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 October 31, 2022 and the results of its operations, changes in stockholders’ equity for the three and six months ended October 31, 2022 and 2021, and cash flows for the six months ended October 31, 2022 and 2021. The April 30, 2022 condensed consolidated balance sheet was derived from audited financial statements (see Revision of Previously Issued Financial Statements in Note C below). 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, 2022, filed on July 14, 2022 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.
The full impact of the COVID-19 pandemic continues to evolve as of 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 financial condition, liquidity, and future financial results. For the six months ended October 31, 2022, the Company has been impacted by employee absenteeism related to direct or indirect effects of the COVID-19 pandemic, delays in the receipt of anticipated new contracts from customers administratively affected by the pandemic and limited availability or delivery delays of parts and materials from vendors affected by the pandemic. FEI-Zyfer’s operations were particularly affected as evidenced by decreases in sales and gross margin during fiscal year 2022, which continued during the six months ended October 31, 2022. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the continuing changing dynamics of the COVID-19 pandemic the Company is not able to estimate the potential adverse effects on its operations, financial condition, or liquidity for the remainder of fiscal year 2023. The Company has returned to essentially normal operations at its various locations. At its locations, the Company continues to follow federal and state guidelines with an emphasis on employee safety.
The Company faces various 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, state and/or other customers or supplier operations are 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.
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.
** For the three months ended October 31, 2022 and six months ended October 31, 2022 and 2021, 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 those periods. The exercisable shares excluded for the three and six-months ended October 31, 2022 was 243,625 shares, respectively. The exercisable shares excluded for the three and six-months ended October 31, 2021 were 198,000 and 223,000 shares, respectively.
Such amounts represent revenue recognized on long-term contracts that have 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. 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 on the percentage-of-completion (“POC”) basis. During the three and six months ended October 31, 2022, revenue recognized under POC contracts was approximately $8.7 million and $16.6 million, respectively. During the three and six months ended October 31, 2021, revenue recognized under POC contracts was approximately $12.2 million and $24.6 million, respectively. If contract losses are anticipated, a loss provision is recorded for the full amount of such losses when they are determinable. Contract losses of approximately $737,000 and $2.0 million were recorded for the three and six months ended October 31, 2022, respectively. Contract losses of approximately $31,000 and $47,000 were recorded for the three and six months ended October 31, 2021, respectively.
During the preparation of our condensed consolidated financial statements for the second quarter ended October 31, 2022, the Company identified an immaterial error in relation to previously reported amounts in the Form 10-K and in the Quarterly Report on Form 10-Q for the three months ended July 31, 2022, filed on September 14, 2022, with the Securities and Exchange Commission (the “Q1 2023 Form 10-Q”). As a result, the Company is revising its consolidated financial statements below for the periods impacted.
The table below sets forth the consolidated balance sheets and consolidated statements of cash flows, including the balances originally as filed, adjustments, and the revised balances for each revised period (in thousands):
|
|
April 30, 2022
