Market Risk
Not applicable to smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of 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. Based on their evaluation, the Company’s chief executive officer and chief financial officer have concluded that, because of the material weaknesses in internal control over financial reporting disclosed below, as of January 31, 2023, the Company’s disclosure controls and procedures were not effective at a reasonable assurance level.
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
Management’s Report on their evaluation, the Company’s chief executive officer and chief financial officer have concluded that, as of January 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.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term isas defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) duringAct. The Company’s internal control system is designed to provide reasonable assurance regarding the three months ended January 31, 2018reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to which this report relatesfuture periods are subject to the risk that have materially affected,controls may become inadequate because of changes in conditions, or are reasonably likely to materially affect,that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of April 30, 2022. In making this assessment, management used the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company’s management initially concluded and disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2022, filed on July 14, 2022 with the SEC (the “Form 10-K”) that the Company’s internal control over financial reporting was effective as of April 30, 2022.
However, for the reasons discussed below, management conducted a re-assessment of the effectiveness of the Company’s internal control over financial reporting. In conducting its re-assessment of the effectiveness of the Company’s internal control over financial reporting, management concluded that the Company’s internal control over financial reporting was not effective as of April 30, 2022, because of the material weaknesses in internal control over financial reporting discussed below.
As disclosed in the Company’s Current Report on Form 8-K filed on December 16, 2022, in the course of preparing the unaudited condensed consolidated financial statements for the fiscal quarter ended October 31, 2022, the Company identified errors related to the calculations and presentation of contract assets and contract liabilities in the Form 10-K.
Following the identification of these prior errors, management re-evaluated the Company’s internal control over financial reporting as of April 30, 2022 and identified material weaknesses in the following areas:
1. While previously corrected as of April 30, 2022, historically, through April 30, 2022, the Company had presented contract assets and contract liabilities on a net basis on the consolidated balance sheets whereas ASC 606-10-45-1 requires gross presentation. In addition, a formula error was identified whereby the Company had not been grouping contracts assets and contract liabilities properly on a project-by-project basis. As a result, management has concluded that the Company did not effectively design and maintain controls over the completeness and accuracy of the gross presentation of contract assets and contract liabilities and thus a material weakness was identified; and
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
2. In connection with the above, as of April 30, 2021 the Company had presented contract assets and contract liabilities on a net basis on the consolidated balance sheets whereas ASC 606-10-45-1 requires gross presentation. During the process of completing the Company’s Form 10-K, management corrected the contract assets and contract liabilities balances in the April 30, 2021 column of the consolidated balance sheet to present them gross as opposed to net as previously filed. However, this should have been identified as a correction of a prior period error and assessed accordingly to determine whether or not a restatement was needed and whether the error was the result of a deficiency in the Company’s internal control over financial reporting. As a result, management has concluded that the Company did not have an adequate control in place for identifying and assessing financial statement errors and thus a material weakness was identified.
As disclosed in the Current Report on Form 8-K filed on December 16, 2022, by the Company, on December 14, 2022, the Company concluded that the items noted above constituted material weaknesses in the Company’s internal control over financial reporting as of April 30, 2022 and continued to exist as of January 31, 2023.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Remediation Plan
To remediate the material weaknesses described above, the Company is pursuing the following remediation steps:
1. | Review and update, as necessary, the design and documentation of its internal control policies and procedures with respect to its internal control over financial reporting. The Company plans to implement additional formulas and comparative reviews of financial information as a result of issues identified in its policies and procedures as promptly as practical and to satisfy documentation requirements under Section 404 of the Sarbanes-Oxley Act. |
2. | Ensure that its internal control over financial reporting is properly designed, documented and operating effectively by (i) enhancing the design of existing control activities and/or implementing additional control activities, as needed, (ii) monitoring the operating effectiveness of those controls, and (iii) ensuring that documentation exists to evidence the performance of those controls. |
The Company believes that its remediation plan will be sufficient to remediate the identified material weaknesses and strengthen its internal control over financial reporting. However, by April 30, 2023, the Company’s next annual reporting date, there may not be sufficient time for the Company to remediate all material weaknesses or, if remediated, to test the operating effectiveness of the remediated controls. As the Company continues to evaluate, and works to improve, its internal control over financial reporting, management may determine that additional measures to address control deficiencies or modifications to the remediation plan are necessary. The Company cannot assure you, however, when it will remediate such weaknesses, nor can it be certain whether additional actions will be required or the costs of any such actions. Moreover, the Company cannot assure you that additional material weaknesses will not arise in the future.
Changes in Internal Control Over Financial Reporting
The Company is in the process of implementing certain changes in its internal control over financial reporting to remediate the material weaknesses described above. Other than the implementation of the remediation plan discussed above, which began in the fiscal quarter ended January 31, 2023, there has been no change in the Company’s internal control over financial reporting during the fiscal quarter ended January 31, 2023, that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1A. Risk Factors
As disclosed in “Item 1A. Risk Factors” in the Form 10-K/A, there are a number of risks and uncertainties that could have a material adverse effect on the Company’s business, financial position, results of operations and/or cash flows. There are no material updates or changes to the Company’s risk factors since the filing of the Form 10-K/A.
Item 6. Exhibits
31.1 - | |
31.2 - | |
32 - | |
101- | The following materials from the Frequency Electronics, Inc. Quarterly Report on Form 10-Q for the quarter ended January 31, |
104- | Cover Page Interaction Data File (formatted as inline XBRL and contained in Exhibit 101). |
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.
Dated: March 19, 2018 BY /s/17, 2023
By: /s/ Thomas McClelland
Thomas McClelland
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Steven L. Bernstein
Steven L. Bernstein
Chief Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer)