UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


(Mark one)

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period ended JulyOctober 31, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                           to                          

 

Commission File No. 1-8061

 

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, NY

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) 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 every Interactive Data File required to be submitted 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 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 emerging growth 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.

 

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 registrant 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’s Common Stock, par value $1.00 per share, as of SeptemberDecember 11, 2023 – 9,390,0469,415,417

 

 

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

 

TABLE OF CONTENTS

 

 

Page No.

Part I. Financial Information:

 

 

 

Item 1 - Financial Statements:

 

 

 

Condensed Consolidated Balance Sheets – JulyOctober 31, 2023 (unaudited) and April 30, 2023

3

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) – Three and Six Months  Ended JulyOctober 31, 2023 and 2022 (unaudited)

4

 

 

Condensed Consolidated Statements of Cash Flows ThreeSix Months Ended JulyOctober 31, 2023 and 2022 (unaudited)

5

 

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity –Three and Six Months Ended JulyOctober 31, 2023 and 2022 (unaudited)

6

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

7-127-13

 

 

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

13-1714-19

 

 

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

1820

 

 

Item 4 - Controls and Procedures

1820

 

 

Part II. Other Information:

 

 

 

Item 1A – Risk Factors

1921

  

Item 6 - Exhibits

1921

 

 

Signatures

2022

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except par value)

 

 

July 31,

  

April 30,

  

October 31,

  

April 30,

 
 

2023

  

2023

  

2023

  

2023

 
 

(UNAUDITED)

      

(UNAUDITED)

     

ASSETS:

                

Current assets:

                

Cash and cash equivalents

 $9,061  $12,049  $8,708  $12,049 

Accounts receivable, net of allowance for doubtful accounts of $111 at July 31, 2023 and April 30, 2023

  6,385   4,622 

Accounts receivable, net of allowance for doubtful accounts of $111 at October 31, 2023 and April 30, 2023

  3,781   4,622 

Contract assets

  11,028   10,009   12,474   10,009 

Inventories

  22,604   20,526   23,071   20,526 

Prepaid income taxes

  27   30   30   30 

Prepaid expenses and other

  1,158   1,071   1,639   1,071 

Total current assets

  50,263   48,307   49,703   48,307 

Property, plant, and equipment, net

  6,778   7,093   6,436   7,093 

Goodwill

  617   617   617   617 

Cash surrender value of life insurance

  10,375   10,220   10,404   10,220 

Other assets

  876   877   876   877 

Right-of-Use assets – operating leases

  7,062   7,382 

Right-of-use assets – operating leases

  6,693   7,382 

Total assets

 $75,971  $74,496  $74,729  $74,496 
                

LIABILITIES AND STOCKHOLDERS EQUITY:

                

Current liabilities:

                

Accounts payable

 $1,214  $1,464  $1,245  $1,464 

Accrued liabilities

  3,967   3,934   4,049   3,934 

Loss provision accrual

  1,577   1,544   1,481   1,544 

Operating lease liability – current portion

  1,766   1,753 

Operating lease liability - current portion

  1,769   1,753 

Contract liabilities

  18,356   18,586   16,435   18,586 

Total current liabilities

  26,880   27,281   24,979   27,281 

Deferred compensation

  8,267   8,314   8,229   8,314 

Deferred taxes

  8   8   8   8 

Operating lease liability – non-current portion

  5,518   5,883   5,126   5,883 

Other liabilities

  129   124   131   124 

Total liabilities

  40,802   41,610   38,473   41,610 
                

Stockholders’ equity:

                

Preferred stock - $1.00 par value; authorized 600 shares, no shares issued

  -   -   -   - 

Common stock - $1.00 par value; authorized 20,000 shares, 9,391 shares issued and 9,390 shares outstanding at July 31, 2023; 9,374 shares issued and 9,373 shares outstanding at April 30, 2023

  9,391   9,374 

Common stock - $1.00 par value; authorized 20,000 shares, 9,404 shares issued and 9,403 shares outstanding at October 31, 2023; 9,374 shares issued and 9,373 shares outstanding at April 30, 2023

  9,405   9,374 

Additional paid-in capital

  49,360   49,136   49,636   49,136 

Accumulated deficit

  (23,579)  (25,621)  (22,782)  (25,621)

Common stock reacquired and held in treasury - at cost (1 share at July 31, 2023 and April 30, 2023)

  (3)  (3)

Common stock reacquired and held in treasury -

at cost (1 share at October 31, 2023 and April 30, 2023)

  (3)  (3)

Accumulated other comprehensive income

  -   - 

Total stockholders’ equity

  35,169   32,886   36,256   32,886 

Total liabilities and stockholders equity

 $75,971  $74,496  $74,729  $74,496 

 

See accompanying notes to condensed consolidated financial statements.

 

3

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands, except per share data)

(Unaudited)

 

 

Three Months Ended July 31,

  

Three Months Ended October 31,

  

Six Months Ended October 31,

 
 

2023

  

2022

  

2023

  

2022

  

2023

  

2022

 
        

Condensed Consolidated Statements of Operations

Condensed Consolidated Statements of Operations

             

Revenues

 $12,408  $8,204  $13,575  $8,949  $25,984  $17,153 

Cost of revenues

  7,540   8,209   9,245   8,599   16,786   16,808 

Gross margin

  4,868   (5)  4,330   350   9,198   345 

Selling and administrative expenses

  2,302   1,992   2,552   2,034   4,853   4,026 

Research and development expenses

  506   1,110   840   599   1,347   1,709 

Operating income (loss)

  2,060   (3,107)  938   (2,283)  2,998   (5,390)
                        

Other income (expense):

                        

Investment income

  20   36 

Investment (expense) income

  (106)  (12)  (86)  24 

Interest expense

  (31)  (45)  (29)  (18)  (60)  (63)

Income (loss) before provision for income taxes

  2,049   (3,116)  803   (2,313)  2,852   (5,429)

Provision for income taxes

  7   1   6   1   13   2 

Net Income (loss)

 $2,042  $(3,117)

Net income (loss)

 $797  $(2,314) $2,839  $(5,431)
                        

Net income (loss) per common share:

                        

Basic and diluted income (loss) per share

 $0.22  $(0.33) $0.08  $(0.25) $0.30  $(0.58)
                        

Weighted average shares outstanding:

                        

Basic and diluted

  9,384   9,308   9,399   9,326   9,392   9,317 
                        
                        

Condensed Consolidated Statements of Comprehensive Income (loss)

     

Net Income (loss)

 $2,042  $(3,117)

Condensed Consolidated Statements of Comprehensive Income (Loss)

Condensed Consolidated Statements of Comprehensive Income (Loss)

         

Net income (loss)

 $797  $(2,314) $2,839  $(5,431)
                        

Unrealized gain (loss) on marketable securities:

        

Unrealized loss on marketable securities:

                

Change in market value of marketable securities before reclassification, net of tax

  -   (2)  -   (581)  -   (552)

Reclassification adjustment for realized gains included in net income, net of tax

  -   16 

Total unrealized gain on marketable securities, net of tax

  -   14 

Reclassification adjustment for realized gains included in net income (loss), net of tax

  -   16   -   1 

Total unrealized loss on marketable securities, net of tax

  -   (565)  -   (551)
                        

Comprehensive income (loss)

 $2,042  $(3,103) $797  $(2,879) $2,839  $(5,982)

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Three Months Ended July 31,

  

Six Months Ended October 31,

 
 

2023

  

2022

  

2023

  

2022

 

Cash flows from operating activities:

                

Net income (loss)

 $2,042  $(3,117) $2,839  $(5,431)

Non-cash charges to earnings

  1,462   816   2,191   1,209 

Net changes in operating assets and liabilities

  (6,305)  (1,273)  (8,011)  3,756 

Net cash used in operating activities

  (2,801)  (3,574)  (2,981)  (466)
                

Cash flows from investing activities:

                

Proceeds on redemption of marketable securities

  -   1,027   -   1,137 

Purchase of marketable securities

  -   (1,303)  -   (1,383)

Purchase of fixed assets

  (187)  (465)

Purchase of property, plant, and equipment, and other assets

  (360)  (729)

Net cash used in investing activities

  (187)  (741)  (360)  (975)
                

Cash flows from financing activities:

                

Net cash used in financing activities

  -   -   -   - 
                

Net decrease in cash and cash equivalents

  (2,988)  (4,315)  (3,341)  (1,441)
                

Cash and cash equivalents at beginning of period

  12,049   11,561   12,049   11,561 
                

Cash and cash equivalents at end of period

 $9,061  $7,246  $8,708  $10,120 
                
                

Supplemental disclosures of cash flow information:

                

Cash paid during the period for:

                

Interest

 $30  $17  $60  $36 

Income Taxes

 $4  $- 

Income taxes

 $9   - 
                

Cash refunded during the period for:

                

Income Taxes

 $-  $2 

Income taxes

 $-  $176 

 

See accompanying notes to condensed consolidated financial statements.

 

5

 

FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Three and Six Months Ended JulyOctober 31, 2023 and 2022

(In thousands, except share data)

(Unaudited)(Unaudited

 

         

Additional

      

Treasury stock

  Accumulated other              

Additional

      

Treasury stock

  

Accumulated other

     
 

Common Stock

  

paid in

  

Accumulated

  

(at cost)

  comprehensive      

Common Stock

  

paid in

  

Accumulated

  

(at cost)

  

comprehensive

     
 

Shares

  

Amount

  

capital

  

Deficit

  

Shares

  

Amount

  Income (loss)  

Total

  

Shares

  

Amount

  

capital

  

Deficit

  

Shares

  

Amount

  

Income (loss)

  

Total

 

Balance at April 30, 2023

  9,373,776  $9,374  $49,136  $(25,621)  741  $(3) $-  $32,886   9,373,776  $9,374  $49,136  $(25,621)  741  $(3) $-  $32,886 

Contribution of stock to

401(k) plan

  17,013   17   96   -   -   -   -   113   17,013   17   96   -   -   -   -   113 

Stock-based

compensation expense

  -   -   128   -   -   -   -   128   -   -   128   -   -   -   -   128 

Net income

  -   -   -   2,042   -   -   -   2,042   -   -   -   2,042   -   -   -   2,042 

Balance at July 31, 2023

  9,390,789  $9,391  $49,360  $(23,579)  741  $(3) $-  $35,169   9,390,789  $9,391  $49,360  $(23,579)  741  $(3) $-  $35,169 

Contribution of stock to 401(k) plan

  12,885   13   75   -   -   -   -   88 

Stock-based compensation expense

  750   1   201   -   -   -   -   202 

Net income

  -   -   -   797   -   -   -   797 

Balance at October 31, 2023

  9,404,424  $9,405  $49,636  $(22,782)  741  $(3) $-  $36,256 

 

         

Additional

      

Treasury stock

  

Accumulated other

              

Additional

      

Treasury stock

  

Accumulated other

     
 

Common Stock

  

paid in

  

Accumulated

  

(at cost)

  

comprehensive

      

Common Stock

  

paid in

  

Accumulated

  

(at cost)

  

comprehensive

     
 

Shares

  

Amount

  

capital

  

Deficit

  

Shares

  

Amount

  

Income (loss)

  

Total

  

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   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   16,708   17   105   -   -   -   -   122 

Stock-based

compensation expense

  -   -   (25)  -   -   -   -   (25)  -   -   (25)  -   -   -   -   (25)

Other comprehensive

income, net of tax

  -   -   -   -   -   -   14   14   -   -   -   -   -   -   14   14 

Net loss

  -   -   -   (3,117)  -   -   -   (3,117)  -   -   -   (3,117)  -   -   -   (3,117)

Balance at July 31, 2022

  9,314,886  $9,315  $58,036  $(23,237)  1,375  $(6) $(426) $43,682   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 

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 

 

See accompanying notes to condensed consolidated financial statements.

 

6

 

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 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 JulyOctober 31, 2023 and the results of its operations, changes in stockholders’ equity for the three and six months ended JulyOctober 31, 2023 and 2022, and cash flows for the threesix months ended JulyOctober 31, 2023 and 2022. The April 30, 2023 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 U.S. GAAP have been condensed or omitted. These condensed consolidated interim financial statements should be read in conjunction with the annual consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2023, filed on July 27, 2023 with the Securities and Exchange Commission (the “Form 10-K”). 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

On May 5, 2023, the World Health Organization (“WHO”) announced an end to the global health emergency related to the coronavirus originating in Wuhan, China (“COVID-19”). Additionally, on May 11, 2023 the Public Health Emergency declared by the U.S. Department of Health and Human Services expired.

Certain Company vendors continue to deliver materials with longer lead times due to COVID-19 related impacts to their workforces or their supply chains. These delays have impacted the Company’s production schedules, and increased costs associated with procurement of materials and services. The Company continues to monitor these and its other vendors and, if necessary, seek alternative suppliers, or, in certain cases, re-design products using alternative parts and materials.

 

NOTE B – EARNINGS (LOSS) PER SHARE

 

Reconciliation of the weighted average shares outstanding for basic and diluted income (loss) per share (“EPS”) for the three and six months ended JulyOctober 31, 2023 and 2022, respectively, were as follows:

 

 

Periods ended October 31,

 
 

Three months ended July 31,

  

Three months

  

Six months

 
 

2023

  

2022

  

2023

  

2022

  

2023

  

2022

 

Weighted average shares outstanding:

                        

Basic EPS shares outstanding (weighted average)

  9,384,375   9,307,939   9,399,052   9,326,347   9,391,714   9,317,143 

Effect of dilutive securities

  **   **   **   **   **   ** 

Diluted EPS shares outstanding

  9,384,375   9,307,939   9,399,052   9,326,347   9,391,714   9,317,143 

 

** For the three and six months ended JulyOctober 31, 2023 and 2022, dilutive securities are excluded from the calculation of earnings per shareEPS since the inclusion of such shares would be antidilutive. The exercisable shares excluded for the three and six months ended JulyOctober 31, 2023 was 97,000 shares. The exercisable shares excluded for the three and six months ended October 31, 2022 were 155,000 options and 357,125 options, respectively.was 243,625 shares.

 

7

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE C – CONTRACT (LIABILITIES) ASSETS

 

At JulyOctober 31, 2023 and April 30, 2023, contract assets and contract liabilities, consisted of the following (in thousands):

 

 

July 31, 2023

  

April 30, 2023

  

October 31, 2023

  

April 30, 2023

 
                

Contract assets

 $11,028  $10,009  $12,474  $10,009 

Contract liabilities

  (18,356)  (18,586)  (16,435)  (18,586)

 

Contract assets represent revenue recognized on long-term contracts that have not been billed at the balance sheet dates, and contract liabilities represent a liability for amounts billed in excess of the revenue recognized, contract liabilities.recognized. Amounts are billed to customers pursuant to contract terms. In general, the recorded amounts will be billed and collected or revenue recognized within twelve months of the balance sheet dates. Revenue on these long-term contracts are accounted for over time using the percentage-of-completion (“POC”) method. Fluctuations of contract assets and contract liabilities are due to the timing of funding, amounts billed and revenue recorded. Contract assets increased $1.0$2.5 million during the threesix months ended JulyOctober 31, 2023, primarily due to revenue recognized during the threesix months ended JulyOctober 31, 2023 for which we have not yet billed our customers. Contract liabilities increased $0.2decreased $2.2 million during the threesix months ended JulyOctober 31, 2023, primarily due to payments received in excess of revenue recognized on these performance obligations. During the three and six months ended JulyOctober 31, 2023, we recognized $3.7$4.4 million and $8.1 million, respectively, of our contract liabilities at April 30, 2023 as revenue. During the three and six months ended JulyOctober 31, 2022, we recognized $2.5$1.9 million and $4.4 million, respectively, of our contract liabilities at April 30, 2022 as revenue. During the three and six months ended JulyOctober 31, 2023, revenue recognized under POC contracts was approximately $12.3 million and $24.0 million, respectively. During the three and six months ended October 31, 2022, revenue recognized under POC contracts was approximately $11.7$8.7 million and $7.9$16.6 million, respectively. If contract losses are anticipated, a loss provision is recorded for the full amount of such losses when they are determinable. Total contract losses, recorded in cost of revenue, for the three and six months ended JulyOctober 31, 2023 were approximately $1.4 million and $1.5 million, respectively. Total contract losses, recorded in cost of revenue, for the three and six months ended October 31, 2022 were approximately $139,000$0.7 million and $1.2$2.0 million, respectively.

 

NOTE D – EMPLOYEE BENEFIT PLANS

 

During the three and six months ended JulyOctober 31, 2023, the Company made contributions of 17,01312,885 and 29,898 shares, respectively, of its common stock to the Company’s profit-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.

 

Deferred compensation expense charged to selling and administrative expenses during the three and six months ended JulyOctober 31, 2023, werewas approximately $138,000, inclusive of approximately $38,000 of interest expense.$109,000 and $217,000, respectively. Payments made related to deferred compensation, inclusive of approximately $29,000 and $60,000, respectively, of interest expense, were approximately $185,000$175,000 and $361,000 for the same period.periods. Deferred compensation expense charged to selling and administrative expenses during the three and six months ended JulyOctober 31, 2022, werewas approximately $127,000, inclusive of approximately $17,000 of interest expense.$109,000 and $218,000, respectively. Payments made related to deferred compensation, inclusive of approximately $18,000 and $36,000, respectively, of interest expense were approximately $161,000$159,000 and $320,000 for the same period.periods.

 

NOTE E – INVENTORIES

 

Inventories, which are reported at the lower of cost and net realizable value, consisted of the following (in thousands):

 

  

July 31, 2023

  

April 30, 2023

 

Raw Materials and Component Parts

 $14,173  $12,460 

Work in Progress

  7,914   7,547 

Finished Goods

  517   519 
  $22,604  $20,526 
  

October 31, 2023

  

April 30, 2023

 

Raw materials and component parts

 $14,193  $12,460 

Work in progress

  8,336   7,547 

Finished goods

  542   519 
  $23,071  $20,526 

 

8

 

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, manufacturing facilities 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.

 

New York lease. In February 2019, the Company entered into an agreement to lease a building to be used as a corporate headquarters office and manufacturing facility in Mitchell Field, NY (“New York lease”). The New York lease expires September 30, 2029 and contains renewal options, early termination, rent abatement, and escalation clauses that are factored into our determination of lease payments when appropriate. We include options to extend or terminate leases in the Right-of-Use (ROU)(“ROU”) operating lease asset and liability when it is reasonably certain we will exercise these options. As of JulyOctober 31, 2023, lease options were not included in the calculation of the ROU operating lease asset and liability. 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.

 

California lease. In October 2017, the Company entered into an agreement to lease a building to be used as an office and manufacturing facility in Garden Grove, CA (“California Lease”lease”). The California lease expires January 31, 2025 and contains renewal options, early termination, rent abatement, and escalation clauses that are factored into our determination of lease payments when appropriate. We include options to extend or terminate leases in the ROU operating lease asset and liability when it is reasonably certain we will exercise these options. As of JulyOctober 31, 2023, lease options were not included in the calculation of the ROU operating lease asset and liability. 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.

 

New Jersey lease. In February 2022, the Company entered into an agreement to lease a building to be used as an office and manufacturing facility in Northvale, NJ (“New Jersey lease”). The New Jersey lease expires January 31, 2025 and contains renewal options, early termination, rent abatement, and escalation clauses that are factored into our determination of lease payments when appropriate. We include options to extend or terminate leases in the ROU operating lease asset and liability when it is reasonably certain we will exercise these options. As of JulyOctober 31, 2023, lease options were not included in the calculation of the ROU operating lease asset and liability. 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.

 

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 (in thousands):

 

 

Classification

 

July 31, 2023

  

April 30, 2023

 

Classification

 

October 31, 2023

  

April 30, 2023

 

Assets

                   

Operating lease ROU assets

 

ROU assets - operating leases

 $7,062  $7,382 

ROU assets - operating leases

 $6,693  $7,382 
                   

Liabilities

                   

Operating lease liabilities (short-term)

 

Operating lease liability - current portion

  1,766   1,753 

Operating lease liability - current portion

  1,769   1,753 

Operating lease liabilities (long-term)

 

Operating lease liability - non-current portion

  5,518   5,883 

Operating lease liability - non-current portion

  5,126   5,883 

Total lease liabilities

Total lease liabilities

 $7,284  $7,636 

Total lease liabilities

 $6,895  $7,636 

 

Total operating lease expense was $454,000$466,000 and $481,000$921,000 for the three and six months ended JulyOctober 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 $481,000 and $962,000 for the three and six months ended October 31, 2022, 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.

 

9

 

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 JulyOctober 31, 2023:

 

Fiscal Year Ending April 30,

Fiscal Year Ending April 30,

 

Fiscal Year Ending April 30,

 

(in thousands)

 

(in thousands)

(in thousands)

 
        

Remainder of 2024

 $1,317  $815 

2025

  1,844   1,844 

2026

  1,328   1,328 

2027

  937   937 

2028

  1,262   1,262 

Thereafter

  1,976   1,976 

Total lease payments

  8,664   8,162 

Less imputed interest

  (1,380)  (1,267)

Present value of future lease payments

  7,284   6,895 

Less current obligations under leases

  (1,766)  (1,769)

Long-term lease obligations

  5,518   5,126 

 

As of JulyOctober 31, 2023 and 2022, the weighted-average remaining lease term for all operating leases was 5.435.27 years and 6.155.97 years, respectively. The Company does not generally have access to the rate implicit in the leases and therefore selected a rate that is reflective of companies with similar credit ratings for secured debt as the discount rate. The weighted average discount rate for operating leases as of JulyOctober 31, 2023 and 2022, was 6.23%6.28% and 6.18%6.19%, respectively.

 

NOTE G – SEGMENT INFORMATION

 

The Company operates under two reportable 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 markets: communication satellites (both commercial and U.S. Government-funded); terrestrial cellular telephone or other ground-based telecommunication stations; and other components and systems for the U.S. military.

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 U.S. market.

 

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

 

The accounting policies of the two segments are the same as those described in “Note 1. Summary of Accounting Policies” to the consolidated financial statements included in the Form 10-K. 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 the applicable reporting segment.

 

10

 

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 condensed consolidated statements of operations or the consolidated balance sheets for each of the periods (in thousands):

 

 

Periods ended October 31,

 
 

Three Months Ended July 31,

  

Three months

  

Six months

 
 

2023

  

2022

  

2023

  

2022

  

2023

  

2022

 

Revenues:

                        

FEI-NY

 $9,490  $6,854  $9,271  $7,680  $18,762  $14,534 

FEI-Zyfer

  3,267   1,732   4,756   1,561   8,023   3,292 

less intersegment revenues

  (349)  (382)  (452)  (292)  (801)  (673)

Consolidated revenues

 $12,408  $8,204  $13,575  $8,949  $25,984  $17,153 

 

Operating income (loss):

                        

FEI-NY

 $1,481  $(2,589) $(231) $(1,389) $1,249  $(3,978)

FEI-Zyfer

  678   (438)  1,484   (792)  2,163   (1,230)

less intersegment margin

  (61)  - 

less intersegment profit

  (79)  -   (140)  - 

Corporate

  (38)  (80)  (236)  (102)  (274)  (182)

Consolidated operating income (loss)

 $2,060  $(3,107) $938  $(2,283) $2,998  $(5,390)

 

 

July 31, 2023

  

April 30, 2023

  

October 31, 2023

  

April 30, 2023

 

Identifiable assets:

                

FEI-NY

 $40,371  $39,005  $37,315  $39,005 

FEI-Zyfer

  12,288   10,699   13,369   10,699 

less intersegment balances

  (119)  (58)  (198)  (58)

Corporate

  23,431   24,850   24,243   24,850 

Consolidated identifiable assets

 $75,971  $74,496  $74,729  $74,496 

 

Total revenue recognized over time as POC and Passage of Title (“POT”) was approximately $11.7$12.3 million and $0.7$1.3 million, respectively, of the $12.4$13.6 million reported for the three months ended JulyOctober 31, 2023. Total revenue recognized over time as POC and POT was approximately $8.0$24.0 million and $2.0 million, respectively, of the $26.0 million reported for the six months ended October 31, 2023. Total revenue recognized over time as POC and POT was approximately $8.7 million and $0.3 million, respectively, of the $8.2$9.0 million reported for the three months ended JulyOctober 31, 2022. Total revenue recognized over time as POC and POT was approximately $16.6 million and $0.5 million, respectively, of the $17.2 million reported for the six months ended October 31, 2022. The amounts by segment and product line were as follows (in thousands):

 

 

Three Months Ended July 31,

 
 

2023

  

2022

  

Three Months Ended October 31,

 
 

POC

  

POT

  

Total

  

POC

  

POT

  

Total

  

2023

  

2022

 
 

Revenue

  Revenue  Revenue  

Revenue

  Revenue  Revenue  

POC

Revenue

  

POT
Revenue

  

Total
Revenue

  

POC

Revenue

  

POT
Revenue

  

Total
Revenue

 

FEI-NY

 $8,675  $815  $9,490  $6,278  $576  $6,854  $7,894  $1,377  $9,271  $7,173  $507  $7,680 

FEI-Zyfer

  3,047   220   3,267   1,674   58   1,732   4,402   354   4,756   1,481   80   1,561 

Intersegment

  -   (349)  (349)  -   (382)  (382)  -   (452)  (452)  -   (292)  (292)

Revenue

 $11,722  $686  $12,408  $7,952  $252  $8,204 

Revenues

 $12,296  $1,279  $13,575  $8,654  $295  $8,949 

 

  

Three Months Ended July 31,

 
  

2023

  

2022

 

Revenues by product line:

        

Satellite revenue

 $4,858  $3,476 

Government non-space revenue

  6,878   4,064 

Other commercial & industrial revenue

  672   664 

Consolidated revenues

 $12,408  $8,204 

11

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

  

Six Months Ended October 31,

 
  

2023

  

2022

 
  

POC

  

POT

  

Total

  

POC

  

POT

  

Total

 
  

Revenue

  Revenue  Revenue  

Revenue

  Revenue   Revenue 

FEI-NY

 $16,569  $2,193  $18,762  $13,451  $1,083  $14,534 

FEI-Zyfer

  7,449   574   8,023   3,156   136   3,292 

Intersegment

  -   (801)  (801)  -   (673)  (673)

Revenues

 $24,018  $1,966  $25,984  $16,607  $546  $17,153 

  

Periods ended October 31,

 
  

Three months

  

Six months

 
  

2023

  

2022

  

2023

  

2022

 

Revenues by product line:

                

Satellite revenue

 $4,664  $4,333  $9,522  $7,808 

Government non-space revenue

  8,201   3,918   15,080   7,983 

Other commercial & industrial revenue

  710   698   1,382   1,362 

Consolidated revenues

 $13,575  $8,949  $25,984  $17,153 

 

NOTE H – INVESTMENT IN MORION, INC.

 

The Company has an investment in Morion, Inc. (“Morion”), a privately held Russian company, which manufactures high precision quartz resonators and crystal oscillators. The Company has also licensed certain technology to Morion. During the three and six months ended JulyOctober 31, 2023, and 2022, the Company did not acquire any product from Morion. During the three and six months ended JulyOctober 31, 2023 and 2022, the Company did not receive dividendsacquired product from Morion in the aggregate amount of approximately $31,000 for both periods.

 

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. Morion 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 for the fiscal year ended April 30, 2022, as amended, the Company impaired its investment in Morion in full. The likelihood of future sales to, purchases from, and dividend payments from Morion is remote.

 

NOTE I – RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2017,November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-04,2023-07, Intangibles Goodwill and OtherSegment Reporting (Topic 350)280): Simplifying the Test for Goodwill Impairment Improvements to Reportable Segment Disclosures(“ (“ASU 2017-04”2023-07”), which simplifies how an entity isexpands on the 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 valuedisclosure 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, 2022, with early adoption permitted. ASU 2017-04 was adopted, effective May 1, 2023, with no material impact to the consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.incremental segment information. The new guidance is effective for fiscal years beginning after December 15, 2022. ASU 2016-13 was adopted, effective May 1, 2023, and interim periods within fiscal years beginning after December 15, 2024, with no material impactearly adoption permitted. The Company expects the new standard to thehave an immaterial effect on its consolidated financial statements.statements when adopted in fiscal year 2025.

12

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE J – CREDIT FACILITY

 

As of JulyOctober 31, 2023, the Company neither had noany borrowings nor any borrowing capacity pursuant to a credit facility. As of April 30, 2023, the Company retired its advisory credit arrangement with UBS Bank USA. Prior to retiring the advisory credit arrangement, no borrowings were made during fiscal 2023.

 

NOTE K – 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.

 

As required by the authoritative guidance on accounting for income taxes, we evaluate the realization of deferred tax assets on 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. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the deferred tax assets will 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 JulyOctober 31, 2023, and April 30, 2023, the Company 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 adjust its existing valuation allowance resulting in changes to deferred income tax expense.

 

1213

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

 

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

 

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

 

The statements in this quarterly report on Form 10-Q regarding future earnings and operations and other statements relating to the future constitute “forward-looking” statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking 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, including the U.S government, 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, the availability of capital, and the 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 Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2023 (the “Form 10-K”) include additional factors that could materially and adversely impact the Company’s business, financial condition and results of operations. Moreover, the Company operates in a very competitive and rapidly changing environment. New factors emerge from time to time and it is not possible for management to predict 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 as a prediction of actual results. Any or all of the forward-looking statements contained in this Form 10-Q and any other public statement made by the Company or its management may turn out to be incorrect. The Company expressly disclaims any obligation to update or revise any forward-looking statements, 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 and the valuation of inventory. EachBoth of these areas requiresrequire the Company to make use of reasonable estimates including estimating the cost to complete a contract, the realizable value of its inventory and 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 six months ended JulyOctober 31, 2023.

 

Revenue Recognition

 

Revenues are reported in operating results predominantly over time using 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 revenues 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 regarding labor, outside services, materials, overhead costs, and status of the contract. The effect of any change in the estimated gross margin rate (“GM Rate”) for a contract is reflected in revenues in the period in which the change is known. Provisions for the full amount of anticipated losses on contracts are made in the period in which they become determinable.

 

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

 

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-downs are based upon management’s experience and estimates for future business. Any changes arising from revised estimates are reflected in cost of revenues in the period the revision is made.

 

1314

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

 

RESULTS OF OPERATIONS

 

The table below sets forth for the three and six months ended JulyOctober 31, 2023 and 2022, respectively, the percentage of consolidated revenues represented by certain items in the Company’s condensed consolidated statements of operations or notes to the condensed consolidated financial statements:

 

 

Three months

  

Six months

 
 

Three Months ended July 31,

  

Periods ended October 31,

 
 

2023

  

2022

  

2023

  

2022

  

2023

  

2022

 

Revenues

                        

FEI-NY

  76.5

%

  83.6

%

  68.3

%

  85.8

%

  72.2

%

  84.7

%

FEI-Zyfer

  26.3   21.1   35.0   17.4   30.9   19.2 

Less intersegment revenues

  (2.8)  (4.7)  (3.3)  (3.2)  (3.1)  (3.9)
  100.0   100.0   100.0   100.0   100.0   100.0 

Cost of revenues

  60.8   100.1   68.1   96.1   64.6   98.0 

Gross margin

  39.2   (0.1)  31.9   3.9   35.4   2.0 

Selling and administrative expenses

  18.6   24.3   18.8   22.7   18.7   23.4 

Research and development expenses

  4.1   13.5   6.2   6.7   5.2   10.0 

Operating income (loss)

  16.5   (37.9)  6.9   (25.5)  11.5   (31.4)

Other expense, net

  (0.1)  (0.1)

Other loss, net

  (1.0)  (0.4)  (0.7)  (0.3)

Provision for income taxes

  0.1   0.0   -   -   0.1   - 

Net income (loss)

  16.5

%

  (38.0

)%

  5.9

%

  (25.9

)%

  10.9

%

  (31.7

)%

 

Revenues

 

 

Three months

  

Six months

 
 

Three months ended July 31,

  

Periods ended October 31,

 
 

(in thousands)

  

(in thousands)

 

Segment

 

2023

  

2022

  

Change

  

2023

  

2022

  

Change

  

2023

  

2022

  

Change

 

FEI-NY

 $9,490  $6,854  $2,636   38.5

%

 $9,271  $7,680  $1,591   20.7

%

 $18,762  $14,534  $4,228   29.1

%

FEI-Zyfer

  3,267   1,732   1,535   88.6   4,756   1,561   3,195   204.7   8,023   3,292   4,731   143.7 

Intersegment revenues

  (349)  (382)  33   (8.6)  (452)  (292)  (160)  54.8   (801)  (673)  (128)  19.0 
 $12,408  $8,204  $4,204   51.2

%

 $13,575  $8,949  $4,626   51.7

%

 $25,984  $17,153  $8,831   51.5

%

 

For the three months ended JulyOctober 31, 2023, revenues from commercial and U.S. Government communication satellite programs accounted for approximately 39%34% of consolidated revenues compared to approximately 42%48% of consolidated revenues during this same period in the prior fiscal year. Revenues are recognized primarily over time under the POC method. Revenues from the satellite market are recorded in the FEI-NY segment. Revenues from non-space U.S. Government/Department of Defense (“DOD”) customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, accounted for approximately 55%60% of consolidated revenues for the three months ended July,October, 31, 2023 compared to approximately 50%44% of consolidated revenue during the same period in the prior fiscal year. Other commercial and industrial revenues for the three months ended JulyOctober 31, 2023 accounted for approximately 5% of consolidated revenue compared to 8% in the same period of the prior fiscal year. The significant increase in revenue for this quarter, compared to the three months ended July 31, 2023same quarter in the previous fiscal year, was in both segments and primarily related to government non-space programs.contract awards coming in, resolution of technical problems from the previous fiscal year, and improvements made by management.

 

1415

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

 

For the six months ended October 31, 2023, revenues from commercial and U.S. Government communication satellite programs accounted for approximately 37% of consolidated revenues compared to approximately 46% of consolidated revenues during this same period in the prior fiscal year. Revenues are recognized primarily over time under the POC method. Revenunes from the satellite market are recorded in the FEI-NY segment. Revenues from non-space U.S. Government/DOD customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, accounted for approximately 58% of consolidated revenues for the six months ended October, 31, 2023 compared to approximately 47% of consolidated revenue during the same period in the prior fiscal year. Other commercial and industrial revenues for the six months ended October 31, 2023 accounted for approximately 5% of consolidated revenue compared to 8% in the same period of the prior fiscal year. The significant increase in revenue for this period, compared to the same period in the previous fiscal year, was in both segments and primarily related to contract awards coming in, resolution of technical problems from the previous fiscal year, and improvements made by management.

Gross Margin

 

  

Three Months ended July 31,

 
  

(in thousands)

 
  

2023

  

2022

  

Change

 
  $4,868  $(5) $4,873 

GM Rate

  39.2

%

  (0.1

)%

    
  

Three months

  

Six months

 
  

Periods ended October 31,

 
  

(in thousands)

 
  

2023

  

2022

  

Change

  

2023

  

2022

  

Change

 
  $4,330  $350  $3,980   1,137.1

%

 $9,198  $345  $8,853   2,566.1

%

Gross margin rate

  31.9

%

  3.9

%

          35.4

%

  2.0

%

        

 

For the three and six months ended JulyOctober 31, 2023, gross margin (“GM”) and GM Rate increased compared to the same period in the prior fiscal year. The gross margin dollars increased as a direct result of the increase in revenue. The GM Rate increased significantly due to two primary factors. First,the fact that many of the technical challenges faced in the early part of lastprior fiscal year have been resolved and, as a result, the related programs are now moving forward. Second, during the three months ended July 31, 2023, there were one-time contractualforward and other adjustmentsrunning more efficiently. Previous programs that also benefited the GM Rate by approximately 8%.sustained lower margins due to technical issues are near completion, or have been completed.

 

Selling, General, and Administrative Expenses

 

Three Months ended July 31,

 

(in thousands)

 

2023

  

2022

  

Change

 
$2,302  $1,992  $310   15.6

%

 

Three months

  

Six months

 
 

Periods ended October 31,

 
 

(in thousands)

 
 

2023

  

2022

  

Change

  

2023

  

2022

  

Change

 
 $2,552  $2,034  $518   25.5

%

 $4,853  $4,026  $827   20.6

%

 

For the three months ended JulyOctober 31, 2023 and 2022, selling, general, and administrative (“SG&A”) expenses were approximately 19% and 24%23%, respectively, of consolidated revenues. The percentage of consolidated revenue decreased 4% due to an increase in sales for the three months ended October 31, 2023 as compared to the three months ended October 31, 2022. The increase in SG&A expenses for the three months ended October 31, 2023 as compared to the prior year period was largely due to an increase in professional fees and payroll and associated costs.

For the six months ended October 31, 2023 and 2022 SG&A expenses were approximately 19% and 23%, respectively, of consolidated revenues. The percentage of consolidated revenue decreased 5% due to an increase in sales for the threesix months ended JulyOctober 31, 2023 as compared to the threesix months ended JulyOctober 31, 2022. The increase in SG&A expenses for the threesix months ended JulyOctober 31, 2023 as compared to the prior year period was largely due to an increase in professional fees and payroll and associated costs.

16

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

 

Research and Development Expenses

 

Three Months ended July 31,

 

(in thousands)

 

2023

  

2022

  

Change

 
$506  $1,110  $(604)  (54.4

)%

 

Three months

  

Six months

 
 

Periods ended October 31,

 
 

(in thousands)

 
 

2023

  

2022

  

Change

  

2023

  

2022

  

Change

 
 $840  $599  $241   40.2

%

 $1,347  $1,709  $(362)  (21.2

)%

 

R&D expenditures represent investments intended to keep the Company’s products at the leading edge of time and frequency technology and enhance future competitiveness. The decreasechange in R&D expenditures for the three and six months ended JulyOctober 31, 2023, was primarily due to a shift of employees tobetween production orders in order to meet schedule.and development depending upon availability, scheduling and necessity. The Company plans to continue to invest in R&D in the future to keep its products at the state of the art.

 

Operating Income (Loss)

 

Three Months ended July 31,

 

(in thousands)

 

2023

  

2022

  

Change

 
$2,060  $(3,107) $5,167 
 

Three months

  

Six months

 
 

Periods ended October 31,

 
 

(in thousands)

 
 

2023

  

2022

  

Change

  

2023

  

2022

  

Change

 
 $938  $(2,283) $3,221   141.1

%

 $2,998  $(5,390) $8,388   155.6

%

 

For the three and six months ended JulyOctober 31, 2023, operating income increased due to a combination of increased revenue and gross margin, and the effects of certain cost cutting measures instituted by management beginningthat began in fiscal year 2023.

15

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

 

Other Income (Expense), net

 

 

Three Months ended July 31,

  

Three months

  

Six months

 
 

(in thousands)

  

Periods ended October 31,

 
 

2023

  

2022

  

Change

  

(in thousands)

 

Investment income

 $20  $36  $(16)  (44.4

)%

 

2023

  

2022

  

Change

  

2023

  

2022

  

Change

 

Investment (expense) income

 $(106) $(12) $(94)  783.3

%

 $(86) $24  $(110)  (458.3

%)%

Interest expense

  (31)  (45)  14   (31.1

)%

  (29)  (18)  (11)  61.1

%

  (60)  (63)  3   (4.8

%)%

 $(11) $(9) $(2)  22.2

%

 $(135) $(30) $(105)  350.0

%

 $(146) $(39) $(107)  274.4

%

 

Other income (expense), net is derived from various sources. The income can come from reclaiming of metal, refunds, interest on deferred trust assets, or the sale of a fixed asset. Interest expense is related to the deferred compensation payments made to retired employees.

 

17

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

Provision for Income Tax Provision

 

Three Months ended July 31,

 

(in thousands)

 

2023

  

2022

  

Change

 
$7  $1  $6 
 

Three months

  

Six months

 
 

Periods ended October 31,

 
 

(in thousands)

 
 

2023

  

2022

  

Change

  

2023

  

2022

  

Change

 
 $6  $1  $5   500.0

%

 $13  $2  $11   550.0

%

 

  

Three Months ended July 31,

 
  

2023

  

2022

 

Effective tax rate on pre-tax book loss:

  0.3

%

  0

%

  

Three months

  

Six months

 
  

Periods ended October 31,

 
  

2023

  

2022

  

2023

  

2022

 

Effective tax rate on pre-tax book income (loss):

  0.7

%

  0.0

%

  0.5

%

  0.0

%

 

The estimated annual effective tax rate for the fiscal year ending April 30, 2024 is 0%. This calculation reflects estimated income tax expense based on our current year annual pretax income forecast which is offset by the estimated change in the current year valuation allowance. The Company maintains a full valuation allowance against its deferred tax assets.

 

For the three months ended JulyOctober 31, 2023, the Company recorded an income tax provision of $6,894$6,000 primarily related to state income taxes and discrete income tax provision related to an accrual of interest for unrecognized tax benefits. For the three months ended JulyOctober 31, 2022, the Company recorded an income tax provision of $1,000.

 

For the six months ended October 31, 2023, the Company recorded an income tax provision of $13,000 primarily related to state income taxes and discrete income tax provision related to an accrual of interest for unrecognized tax benefits. For the six months ended October 31, 2022, the Company recorded an income tax provision of $2,000.

The effective tax rate for the three months ended JulyOctober 31, 2023 was an income tax provision of 0.3%0.7% on pretax income of $2.0$0.8 million compared to an income tax provision of (0.0)%0.0% on pretax loss of $3.1$2.3 million in the comparable prior fiscal year period. The effective tax rate for the three months ended JulyOctober 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 benefit.

 

16

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)0.5% on pretax income of $2.9 million compared to an income tax provision of 0.0% on pretax loss of $5.4 million in the comparable prior fiscal year period. The effective tax rate for the six months ended October 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 benefit.

 

The Inflation Reduction Act of 2022 (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 corporate alternative minimum tax that generally applies to U.S. corporations with average adjusted annual financial statement income over a three-year period in excess of $1 billion. The Company does not expect the Act to materially impact its consolidated financial statements.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s consolidated balance sheets continue to reflect a strong working capital position of approximately $23.4$24.7 million at JulyOctober 31, 2023 and $21.0 million at April 30, 2023. Included in working capital at JulyOctober 31, 2023 and April 30, 2023 was $9.1$8.7 million and $12.0 million, respectively, of cash and cash equivalents. The Company’s current ratio was 1.92.0 to 1 at JulyOctober 31, 2023 compared to 1.8 to 1 as of April 30, 2023.

 

Net cash used in operating activities for the threesix months ended JulyOctober 31, 2023 and 2022 was approximately $2.8$2.9 million and $3.6$0.5 million, respectively. The increase in net cash used in operating cash flowactivities in the first threesix months of fiscal 2024 as compared to the prior fiscal year period was mainly due to operating income, offset by an increase in inventory accounts receivable, and a decrease in contract assets.liabilities. For the threesix months ended JulyOctober 31, 2023 and 2022, the Company incurred approximately $1.5$2.2 million and $816,000,$1.2 million, respectively, of non-cash operating expenses including amortization of ROU assets, loss provision accrual, depreciation and amortization, inventory net realizable value adjustments, deferred compensation, and accruals for employee benefit programs.

 

18

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

Net cash used in investing activities for the threesix months ended JulyOctober 31, 2023 and 2022 was approximately $187,000$360,000 and $741,000,$975,000, respectively. During the threesix months ended JulyOctober 31, 2023, no marketable securities were sold or redeemed compared to $1.0$1.1 million for the same period of fiscal year 2023. During the threesix months ended JulyOctober 31, 2023, no marketable securities were purchased compared to $1.3$1.4 million for the same period of fiscal year 2023. The Company acquired property, plant, and equipment in the amount of approximately $187,000$360,000 and $465,000$729,000 for the three monthssix month periods ended JulyOctober 31, 2023 and 2022, respectively.

 

There waswere no financing activities for the threesix months ended JulyOctober 31, 2023 or the threesix months ended JulyOctober 31, 2022.

 

The Company has been authorized by its Board of Directors to repurchase up to $5 million worth of shares of its common stock when appropriate opportunities arise. As of JulyOctober 31, 2023, the Company has repurchased approximately $4 million of its common stock out of the $5 million authorization, the majority of which havehas since been reissued. For the threesix months ended JulyOctober 31, 2023 and 2022, there were no repurchases of shares.

 

The Company will continue to expend resources for R&D to develop, improve and acquire products for space applications, guidance and targeting systems, and communication systems that management believes will result in future growth and profitability. The Company anticipates securing additional customer funding for a portion of its R&D activities and will allocate internal funds depending on market conditions and identification of new opportunities. The Company expects internally generated cash will be adequate to fund these R&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 JulyOctober 31, 2023, the Company’s consolidated funded backlog was approximately $52$50 million compared to $57 million at April 30, 2023, the end of fiscal year 2023. Approximately 79%75% of this backlog is expected to be realized in the next twelve months. The Company excludes from backlog any contracts or awards for which it has not received authorization to proceed. On fixed price contracts, the Company excludes any unfunded portion. Over time, as partially funded contracts become fully funded, the Company will add the additional funding to its backlog. The backlog 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 short-term operating and investment needs through at least September 14,December 15, 2024 and its long-term operation and investment needs for the foreseeable future thereafter.

 

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

 

1719

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

 

Item 3. Quantitative and Qualitative Disclosures about 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, as of JulyOctober 31, 2023, the Company’s disclosure controls and procedures were 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.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended JulyOctober 31, 2023 that has materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

1820

 

PART II. OTHER INFORMATION

Item 1A. Risk Factors

 

As disclosed in “Item 1A. Risk Factors” in the Form 10-K, 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.

 

Item 6. Exhibits

 

31.1 -

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

 

 

31.2 -

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

 

 

32 -

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

 

 

101-

The following materials from the Frequency Electronics, Inc. Quarterly Report on Form 10-Q for the quarter ended JulyOctober 31, 2023 formatted in eXtensible Business Reporting Language (XBRL): (i) Cover Page, (ii) Condensed Consolidated Balance Sheets, (iii) Condensed Consolidated Statements of Operations and Comprehensive Loss,Income (Loss), (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Changes in Stockholders’ Equity and (vi) Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within Inline XBRL document.

 

 

104-

Cover Page Interaction Data File (formatted as inline XBRL and contained in Exhibit 101).

 

1921

 

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: September 14,December 15, 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)

 

2022
iso4217:USD xbrli:shares