|
|
|
April 30, 2021
|
|
|
July 31, 2022
|
|
|
|
As Filed
|
|
|
Adjustment
|
|
|
Revised
|
|
|
As Filed
|
|
|
Adjustment
|
|
|
Revised
|
|
|
As Filed
|
|
|
Adjustment
|
|
|
Revised
|
|
Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Assets
|
|
$ |
9,977 |
|
|
$ |
(1,120 |
) |
|
$ |
8,857 |
|
|
$ |
12,640 |
|
|
$ |
1,820 |
|
|
$ |
14,460 |
|
|
$ |
11,750 |
|
|
$ |
(1,741 |
) |
|
$ |
10,009 |
|
Total Current Assets
|
|
|
57,130 |
|
|
|
(1,120 |
) |
|
|
56,010 |
|
|
|
59,371 |
|
|
|
1,820 |
|
|
|
61,191 |
|
|
|
54,402 |
|
|
|
(1,741 |
) |
|
|
52,661 |
|
Total Assets
|
|
|
85,880 |
|
|
|
(1,120 |
) |
|
|
84,760 |
|
|
|
96,708 |
|
|
|
1,820 |
|
|
|
98,528 |
|
|
|
82,833 |
|
|
|
(1,741 |
) |
|
|
81,092 |
|
Contract Liabilities
|
|
|
12,218 |
|
|
|
(1,120 |
) |
|
|
11,098 |
|
|
|
10,692 |
|
|
|
1,820 |
|
|
|
12,512 |
|
|
|
12,837 |
|
|
|
(1,741 |
) |
|
|
11,096 |
|
Total Current Liabilities
|
|
|
22,981 |
|
|
|
(1,120 |
) |
|
|
21,861 |
|
|
|
18,789 |
|
|
|
1,820 |
|
|
|
20,609 |
|
|
|
23,498 |
|
|
|
(1,741 |
) |
|
|
21,757 |
|
Total Liabilities
|
|
|
39,192 |
|
|
|
(1,120 |
) |
|
|
38,072 |
|
|
|
41,299 |
|
|
|
1,820 |
|
|
|
43,119 |
|
|
|
39,151 |
|
|
|
(1,741 |
) |
|
|
37,410 |
|
Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Operating Assets & Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Assets
|
|
$ |
2,306 |
|
|
$ |
2,940 |
|
|
$ |
5,246 |
|
|
$ |
(2,180 |
) |
|
$ |
(2,315 |
) |
|
$ |
(4,495 |
) |
|
|
* |
|
|
|
* |
|
|
|
* |
|
Contract Liabilities
|
|
|
1,526 |
|
|
|
(2,940 |
) |
|
|
(1,414 |
) |
|
|
7,185 |
|
|
|
2,315 |
|
|
|
9,500 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Net cash provided by operating activities
|
|
|
4,036 |
|
|
|
- |
|
|
|
4,036 |
|
|
|
12,157 |
|
|
|
- |
|
|
|
12,157 |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* No effect on the Company's quarterly report for the period ended July 31, 2022 as the Statement of Cash Flows are condensed
|
|
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The table below sets forth the disclosures in Note 3 to the consolidated financial statements in the Form 10-K and Note C to the condensed consolidated financial statements in the Q1 2023 Form 10-Q, including the balances originally as filed, adjustments, and the revised balances for each revised period (in thousands):
|
|
April 30, 2022
|
|
|
April 30, 2021
|
|
|
July 31, 2022
|
|
|
|
As Filed
|
|
|
Adjustment
|
|
|
Revised
|
|
|
As Filed
|
|
|
Adjustment
|
|
|
Revised
|
|
|
As Filed
|
|
|
Adjustment
|
|
|
Revised
|
|
Contract Assets
|
|
$ |
9,977 |
|
|
$ |
(1,120 |
) |
|
$ |
8,857 |
|
|
$ |
12,640 |
|
|
$ |
1,820 |
|
|
$ |
14,460 |
|
|
$ |
11,750 |
|
|
$ |
(1,741 |
) |
|
$ |
10,009 |
|
Contract Liabilities
|
|
|
(12,218 |
) |
|
|
1,120 |
|
|
|
(11,098 |
) |
|
|
(10,692 |
) |
|
|
(1,820 |
) |
|
|
(12,512 |
) |
|
|
(12,837 |
) |
|
|
1,741 |
|
|
|
(11,096 |
) |
Net (liability) asset
|
|
$ |
(2,241 |
) |
|
$ |
- |
|
|
$ |
(2,241 |
) |
|
$ |
1,948 |
|
|
$ |
- |
|
|
$ |
1,948 |
|
|
$ |
(1,087 |
) |
|
$ |
- |
|
|
$ |
(1,087 |
) |
The table below sets forth the segment information disclosures in Note 13 to the consolidated financial statements in the Form 10-K and Note G to the condensed consolidated financial statements in the Q1 2023 Form 10-Q, including the balances originally as filed, adjustments, and the revised balances for each revised period (in thousands):
|
|
April 30, 2022
|
|
|
April 30, 2021
|
|
|
July 31, 2022
|
|
|
|
As Filed
|
|
|
Adjustment
|
|
|
Revised
|
|
|
As Filed
|
|
|
Adjustment
|
|
|
Revised
|
|
|
As Filed
|
|
|
Adjustment
|
|
|
Revised
|
|
Identifiable assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$ |
42,008 |
|
|
$ |
(1,120 |
) |
|
$ |
40,888 |
|
|
$ |
45,552 |
|
|
$ |
1,820 |
|
|
$ |
47,372 |
|
|
$ |
42,433 |
|
|
$ |
(1,741 |
) |
|
$ |
40,692 |
|
Consolidated identifiable assets
|
|
|
85,880 |
|
|
|
(1,120 |
) |
|
|
84,760 |
|
|
|
96,708 |
|
|
|
1,820 |
|
|
|
98,528 |
|
|
|
82,833 |
|
|
|
(1,741 |
) |
|
|
81,092 |
|
NOTE D –STOCK TRANSACTIONS
During the three and six-month periods ended October 31, 2022, the Company made contributions of 18,632 and 35,340 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.
NOTE E – INVENTORIES, NET
Inventories, which are reported at the lower of cost and net realizable value, consisted of the following:
|
|
October 31, 2022
|
|
|
April 30, 2022
|
|
|
|
(In thousands)
|
|
Raw Materials and Component Parts
|
|
$ |
11,930 |
|
|
$ |
11,683 |
|
Work in Progress
|
|
|
7,269 |
|
|
|
7,746 |
|
Finished Goods
|
|
|
679 |
|
|
|
477 |
|
|
|
$ |
19,878 |
|
|
$ |
19,906 |
|
Inventory reserves included in inventory were $7.8 million and $7.5 million as of October 31, 2022 and April 30, 2022, respectively. Reserve amounts relate to raw materials and component parts and work in progress.
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.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 sheet.
The table below presents ROU assets and liabilities recorded on the respective consolidated balance sheets as follows:
|
Classification
|
|
October 31, 2022
|
|
|
April 30, 2022
|
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Operating lease ROU assets
|
Right-of-Use assets leases
|
|
$ |
8,104 |
|
|
$ |
8,805 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities (short-term)
|
Lease liability, current
|
|
|
1,751 |
|
|
|
1,744 |
|
Operating lease liabilities (long-term)
|
Lease liability, non-current
|
|
|
6,629 |
|
|
|
7,353 |
|
Total lease liabilities
|
|
$ |
8,380 |
|
|
$ |
9,097 |
|
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. Total operating lease expense was $500,000 and $1.0 million for the three and six months ended October 31, 2021, 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.
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 October 31, 2022:
Fiscal Year Ending April 30,
|
|
(in thousands)
|
|
|
|
|
|
|
Remainder of 2023
|
|
$ |
808 |
|
2024
|
|
|
1,993 |
|
2025
|
|
|
1,832 |
|
2026
|
|
|
1,317 |
|
2027
|
|
|
937 |
|
Thereafter
|
|
|
3,238 |
|
Total lease payments
|
|
|
10,125 |
|
Less imputed interest
|
|
|
(1,745 |
) |
Present value of future lease payments
|
|
|
8,380 |
|
Less current obligations under leases
|
|
|
(1,751 |
) |
Long-term lease obligations
|
|
|
6,629 |
|
As of October 31, 2022, the weighted-average remaining lease term for all operating leases was 5.97 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 October 31, 2022 was 6.19%.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 the “Summary of Accounting Policies” in the fiscal year-end 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, which is defined as income before investment income, interest 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 consolidated statements of operations or the consolidated balance sheets for each of the periods (in thousands):
|
|
Periods ended October 31,
|
|
|
|
Three months
|
|
|
Six months
|
|
|
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$ |
7,680 |
|
|
$ |
10,381 |
|
|
$ |
14,534 |
|
|
$ |
20,543 |
|
FEI-Zyfer
|
|
|
1,561 |
|
|
|
2,648 |
|
|
|
3,292 |
|
|
|
5,783 |
|
less intersegment revenues
|
|
|
(292 |
) |
|
|
(93 |
) |
|
|
(673 |
) |
|
|
(436 |
) |
Consolidated revenues
|
|
$ |
8,949 |
|
|
$ |
12,936 |
|
|
$ |
17,153 |
|
|
$ |
25,890 |
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$ |
(1,389 |
) |
|
$ |
(64 |
) |
|
$ |
(3,978 |
) |
|
$ |
(1,075 |
) |
FEI-Zyfer
|
|
|
(792 |
) |
|
|
(132 |
) |
|
|
(1,230 |
) |
|
|
(99 |
) |
less intersegment profit
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(20 |
) |
Corporate
|
|
|
(102 |
) |
|
|
499 |
|
|
|
(182 |
) |
|
|
(191 |
) |
Consolidated operating income (loss)
|
|
$ |
(2,283 |
) |
|
$ |
303 |
|
|
$ |
(5,390 |
) |
|
$ |
(1,385 |
) |
|
|
October 31, 2022
|
|
|
April 30, 2022
|
|
|
|
|
|
|
|
(Revised - See Note C)
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$ |
40,682 |
|
|
$ |
40,888 |
|
FEI-Zyfer
|
|
|
10,756 |
|
|
|
10,522 |
|
less intersegment balances
|
|
|
(124 |
) |
|
|
(126 |
) |
Corporate
|
|
|
31,762 |
|
|
|
33,476 |
|
Consolidated identifiable assets
|
|
$ |
83,076 |
|
|
$ |
84,760 |
|
Total revenue recognized over time as POC and Passage of Title (“POT”) were approximately $8.7 million and $0.3 million, respectively, of the $9.0 million reported for the three months ended October 31, 2022. Total revenue recognized over time as POC and POT were approximately $16.6 million and $0.5 million, respectively, of the $17.2 million reported for the six months ended October 31, 2022. Total revenue recognized over time as POC and POT were approximately $12.2 million and $0.7 million, respectively, of the $12.9 million reported for the three months ended October 31, 2021. Total revenue recognized over time as POC and POT were approximately $24.6 million and $1.3 million, respectively, of the $25.9 million reported for the six months ended October 31, 2021. The amounts by segment and product line were as follows:
|
|
Three Months Ended October 31,
|
|
|
|
2022
|
|
|
2021
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
POC
|
|
|
POT
|
|
|
Total
|
|
|
POC
|
|
|
POT
|
|
|
Total
|
|
|
|
Revenue
|
|
|
Revenue |
|
|
Revenue |
|
|
Revenue
|
|
|
Revenue |
|
|
Revenue |
|
FEI-NY
|
|
$ |
7,173 |
|
|
$ |
507 |
|
|
$ |
7,680 |
|
|
$ |
9,928 |
|
|
$ |
453 |
|
|
$ |
10,381 |
|
FEI-Zyfer
|
|
|
1,481 |
|
|
|
80 |
|
|
|
1,561 |
|
|
|
2,300 |
|
|
|
348 |
|
|
|
2,648 |
|
Intersegment
|
|
|
- |
|
|
|
(292 |
) |
|
|
(292 |
) |
|
|
- |
|
|
|
(93 |
) |
|
|
(93 |
) |
Revenue
|
|
$ |
8,654 |
|
|
$ |
295 |
|
|
$ |
8,949 |
|
|
$ |
12,228 |
|
|
$ |
708 |
|
|
$ |
12,936 |
|
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
|
Six Months Ended October 31,
|
|
|
|
2022
|
|
|
2021
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
POC
|
|
|
POT
|
|
|
Total
|
|
|
POC
|
|
|
POT
|
|
|
Total
|
|
|
|
Revenue
|
|
|
Revenue |
|
|
Revenue |
|
|
Revenue
|
|
|
Revenue |
|
|
Revenue |
|
FEI-NY
|
|
$ |
13,451 |
|
|
$ |
1,083 |
|
|
$ |
14,534 |
|
|
$ |
19,529 |
|
|
$ |
1,014 |
|
|
$ |
20,543 |
|
FEI-Zyfer
|
|
|
3,156 |
|
|
|
136 |
|
|
|
3,292 |
|
|
|
5,100 |
|
|
|
683 |
|
|
|
5,783 |
|
Intersegment
|
|
|
- |
|
|
|
(673 |
) |
|
|
(673 |
) |
|
|
- |
|
|
|
(436 |
) |
|
|
(436 |
) |
Revenue
|
|
$ |
16,607 |
|
|
$ |
546 |
|
|
$ |
17,153 |
|
|
$ |
24,629 |
|
|
$ |
1,261 |
|
|
$ |
25,890 |
|
|
|
Periods ended October 31,
|
|
|
|
(in thousands)
|
|
|
|
Three months
|
|
|
Six months
|
|
|
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
Revenues by Product Line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite Revenue
|
|
$ |
4,333 |
|
|
$ |
6,603 |
|
|
$ |
7,808 |
|
|
$ |
13,343 |
|
Government Non-Space Revenue
|
|
|
3,918 |
|
|
|
5,099 |
|
|
|
7,983 |
|
|
|
10,590 |
|
Other Commercial & Industrial Revenue
|
|
|
698 |
|
|
|
1,234 |
|
|
|
1,362 |
|
|
|
1,957 |
|
Consolidated revenues
|
|
$ |
8,949 |
|
|
$ |
12,936 |
|
|
$ |
17,153 |
|
|
$ |
25,890 |
|
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 October 31, 2022, the Company acquired product from Morion in the aggregate amount of approximately $31,000 for both periods. During the three and six months ended October 31, 2021, the Company acquired product from Morion in the aggregate amount of approximately $34,000 and $120,000, respectively. During the six months ended October 31, 2021, the Company received dividends from Morion in the amount of approximately $123,000, which is included in other income, net in the 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. 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, the Company impaired its investment in Morion in full. The impairment of $796,000 is included in other income (expense), net, in the Consolidated Statements of Operations for the fiscal year ended April 30, 2022. The likelihood of future sales to, purchases, and dividend payments from Morion is questionable.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to 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 October 31, 2022 and April 30, 2022, respectively, were as follows (in thousands):
|
|
October 31, 2022
|
|
|
|
Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair Market Value
|
|
Fixed income securities
|
|
$ |
10,603 |
|
|
$ |
2 |
|
|
$ |
(993 |
) |
|
$ |
9,612 |
|
|
|
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
|
|
October 31, 2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
$ |
2,306 |
|
|
$ |
(133 |
) |
|
$ |
6,732 |
|
|
$ |
(860 |
) |
|
$ |
9,038 |
|
|
$ |
(993 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
$ |
2,349 |
|
|
$ |
(146 |
) |
|
$ |
5,573 |
|
|
$ |
(316 |
) |
|
$ |
7,922 |
|
|
$ |
(462 |
) |
The Company regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. The Company does not believe that its investments in marketable securities with unrealized losses at October 31, 2022 were other-than-temporary due to market volatility of the security’s fair value, analysts’ expectations and the Company’s ability to hold the securities for a period of time sufficient to allow for any anticipated recoveries in market value.
During the three and six months ended October 31, 2022, the Company sold or redeemed available-for-sale securities of approximately $110,000 and $1.1 million, respectively, realizing losses of approximately $1,000 and $20,000, respectively, during the same periods ended October 31, 2022.
Maturities of fixed income securities classified as available-for-sale at October 31, 2022 were as follows, at cost (in thousands):
Current
|
|
$ |
3,147 |
|
Due after one year through five years
|
|
|
5,747 |
|
Due after five years
|
|
|
1,709 |
|
|
|
$ |
10,603 |
|
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 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The 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 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. The Company’s money market, business account, and U.S. securities are valued on a Level 1 basis. The Company’s fixed income corporate debt securities and certificates of deposit are valued on a Level 2 basis. Level 2 securities are valued at the closing prices and are consistent with quoted prices of similar assets reported in active markets.
NOTE J – RECENT ACCOUNTING PRONOUNCEMENTS
In January 2017, the Financial Accounting Standards Board (“FASB”) issued 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, 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, the Company expects the new standard to have an immaterial effect on its consolidated financial statements when adopted in fiscal year 2024.
NOTE K – CREDIT FACILITY
As of October 31, 2022, the Company had available credit with UBS Bank USA 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 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 October 31, 2022, and April 30, 2022, 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.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE M – COMMITMENTS AND CONTINGENCIES
On August 25, 2021, to resolve previously disclosed disputes with Martin B. Bloch, the former Chief Scientist of the Company and a former member of the Company’s Board of Directors, the Company entered into the Agreement on Material Terms of Settlement (the “Settlement Terms”), dated August 25, 2021, between and among the Company, Jonathan Brolin, Lance W. Lord, Russell M. Sarachek, Richard Schwartz, and Stanton D. Sloane, each in their capacity as members of the Company’s Board of Directors (the “Director Defendants”), and the Compensation Committee of the Company’s Board of Directors, in its capacity as administrator under the deferred compensation agreements, and Mr. Bloch and certain members of Mr. Bloch’s family. Under the Settlement Terms, in full and complete settlement of all claims asserted and all sums sought by Mr. Bloch in the litigation and arbitration proceedings, the Company agreed to pay Mr. Bloch $6 million on or before September 24, 2021.
Consistent with the Settlement Terms, on September 21, 2021, the Company, the Director of Defendants, the Company’s Compensation Committee and Mr. Bloch and certain members of Mr. Bloch’s family entered into a formal written settlement agreement, providing for the Company’s payment of $6 million in full and complete settlement of all claims asserted and all sums sought by Mr. Bloch in the litigation and arbitration proceedings. This settlement agreement concluded all previously disclosed disputes between Mr. Bloch and the Company, the Director Defendants and the Company’s Compensation Committee. Prior to the termination of Mr. Bloch’s employment and commencement of the litigation and arbitration proceedings, the Company had been regularly accruing amounts pertaining to Mr. Bloch’s post-employment deferred compensation retirement benefits. As of July 31, 2021, the Company had accrued $6 million for deferred compensation and contingent liability in connection with the settlement with Mr. Bloch. The settlement resulted in a net expense of $650,000 to the Company and eliminated further legal expenses with respect to the dispute between Mr. Bloch and the Company. This net expense for financial statement purposes was recognized in selling and administrative expenses on the condensed consolidated statements of operations during the three months ended July 31, 2021.
NOTE N – SUBSEQUENT EVENT
On December 20, 2022, the Company’s Board of Directors declared a special cash dividend of $1.00 per share of common stock. The dividend is payable on January 27, 2023, to stockholders of record as of the close of business on January 6, 2023. Based on the current number of shares of common stock outstanding, the total amount of the special dividend payment will be approximately $9.3 million.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES