UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
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ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year ended April 30, 2020
OR
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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)
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Delaware |
11-1986657 |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y. |
11553 |
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(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:
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Title of each class |
Trading Symbol |
Name of each exchange on which registered |
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Common Stock (par value $1.00 per share) |
FEIM |
NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
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.
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Large accelerated filer ☐ |
Accelerated filer ☐ |
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Non-accelerated filer ☒ |
Smaller Reporting Company ☒ |
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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 provided 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 ☒
The aggregate market value of voting stock held by non-affiliates of the registrant as of October 31, 2019 – $68,800,000
The number of shares outstanding of registrant’s Common Stock, par value $1.00 per share, as of July 27, 2020 – 9,149,853
DOCUMENTS INCORPORATED BY REFERENCE: PART III incorporates information by reference from the definitive proxy statement to be filed for the Annual Meeting of Stockholders to be held on or about October 7, 2020.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
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PART I |
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Item 1. |
3 |
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Item 1A. |
9 |
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Item 1B. |
9 |
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Item 2. |
9 |
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Item 3. |
10 |
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Item 4. |
10 |
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PART II |
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Item 5. |
11 |
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Item 6. |
11 |
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Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
11 |
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Item 7A. |
18 |
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Item 8. |
19 |
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
48 |
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Item 9A. |
48 |
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Item 9B. |
48 |
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PART III |
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Item 10. |
Directors, Executive Officers and Corporate Governance |
49 |
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Item 11. |
49 |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
49 |
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Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
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Item 14. |
49 |
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PART IV |
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Item 15. |
50 |
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Item 16. |
52 |
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53 |
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PART I
GENERAL DISCUSSION
Frequency Electronics, Inc. (sometimes referred to as “Registrant”, “Frequency Electronics” or the “Company”) is a world leader in precision time and frequency generation technology, which is employed in commercial and Government Satellite Payload systems, Secure Communications, Command, Control, Communication, Computer, Intelligence, Security and Reconnaissance (“C4ISR”), and Electronic Warfare (“EW”) systems. Its technology is used for a wide range of space and non-space applications.
Unless the context indicates otherwise, references to the Registrant or the Company are to Frequency Electronics, Inc. and its subsidiaries. References to “FEI” are to the parent company alone and do not refer to any of the subsidiaries. Frequency Electronics, a Delaware corporation, has its principal executive office at 55 Charles Lindbergh Boulevard, Mitchel Field, New York 11553. Its telephone number is 516-794-4500 and its website is www.frequencyelectronics.com.
Frequency Electronics was founded in 1961 as a research and development firm generating proprietary precision time and frequency technology primarily under contracts for end-use by the United States (“U.S.”) Government. In the mid-1990’s, the Company evolved into a designer, developer and manufacturer of state-of-the-art products for both commercial and government end-use. The Company’s present mission is to be the world leader in providing precision time and low phase noise frequency generation systems, from 1 Hz to 46 GHz for space and other challenging environments. The Company’s technology is the key element in enhancing the functionality and performance of many electronic systems.
MARKETS
The Company’s principle end markets are satellite payloads and precision time for terrestrial secure command control and communications systems.
For the satellite market, the Company has a unique legacy of providing master timing systems, power converters, and frequency generation, synthesis and distribution systems. These products are applicable for both commercial and U.S. Government end-use. Currently, there are approximately two thousand satellites with varying remaining useful lives operating in Geostationary, Medium and Low Earth Orbits. The U.S. government operates approximately 800 of these. The number of operational satellites with emphasis on high-throughput is expected to continue to grow over the next ten years as demand for higher bandwidths and improved anti-jam-anti-spoofing increases. Furthermore, the U.S. Government is expected to contract options for additional GPS III satellites, and the Company is well positioned to compete for the onboard clock ensemble with its high-precision digital Rubidium atomic frequency standard.
For the terrestrial secure command control and communications systems market, the Company’s products support multiple C4ISR counter measures and EW applications for the U.S. Government on land, sea and air-borne platforms. Recently identified threats to the communication capabilities of U.S. Government facilities through jamming, multi-path or “spoofing” global positioning systems (“GPS”) signals may be mitigated by the Company’s technologies. In addition, similar types of threats to the public and enterprise networks have been identified by the U.S. Department of Homeland Security. The Company’s high precision, ruggedized clocks combined with specialized software are essential for certain secure communication systems.
To address these markets, the Company has several corporate entities which operate under two reportable segments primarily based on the geographic locations of its subsidiaries. The two reportable segments are (1) FEI-NY, which includes the subsidiaries FEI Government Systems, Inc., FEI Communications, Inc., Frequency Electronics, Inc. Asia (“FEI-Asia”), classified as an Asset Held for Sale in fiscal year 2019, (see Note 2 to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K (the “Consolidated Financial Statements”) for details) and FEI-Elcom Tech, Inc. (“FEI-Elcom”) and (2) FEI-Zyfer, Inc. (“FEI-Zyfer”).
Frequency Electronics has made a strategic decision to focus on satellite payloads, C4ISR and EW market segments, because these business areas represent significant opportunities for revenue growth. Accordingly, in fiscal year 2019 the Company classified FEI-Asia as an Asset Held for Sale.
1. FEI-NY – U.S. Government and commercial satellite electronics, as well as products for the U.S. military and commercial telecom customers, are designed and manufactured at the Company’s Long Island, New York headquarters facility.
FEI-Elcom designs and manufactures Radio Frequency (“RF”) microwave modules, devices and subsystems up to 46 GHz including fast switching, ultra-low phase noise synthesizers, up-down converters, receivers, tuners, ceramic resonance oscillators and dielectric resonance oscillators. These instruments and components are mission critical for multiple applications in the EW market, SATCOM communication, surveillance, signal intelligence (COMINT, MASINT and ELINT), threat simulation, electronic attack (“EA”) and electronic prevention (“EP”) systems. FEI-Elcom’s RF microwave technology has also been utilized to develop new products for application in the Company’s satellite payload end market. The Company has consolidated FEI-Elcom’s manufacturing capabilities with other FEI-NY operations in an effort to reduce costs and improve margin.
2. FEI-Zyfer - Precision time references for terrestrial secure communications and command and control, and frequency products that incorporate GPS technology are manufactured by the Company’s subsidiary, FEI-Zyfer. FEI-Zyfer’s GPS capability complements the Company’s existing technologies and permits the combined entities to provide a broader range of embedded systems for a variety of timing functions and anti-spoofing (“SAASM”) applications.
For additional information about these reportable segments, see Item 1. Business – Reportable Segments and Products below.
In addition to its subsidiaries, the Company made a strategic investment in and licensed certain technology to Morion, Inc. (“Morion”), a Russian crystal oscillator manufacturer located in St. Petersburg, Russia. The Company’s relationship with Morion, which includes ownership of 4.6% of the outstanding shares of Morion’s common stock, permits the Company to secure a cost-effective source for high precision quartz resonators and crystal oscillators. The Morion investment is accounted for under the cost method. For more information regarding the Company’s investment in Morion, see Note 11 to the Consolidated Financial Statements.
REPORTABLE SEGMENTS AND PRODUCTS
The Company operates under two reportable segments, primarily aligned with the geographical locations of its subsidiaries: (1) FEI-NY and (2) FEI-Zyfer. Within each segment the Company designs, develops, manufactures and markets precision time and frequency control products for different markets as described below. The Company’s Chief Executive Officer measures segment performance based on total revenues and profits generated by each geographic center rather than on the specific types of customers or end-users. Consequently, the Company determined that the segments indicated above appropriately reflect the way the Company’s management views the business. The FEI-NY segment, which operates out of the Company’s Long Island, New York headquarters facility, 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 business. The products manufactured by the FEI-NY segment are principally marketed to the commercial and U.S. Government satellite markets, to other U.S. Department of Defense (“DOD”) customers and to wireless communications network providers. The FEI-Zyfer segment, which operates out of California, designs and manufactures products which incorporate GPS technologies and high-precision clocks designed and manufactured at FEI-NY. FEI-Zyfer sells its products to both commercial and U.S. Government customers and collaborates with FEI-NY on joint product development activities.
During fiscal years 2020 and 2019, approximately 77%, of the Company’s consolidated revenues were from products sold by the FEI-NY segment. In fiscal years 2020 and 2019, sales for the FEI-Zyfer segment were 26% and 25% of consolidated revenues, respectively. (The sum of annual sales percentages exceeds 100% due to intersegment sales.)
Consolidated revenues include sales to end-users in countries located outside of the U.S., primarily in Europe and China. During fiscal years 2020 and 2019, foreign sales comprised 4%, of consolidated revenues. For segment information, see Note 14 to the Consolidated Financial Statements.
FEI-NY segment:
The Company provides precision time, frequency generation and synchronization products and subsystems that are found on-board satellites, in ground-based communication systems and imbedded in mobile platforms operated by the U.S. military. The Company has made a substantial investment in research and development (“R&D”) to apply its core technologies to satellite payloads, non-space DOD programs and commercial and industrial markets. Revenues from satellite payloads, both for commercial and U.S. Government applications, have become the Company’s largest business area while the portion of network infrastructure sales has declined relatively. The Company expects to continue to generate substantial revenues from deployment of new and replacement satellites and other U.S. Government/DOD applications including sales of ruggedized subsystems for moving platforms of the U.S. military.
Satellite Payloads
The use of satellites launched for communications, navigation, weather forecasting, video and data transmissions and Internet access has expanded the need to transmit increasing amounts of voice, video, and data to earth-based receivers. This requires more precise timing and frequency control at the satellite. The Company manufactures the master timing systems (quartz, rubidium) and other significant timing and frequency generation products for navigation, communication and intelligence collection satellites, and many of the Company’s other space assemblies are used onboard spacecraft for command, control and power distribution. Efficient and reliable DC-DC power converters are also manufactured for the Company’s own assemblies and as stand-alone products for space applications. The Company’s oven-controlled quartz crystal oscillators are cost-effective precision frequency sources suited for high-end performance required in satellite communications, airborne and terrestrial datalinks and geophysical survey positioning systems. Commercial satellite programs which utilize the Company’s space-qualified products include Iridium NEXT Constellation, Intelsat EPIC, O3B, WAAS, MexSat, MSV, ICO, TerreStar, EchoStar, Inmarsat and others. The Company is also pursuing core product opportunities for planned satellite constellations that will operate in low- or mid-earth orbits.
In the years ahead, the Company expects that the DOD will require more secure communication capabilities, more assets in space and greater bandwidth. The Global Positioning Satellite System, the MILSTAR Satellite System and the AEHF Satellite System are examples of the programs in which the Company has participated or will participate - programs which management believes are important to the success of the U.S. Government’s communication, intelligence and Precision Navigation and Timing (PNT) needs. The Company previously manufactured the master clock for the Trident missile, the basic timing system for the Voyager I and Voyager II deep space exploratory missions and the quartz timing system for the Space Shuttle. The Company’s product offerings for U.S. Government satellite programs are similar in design and function to those used on commercial satellites, as described above.
U.S. Government- Non-space
In addition to space-based programs, the Company’s proprietary products have been used in airborne and ground-based guidance, navigation, communications, radar, sonar and electronic countermeasures and timing systems. The Company has developed and patented a low g-sensitivity (gravity) technology which offers a 100 times improvement in performance under shock, vibration and other environmental effects. Products are built in accordance with DOD standards and are in use on many of the U.S. Government’s important military applications. The Company anticipates that adequate funds will be provided by the U.S. Government to ensure that these programs are sustained.
FEI-Elcom addresses RF microwave modules and subsystems up to 46 GHz including fast switching, ultra-low phase noise synthesizers, up-down converters, receivers, tuners, ceramic resonance oscillators and dielectric resonance oscillators. These instruments and components are mission critical for many applications in the EW market, including SATCOM communication, surveillance, intelligence collection (SIGINT, COMINT, MASINT, and ELINT) and threat simulation systems.
The Company’s sales on U.S. Government programs for both space and non-space applications are generally made under fixed price or cost-plus contracts either directly with U.S. Government agencies or indirectly through subcontracts intended for government end-use. For fixed-price contracts, the price paid to the Company is not subject to adjustment by reason of costs incurred by the Company in the performance of the contract, except for costs incurred due to contract changes ordered by the customer. These contracts are negotiated on terms under which the Company bears the risk of cost overruns and derives the benefit from cost savings. Cost-plus contracts reimburse the Company for the actual costs incurred in performance of the contract requirements.
As indicated above, many of the programs and platforms for which the Company supplies products and systems, are used by the U.S. Government for maintaining secure communications world-wide, for obtaining vital intelligence and for enabling precision targeting capabilities. It is the belief of management that the future success of the mission of the U.S. military and intelligence community is dependent on successful and timely deployment of these systems. Thus, the Company anticipates that adequate funds will be provided by the U.S. Government to ensure that the programs are completed. However, the Company’s experience indicates that programs and/or product sales can be delayed due to periodic U.S. Government appropriations cycles.
Negotiations on U.S. Government contracts are sometimes based in part on Certificates of Current Costs. An inaccuracy in such certificates may entitle the government to an appropriate recovery. The Company’s accounts with respect to these contracts are subject to audit by the Defense Contract Audit Agency (“DCAA”). The Company’s last full incurred cost audit was performed in 2008. The Company is required to submit for subsequent review an incurred cost report by October 31, for each year then ended. All such required reports have been filed with no adverse comments to date.
FEI has a DCAA audited and approved accounting system, which enables the Company to enter into contracts directly with U.S. Government agencies that require government certified accounting systems.
Government end-use contracts are subject to termination by the purchaser for convenience or default, as well as various other Federal Acquisition Regulations (“FAR”) provisions. In the event of a termination for convenience, the Company is entitled to receive compensation as provided under the specific terms of such contracts. There were no end-use contracts terminated for the year ended April 30, 2020.
FEI-Zyfer segment:
FEI-Zyfer designs, develops and manufactures products which provide Precision Navigation and Timing (PNT), primarily incorporating Global Navigation Satellite System(s) technology. FEI-Zyfer’s products make use of both “in-the-clear” civil and “crypto-secured” military signals for GPS. FEI-Zyfer’s products are integrated into radar systems, airborne SIGINT/COMINT platforms, information networks, test equipment, military command and control terminals, and satellite ground stations. FEI-Zyfer’s products are an important extension of FEI’s core product line, specifically in secure PNT for Command, Control, Communications, Computers, Combat Systems, Intelligence, Surveillance, and Reconnaissance (C5ISR). Recently identified threats to the communication capabilities of U.S. Government and to the public and enterprise networks through jamming, multi-path or “spoofing” GPS signals may be mitigated by FEI-Zyfer’s technologies and products. High precision, ruggedized clocks combined with specialized software are essential for certain communication and operational security. More than 95% of FEI-Zyfer’s revenues are derived from sales where the end user is the U.S. Government.
BACKLOG
As of April 30, 2020, the Company’s consolidated backlog amounted to approximately $36 million compared to approximately $37 million at the end of the prior fiscal year. Approximately 81% of the current backlog is expected to be filled during the Company’s fiscal year ending April 30, 2021. As of April 30, 2020, there are no amounts included in backlog under cost-plus fixed-fee contracts that have not been funded. The Company excludes from backlog those contracts or awards for which it has not received authorization to proceed. On fixed price contracts, the Company excludes any unfunded portion. The Company expects any partially funded contracts to become fully funded over time and will add the additional funding to its backlog at that time. 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 the revenues or profits (losses) which may be realized when the results of such contracts are reported.
CUSTOMERS AND SUPPLIERS
The Company markets its products both directly and through independent sales representative organizations located in the U.S., Europe and Asia. Sales to non-U.S. end-users totaled approximately 4% of net revenues in fiscal years 2020 and 2019, respectively.
The Company’s products are sold to both commercial and governmental customers. For the years ended April 30, 2020 and 2019, approximately 83% and 87%, respectively, of the Company’s sales were made under contracts to the U.S. Government or subcontracts for U.S. Government end-use.
During fiscal year 2020, Lockheed Martin Corporation (“Lockheed Martin”), Northrop Grumman Company (“Northrop Grumman”), BAE Systems and L3Harris Technologies, Inc. each accounted for more than 10% of the Company’s consolidated revenues.
During fiscal year 2019, Lockheed Martin accounted for more than 10% of the Company’s consolidated revenues.
The loss by the Company of any one of these customers could have a material adverse effect on the Company’s business. The Company believes its relationship with these companies is mutually satisfactory. Additionally, the Company is not aware of any prospect for the cancellation or significant reduction of any of its commercial or existing U.S. Government contracts.
The Company purchases a variety of components such as transistors, resistors, capacitors, connectors and diodes for use in the manufacture of its products. The Company is not dependent upon any one supplier or source of supply for any of its component part purchases and maintains alternative sources of supply for all of its purchased components. The Company has found its suppliers generally to be reliable and price-competitive.
RESEARCH AND DEVELOPMENT
The Company’s technological leadership continues to be an essential factor as it pursues future growth in revenues and earnings. The Company has focused its internal R&D efforts on improving the core physics and electronic packages in its time and frequency products, conducting research to develop new time and frequency technologies and capabilities, improving product manufacturability by seeking to reduce its production costs through product redesign and process improvements and other measures to take advantage of lower cost components.
The Company continues to focus a significant portion of its own resources and efforts on developing hardware for satellite (commercial and U.S. Government) and terrestrial commercial communications systems, including wireless and GPS-related systems. During fiscal years 2020 and 2019, the Company expended $5.1 million and $6.5 million of its own funds, respectively, on such R&D activity. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. Additionally, the Company receives customer funding for specific R&D projects and anticipates additional funding from customers for future R&D initiatives. During fiscal years 2020 and 2019, some of the Company’s development resources were applied to the design-stage of fixed-price satellite payload sub-system programs. For fiscal year 2021, the resources to be allocated to R&D will depend on market conditions and identification of new opportunities, as was the case in fiscal 2020.
PATENTS AND LICENSES
The Company believes that its business is generally not dependent on patent or license protection. Rather, it is primarily dependent upon the Company’s technical competence, the quality of its products and its prompt and responsible contract performance. However, employees working for the Company assign all rights to inventions to the Company, and the Company presently holds such patents and licenses. In certain limited circumstances, the U.S. Government may use or permit the use by the Company’s competitors of certain patents or licenses the government has funded. During fiscal year 2003, the Company received a broad and significant patent for proprietary quartz oscillator technology which the Company has incorporated into its legacy designs, and which it will incorporate into future designs, to exploit in both legacy and new applications. In 2006, the Company obtained a basic patent for its low g-sensitivity technology which management believes will permit greatly enhanced performance of devices on moving platforms and under externally imposed shock or vibration.
COMPETITION
The Company experiences competition in all areas of its business. Many of the Company’s competitors are larger, have greater financial resources and have larger R&D and marketing staffs. The Company has a strong history of competing successfully in this environment due to the quality, reliability and outstanding record of performance its products have achieved. The Company competes primarily on the basis of the accuracy, performance and reliability of its products, the ability of its products to function under severe conditions, such as in space or in other extremely hostile environments, and the Company’s track record of prompt and responsive contract performance and technical competence. The Company has unique and broad capabilities which include quartz, rubidium and cesium-based timing references and specialized RF microwave technology. With respect to very high precision products, the Company encounters fewer competitors than it does for lower precision products for which there are a significant number of suppliers.
The Company’s principal competition for space products is the in-house capability of its major customers such as the Boeing Company, Northrop Grumman and Lockheed Martin, as well as a number of other firms capable of providing high-reliability microwave frequency generators. With respect to non-space products, such as systems for precision time for terrestrial secure communication and command and control, and products for multiple applications in the EW market, the Company competes with larger domestic companies such as Microchip Technology Inc. and Mercury Systems.
The Company has previously outsourced certain manufacturing processes to third parties and to Russia-based Morion, in which the Company is a minority shareholder. The Company believes its ability to obtain raw materials, manufacture finished products, integrate them into systems and sub-systems and interface these systems with highly sophisticated end-user applications provides a strong competitive edge.
EMPLOYEES
The Company employs approximately 220 full-time persons worldwide. No employees are represented by labor unions.
OTHER ASPECTS
The Company’s business is not seasonal although it expects to experience some fluctuation in revenues during the second fiscal quarter as a result of summer holiday periods. No unusual working capital requirements exist. The Company’s U.S. Government contracts are subject to FAR, which impose various requirements and failure to comply could potentially have consequences.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The executive officers hold office until the annual meeting of the Board of Directors following the annual meeting of stockholders, subject to earlier removal by the Board of Directors.
The names of all executive officers of the Company and all positions and offices with the Company which they presently hold are as follows:
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Stanton D. Sloane |
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President and Chief Executive Officer |
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Oleandro Mancini |
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Senior Vice President, Business Development |
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Steven Strang |
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President, FEI-Zyfer |
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Thomas McClelland |
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Vice President, Advanced Development and Chief Scientist |
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Adrian Lalicata |
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Vice President, RF & Microwave Systems |
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Steven L. Bernstein |
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Chief Financial Officer and Secretary and Treasurer |
Stanton D. Sloane, age 69, has served as a Director of the Company since August 2016. On May 1, 2018, Dr. Sloane was named President and Chief Executive Officer of the Company. Prior to being named President and Chief Executive Officer, Dr. Sloane had served as the Chief Operating Officer of the Company since September 2017. Dr. Sloane was President and Chief Executive Officer of Comtech Telecommunications Corp. (Nasdaq: CMTL) from January 2015 until September 2016 and a director of Comtech from January 2012 until September 2016. Prior to joining Comtech, Dr. Sloane was President and CEO and a Director of Decision Sciences International Corporation, a privately-held advanced security and detection systems company, from August 2011 through January 2015. Prior to that, he served as President and CEO and a Director of SRA International, Inc. (“SRA”), an information solutions company. He served as President and CEO of SRA from April 2007 through July 2011, during which time he helped lead the sale of SRA to a private equity firm. Prior to joining SRA, he was Executive Vice President of Lockheed Martin's Integrated Systems & Solutions from June 2004 until April 2007. He began his business career with General Electric Aerospace in 1984 and progressed through engineering, program management, and business development assignments in a variety of General Electric Aerospace and subsequently Lockheed Martin businesses. He also served as an officer in the U.S. Navy from 1976 until 1981. Dr. Sloane holds a bachelor's degree in Professional Studies (Aeronautics) from Barry University, a master's degree in Human Resources Management from Pepperdine University, and a Doctor of Management degree from the Weatherhead Business School at Case Western Reserve University.
Oleandro Mancini, age 71, joined the Company in August 2000 as Vice President, Business Development and was promoted to Senior Vice President in 2010. Prior to joining the Company, Mr. Mancini served from 1998 to 2000 as Vice President, Sales and Marketing at Satellite Transmission Systems, Inc. and from 1995 to 1998 as Vice President, Business Development at Cardion, Inc., a Siemens A.G. company. From 1987 to 1995, he held the position of Vice President, Engineering at Cardion, Inc.
Steven Strang, age 56, was named President of FEI-Zyfer, Inc., effective May 1, 2005. Previously, Mr. Strang was Executive Vice President of this subsidiary and its predecessor companies where he has served for 21 years in various technical and management positions.
Thomas McClelland, age 65, joined the Company as an engineer in 1984 and was elected Vice President, Commercial Products in March 1999. In fiscal year 2011, Mr. McClelland’s title was modified to Vice President Advanced Development to describe his expanded role in the Company.
Adrian Lalicata, age 73, joined the Company in 2006 as Vice President, RF & Microwave Systems. Prior to joining the Company, Mr. Lalicata served as Vice President of Engineering at Herley-CTI and Communication Techniques, a Dover Company. Mr. Lalicata has also served as Director of Engineering at Microphase Corp. and Adcomm, Inc. He also held leading engineering positions at Loral Electronic Systems, Cardion Electronics, and Airborne Instruments Laboratories.
Steven L. Bernstein, age 55, joined the Company in April 2010 as its Controller and was appointed to the position of Chief Financial Officer in April 2016. Effective January 1, 2019, Mr. Bernstein was also appointed as Secretary and Treasurer of the Company, in addition to his role as Chief Financial Officer. Prior to joining the Company, Mr. Bernstein worked in the North America accounting group of Arrow Electronics, a Fortune 500 electronics distributor.
This item is not required for smaller reporting companies.
Item 1B. Unresolved Staff Comments
Not Applicable.
The Company operates out of several facilities located around the world. Each facility is used for manufacturing its products and for administrative activities. The following table presents the location, size and terms of ownership/occupation:
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Location |
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Size (sq. ft.) |
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Own or Lease |
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Long Island, NY |
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93,000 |
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Lease |
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Garden Grove, CA |
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27,850 |
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Lease |
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Northvale, NJ |
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9,000 |
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Lease |
The Company’s facility located in Mitchel Field, Long Island, New York, is part of the building that the Company constructed in 1981 and expanded in 1988 on land leased from Nassau County. In January 1998, the Company sold this building and the related land lease to Reckson Associates Realty Corp. (“Reckson”), leasing back the space that it presently occupies.
The Company leased its manufacturing and office space from Reckson under an initial 11-year lease followed by two five-year renewal periods which ended in January 2019. On July 25, 2018, the Company signed an amendment to the lease with RA 55 CLB LLC (as successor-in-interest to Reckson) which extended the current lease terms ten years and eight months through September 30, 2029. Pursuant to the amendment to the lease agreement, the Company shall pay a gradually increasing annual rent of $1,046,810 in 2019 to $1,276,056 in 2029. The Company believes the leased space is adequate to meet the Company’s domestic operational needs which encompass the principal operations of the FEI-NY segment and also serves as the Company’s corporate headquarters.
The Garden Grove, California facility is leased by the Company’s subsidiary, FEI-Zyfer. The facility consists of a combination office and manufacturing space. The Company has signed a second amendment to the lease, which extends the lease an additional 88 months, beginning October 1, 2017 and expiring January 31, 2025. The average annual rent over the period of the amendment is approximately $312,000. The Company believes the leased space is adequate to meet FEI-Zyfer’s operational needs.
FEI-Elcom entered into a new lease agreement on February 1, 2018 regarding its Northvale, New Jersey facility. The facility consists of a combination office and manufacturing space. The lease, which expires in January 31, 2021, requires monthly payments of $9,673. The Company believes the leased space is adequate to meet FEI-Elcom’s operational needs.
On January 28, 2020, Martin B. Bloch, the former Chief Scientist of the Company and a current member of the Company’s Board, filed a complaint against the Company and Jonathan Brolin, Lance W. Lord, Russell M. Sarachek, Richard Schwartz and Stanton D. Sloane, each in their capacity as members of the Board (collectively, the “Director Defendants”), in the Supreme Court of the State of New York, County of Nassau (Bloch v. Frequency Electronics, Inc., et al., Index No. 601369/2020 (N.Y. Sup. Ct. filed Jan. 28, 2020)). Mr. Bloch seeks compensatory damages and costs and attorney’s fees, among other things, based on allegations that he was wrongfully terminated “for cause” pursuant to his employment agreement, dated March 17, 2008, and his deferred compensation agreements, in each case as amended, with the Company, and that the Company and the Director Defendants discriminated against him based on his age. Mr. Bloch had originally also sought a declaratory judgment and claims for damage to his reputation and a derivative claim on behalf of the Company alleging that the Director Defendants breached their fiduciary duty in rendering their decision to terminate Mr. Bloch’s employment with the Company. However, Mr. Bloch removed those claims from a subsequently filed amended complaint after the Company and the Director Defendants moved to dismiss them. On June 11, 2020, the Company and the Director Defendants filed their answer to the amended complaint. Mr. Bloch filed a motion for summary judgment on June 23, 2020, which the Company and the Director Defendants opposed on July 10, 2020. Mr. Bloch’s motion seeks an order that the Company is liable for breach of his employment agreement because he purportedly resigned from the Company before he was terminated. On July 10, 2020, the Company and the Director Defendants opposed Mr. Bloch’s motion and also filed a motion for summary judgment seeking the dismissal of all claims in Mr. Bloch’s amended complaint. The Company and the Director Defendants believe that the Board was justified in its decision to terminate Mr. Bloch “for cause” and that Mr. Bloch’s complaint is entirely without merit. The Company intends to vigorously defend against all of Mr. Bloch’s allegations. At this time, the Company does not have sufficient information to determine whether liability, if any, arising out of these matters is probable or the possible loss, if any, that could result from an unfavorable outcome arising out of these matters.
In addition, Mr. Bloch sought to initiate two arbitration proceedings under the AAA Rules (Bloch v. Frequency Electronics, Inc., the Compensation Committee of the Board of Directors of Frequency Electronics, Inc., and the Deferred Compensation Plan Agreement Dated March 7, 2008). One arbitration is brought under a deferred compensation agreement dated March 27, 1980 and the other under a second amended and restated deferred compensation agreement, dated March 7, 2008. Bloch submitted his Statements of Claim in both arbitrations on May 4, 2020. In both proceedings, Bloch claims that defendants violated ERISA rules by denying him the benefits he was allegedly entitled to under the deferred compensation agreements.
On June 2, 2020, the Company filed a petition for a stay of arbitration and related declaratory relief against Mr. Bloch, in the Supreme Court of the State of New York, New York County (Frequency Electronics, Inc. v. Martin B. Bloch, Index No. 652191/2020 (N.Y. Sup. Ct. filed June 2, 2020)). The Company claims that Mr. Bloch may not arbitrate his claims for deferred compensation because he did not timely appeal the Company’s denial of those claims, and because he failed to comply with the arbitration procedures in the applicable deferred compensation agreement. Mr. Bloch filed a motion on June 16, 2020 seeking a change of venue to the County of Nassau, which the Company opposed on July 7, 2020. The motion is currently pending. At this time, the Company does not have sufficient information to determine the likelihood of success of this petition.
On June 5, 2020, Mr. Bloch filed a petition against the Company, the Compensation Committee of the Company’s Board of Directors, and the Deferred Compensation Plan Agreement Dated March 7, 2008, as amended, for the appointment of an arbitrator in one of the arbitration proceedings that Mr. Bloch sought to initiate. The petition was filed in the Supreme Court of the State of New York, County of Nassau (Bloch v. Frequency Electronics, Inc. et al., Index No. 605380/2020 (N.Y. Sup. Ct. filed June 5, 2020)). On June 22, 2020, the Company moved to dismiss Mr. Bloch’s petition, and he opposed the Company’s motion on July 2, 2020. The motion is currently pending. Defendants dispute all of Bloch’s claims and intend to continue to vigorously defend the Company in this special proceeding. The likelihood of any outcome of this proceeding cannot be determined at this time.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The common stock of the Company is listed on The Nasdaq Global Market (“NASDAQ”) under the ticker symbol “FEIM.” As of July 27, 2020, the approximate number of holders of record of common stock was 485.
DIVIDEND POLICY
No dividends were declared or paid during fiscal years 2020 and 2019. The Company currently intends to retain any future earnings for use in the business. Any future determinations as to the declaration of dividends on our common stock will be made at the discretion of the Board of Directors and will depend on our earnings, operating and financial conditions, capital requirements and other factors deemed relevant by the Board of Directors.
STOCK BUYBACK PROGRAM
In March 2005, the Company’s Board of Directors authorized a stock repurchase program for up to $5 million of the Company’s outstanding common stock. This program does not have an expiration date. Shares may be purchased in open market purchases, private transactions or otherwise at such times and from time to time, and at such prices and in such amounts as the Company believes appropriate and in the best interests of its shareholders. The timing and volume of repurchases will vary depending on market conditions and other factors. Purchases may be commenced or suspended at any time without notice. During fiscal year 2009, the Company repurchased 724,632 shares under the buyback program, including a block purchase of 615,000 shares from its former largest institutional shareholder. The average purchase price was $4.29 per share or an aggregate amount of approximately $3.1 million. With these purchases, the Company has acquired approximately $4 million of its common stock out of the total authorization of $5 million. The Company did not make any purchases of stock for the treasury during fiscal years 2020 or 2019.
Item 6. Selected Financial Data
Not Applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:
The statements in this Annual Report on Form 10-K 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, 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-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-K 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.
Critical Accounting Policies and Estimates
The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. The Company believes its most critical accounting policies to be the recognition of revenue and costs on production contracts, income taxes and the valuation of inventory. Each of these areas requires the Company to make use of reasonable estimates, including estimating the cost to complete a contract, the realizable value of its inventory or the market value of its products. Changes in estimates can have a material impact on the Company’s financial position and results of operations.
Revenue Recognition
Revenue is recognized when a performance obligation is satisfied, which is when the expected goods or services are transferred to the customer, in an amount that reflects the consideration to which the Company expects to receive. A performance obligation is a distinct product or service that is transferred to the customer based on the contract. The transaction price is allocated to each performance obligation and is recognized as revenue upon satisfaction of that performance obligation. The Company derives revenue from contracts with customers by units sold with specific specifications and frequencies that are used by a specific customer and contracts where the end user is the government. The Company’s contracts typically include one performance obligation which is satisfied by shipped projects and completed services/reports required in the contract. Control over these performance obligations passes to the customer over time and therefore these revenues are reported in operating results over time using the 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 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.
For smaller contracts or orders, sales of products and services to customers are reported in operating results based upon (i) shipment of the product or (ii) performance of the services pursuant to terms of the customer order. When payment is contingent upon customer acceptance of the installed system, revenue is deferred until such acceptance is received and installation completed. The Company’s products generally carry a one-year warranty, but may vary based on the contract terms.
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.
Contract costs include all direct material, direct labor costs, manufacturing overhead and other direct costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred.
Inventory
In accordance with industry practice, inventoried costs contain amounts relating to contracts and programs with long production cycles, a portion of which will not be realized within one year. Inventory write downs are established for slow-moving materials based on percentage of usage over a ten-year period, obsolete items on a gradual basis over five years with no usage and costs incurred on programs for which production-level orders cannot be determined as probable. Such write-downs are based upon management’s experience and expectations for future business. Any changes arising from revised expectations are reflected in cost of revenues in the period the revision is made.
Income Taxes
Our income tax expense, deferred tax asset and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. Significant judgments and estimates are required in the determination of the consolidated income tax expense.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover deferred tax assets in the jurisdiction from which they arise, we consider all positive and negative evidence, including the reversal of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of recent operations. As of April 30, 2020 and 2019, we have a full valuation allowance against our U.S. net deferred tax assets. If these estimates and assumptions change in the future, the Company may be required to reduce its existing valuation allowance resulting in less income tax expense. The Company evaluates the likelihood of realizing its deferred tax assets quarterly.
Tax benefits are recognized for an uncertain tax position when, in the Company’s judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances and when new information becomes available. Such adjustments are recognized entirely in the period in which they are identified. The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by the Company. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes its liability for unrecognized tax benefits is adequate. Interest and penalties recognized on income taxes are recorded as income tax expense.
COVID-19 Outbreak Update
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
The Company’s priority during the COVID-19 outbreak has been to protect the health and safety of its employees while keeping its manufacturing sites open. Within the limitations imposed by governmental health and safety procedures, the Company has continued to manufacture its full range of products at its facilities. The Company has educated employees about COVID-19 symptoms and hygiene best practices. The Company’s policies also include taking an employee’s temperature before entering production facilities; mandating handwashing; requiring social distancing and, where social distancing is difficult, requiring face coverings; streamlining onsite personnel; encouraging, and in some cases, requiring remote work for those employees who can work from home; and disinfecting facilities.
As of July 29, 2020, the Company was aware of two employees that have had confirmed cases of COVID-19 since the COVID-19 outbreak began, with no fatalities and both of those employees having returned to work. Additional employees have been absent or self-quarantined due to COVID-19; however, such absences have not had a significant impact on production. Additionally, since the COVID-19 outbreak began, no facilities have been fully shut down (other than temporarily for disinfecting) and such measures to disinfect facilities have not had a significant impact on production. Certain of the Company’s vendors have been unable to deliver materials on time due to the COVID-19 outbreak. Such delays have negatively impacted the Company’s production, and the Company plans to continue to monitor these and its other vendors and, if necessary, seek alternative suppliers.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic may have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2021.
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act also appropriated funds for the SBA Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19.
RESULTS OF OPERATIONS
Consolidated Results
The table below sets forth for the fiscal years ended April 30, 2020 and 2019, the percentage of consolidated net sales represented by certain items in the Company’s consolidated statements of operations:
|
2020 |
2019 |
|||||||
|
Revenues |
||||||||
|
FEI-NY |
76.5 |
% |
76.9 |
% |
||||
|
FEI-Zyfer |
26.3 | 24.7 | ||||||
|
Less intersegment revenues |
(2.8 |
) |
(1.6 |
) |
||||
| 100.0 | 100.0 | |||||||
|
Cost of Revenues |
86.1 | 68.1 | ||||||
|
Gross profit |
13.9 | 31.9 | ||||||
|
Selling and Administrative expenses |
27.9 | 24.5 | ||||||
|
Research and Development expenses |
12.3 | 13.1 | ||||||
|
Operating Loss |
(26.3 |
) |
(5.7 |
) |
||||
|
Other (Expenses) Income, net |
(2.0 |
) |
0.7 | |||||
|
(Benefit) Provision for Income Taxes |
(4.2 |
) |
0.1 | |||||
|
Net Loss |
(24.1 |
)% |
(5.1 |
)% |
||||
Revenues
|
Fiscal years ended April 30, (in thousands) |
||||||||||||||||
|
Change |
||||||||||||||||
|
2020 |
2019 |
$ |
% |
|||||||||||||
|
FEI-NY |
$ | 31,751 | $ | 38,096 | $ | (6,345 |
) |
(17 |
%) |
|||||||
|
FEI-Zyfer |
10,914 | 12,235 | (1,321 |
) |
(11 |
%) |
||||||||||
|
Intersegment sales |
(1,158 |
) |
(822 |
) |
(336 |
) |
41 |
% |
||||||||
| $ | 41,507 | $ | 49,509 | $ | (8,002 |
) |
(16 |
%) |
||||||||
Fiscal 2020 revenues from satellite programs, one of the Company’s largest business areas, decreased by $2.4 million, or 11%, compared to the prior fiscal year. For Fiscal 2020 satellite program revenues for government end-use were 41% and 46% of total revenues for fiscal years 2020 and 2019, respectively. Satellite program revenues for commercial end-use were 9% and 5% of total revenue for Fiscal 2020 and Fiscal 2019, respectively. Revenues on satellite program contracts are recorded in the FEI-NY segment and are recognized primarily under the Percentage-of-Completion (“POC”) method. Revenues from non-space U.S. Government/DOD customers decreased by approximately $5.8 million, or 26%, in Fiscal 2020 compared to prior fiscal year. These revenues are recorded in both the FEI-NY and FEI-Zyfer segments and accounted for approximately 41% and 46% of consolidated revenues for fiscal years 2020 and 2019, respectively. For the year ended April 30, 2020, other commercial and industrial sales accounted for approximately 10% of consolidated revenues compared to approximately 8% for fiscal year 2019. Sales in this business area were $4.2 million for the year ended April 30, 2020 compared to $3.9 million for the preceding year.
Gross Profit
|
Fiscal years ended April 30, |
||||||||||||||||
|
(in thousands) |
||||||||||||||||
|
Change |
||||||||||||||||
|
2020 |
2019 |
$ |
% |
|||||||||||||
| $ | 5,748 | $ | 15,789 | $ | (10,041 | ) | (63.6 |
%) |
||||||||
|
Gross Profit Percentage |
13.9 |
% |
31.9 |
% |
||||||||||||
For the fiscal year ended April 30, 2020, the gross profit and gross profit percentage both decreased compared to the prior fiscal year. The lower gross profit and gross profit percentage were the result of lower revenues and were impacted by increases in engineering costs incurred on several programs, which are in the development phase and which encountered unanticipated technical challenges related to customer driven system packaging and environmental requirements for state-of-the-art performance demands.
Selling and Administrative Expenses
|
Fiscal years ended April 30, |
|||||||||||||||
|
(in thousands) |
|||||||||||||||
|
Change |
|||||||||||||||
|
2020 |
2019 |
$ |
% |
||||||||||||
| $ | 11,593 | $ | 12,100 | $ | (507 | ) | (4.2 |
%) |
|||||||
In fiscal years ended April 30, 2020 and 2019, selling and administrative expenses (“SG&A”) were 28% and 24%, respectively, of consolidated revenues. SG&A increased as a percentage of consolidated revenues due to the decrease in revenues. SG&A expenses in Fiscal 2019 included a one-time charge of approximately $1 million for the loss associated with the sale of FEI-Asia. Excluding this one-time charge, SG&A expenses were relatively flat year over year; depreciation increased while deferred compensation expense decreased. Stock compensation expenses, which are included in total SG&A, were $144,000 and $298,000 in Fiscal 2020 and Fiscal 2019, respectively. Some legal expenses included in SG&A are covered by the Company’s Directors & Officers or Employment Practices Liability insurance policies and are anticipated to be reimbursed at a future date. The insurance coverage has been confirmed by the carrier, but the amount which will be reimbursed is subject to future negotiation.
Research and Development Expenses
|
Fiscal years ended April 30, |
|||||||||||||||
|
(in thousands) |
|||||||||||||||
|
Change |
|||||||||||||||
|
2020 |
2019 |
$ |
% |
||||||||||||
| $ | 5,077 | $ | 6,506 | $ | (1,429 |
) |
(22.0 |
)% |
|||||||
As a percentage of consolidated revenue, R&D expense for the years ended April 30, 2020 and 2019 was approximately 12% and 13%, respectively. The approximately $1.4 million decrease in R&D expense year over year reflects a higher level of customer funded R&D as a portion of the total R&D effort. These R&D efforts address large business opportunities in secure communications command and control, and satellite systems that require advanced technologies and capabilities going forward.
The funds received in connection with customer funded R&D appears in revenues and the associated expenses are included in costs of revenues and are not included in the table above. Although funding is obtained from customers, the Company retains the rights to any products developed. The Company believes that internally generated cash and cash reserves are adequate to fund its R&D activity.
Operating Loss
|
Fiscal years ended April 30, |
|||||||||||||||
|
(in thousands) |
|||||||||||||||
|
Change |
|||||||||||||||
|
2020 |
2019 |
$ |
% |
||||||||||||
| $ | (10,922 |
) |
$ | (2,817 |
) |
$ | (8,105 | ) | NM | ||||||
For the fiscal year ended April 30, 2020, the Company recorded an operating loss of $10.9 million compared to an operating loss of $2.8 million in the prior year. The increase in the operating loss in the fiscal year ended April 30, 2020 was a result of decreased revenues as well as increased costs related to technical challenges on certain programs in the developmental phase.
Other (Expense) Income, net
|
Fiscal years ended April 30, (in thousands) |
||||||||||||||||
|
Change |
||||||||||||||||
|
2020 |
2019 |
$ |
% |
|||||||||||||
|
Investment income |
$ | 329 | $ | 293 | $ | 36 | 12 |
% |
||||||||
|
Interest expense |
(107 |
) |
(83 |
) |
(24 |
) |
29 |
% |
||||||||
|
Other (expense) income, net |
(1,068 |
) |
134 | (1,202 |
) |
NM | ||||||||||
| $ | (846 | ) | $ | 344 | $ | (1,190 |
) |
NM | ||||||||
Investment income is derived primarily from the Company’s holdings of marketable securities, which primarily consist of fixed income securities. Earnings on securities may vary based on fluctuating interest rates, dividend payout levels, and the timing of purchases, sales, redemptions or maturities of securities. Included in other expenses for the fiscal year ended April 30, 2020 is a provision related to the note receivable arising from the sale of Gillam to a European entity on April 26, 2018 which is due Fiscal 2021.
Income Tax (Benefit) Provision
|
Fiscal years ended April 30, |
|||||||||||||||
|
(in thousands) |
|||||||||||||||
|
Change |
|||||||||||||||
|
2020 |
2019 |
$ |
% |
||||||||||||
| $ | (1,742 |
) |
$ | 56 | $ | (1,798 | ) | NM | |||||||
Effective tax rate on pre-tax book income:
|
(14.80 |
%) |
|
|
(2.27 |
%) |
|
|
|
|
|
|
|
|
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted. Intended to provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act includes provisions, among others, allowing for the carryback of net operating losses generated in tax years 2018, 2019 and 2020, refunds of alternative minimum tax credits, temporary modifications to the limitations placed on the tax deductibility of net interest expense, and technical corrections so that qualified improvement property can be immediately expensed under Internal Revenue Code (“IRC”) Section 168(k) and net operating losses arising in tax years beginning in 2017 and ending in 2018 can be carried back two years and forward twenty years.
For the fiscal year ended April 30, 2020, the Company recorded an income tax benefit of $1,742,000 primarily due to the enactment of the CARES Act, which allows for the carryback of net operating losses to prior tax years in which the Company was subject to U.S. federal income tax. The income tax benefit is reflected as a current tax benefit in Note 13 as the deferred tax expense related to the utilization of net operating losses is offset by a change in the valuation allowance. The Company recorded an income tax provision of $56,000 in the fiscal year ended April 30, 2019 primarily related to state and local taxes, a foreign tax benefit, and an increase in the uncertain tax position liability.
The Company’s effective tax rate of (14.85)% for Fiscal 2020 differs from the U.S. federal statutory rate of 21% primarily due to the tax effects related to (i) the enactment of the CARES Act, which allowed the Company to recognize a tax benefit for a portion of its pretax loss, (ii) state and local taxes, (iii) and a change in the valuation allowance. (See Note 13 to the Consolidated Financial Statements for a reconciliation of the actual tax benefit to the expected tax provision at the federal statutory rate.)
As of April 30, 2020, the Company has U.S. federal net operating losses of $24.6 million of which $16.4 million begins to expire in Fiscal 2026 through 2038, including $3.4 million which is subject to annual limitation under IRC Section 382. The remaining U.S. federal net operating losses of $8.2 million have an indefinite carry-forward period. The U.S. federal capital loss carry-forward of $10.0 million expires in 2023. The Company also has state net operating loss carryforwards, U.S federal R&D tax credits, and state tax credits that expire in various years and amounts.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations was $1.4 million in fiscal year 2020 compared to cash used in operations of $0.1 million in fiscal year 2019. The Company’s balance sheet continues to reflect a highly liquid position with working capital of $38.3 million at April 30, 2020 as compared to $46.9 million at April 30, 2019. Included in working capital at April 30, 2020 was $14.4 million consisting of cash, cash equivalents and short-term investments. The Company’s current ratio at April 30, 2020 is 3.9 to 1 compared to 9.0 to 1 at the end of the prior fiscal year.
During fiscal years 2020 and 2019, the Company incurred $6.4 million and $3.7 million, respectively, in non-cash charges to earnings, including adjustments relating to net assets and liabilities for operating leases, loss provision accrual, provision for note receivable, the Asia investment held for sale in Fiscal 2019, depreciation and amortization expense, inventory adjustments, warranty and accounts receivable reserves and certain employee benefit plan expenses, including accounting for stock-based compensation. During fiscal year 2020, operating cash was decreased by increases in prepaids, offset by decreases in accounts receivable and inventory. During fiscal year 2019, operating cash was decreased by increases in accounts receivable and prepaid expenses, offset by decreases in inventory.
Net cash used in investing activities for the fiscal year ended April 30, 2020 was $3.4 million compared to $4.6 million used in investing activities for the fiscal year ended April 30, 2019. In fiscal year 2020, investing activities included the purchase of marketable securities net of proceeds related to sales of marketable securities of $1.9 million and purchases of capital expenditures of $1.5 million. In fiscal year 2019, investing activities included the purchase of marketable securities net of proceeds related to sales of marketable securities of $1.9 million, and purchases of fixed assets of $2.8 million. The Company may continue to invest cash equivalents as dictated by its investment and acquisition strategies.
Cash provided by financing activities for the fiscal year ended April 30, 2020 was $5.0 million related to a loan acquired from JPMorgan Chase Bank, N.A. as the Lender, pursuant to the Small Business Administration Paycheck Protection Program under the CARES Act. This loan was subsequently repaid in full in May 2020. There was no cash provided by financing activities for the prior year. As of April 30, 2020, the Company had available credit at variable terms based on its securities holdings under an advisory arrangement, under which no borrowings have been made.
The Company will continue to expend resources to develop, improve and acquire products for space applications, guidance and targeting systems, and communication systems which management believes such expenditures will result in future growth and profitability. During fiscal year 2020, the Company secured partial customer funding for a portion of its R&D efforts. The customer funds received in connection therewith appear in revenues and are not included in R&D expenses. For fiscal year 2021, 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 as in fiscal 2020. 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.
The Company has incurred operating losses in its last four completed fiscal years, as well as cash used in operating activities in its last two completed fiscal years. As of April 30, 2020, the Company had an accumulated deficit of $12.1 million. The Company believes that its cash and cash equivalents, as well as marketable securities as of April 30, 2020 and cash flows from operations will provide sufficient liquidity to meet its operating needs in the normal course of business through the next twelve months from the date of issuance of these consolidated financial statements. However, changing circumstances, including COVID-19 uncertainties, some of which may be beyond its control, could cause the Company to consume capital faster than it currently anticipates, and it may need to seek additional funding through equity offerings, debt financings, or other sources.
Off-Balance Sheet Arrangements
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, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
As of April 30, 2020, the Company’s consolidated backlog amounted to approximately $36 million as compared to approximately $37 million at the beginning of the fiscal year. See Item 1. Business – Backlog. Approximately 81% of this backlog is expected to be filled during the Company’s fiscal year ending April 30, 2021. 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. The Company expects any partially funded contracts to become fully funded over time and will add the additional funding to its backlog at that time. The backlog is subject to change by reason of several factors 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 the revenues or profits (losses) which may be realized when the results of such contracts are reported.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-13 Fair Value Measurement (Topic 820) (“ASU 2018-13”) which modifies the disclosure requirement on fair value measurements. The new guidance is effective for fiscal years beginning after December 15, 2019. The Company is evaluating the effect, if any, the update will have on its consolidated financial statements when adopted in Fiscal 2021.
In January 2017, the 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, 2019, with early adoption permitted. The Company does not plan to adopt 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 2021.
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 generally accepted accounting principles (“GAAP”) with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance is effective for fiscal years beginning after December 15, 2022. The Company is evaluating the effect, if any, the update will have on its consolidated financial statements when adopted in Fiscal 2023.
Newly Adopted Accounting Standards
Leases (Topic 842)
In the first quarter of fiscal 2020 the Company adopted ASU No. 2016-02 Leases (Topic 842) (“ASU 2016-02”) and recognized on its condensed consolidated balance sheets $12.1 million of lease liabilities with corresponding ROU assets for operating leases. The Company elected a prospective application for the new guidance, as permitted under ASU 2016-02, and therefore prior periods continue to be presented in accordance with Topic 840. The Company also elected the package of practical expedients, which among other things, does not require reassessment of lease classification.
OTHER MATTERS
The financial information reported herein is not necessarily indicative of future operating results or of the future financial condition of the Company.
Morion
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.
In light of Morion’s relationship with Gazprombank, the Company recently evaluated, with the assistance of external legal counsel, certain sales to Morion and the timing of payments by Morion to the Company in connection with those sales to determine whether payments by Morion may have inadvertently constituted extensions of credit in violation of Directive 1 under Executive Order 13662. The Company determined that certain payments by Morion – the majority of which occurred more than five years ago – were not timely. Following the evaluation, on May 7, 2020, the Company voluntarily disclosed its findings to the Office of Foreign Assets Control (“OFAC”). The Company’s voluntary disclosure to OFAC relates solely to delays in collection of accounts receivable that exceeded then-applicable payment windows set forth in sanctions regulations and do not relate to any other type of payment or transaction. On July 22, 2020, OFAC informed the Company that it is conducting a civil investigation of the matter.
The ongoing OFAC civil investigation subjects the Company to a number of financial and business risks. OFAC has broad enforcement discretion, and the imposition of sanctions, fines or remedial measures could have a material adverse effect on the Company’s business, prospects, reputation, financial condition, liquidity, results of operations or cash flows. Given the matter is in an early stage, however, the Company does not have sufficient information to (i) determine whether any liability (including penalties, sanctions, or remedial actions) as a result of the voluntary disclosure is probable or (ii) estimate the magnitude of any liability. While we are currently unable to predict what if any actions OFAC might take, or what the likely outcome of any such actions might be, or estimate the range of reasonably possible fines or penalties, such outcome may be material. Also, the Company is unable to predict the duration, scope, result or related costs of the investigation, including legal fees.
INFLATION
During fiscal year 2020, as in fiscal year 2019, the impact of inflation on the Company’s business was not materially significant.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Not applicable
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Frequency Electronics, Inc.
Mitchel Field, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Frequency Electronics, Inc. and Subsidiaries (the “Company”) as of April 30, 2020, the related consolidated statements of operations and compressive loss, changes in stockholders’ equity, and cash flows for the year then ended and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at April 30, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
On May 1, 2019, the Company changed its method of accounting for leases due to the adoption of Accounting Standards Codification Topic 842, Leases. The effects of the adoption are described in Note 1 to the consolidated financial statements.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2020.
Melville, New York
July 29, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Frequency Electronics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Frequency Electronics, Inc. and Subsidiaries (the "Company") as of April 30, 2019, and the related consolidated statements of operations and comprehensive loss, cash flows, and changes in stockholders' equity for the year then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of April 30, 2019, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit includes performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ EisnerAmper LLP
We have served as the Company's auditor from 2008 through 2019.
EISNERAMPER LLP
New York, New York
July 26, 2019
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 2020 and 2019
(In thousands, except par value)
|
2020 |
2019 |
|||||||
|
ASSETS: |
||||||||
|
Current assets: |
||||||||
|
Cash and cash equivalents |
$ | 3,808 | $ | 3,683 | ||||
|
Marketable securities |
10,570 | 8,199 | ||||||
|
Accounts receivable, net of allowance for doubtful accounts of $183 in 2020 and $183 in 2019 |
4,392 | 6,362 | ||||||
|
Costs and estimated earnings in excess of billings, net |
6,953 | 6,670 | ||||||
|
Inventories, net |
22,958 | 23,356 | ||||||
|
Prepaid income taxes |
849 | 499 | ||||||
|
Prepaid expenses and other |
1,705 | 2,583 | ||||||
|
Current assets held for sale |
- | 1,347 | ||||||
|
Total current assets |
51,235 | 52,699 | ||||||
|
Property, plant and equipment, at cost, net of accumulated depreciation and amortization |
11,267 | 13,038 | ||||||
|
Goodwill |
617 | 617 | ||||||
|
Cash surrender value of life insurance |
14,790 | 14,292 | ||||||
|
Other assets |
2,503 | 5,923 | ||||||
|
Right-of-Use assets – operating leases |
10,864 | - | ||||||
|
Non-current assets held for sale |
- | 202 | ||||||
|
Total assets |
$ | 91,276 | $ | 86,771 | ||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY: |
||||||||
|
Current liabilities: |
||||||||
|
Accounts payable - trade |
$ | 1,424 | $ | 1,188 | ||||
|
Accrued liabilities |
3,982 | 3,571 | ||||||
|
Loss Provision accrual |
748 | - | ||||||
| Operating lease liability | 1,869 | - | ||||||
| PPP loan | 4,965 | - | ||||||
|
Current liabilities held for sale |
- | 1,078 | ||||||
|
Total current liabilities |
12,988 | 5,837 | ||||||
|
Deferred compensation |
14,258 | 14,216 | ||||||
|
Deferred taxes |
8 | - | ||||||
|
Operating lease liability – non-current |
9,444 | - | ||||||
|
Deferred rent and other liabilities |
342 | 1,376 | ||||||
|
Non-current liabilities held for sale |
- | 2,253 | ||||||
|
Total liabilities |
37,040 | 23,682 | ||||||
|
Commitments and contingencies |
||||||||
|
Stockholders’ equity: |
||||||||
|
Preferred stock, $1.00 par value; authorized 600 shares, no shares issued |
- | - | ||||||
|
Common stock, $1.00 par value; authorized 20,000 shares, 9,164 shares issued and 9,121 outstanding in 2020; 8,980 outstanding in 2019 |
9,164 | 9,164 | ||||||
|
Additional paid-in capital |
56,914 | 56,831 | ||||||
|
Accumulated deficit |
(12,137 |
) |
(2,111 |
) |
||||
| 53,941 | 63,884 | |||||||
|
Common stock reacquired and held in treasury - at cost (43 shares in 2020 and 184 shares in 2019) |
(195 |
) |
(841 |
) |
||||
|
Accumulated other comprehensive income |
490 | 46 | ||||||
|
Total stockholders’ equity |
54,236 | 63,089 | ||||||
|
Total liabilities and stockholders’ equity |
$ | 91,276 | $ | 86,771 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
Years ended April 30, 2020 and 2019
|
2020 |
2019 |
|||||||
|
(In thousands, except per share data) |
||||||||
|
Revenues |
$ | 41,507 | $ | 49,509 | ||||
|
Cost of revenues |
35,759 | 33,720 | ||||||
|
Gross profit |
5,748 | 15,789 | ||||||
|
Selling and administrative expenses |
11,593 | 12,100 | ||||||
|
Research and development expenses |
5,077 | 6,506 | ||||||
|
Loss from operations |
(10,922 |
) |
(2,817 |
) |
||||
|
Other income (expense): |
||||||||
|
Investment income |
329 | 293 | ||||||
|
Interest expense |
(107 |
) |
(83 |
) |
||||
|
Other (expense)/income, net |
(1,068 |
) |
134 | |||||
|
Loss before (benefit) provision for income taxes |
(11,768 |
) |
(2,473 |
) |
||||
|
(Benefit) provision for income taxes |
(1,742 |
) |
56 | |||||
|
Net loss |
$ | (10,026 |
) |
$ | (2,529 |
) |
||
|
Net loss per common share: |
||||||||
|
Basic and diluted loss per share |
$ | (1.10 |
) |
$ | (0.28 |
) |
||
|
Weighted average number of shares outstanding: |
||||||||
|
Basic and diluted |
9,074 | 8,916 | ||||||
|
Consolidated Statements of Comprehensive Loss |
||||||||
|
Net loss |
$ | (10,026 |
) |
$ | (2,529 |
) |
||
|
Other comprehensive income: |
||||||||
|
Foreign currency translation adjustment |
- | 790 | ||||||
|
Unrealized gain on marketable securities: |
||||||||
|
Change in market value of marketable securities before reclassification, net of tax of ($1) in fiscal 2019 |
443 | 173 | ||||||
|
Reclassification adjustment for realized gains included in net income, net of tax of $1 in fiscal 2019 |
1 | (2 |
) |
|||||
|
Total unrealized gain on marketable securities, net of tax |
444 | 171 | ||||||
|
Total other comprehensive income |
444 | 961 | ||||||
|
Comprehensive loss |
$ | (9,582 |
) |
$ | (1,568 |
) |
||
The accompanying notes are an integral part of these consolidated financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 2020 and 2019
|
2020 |
2019 |
|||||||
|
(In thousands) |
||||||||
|
Cash flows from operating activities: |
||||||||
|
Net loss |
$ | (10,026 |
) |
$ | (2,529 |
) |
||
|
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
|
Deferred income taxes |
8 | - | ||||||
|
Depreciation and amortization |
3,319 | 2,802 | ||||||
|
Deferred rent |
- |
|
65 | |||||
|
Non-cash lease expense |
214 | - | ||||||
|
Provision for losses on accounts receivable, inventories, other assets and warranty reserve |
1,385 | 1,128 | ||||||
|
Loss (gain) on marketable securities |
1 | (3 |
) |
|||||
|
Loss on sale of fixed and other assets, net |
143 | 18 | ||||||
|
Employee benefit plans expense |
1,052 | 1,672 | ||||||
|
Stock-based compensation expense |
312 | 500 | ||||||
|
Investment in Asia |
- | (2,529 |
) |
|||||
|
Changes in operating assets and liabilities: |
||||||||
|
Accounts receivable |
1,970 | (2,994 |
) |
|||||
|
Costs and estimated earnings in excess of billings |
(283 |
) |
509 | |||||
|
Inventories |
17 | (199 |
) |
|||||
|
Prepaid expenses and other |
878 | (1,429 |
) |
|||||
|
Other assets |
(518 |
) |
(468 |
) |
||||
|
Accounts payable - trade |
374 | (195 |
) |
|||||
|
Accrued liabilities |
947 |
|
73 | |||||
| Loss provision accrual | 748 | - | ||||||
|
Income taxes refundable |
(350 |
) |
960 | |||||
|
Other liabilities |
(1,598 |
) |
(556 |
) |
||||
|
Cash used in operating activities – continuing operations |
(1,407 |
) |
(3,175 |
) |
||||
|
Cash provided by operating activities – assets held for sale |
- | 3,078 | ||||||
|
Net cash (used in) provided by operating activities |
(1,407 |
) |
(97 |
) |
||||
|
Cash flows from investing activities: |
||||||||
|
Purchase of marketable securities |
(5,489 |
) |
(3,705 |
) |
||||
|
Proceeds from sale or redemption of marketable securities |
3,539 | 1,812 | ||||||
|
Capital expenditures |
(1,483 |
) |
(2,767 |
) |
||||
|
Net cash used in investing activities |
(3,433 |
) |
(4,660 |
) |
||||
|
Cash flows from financing activities: |
||||||||
|
Proceeds from PPP loan |
4,965 | - | ||||||
|
Net cash provided by financing activities |
4,965 | - | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 2020 and 2019
(Continued)
|
2020 |
2019 |
|||||||
|
(In thousands) |
||||||||
|
Net increase (decrease) in cash and cash equivalents before effect of exchange rate changes |
125 | (4,757 |
) |
|||||
|
Effect of exchange rate changes on cash and cash equivalents |
- | 606 | ||||||
|
Net increase (decrease) in cash and cash equivalents |
125 | (4,151 |
) |
|||||
|
Cash and cash equivalents at beginning of year |
3,683 | 7,869 | ||||||
|
Cash and equivalents at end of year |
3,808 | 3,718 | ||||||
|
Less cash and equivalents of assets held for sale at end of year |
- | 35 | ||||||
|
Cash and cash equivalents of continuing operations at end of year |
$ | 3,808 | $ | 3,683 | ||||
|
Supplemental disclosures of cash flow information: |
||||||||
|
Cash paid during the year for: |
||||||||
|
Interest |
$ | 99 | $ | 83 | ||||
|
Income taxes |
$ | - | $ | - | ||||
The accompanying notes are an integral part of these consolidated financial statements.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
Years ended April 30, 2020 and 2019
(In thousands, except share data)
|
Additional |
Treasury stock |
Accumulated other |
||||||||||||||||||||||||||||||
|
Common Stock |
paid in |
Accumulated |
(at cost) |
comprehensive |
||||||||||||||||||||||||||||
|
Shares |
Amount |
capital |
Deficit |
Shares |
Amount |
Income (loss) |
Total |
|||||||||||||||||||||||||
|
Balance at April 30, 2018 |
9,163,940 | $ | 9,164 | $ | 56,439 | $ | (65 |
) |
297,083 | $ | (1,361 |
) |
$ | (915 |
) |
$ | 63,262 | |||||||||||||||
|
Opening balance sheet Adjustment for ASU 2014-09 |
- | - | - | 483 | - | - | - | 483 | ||||||||||||||||||||||||
|
Contributions of stock to 401(k) plan |
- | - | 223 | - | (41,211 |
) |
189 | - | 412 | |||||||||||||||||||||||
|
Stock-based compensation expense |
- | - | 495 | - | (1,100 |
) |
5 | - | 500 | |||||||||||||||||||||||
|
Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price |
- | - | (326 |
) |
- | (71,111 |
) |
326 | - | - | ||||||||||||||||||||||
|
Change in unrealized gains and losses on marketable debt securities, net of taxes |
- | - | - | - | - | - | 171 | 171 | ||||||||||||||||||||||||
|
Foreign currency translation adjustment |
- | - | - | - | - | - | 790 | 790 | ||||||||||||||||||||||||
| Net loss | - | - | - | (2,529 | ) | - | - | - | (2,529 | ) | ||||||||||||||||||||||
|
Balance at April 30, 2019 |
9,163,940 | 9,164 | 56,831 | (2,111 |
) |
183,661 | (841 |
) |
46 | 63,089 | ||||||||||||||||||||||
|
Contributions of stock to 401(k) plan |
- | - | 236 | - | (39,403 |
) |
181 | - | 417 | |||||||||||||||||||||||
|
Stock-based compensation expense |
- | - | 304 | - | (1,850 |
) |
8 | - | 312 | |||||||||||||||||||||||
|
Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price |
- | - | (457 |
) |
- | (99,712 |
) |
457 | - | - | ||||||||||||||||||||||
|
Change in unrealized gains and losses on marketable debt securities, net of taxes |
- | - | - | - | - | - | 444 | 444 | ||||||||||||||||||||||||
|
Net loss |
- | - | - | (10,026 |
) |
- | - | - | (10,026 |
) |
||||||||||||||||||||||
|
Balance at April 30, 2020 |
9,163,940 | $ | 9,164 | $ | 56,914 | $ | (12,137 |
) |
42,696 | $ | (195 |
) |
$ | 490 | $ | 54,236 | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2020 and 2019
1. Summary of Accounting Policies
Basis of Presentation and Principles of Consolidation:
The consolidated financial statements include the accounts of Frequency Electronics, Inc. and its wholly-owned subsidiaries (the “Company” or “Registrant”). References to “FEI” are to the parent company alone and do not refer to any of its subsidiaries. The Company is principally engaged in the design, development and manufacture of precision time and frequency control products and components for microwave integrated circuit applications. See Note 14 for information regarding the Company’s business segments: (1) FEI-NY (which includes the subsidiaries FEI Government Systems, Inc., FEI Communications, Inc., and FEI-Elcom Tech, Inc. (“FEI-Elcom”)), and (2) FEI-Zyfer, Inc. (“FEI-Zyfer”). Intercompany accounts and significant intercompany transactions are eliminated in consolidation.
These financial statements have been prepared in conformity with United States generally accepted accounting principles (“U.S. GAAP”) and require management to make estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and related notes. Actual results could differ from these estimates.
COVID-19 Pandemic and the CARES Act
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic may have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2021.
The Company faces various risks related to COVID-19 outbreak. The Company is dependent on its workforce to deliver its products primarily to the U.S. Government. If significant portions of the Company’s workforce are unable to work effectively, or if the U.S. Government and/or other customers’ operations are curtailed due to illness, quarantines, government actions, facility closures, or other restrictions in connection with the COVID-19 pandemic, the Company’s operations will likely be impacted. The Company may be unable to perform fully on its contracts and costs may increase as a result of the COVID-19 outbreak. These cost increases may not be fully recoverable or adequately covered by insurance. Additionally, since the COVID-19 outbreak began, no facilities have been fully shut down (other than temporarily for disinfecting) and such measures to disinfect facilities have not had a significant impact on production. Certain of the Company’s vendors have been unable to deliver materials on time due to the COVID-19 outbreak. Such delays have negatively impacted the Company’s production, and the Company plans to continue to monitor these and its other vendors and, if necessary, seek alternative suppliers.
At this time, the Company’s management cannot predict the impact of the COVID-19 pandemic, but management continues to monitor the situation, to assess further possible implications to operations, the supply chain, and customers, and to take actions in an effort to mitigate adverse consequences. Further, the pandemic may have an adverse effect on the Company’s results of operations, financial position, and liquidity in fiscal year 2021.
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act also appropriated funds for the SBA Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by COVID-19. See Notes 9 and 13.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
Liquidity and Capital Resources:
The Company has incurred operating losses in its last four completed fiscal years, as well as cash used in operating activities in its last two completed fiscal years. As of April 30, 2020, the Company had an accumulated deficit of $12.1 million. The Company believes that its cash and cash equivalents, as well as marketable securities as of April 30, 2020 and cash flows from operations will provide sufficient liquidity to meet its operating needs in the normal course of business through the next twelve months from the date of issuance of these consolidated financial statements. However, changing circumstances, including COVID-19 uncertainties, some of which may be beyond its control, could cause the Company to consume capital faster than it currently anticipates, and it may need to seek additional funding through equity offerings, debt financings, or other sources.
Cash Equivalents:
The Company considers certificates of deposit and other highly liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company places its temporary cash investments with high credit quality financial institutions. Such investments may at times be in excess of the Federal Deposit Insurance Corporation (“FDIC”) and Securities Investor Protection Corporation (“SIPC”) insurance limits. No losses have been experienced on such investments.
Marketable Securities:
Marketable securities consist of corporate debt securities, certificates-of-deposit, and debt securities of U.S. Government agencies. All marketable securities were held in the custody of one financial institution at April 30, 2020 and 2019. Investments in debt securities are categorized as available-for-sale and are carried at fair value, with unrealized gains and losses excluded from income and recorded directly to stockholders’ equity. The Company recognizes gains or losses when securities are sold using the specific identification method.
Allowance for Doubtful Accounts:
Losses from uncollectible accounts receivable are provided for by utilizing the allowance for doubtful accounts method based upon management’s estimate of uncollectible accounts. Management analyzes accounts receivable and the potential for bad debts, customer concentrations, credit worthiness, current economic trends and changes in customer payment terms when evaluating the amount recorded for the allowance for doubtful accounts.
Property, Plant and Equipment:
Property, plant and equipment are recorded at cost and include interest on funds borrowed to finance construction. Expenditures for renewals and betterments are capitalized; maintenance and repairs are charged to income when incurred. When fixed assets are sold or retired, the cost and related accumulated depreciation and amortization are eliminated from the respective accounts and any gain or loss is credited or charged to income.
If events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the long-lived asset, an impairment loss is recognized. No impairment losses have been recognized in the years ended April 30, 2020 and 2019.
Inventories:
Inventories, which consist of finished goods, work-in-process, raw materials and components, are accounted for at the lower of cost (specific and average) and net realizable value.
Depreciation and Amortization:
Depreciation of fixed assets is computed on the straight-line method based upon the estimated useful lives of the assets (40 years for buildings and 3 to 10 years for other depreciable assets). Leasehold improvements and equipment acquired under capital leases are amortized on the straight-line method over the shorter of the term of the lease or the useful life of the related asset.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
Goodwill:
The Company records goodwill as the excess of purchase price over the fair value of identifiable net assets acquired. Goodwill is tested for impairment, on a reporting unit level qualitatively, on at least an annual basis at year end to determine whether it is more likely than not that the reporting unit’s fair value is less than its carrying amount. If it is determined that the carrying value of goodwill may not be recoverable, the Company will write down the goodwill to an amount to commensurate with the revised value of the acquired assets. The Company measures impairment based on revenue projections, recent transactions involving similar businesses and price/revenue multiples at which they were bought and sold, price/revenue multiples of competitors, and the present market value of publicly-traded companies in the Company’s industry. Management has determined that goodwill is not impaired as of April 30, 2020 and 2019.
Revenue and Cost Recognition:
Revenue is recognized when a performance obligation is satisfied, which is when the expected goods or services are transferred to the customer, in an amount that reflects the consideration to which the Company expects to receive. A performance obligation is a distinct product or service that is transferred to the customer based on the contract. The transaction price is allocated to each performance obligation and is recognized as revenue upon satisfaction of that performance obligation. The Company derives revenue from contracts with customers by units sold with specific specifications and frequencies that are used by a specific customer and contracts where the end user is the government. The Company’s contracts typically include one performance obligation which is satisfied by shipped projects and completed services/reports required in the contract. Control over these performance obligations passes to the customer over time and therefore these revenues are reported in operating results over time using the 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 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.
For smaller contracts or orders sales of products and services to customers are reported in operating results based upon (i) shipment of the product or (ii) performance of the services pursuant to terms of the customer order. When payment is contingent upon customer acceptance of the installed system, revenue is deferred until such acceptance is received and installation completed. The Company’s products generally carry a one-year warranty, but may vary based on the contract terms.
Some judgment is used in evaluating the financial information for certain contracts related to the adoption of this ASU 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.
Contract costs include all direct material, direct labor costs, manufacturing overhead and other direct costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred.
Practical Expedients
The Company expenses sales commissions as sales and marketing expenses in the period they are incurred if the expected amortization period is one year or less.
The Company expenses costs, other than sales commissions, to obtain a contract in the period for which they are incurred as these amounts would have been incurred even if the contract had not been obtained.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
Disaggregation of Revenue
Total revenue recognized over time as POC was approximately $38.0 million and $45.3 million of the $41.5 million and $49.5 million reported for the years ended April 30, 2020 and 2019, respectively. The amounts by segment and product line were as follows:
|
Year Ended April 30, 2020 |
||||||||||||
|
(In thousands) |
||||||||||||
|
POC Revenue |
POT Revenue |
Total Revenue |
||||||||||
|
FEI-NY |
$ | 28,720 | $ | 3,031 | $ | 31,751 | ||||||
|
FEI-Zyfer |
9,210 | 1,704 | 10,914 | |||||||||
|
Intersegment |
(88 |
) |
(1,070 |
) |
(1,158 |
) |
||||||
|
Revenue |
$ | 37,842 | $ | 3,665 | $ | 41,507 | ||||||
|
Year Ended April 30, 2019 |
||||||||||||
|
(In thousands) |
||||||||||||
|
POC Revenue |
POT Revenue |
Total Revenue |
||||||||||
|
FEI-NY |
$ | 35,588 | $ | 2,508 | $ | 38,096 | ||||||
|
FEI-Zyfer |
9,803 | 2,432 | 12,235 | |||||||||
|
Intersegment |
(62 |
) |
(760 |
) |
(822 |
) |
||||||
|
Revenue |
$ | 45,329 | $ | 4,180 | $ | 49,509 | ||||||
|
Years Ended April 30, |
||||||||
|
(In thousands) |
||||||||
|
2020 |
2019 |
|||||||
|
Revenue by Product Line: |
||||||||
|
Satellite Revenue |
$ | 20,422 | $ | 22,810 | ||||
|
Government Non-Space Revenue |
16,939 | 22,771 | ||||||
|
Other Commercial & Industrial Revenue |
4,146 | 3,928 | ||||||
|
Consolidated revenues |
$ | 41,507 | $ | 49,509 | ||||
Comprehensive Loss:
Comprehensive loss consists of net loss and other comprehensive income/loss. Other comprehensive income/loss includes changes in unrealized gains or losses, net of tax, on securities (for Fiscal 2020, debt securities) available for sale during the year. Other comprehensive income/loss includes changes in foreign currency translation and unrealized gains or losses, net of tax, on securities (for Fiscal 2019, debt securities) available for sale during the year.
Research and Development Expenses:
The Company engages in research and development (“R&D”) activities to identify new applications for its core technologies, to improve existing products and to improve manufacturing processes to achieve cost reductions and manufacturing efficiencies. R&D costs include direct labor, manufacturing overhead, direct materials and contracted services. Such costs are expensed as incurred. The Company also engages in customer-funded R&D activity. The customer funds received in connection therewith appear in revenues and the associated expenses are included in cost of revenues and are not included in R&D expenses.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
Income Taxes:
The Company recognizes deferred tax liabilities and assets based on the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established and adjusted when necessary to increase or reduce deferred tax assets to the amount expected to be realized.
The Company analyzes its tax positions under accounting standards which prescribe recognition thresholds that must be met before a tax benefit is recognized in the financial statements and provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. An entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. Interest and penalties recognized on income taxes are recorded as income tax expense.
Earnings/Loss per Share:
Basic earnings/loss per share are computed by dividing net earnings/loss by the weighted average number of shares of common stock outstanding. Diluted earnings per share are computed by dividing net earnings by the sum of the weighted average number of shares of common stock and the if-converted effect of unexercised stock options and stock appreciation rights (“SARs”). Diluted earnings per share are not computed where the if-converted effect of such items would be anti-dilutive.
Fair Values of Financial Instruments:
Cash and cash equivalents, marketable securities, short-term credit obligations and debt and cash surrender value of life insurance are reflected in the accompanying consolidated balance sheets at amounts considered by management to reasonably approximate fair value based upon the nature of the instrument and current market conditions. Management is not aware of any factors that would significantly affect the value of these amounts. The Company also has an investment in a privately-held Russian company, Morion, Inc. (“Morion”). The Company is unable to reasonably estimate a fair value for this investment.
Foreign Operations and Foreign Currency Adjustments:
For the year ended April 30, 2019, the Company’s wholly-owned subsidiary, FEI-Asia, which was reported under the FEI-NY segment, was classified as held-for-sale (see Note 2) and is shown in these consolidated financial statements for comparative purposes only.
Equity-based Compensation:
The Company values its share-based payment transactions using the Black-Scholes valuation model. Such value is recognized as expense on a straight-line basis over the service period of the awards, which is generally the vesting period, net of estimated forfeitures.
The weighted average fair value of each option or SAR has been estimated on the date of grant using the Black-Scholes option pricing model with the following range of weighted average assumptions used for grants:
|
Years ended April 30 |
||||||||
|
2020 |
2019 |
|||||||
|
Expected volatility |
- |
% |
35 |
% |
||||
|
Dividend yield |
- |
% |
0.0 |
% |
||||
|
Risk-free interest rate |
- |
% |
2.81% - 3.07 |
% |
||||
|
Expected lives |
- |
5.0 years |
||||||
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
There were no grants of options or SARs in fiscal year 2020. The expected life assumption was determined based on the Company’s historical experience as well as the term of recent SAR agreements. The expected volatility assumption was based on the historical volatility of the Company’s common stock. The dividend yield assumption was determined based upon the Company’s past history of dividend payments and the Company’s current decision to suspend payment of dividends. The risk-free interest rate assumption was determined using the implied yield currently available for zero-coupon U.S. Government issues with a remaining term equal to the expected life of the stock options or SARs.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and cash equivalents and trade receivables. The Company maintains accounts at several commercial banks at which the balances exceed FDIC limits. The Company has not experienced any losses on such amounts. Concentration of credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising the Company’s customer base and their dispersion across geographic areas, principally within the U.S. The Company routinely addresses the financial strength of its customers and, as a consequence, believes that its receivable credit risk exposure is limited. The Company does not require customers to post collateral.
New Accounting Pronouncements:
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-13 Fair Value Measurement (Topic 820) (“ASU 2018-13”) which modifies the disclosure requirement on fair value measurements. The new guidance is effective for fiscal years beginning after December 15, 2019. The Company is evaluating the effect, if any, the update will have on its consolidated financial statements when adopted in Fiscal 2021.
In January 2017, the 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, 2019, with early adoption permitted. The Company does not plan to adopt 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 2021.
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 generally accepted accounting principles 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. The new guidance is effective for fiscal years beginning after December 15, 2022. The Company is evaluating the effect, if any, the update will have on its consolidated financial statements when adopted in Fiscal 2023.
Newly Adopted Accounting Standards
Leases (Topic 842)
In the first quarter of fiscal 2020 the Company adopted ASU No. 2016-02 Leases (Topic 842) (“ASU 2016-02”) and recognized on its condensed consolidated balance sheets $12.1 million of lease liabilities with corresponding Right-of-Use (“ROU”) assets for operating leases. The Company elected a prospective application for the new guidance, as permitted under ASU 2016-02, and therefore prior periods continue to be presented in accordance with Topic 840. The Company also elected the package of practical expedients, which among other things, does not require reassessment of lease classification.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
2. Assets Held for Sale and Note Receivable for Sale of Subsidiaries
For the year ended April 30, 2019, the Company’s wholly-owned subsidiary, FEI-Asia, which is reported under the FEI-NY segment, was classified as held-for-sale. The table below represents FEI-Asia’s assets and liabilities as of April 30, 2019 (in thousands):
|
Cash and cash equivalents |
$ | 35 | ||
|
Accounts receivable, net |
348 | |||
|
Inventories, net |
876 | |||
|
Other current assets |
88 | |||
|
Property, plant and equipment, net |
202 | |||
|
Total assets held for sale |
$ | 1,549 | ||
|
Accounts payable – trade |
$ | 707 | ||
|
Accrued liabilities |
315 | |||
|
Other current liabilities |
56 | |||
|
Other liabilities |
2,253 | |||
|
Total liabilities held for sale |
$ | 3,331 |
On May 21, 2019 the Company completed the sale of its wholly-owned subsidiary FEI-Asia to an Asian corporation. FEI-Asia was sold for $130,000 in addition to all rights, benefits and obligations attached thereto, free and clear from any encumbrance. The results of this transaction, including approximately $85,000 of income for the twenty-one days in May 2019, are included in the consolidated financial statements for the fiscal year ended April 30, 2019. The above transaction resulted in a consolidated loss of approximately $1 million recorded in SG&A on the consolidated statement of operations in fiscal year 2019.
On April 26, 2018, the Company sold its Gillam-FEI s.a. (“Gillam”) Belgium subsidiary to a European entity, in a stock purchase agreement, for $1 million in cash received on April 27, 2018, and a note receivable payable in three years for $1 million, included in other assets in the accompanying consolidated balance sheets. In fiscal 2020 it was determined that the note receivable would not likely be collected and thus a reserve was recorded for $1 million, recorded in other expense on the consolidated statement of operations for the year ended April 30, 2020.
3. Earnings per Share
Reconciliations of the weighted average shares outstanding for basic and diluted loss per share for the years ended April 30, 2020 and 2019, respectively, were as follows (in thousands):
|
For the years ended April 30, |
||||||||
|
2020 |
2019 |
|||||||
|
Basic EPS Shares outstanding (weighted average) |
9,073,609 | 8,916,250 | ||||||
|
Effect of Dilutive Securities |
251,878 | 242,874 | ||||||
|
Diluted EPS Shares outstanding |
9,325,487 | 9,159,124 | ||||||
For the years ended April 30, 2020 and 2019, dilutive securities noted in the above table are excluded from the calculation of earnings per share since the inclusion of such shares would be antidilutive due to the net loss for both periods. Basic and diluted shares outstanding for the fiscal years ended April 30, 2020 and 2019 are 9,073,609 and 8,916,250, respectively. Additionally, there are anti-dilutive exercisable shares excluded in the above table for fiscal years ended April 30, 2020 and 2019 of 896,375 and 1,216,000, respectively.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
4. Costs and Estimated Earnings in Excess of Billings, Net
At April 30, 2020 and 2019, costs and estimated earnings in excess of billings, net, consisted of the following (in thousands):
|
2020 |
2019 |
|||||||
|
Costs and estimated earnings in excess of billings |
$ | 10,460 | $ | 8,278 | ||||
|
Billings in excess of costs and estimated earnings |
(3,507 |
) |
(1,608 |
) |
||||
|
Net asset |
$ | 6,953 | $ | 6,670 | ||||
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 date. Revenue on these long-term contracts is accounted for on the POC basis. During the years ended April 30, 2020 and 2019, revenue recognized under POC contracts was approximately $38.0 million and $45.3 million, respectively. If contract losses
are anticipated, costs and estimated earnings in excess of billings are reduced for the full amount of such losses when they are determinable. Total contract losses for the fiscal years ended April 30, 2020 and 2019 were approximately $2.4 million and $136,000, respectively.
5. Inventories, Net
Inventories, net at April 30, 2020 and 2019, respectively, consisted of the following (in thousands):
|
2020 |
2019 |
|||||||
|
Raw Materials and Component Parts |
$ | 15,470 | $ | 11,600 | ||||
|
Work in Progress |
6,104 | 8,896 | ||||||
|
Finished Goods |
1,384 | 2,860 | ||||||
| $ | 22,958 | $ | 23,356 | |||||
The Company’s inventory reserve policy resulted in a charge of $1.1 million in the fiscal year ended April 30, 2019. Inventory reserves included in inventory were $6.6 million for each of the fiscal years ended April 30, 2020 and 2019.
6. Property, Plant and Equipment, Net
Property, plant and equipment, net at April 30, 2020 and 2019, consisted of the following (in thousands):
|
2020 |
2019 |
|||||||
|
Buildings and building improvements |
$ | 2,692 | $ | 2,692 | ||||
|
Machinery, equipment and furniture |
57,916 | 57,157 | ||||||
| 60,608 | 59,849 | |||||||
|
Less, accumulated depreciation and amortization |
(49,341 |
) |
(46,811 |
) |
||||
| $ | 11,267 | $ | 13,038 | |||||
Depreciation and amortization expense for the years ended April 30, 2020 and 2019 was $3.3 million and $2.8 million, respectively.
Maintenance and repairs charged to operations for the years ended April 30, 2020 and 2019 was approximately $706,000 and $309,000, respectively.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
7. Right-of-Use Assets and Lease Liabilities
The Company’s leases primarily represent offices, warehouses, vehicles, and manufacturing and research and development facilities which expire at various times through 2029 and are generally 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. ROU assets and lease liabilities are recorded based on the present value of future lease payments which will factor in certain qualifying initial direct costs incurred as well as any lease incentives that may have been received. Lease expenses for operating lease payments are recognized on a straight-line basis over the lease term. Lease terms may factor in options to extend or terminate the lease.
The Company elected the practical expedient for short-term leases which allows leases with terms of twelve months or less to be recorded on a straight-line basis over the lease term without being recognized on the consolidated balance sheet.
Effective May 1, 2019, the Company adopted ASU 2016-02. The table below presents ROU assets and lease liabilities recorded on the consolidated balance sheet related to ASU 2016-02 as follows:
|
Classification |
April 30, 2020 |
||||
|
(in thousands) |
|||||
|
Assets |
|||||
|
Operating lease ROU assets |
ROU assets - leases |
$ | 10,864 | ||
|
Liabilities |
|||||
|
Operating lease liabilities (short-term) |
Lease liability, current |
1,869 | |||
|
Operating lease liabilities (long-term) |
Lease liability, non-current |
9,444 | |||
|
Total lease liabilities |
$ | 11,313 | |||
Total operating lease expense was approximately $1.6 million and $1.2 million for the fiscal years ended April 30, 2020 and 2019, the majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses on the consolidated statements of operations. There were no new leases entered into for the year ended April 30, 2020.
Under the previous lease accounting standard, future minimum lease payments for operating leases having initial or remaining non-cancellable lease terms in excess of one year would have been as follows as of April 30, 2019 (in thousands):
|
Fiscal Year Ending April 30, |
Operating Leases |
|||
|
(in thousands) |
||||
|
2020 |
$ | 1,316 | ||
|
2021 |
1,521 | |||
|
2022 |
1,436 | |||
|
2023 |
1,469 | |||
|
2024 |
1,502 | |||
|
Thereafter |
6,349 | |||
|
Total future minimum lease payments |
$ | 13,593 | ||
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
The table below reconciles the undiscounted cash flows for each of the first five fiscal years and total of the remaining fiscal years to the operating lease liabilities recorded on the consolidated balance sheet as of April 30, 2020:
|
Fiscal Year Ending April 30, |
||||
|
(in thousands) |
||||
|
2021 |
1,919 | |||
|
2022 |
1,783 | |||
|
2023 |
1,801 | |||
|
2024 |
1,834 | |||
|
2025 |
1,723 | |||
|
Thereafter |
5,492 | |||
|
Total lease payments |
14,552 | |||
|
Less imputed interest |
(3,239 |
) |
||
|
Present value of future lease payments |
11,313 | |||
|
Less current obligations under leases |
(1,869 |
) |
||
|
Long-term lease obligations |
$ | 9,444 | ||
As of April 30, 2020, the weighted-average remaining lease term for all operating leases was 8.3 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 weighted average discount rate for operating leases as of April 30, 2020 was 6.19%.
Supplemental cash flow information related to leases include operating cash flows for operating leases of $1.7 million and right-of-use assets obtained in exchange for lease obligations of $12.1 million, as of adoption, for the fiscal year ended April 30, 2020. There have been no new leases since adoption.
8. Marketable Securities
The cost, gross unrealized gains, gross unrealized losses and fair market value of available-for-sale securities at April 30, 2020 and 2019, respectively, were as follows (in thousands):
|
April 30, 2020 |
||||||||||||||||
|
Gross |
Gross |
Fair |
||||||||||||||
|
Unrealized |
Unrealized |
Market |
||||||||||||||
|
Cost |
Gains |
Losses |
Value |
|||||||||||||
|
Fixed income securities |
$ | 10,081 | $ | 495 | $ | (6 |
) |
$ | 10,570 | |||||||
|
April 30, 2019 |
||||||||||||||||
|
Gross |
Gross |
Fair |
||||||||||||||
|
Unrealized |
Unrealized |
Market |
||||||||||||||
|
Cost |
Gains |
Losses |
Value |
|||||||||||||
|
Fixed income securities |
$ | 8,152 | $ | 71 | $ | (24 |
) |
$ | 8,199 | |||||||
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 |
Unrealized |
Fair |
Unrealized |
Fair |
Unrealized |
|||||||||||||||||||
|
Value |
Losses |
Value |
Losses |
Value |
Losses |
|||||||||||||||||||
|
April 30, 2020 |
||||||||||||||||||||||||
|
Fixed income securities |
$ | 380 | $ | (6 |
) |
$ | - | $ | - | $ | 380 | $ | (6 |
) |
||||||||||
|
April 30, 2019 |
||||||||||||||||||||||||
|
Fixed income securities |
$ | 995 | $ | (4 |
) |
$ | 3,349 | $ | (20 |
) |
$ | 4,344 | $ | (24 |
) |
|||||||||
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
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 April 30, 2020 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.
Proceeds from the sale or redemption of available-for-sale securities and the resulting gross realized gains and losses included in the determination of net loss for the years ended April 30, 2020 and 2019, respectively, were as follows (in thousands):
|
For the years ended April 30, |
||||||||
|
2020 |
2019 |
|||||||
|
Proceeds |
$ | 3,539 | $ | 1,812 | ||||
|
Gross realized gains |
$ | - | $ | 3 | ||||
|
Gross realized losses |
$ | (1 | ) | $ | - | |||
Maturities of fixed income securities classified as available-for-sale at April 30, 2020 were as follows (at cost, in thousands):
|
Current |
$ | 2,610 | ||
|
Due after one year through five years |
4,280 | |||
|
Due after five years through ten years |
3,191 | |||
| $ | 10,081 |
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).
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’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. 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.
9. Debt Obligations
As of April 30, 2020, 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. On April 12, 2020, the Company received proceeds from a loan in the amount of $4,964,810 (the “PPP Loan”) from JPMorgan Chase Bank, N.A. as the Lender, pursuant to the Small Business Administration Paycheck Protection Program under the CARES Act. The PPP Loan was repaid in full on May 6, 2020.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
10. Accrued Liabilities
Accrued liabilities at April 30, 2020 and 2019, respectively, consisted of the following (in thousands):
|
2020 |
2019 |
|||||||
|
Vacation and other compensation |
$ | 1,437 | $ | 1,659 | ||||
|
Incentive compensation |
107 | 346 | ||||||
|
Payroll taxes |
379 | 155 | ||||||
|
Warranty reserve |
527 | 529 | ||||||
|
Commissions |
345 | 378 | ||||||
|
Other |
1,187 | 504 | ||||||
| $ | 3,982 | $ | 3,571 | |||||
11. Investment in Morion, Inc.
The Company has an investment in Morion, a privately-held Russian company, which manufactures high precision quartz resonators and crystal oscillators. The Company has also licensed certain technology to Morion.
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. This investment, of approximately $800,000, is included in other assets in the accompanying consolidated balance sheets. During the fiscal years ended April 30, 2020 and 2019, the Company acquired product from Morion in the aggregate amount of approximately $888,000 and $437,000, respectively, and the Company sold product to Morion in the aggregate amount of approximately $85,000 and $2,000, respectively. At April 30, 2020 and 2019, there was no accounts receivable balance due from Morion. At April 30, 2020, there was no accounts payable balance owed to Morion. At April 30, 2019, approximately $38,000 was payable to Morion. During the fiscal years 2020 and 2019, the Company received dividends from Morion of approximately $250,000 and $105,000, respectively.
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.
In light of Morion’s relationship with Gazprombank, the Company recently evaluated, with the assistance of external legal counsel, certain sales to Morion and the timing of payments by Morion to the Company in connection with those sales to determine whether payments by Morion may have inadvertently constituted extensions of credit in violation of Directive 1 under Executive Order 13662. The Company determined that certain payments by Morion – the majority of which occurred more than five years ago – were not timely. Following the evaluation, on May 7, 2020, the Company voluntarily disclosed its findings to the Office of Foreign Assets Control (“OFAC”). The Company’s voluntary disclosure to OFAC relates solely to delays in collection of accounts receivable that exceeded then-applicable payment windows set forth in sanctions regulations and do not relate to any other type of payment or transaction. On July 22, 2020, OFAC informed the Company that it is conducting a civil investigation of the matter.
The ongoing OFAC civil investigation subjects the Company to a number of financial and business risks. OFAC has broad enforcement discretion, and the imposition of sanctions, fines or remedial measures could have a material adverse effect on the Company’s business, prospects, reputation, financial condition, liquidity, results of operations or cash flows. Given the matter is in an early stage, however, the Company does not have sufficient information to (i) determine whether any liability (including penalties, sanctions, or remedial actions) as a result of the voluntary disclosure is probable or (ii) estimate the magnitude of any liability. While we are currently unable to predict what if any actions OFAC might take, or what the likely outcome of any such actions might be, or estimate the range of reasonably possible fines or penalties, such outcome may be material. Also, the Company is unable to predict the duration, scope, result or related costs of the investigation, including legal fees.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
12. Employee Benefit Plans
Profit Sharing Plan:
The Company provides its U.S.-based employees with a profit-sharing plan and trust under § 401(k) of the Internal Revenue Code (“IRC”). This plan allows all eligible employees to defer a portion of their income through voluntary contributions to the plan. In accordance with the provisions of the plan, the Company can make discretionary matching contributions in the form of cash or common stock. For the years ended April 30, 2020 and 2019, the Company contributed 39,403 and 41,211 shares of common stock, respectively. The approximate value of these shares at the date of contribution was $417,000 and $412,000 in fiscal years 2020 and 2019, respectively. [Contributed shares are drawn from the Company’s common stock held in treasury] and are removed at the Company’s original cost of acquisition of such shares on a specific identification basis. In addition to changes in the treasury stock accounts, during fiscal years 2020 and 2019, such transactions increased additional paid in capital by $236,000 and $223,000, respectively. As of April 30, 2020, the plan held a total of 507,204 shares, which are allocated to the accounts of the individual participants.
Income Incentive Pool:
The Company maintains incentive bonus programs for certain employees which are based on operating profits of the individual subsidiaries to which the employees are assigned. The Company also adopted a plan for the President and Chief Executive Officer of the Company, which formula is based on consolidated pre-tax profits. Under these plans, the Company charged $195,000 to selling and administrative expenses for the fiscal year ended April 30, 2019. There was no incentive bonus recorded for the fiscal year ended April 30, 2020.
Employee Stock Plans:
The Company has various stock plans, some of which have been approved by the Company’s stockholders, for key management employees, including officers and directors who are employees, certain consultants and independent members of the Board of Directors. The plans are Nonqualified Stock Options (“NQSO”) plans, Incentive Stock Option (“ISO”) plans, and SAR plans. Under these plans, options or SAR are granted at the discretion of the Stock Option Committee at an exercise price not less than the fair market value of the Company’s common stock on the date of grant.
Typically, options and SAR vest over a four-year period from the date of grant. The options and SAR generally expire ten years after the date of grant (the most recent SAR awards expire in five years) and are subject to certain restrictions on transferability of the shares obtained on exercise. Under the Company’s 2005 Stock Award Plan (“Plan”) the Company provided option holders the opportunity to exercise stock options either by paying the exercise price for the shares or to do a cashless exercise whereby the individual receives the net number of shares of stock equal in value to the exercised number of shares times the difference between the current market value of the Company’s stock and the exercise price. Under the Plan, instruments granted under other plans which expire, are canceled, or are tendered in the exercise of such instruments, increase the shares available under the Plan.
As of April 30, 2020, eligible employees and directors had been granted SAR representing approximately 2,384,000 shares of Company stock, of which approximately 1,060,000 shares were outstanding and approximately 900,000 shares with a weighted average exercise price of $9.85 were exercisable. As of April 30, 2019, eligible employees and directors had been granted SAR representing approximately 2,384,000 shares of Company stock, of which approximately 1,500,000 shares were outstanding and approximately 1,216,000 shares with a weighted average exercise price of $9.12 were exercisable. When the SAR become exercisable, the Company will settle the SAR by issuing to exercising recipients the number of shares of stock from treasury stock, if available, equal to the appreciated value of the Company’s stock between the grant date and exercise date. At the time of exercise, the quantity of shares under the SAR grant equal to the exercise value divided by the then market value of the shares will be returned to the pool of available shares for future grant under the Plan. During the year ended April 30, 2020, employees exercised SAR representing 171,250 shares of Company stock and received 92,212 shares of Company stock. The 79,038 share difference was returned to the pool of available shares and may be used for future grants. During the year ended April 30, 2019, employees exercised SAR representing 145,750 shares of Company stock and received 71,111 shares of Company stock. The 74,639 share difference was returned to the pool of available shares and may be used for future grants.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
The excess of the consideration received over the par value of the common stock or cost of treasury stock issued under both types of option plans is recognized as an increase in additional paid-in capital.
The following table summarizes information about stock option and SARs activity for the years ended April 30, 2020 and 2019:
|
Stock Options and Stock Appreciation Rights |
|||||||||||||
|
Weighted Average |
|||||||||||||
|
Weighted- |
Remaining |
||||||||||||
|
Average |
Contractual |
Aggregate |
|||||||||||
|
Shares |
Exercise Price |
Term |
Intrinsic Value |
||||||||||
|
Outstanding – April 30, 2018 |
1,488,000 | $ | 8.93 |
3.7 years |
|||||||||
|
Granted |
162,500 | 8.50 | |||||||||||
|
Exercised |
(145,750 |
) |
5.95 | $ | 889,588 | ||||||||
|
Expired or Canceled |
(5,000 |
) |
9.55 | ||||||||||
|
Outstanding – April 30, 2019 |
1,499,750 | $ | 9.17 |
3.0 years |
$ | 6,660,150 | |||||||
|
Granted |
- | - | |||||||||||
|
Exercised |
(171,250 |
) |
5.48 | 781,680 | |||||||||
|
Expired or Canceled |
(269,000 |
) |
9.26 | ||||||||||
|
Outstanding – April 30, 2020 |
1,059,500 | $ | 9.74 |
2.2 years |
$ | 5,416,783 | |||||||
|
Exercisable |
896,275 | $ | 9.85 |
2.1 years |
$ | 4,739,209 | |||||||
|
Available for future grants |
417,004 | ||||||||||||
As of April 30, 2020, total unrecognized compensation cost related to non-vested options and SARs under the plans was approximately $300,000. These costs are expected to be recognized over a weighted average period of 1.7 years.
During the years ended April 30, 2020 and 2019, 100,625 and 104,250 shares, respectively, vested, the fair value of which was approximately $339,000 and $403,000, respectively. There were no SARs granted during the fiscal year 2020. The weighted average grant date fair value of SARs granted during the year ended April 30, 2019, was approximately $3.01.
Stock-based compensation costs capitalized as part of work in process inventory or included in the cost of sales of programs on which the Company recognizes revenue under the POC method were approximately $110,000 and $190,000 for the years ended April 30, 2020 and 2019, respectively. Selling and administrative expenses included stock-based compensation expense of approximately $141,000 and $298,000 for the years ended April 30, 2020 and 2019, respectively.
The Company classifies cash flows resulting from the tax benefits from tax deductions recognized upon the exercise of stock options or SAR (tax benefits) as financing cash flows. The Company did not recognize any tax benefits from the exercise of stock options and SAR for the fiscal years presented.
Restricted Stock Plan and Other Issuances:
During fiscal year 1990, the Company adopted a Restricted Stock Plan which provided that key management employees could be granted rights to purchase an aggregate of 375,000 shares of the Company’s common stock. The grants, transferability restrictions and purchase price were determined at the discretion of a special committee of the Board of Directors. The purchase price could not be less than the par value of the common stock. Transferability of shares is restricted for a four-year period, except in the event of a change in control as defined therein. As a result of the adoption by the Company’s stockholders of the 2005 Stock Award Plan, the Restricted Stock Plan was discontinued. No additional grants will be made under this plan. As of April 30, 2020, there are no outstanding shares available for purchase. As of April 30, 2019, grants for 7,500 shares were available to be purchased at a price of $4.00 per share.
During the years ended April 30, 2020 and 2019 the Company issued 1,850 shares and 1,100 shares from treasury stock, respectively, to select employees for milestone years of service to the Company. These shares are common stock and are fully vested at time of issuance.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
In fiscal year 2020 the Company elected to issue Restricted Stock Units (“RSUs”) to directors, officers, and other key employees pursuant to the 2005 Stock Award Plan. The fair value of these awards is equivalent to the market value of our common stock on the grant date. RSUs are not shares of our common stock and do not have any rights or privileges thereof, including voting or dividend rights. On the applicable vesting date, the holder of an RSU becomes entitled to a share of our common stock. RSUs are subject to certain restrictions and forfeiture provisions prior to vesting. During the year ended April 30, 2020, the Company granted 13,000 RSUs, at a grant date fair value of $11.38, that will vest over a four-year period.
Deferred Compensation Agreements:
The Company has a series of agreements with key employees providing for the payment of benefits upon retirement or death. Under these agreements, each key employee receives specified retirement payments for the remainder of the employee’s life with a minimum payment of ten years’ benefits to either the employee or his or her beneficiaries. The agreements also provide for lump sum payments upon termination of employment without cause and reduced benefits upon early retirement. The Company pays the benefits out of its working capital but has also purchased whole life or term life insurance policies on the lives of certain of the participants to cover the optional lump sum obligations of the agreements upon the death of the participant. Deferred compensation expense charged to selling and administrative expenses during the years ended April 30, 2020 and 2019 was approximately $640,000 and $1.3 million, respectively.
Life Insurance Policies and Cash Held in Trust:
The whole-life insurance policies on the lives of certain participants covered by deferred compensation agreements have been placed in a trust. Upon the death of any insured participant, cash received from life insurance policies in excess of the Company’s deferred compensation obligations to the estate or beneficiaries of the deceased, are also placed in the trust. These assets belong to the Company until a change of control event, as defined in the trust agreement, should occur. At that time, the Company is required to add sufficient cash to the trust so as to match the deferred compensation liability described above. Such funds will be used to continue the deferred compensation arrangements following a change of control.
13. Income Taxes
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted to provide economic relief to those impacted by the COVID-19 pandemic. The CARES Act includes provisions, among others, allowing for the carryback of net operating losses generated in tax years 2018, 2019 and 2020, refunds of alternative minimum tax credits, temporary modifications to the limitations placed on the tax deductibility of net interest expense, and technical corrections so that qualified improvement property can be immediately expensed under IRC § 168(k) and net operating losses arising in tax years beginning in 2017 and ending in 2018 can be carried back two years and forward twenty years.
The Loss before (benefit) provision for income taxes consisted of (in thousands):
|
Year Ended April 30, |
||||||||
|
2020 |
2019 |
|||||||
|
U.S. |
$ | (11,768 |
) |
$ | (4,713 |
) |
||
|
Foreign |
- | 2,240 | ||||||
| $ | (11,768 |
) |
$ | (2,473 |
) |
|||
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
The (benefit) provision for income taxes consisted of the following (in thousands):
|
Year Ended April 30, |
||||||||
|
2020 |
2019 |
|||||||
|
Current: |
||||||||
|
Federal |
$ | (1,713 | ) | $ | 8 | |||
|
Foreign |
- | 196 | ||||||
|
State |
(37 | ) | 99 | |||||
|
Current (benefit) provision |
(1,750 | ) | 303 | |||||
|
Deferred: |
||||||||
|
Federal |
9 | - | ||||||
|
Foreign |
- | (247 | ) | |||||
|
State |
(1 | ) | - | |||||
|
Deferred tax (benefit) |
8 | (247 | ) | |||||
|
Total (benefit) provision |
$ | (1,742 | ) | $ | 56 | |||
The following table reconciles the reported income tax (benefit) expense, recorded primarily due to the (i) enactment of the CARES Act, which allowed the Company to recognize a tax benefit for a portion of its pretax loss, (ii) state and local taxes, (iii) and a change in the valuation allowance, with the amount computed using the federal statutory income tax rate (in thousands):
|
Year Ended April 30, |
||||||||
|
2020 |
2019 |
|||||||
|
Statutory rate |
$ | (2,471 |
) |
$ | (519 | ) | ||
|
State and local tax |
(417 |
) |
(32 | ) | ||||
|
Valuation allowance on deferred tax assets |
2,009 | 1,419 | ||||||
|
Effect of foreign operations |
- | (51 | ) | |||||
|
Nondeductible expenses |
(134 |
) |
87 | |||||
|
Sale of Subsidiary Stock |
- | (863 | ) | |||||
|
Uncertain tax positions |
- | 101 | ||||||
|
Nontaxable life insurance cash value increase |
(73 |
) |
(120 |
) |
||||
|
Tax credits |
(46 |
) |
(28 |
) |
||||
|
Change in tax rate |
(120 |
) |
225 | |||||
|
Impact of CARES Act |
(592 |
) |
- | |||||
|
Other items |
102 | (163 | ) | |||||
|
Total (benefit) expense |
$ | (1,742 | ) | $ | 56 | |||
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
The components of deferred taxes are as follows (in thousands):
|
Year Ended April 30, |
||||||||
|
2020 |
2019 |
|||||||
|
Deferred tax assets: |
||||||||
|
Employee benefits |
$ | 4,794 | $ | 5,092 | ||||
|
Inventory |
1,904 | 1,649 | ||||||
|
Accounts receivable |
207 | 204 | ||||||
|
Tax credits |
1,610 | 1,300 | ||||||
|
Other assets |
1,073 | 148 | ||||||
|
Lease Liability |
2,807 | - | ||||||
|
Capital Loss carry-forward |
2,515 | 2,455 | ||||||
|
Net operating loss carryforwards |
6,185 | 5,556 | ||||||
|
Total deferred tax asset |
21,095 | 16,404 | ||||||
|
Deferred tax liabilities: |
||||||||
|
Property, plant and equipment |
(1,518 |
) |
(1,344 |
) |
||||
|
Right of use asset |
(2,696 |
) |
||||||
|
Other liabilities |
(193 | ) | (343 |
) |
||||
|
Deferred state income tax |
(842 |
) |
(767 |
) |
||||
|
Net deferred tax asset |
15,846 | 13,950 | ||||||
|
Valuation allowance |
(15,854 |
) |
(13,950 |
) |
||||
|
Net deferred tax (liability) asset |
$ | (8 | ) | $ | - | |||
In assessing the potential for realization of deferred tax assets, the Company considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will be realized. A valuation allowance, if needed, reduces the deferred tax assets to the amounts expected to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating loss carryforwards can be utilized. We assess all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable. As of April 30, 2020 and 2019, we have a full valuation allowance against our U.S. net deferred tax assets. If these estimates and assumptions change in the future, the Company may be required to reduce its existing valuation allowance resulting in less income tax expense.
For the year ended April 30, 2020, the valuation allowance increased by approximately $1.9 million from the prior year primarily due to the portion of the fiscal year ended April 30, 2020 pretax loss for which no tax benefit was provided.
The Company may amortize indefinite-lived intangible assets for tax purposes which are not amortizable for financial reporting purposes. As a result of the technical correction to net operating losses in the CARES Act, the Company recorded a deferred tax liability related to the tax effect of differences between financial reporting and tax bases of intangible assets that are not expected to reverse within the Company’s net operating loss carryforward periods. The utilization of indefinite lived net operating losses are limited to 80% of taxable income in an annual period.
As of April 30, 2020, the Company has U.S. federal net operating losses of $24.6 million of which $16.4 million begins to expire in Fiscal 2026 through 2038, including $3.4 million which is subject to annual limitation under IRC § 382. The remaining U.S. federal net operating losses of $8.2 million have an indefinite carry-forward period. The U.S. federal capital loss carry-forward of $10.0 million expires in 2023. The Company also has state net operating loss carryforwards, U.S. federal R&D tax credits, and state tax credits that expire in various years and amounts.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, is as follows (in thousands):
|
2020 |
2019 |
|||||||
|
Balance at the beginning of the fiscal year |
$ | 1,258 | $ | 1,264 | ||||
|
Additions based on positions taken in the fiscal year ended April 30, 2020 |
15 | - | ||||||
|
Additions based on positions taken in prior years |
119 | 142 | ||||||
|
Decreases based on positions taken in prior years |
(2 |
) |
(119 |
) |
||||
|
Lapse in statute of limitations |
(36 |
) |
(29 |
) |
||||
|
Balance at the end of the fiscal year |
$ | 1,354 | $ | 1,258 | ||||
The entire amount reflected in the table above at April 30, 2020, if recognized, would reduce our effective tax rate. The effects of uncertain tax positions embedded in net operating losses would not affect the effective tax rate if the unrecognized tax benefits are resolved while a full valuation allowance is maintained. As of April 30, 2020, and 2019, the Company had $119,000 and $64,000, respectively, accrued for the payment of interest and penalties. For the fiscal years ended April 30, 2020 and 2019, the Company recognized interest and penalties of $60,000 and $54,000, respectively. Although it is difficult to predict or estimate the change in the Company’s unrecognized tax benefits over the next twelve months, the Company believes that it is reasonably possible that decreases in unrecognized tax benefits of up to $1.3 million may be recognized during the next twelve months.
The Company is subject to taxation in the U.S. federal, various state and local, and foreign jurisdictions. The Company is no longer subject to examination of its U.S. federal income tax returns by the Internal Revenue Service for fiscal years 2016 and prior. The Company is no longer subject to examination by the taxing authorities in foreign jurisdictions for fiscal years 2016 and prior. Net operating losses and tax attributes generated by domestic and foreign entities in closed years and utilized in open years are subject to adjustment by the tax authorities.
14. 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 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. 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 CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
The table below presents information about reported segments for each of the years ended April 30, 2020 and 2019, respectively, 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 years (in thousands):
|
2020 |
2019 |
|||||||
|
Net revenues: |
||||||||
|
FEI-NY |
$ | 31,751 | $ | 38,096 | ||||
|
FEI-Zyfer |
10,914 | 12,235 | ||||||
|
Less intersegment revenues |
(1,158 |
) |
(822 |
) |
||||
|
Consolidated revenues |
$ | 41,507 | $ | 49,509 | ||||
|
Operating loss: |
||||||||
|
FEI-NY |
$ | (9,910 |
) |
$ | (4,429 |
) |
||
|
FEI-Zyfer |
(673 |
) |
1,730 | |||||
|
Corporate |
(339 |
) |
(118 |
) |
||||
|
Consolidated operating loss |
$ | (10,922 |
) |
$ | (2,817 |
) |
|
2020 |
2019 |
|||||||
|
Identifiable assets: |
||||||||
|
FEI-NY (approximately $1.5 in China in 2019) |
$ | 44,599 | $ | 54,295 | ||||
|
FEI-Zyfer |
13,344 | 10,478 | ||||||
|
less intersegment receivables |
(8,586 |
) |
(8,346 |
) |
||||
|
Corporate |
41,919 | 30,344 | ||||||
|
Consolidated identifiable assets |
$ | 91,276 | $ | 86,771 | ||||
|
Depreciation and amortization (allocated): |
||||||||
|
FEI-NY |
$ | 3,192 | $ | 2,695 | ||||
|
FEI-Zyfer |
112 | 92 | ||||||
|
Corporate |
15 | 15 | ||||||
|
Consolidated depreciation and amortization expense |
$ | 3,319 | $ | 2,802 |
Major Customers
The Company’s products are sold to both commercial and governmental customers. For the years ended April 30, 2020 and 2019, approximately 83% and 87%, respectively, of the Company’s sales were made under contracts to the U.S. Government or subcontracts for U.S. Government end-use.
In Fiscal 2020 and 2019, revenues to four and two customers, respectively, of the FEI-NY segment accounted for more than 10% of that segment’s revenues. These customers also exceeded 10% of the Company’s consolidated revenues each year. In the FEI-Zyfer segment, two customers accounted for more than 10% of that segment’s revenues in Fiscal 2020.
The loss by the Company of any one of these customers would have a material adverse effect on the Company’s business. The Company believes its relationship with these customers is mutually satisfactory. Sales to the major customers referenced above can include commercial and governmental end users.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
Foreign Sales
Revenues in each of the Company’s segments include sales to foreign governments or to companies located in foreign countries. For the years ended April 30, 2020 and 2019, revenues, based on the location of the procurement entity and excluding intersegment sales, were derived from the following countries (in thousands):
|
2020 |
2019 |
|||||||
|
Belgium |
$ | 22 | $ | 49 | ||||
|
France |
- | 40 | ||||||
|
China |
713 | 359 | ||||||
|
Russia |
85 | 2 | ||||||
|
Germany |
13 | 36 | ||||||
|
Italy |
169 | 159 | ||||||
|
Israel |
240 | - | ||||||
|
Singapore |
82 | 215 | ||||||
|
Other |
441 | 501 | ||||||
| $ | 1,765 | $ | 1,361 | |||||
15. Product Warranties
The Company generally provides its customers with a one-year warranty regarding the manufactured quality and functionality of its products. For some limited products, the warranty period has been extended. The Company establishes warranty reserves based on its product history, current information on repair costs and annual sales levels. As of April 30, 2020 and 2019, respectively, changes in the carrying amount of accrued product warranty costs, reported in accrued expenses on the consolidated balance sheets, were as follows (in thousands):
|
2020 |
2019 |
|||||||
|
Balance at beginning of year |
$ | 529 | $ | 520 | ||||
|
Warranty costs incurred |
(293 |
) |
(398 |
) |
||||
|
Product warranty accrual |
291 | 407 | ||||||
|
Balance at end of year |
$ | 527 | $ | 529 | ||||
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
16. Other Comprehensive Income (Loss)
Changes in Accumulated Other Comprehensive Income (Loss) (“AOCI”) by component and reclassifications from AOCI to Other income (expense), net, for the years ended April 30, 2020 and 2019, respectively, were as follows (in thousands):
|
Change in |
Foreign |
|||||||||||||||
|
Market Value |
Currency |
|||||||||||||||
|
of Marketable |
Translation |
|||||||||||||||
|
Securities |
Adjustment |
Total |
||||||||||||||
|
Balance April 30, 2018, net of taxes |
$ | (125 | ) | $ | (790 | ) | $ | (915 | ) | |||||||
|
Items of other comprehensive income (loss) before reclassification, pretax |
174 | 790 | 964 | |||||||||||||
|
Tax effect |
(1 |
) |
- | (1 |
) |
|||||||||||
|
Items of other comprehensive income (loss) before reclassification, net of taxes |
173 | 790 | 963 | |||||||||||||
|
Reclassification adjustments, pretax ** |
(3 |
) |
||||||||||||||
|
Tax effect |
1 | (2 |
) |
- | (2 |
) |
||||||||||
|
Total other comprehensive income (loss), net of taxes |
171 | 790 | 961 | |||||||||||||
|
Balance April 30, 2019, net of taxes |
46 | - | 46 | |||||||||||||
|
Items of other comprehensive income (loss) before reclassification, pretax |
443 | - | 443 | |||||||||||||
|
Tax effect |
- | - | - | |||||||||||||
|
Items of other comprehensive income (loss) before reclassification, net of taxes |
443 | - | 443 | |||||||||||||
|
Reclassification adjustments, pretax ** |
(1 |
) |
||||||||||||||
|
Tax effect |
- | 1 | - | 1 | ||||||||||||
|
Total other comprehensive income (loss), net of taxes |
444 | - | 444 | |||||||||||||
|
Balance April 30, 2020, net of taxes |
$ | 490 | $ | - | $ | 490 | ||||||||||
**The reclassification adjustments represent net realized gains on the sale or redemption of available-for-sale marketable securities that were reclassified from AOCI to Other income (expense), net.
17. Contingencies
On January 28, 2020, Martin B. Bloch, the former Chief Scientist of the Company and a current member of the Company’s Board, filed a complaint against the Company and Jonathan Brolin, Lance W. Lord, Russell M. Sarachek, Richard Schwartz and Stanton D. Sloane, each in their capacity as members of the Board (collectively, the “Director Defendants”), in the Supreme Court of the State of New York, County of Nassau (Bloch v. Frequency Electronics, Inc., et al., Index No. 601369/2020 (N.Y. Sup. Ct. filed Jan. 28, 2020)). Mr. Bloch seeks compensatory damages and costs and attorney’s fees, among other things, based on allegations that he was wrongfully terminated “for cause” pursuant to his employment agreement, dated March 17, 2008, and his deferred compensation agreements, in each case as amended, with the Company, and that the Company and the Director Defendants discriminated against him based on his age. Mr. Bloch had originally also sought a declaratory judgment and claims for damage to his reputation and a derivative claim on behalf of the Company alleging that the Director Defendants breached their fiduciary duty in rendering their decision to terminate Mr. Bloch’s employment with the Company. However, Mr. Bloch removed those claims from a subsequently filed amended complaint after the Company and the Director Defendants moved to dismiss them. On June 11, 2020, the Company and the Director Defendants filed their answer to the amended complaint. Mr. Bloch filed a motion for summary judgment on June 23, 2020, which the Company and the Director Defendants opposed on July 10, 2020. Mr. Bloch’s motion seeks an order that the Company is liable for breach of his employment agreement because he purportedly resigned from the Company before he was terminated. On July 10, 2020, the Company and the Director Defendants opposed Mr. Bloch’s motion and also filed a motion for summary judgment seeking the dismissal of all claims in Mr. Bloch’s amended complaint. The Company and the Director Defendants believe that the Board was justified in its decision to terminate Mr. Bloch “for cause” and that Mr. Bloch’s complaint is entirely without merit. The Company intends to vigorously defend against all of Mr. Bloch’s allegations. At this time, the Company does not have sufficient information to determine whether liability, if any, arising out of these matters is probable or the possible loss, if any, that could result from an unfavorable outcome arising out of these matters.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2020 and 2019
In addition, Mr. Bloch sought to initiate two arbitration proceedings under the AAA Rules (Bloch v. Frequency Electronics, Inc., the Compensation Committee of the Board of Directors of Frequency Electronics, Inc., and the Deferred Compensation Plan Agreement Dated March 7, 2008). One arbitration is brought under a deferred compensation agreement dated March 27, 1980 and the other under a second amended and restated deferred compensation agreement, dated March 7, 2008. Bloch submitted his Statements of Claim in both arbitrations on May 4, 2020. In both proceedings, Bloch claims that defendants violated ERISA rules by denying him the benefits he was allegedly entitled to under the deferred compensation agreements.
On June 2, 2020, the Company filed a petition for a stay of arbitration and related declaratory relief against Mr. Bloch, in the Supreme Court of the State of New York, New York County (Frequency Electronics, Inc. v. Martin B. Bloch, Index No. 652191/2020 (N.Y. Sup. Ct. filed June 2, 2020)). The Company claims that Mr. Bloch may not arbitrate his claims for deferred compensation because he did not timely appeal the Company’s denial of those claims, and because he failed to comply with the arbitration procedures in the applicable deferred compensation agreement. Mr. Bloch filed a motion on June 16, 2020 seeking a change of venue to the County of Nassau, which the Company opposed on July 7, 2020. The motion is currently pending. At this time, the Company does not have sufficient information to determine the likelihood of success of this petition.
On June 5, 2020, Mr. Bloch filed a petition against the Company, the Compensation Committee of the Company’s Board of Directors, and the Deferred Compensation Plan Agreement Dated March 7, 2008, as amended, for the appointment of an arbitrator in one of the arbitration proceedings that Mr. Bloch sought to initiate. The petition was filed in the Supreme Court of the State of New York, County of Nassau (Bloch v. Frequency Electronics, Inc. et al., Index No. 605380/2020 (N.Y. Sup. Ct. filed June 5, 2020)). On June 22, 2020, the Company moved to dismiss Mr. Bloch’s petition, and he opposed the Company’s motion on July 2, 2020. The motion is currently pending. Defendants dispute all of Bloch’s claims and intend to continue to vigorously defend the Company in this special proceeding. The likelihood of any outcome of this proceeding cannot be determined at this time.
18. Subsequent Events
As previously reported, on April 12, 2020, the Company received proceeds from a loan in the amount of $4,964,810 (the “PPP Loan”) from JPMorgan Chase Bank, N.A. as the Lender, pursuant to the Small Business Administration Paycheck Protection Program under the CARES Act. On May 6, 2020, the Company elected to repay the PPP Loan in full.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. 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 April 30, 2020, the Company’s disclosure controls and procedures were effective.
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.
Management’s Annual Report on Internal Control over Financial Reporting
Management of Frequency Electronics is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of April 30, 2020. In making this assessment, management used the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of April 30, 2020.
Financial Reporting
As of result of a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which, among other things, permanently exempted non-accelerated filers, such as us, from complying with the requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, which requires an issuer to include an attestation report from an issuer’s independent registered public accounting firm on the issuer’s internal control over financial reporting, this annual report on Form 10-K does not include an attestation report of our registered public accounting firm regarding our internal control over financial reporting.
Changes in Internal Control over Financial Reporting.
There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended April 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required to be furnished pursuant to this item with respect to Directors of the Company, compliance with Section 16(a) of the Exchange Act, the Company’s code of ethics and certain corporate governance matters is incorporated herein by reference from the Company’s definitive proxy statement to be filed no later than 120 days after April 30, 2020, for the annual meeting of stockholders to be held on or about October 7, 2020 (the “2020 Proxy Statement”). See “Election of Directors,” “Delinquent Section 16(a) Reports,” “Corporate Governance Matters – Code of Ethics,” and “Certain Information as to Committees and Meetings of the Board” from the Company’s 2020 Proxy Statement. The information required to be furnished pursuant to this item with respect to Executive Officers is set forth, pursuant to General Instruction G(3) of Form 10-K, under Part I of this Report.
Item 11. Executive Compensation
Except as set forth below, this item is incorporated herein by reference from the Company’s 2020 Proxy Statement under “Election of Directors” and “Executive Compensation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
This item is incorporated herein by reference from the Company’s 2020 Proxy Statement under “Executive Compensation” and “Stock Ownership of Certain Beneficial Owners and Management.”
EQUITY COMPENSATION PLAN INFORMATION
|
Plan Category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted-average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
|||||||||
|
(a) |
(b) |
(c) |
||||||||||
|
Equity Compensation Plans |
||||||||||||
|
Approved by Security Holders (1) |
1,072,500 | $ | 8.90 | 417,004 | ||||||||
|
(1) |
The Company’s equity compensation plans are described in Note 12 to the Consolidated Financial Statements. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
This item is incorporated herein by reference from the Company’s 2020 Proxy Statement under “Election of Directors.”
Item 14. Principal Accountant Fees and Services
This item is incorporated herein by reference from the Company’s 2020 Proxy Statement under “Appointment of Independent Auditors” and “Report of the Audit Committee.”
PART IV
Item 15. Exhibits and Financial Statement Schedules
|
(a) |
Index to Financial Statements and Exhibits |
The financial statements and exhibits are listed below and are filed as part of this report.
(1) FINANCIAL STATEMENTS
Included in Part II of this report:
|
|
Page(s) |
|
Report of Independent Registered Public Accounting Firm |
19-20 |
|
|
|
|
Consolidated Balance Sheets |
|
|
- April 30, 2020 and 2019 |
21 |
|
|
|
|
Consolidated Statements of Operations and Comprehensive Loss |
|
|
- years ended April 30, 2020 and 2019 |
22 |
|
|
|
|
Consolidated Statements of Cash Flows |
|
|
- years ended April 30, 2020 and 2019 |
23-24 |
|
|
|
|
Consolidated Statements of Changes in Stockholders’ Equity |
|
|
- years ended April 30, 2020 and 2019 |
25 |
|
|
|
|
Notes to Consolidated Financial Statements |
26-47 |
|
(2) EXHIBITS |
|
Exhibit No. in |
|
|
|
|
|
this Form 10-K |
|
Description of Exhibit |
|
NOTE |
|
|
|
|
|
|
|
2.1 |
|
|
(11) |
|
|
|
|
|
|
|
|
3.1 |
|
Copy of Certificate of Incorporation of the Registrant filed with the Secretary of State of Delaware |
|
(1) |
|
|
|
|
|
|
|
3.2 |
|
Amendment to Certificate of Incorporation of the Registrant filed with the Secretary of State of Delaware on March 27, 1981 |
|
(2) |
|
|
|
|
|
|
|
3.3 |
|
Amendment to Certificate of Incorporation of the Registrant filed with Secretary of State of Delaware on October 26, 1984 |
|
(5) |
|
|
|
|
|
|
|
3.4 |
|
Amendment to Certificate of Incorporation of the Registrant filed with the Secretary of State of Delaware on October 22, 1986 |
|
(7) |
|
|
|
|
|
|
|
3.5 |
|
Amended and Restated Certificate of Incorporation of the Registrant filed with the Secretary of State of Delaware on October 26, 1987 |
|
(9) |
|
|
|
|
|
|
|
3.6 |
|
Amended Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on November 2, 1989 |
|
(9) |
|
|
|
|
|
|
|
3.7 |
|
|
(13) |
|
|
|
|
|
|
|
|
4.1 |
|
Specimen of Common Stock certificate |
|
(1) |
|
4.2 |
Filed herewith |
|
Exhibit No. in |
|
|
|
|
|
this Form 10-K |
|
Description of Exhibit |
|
NOTE |
|
|
|
|
|
|
|
10.1* |
|
Employment agreement, dated as of March 17, 2008, between Registrant and Martin Bloch |
|
(4) |
|
|
|
|
|
|
|
10.2 |
|
|
(14) |
|
|
|
|
|
|
|
|
10.3* |
|
|
(16) |
|
|
|
|
|
|
|
|
10.4 |
|
Lease Agreement between Registrant and Reckson Operating Partnership, L.P. dated January 6, 1998 |
|
(15) |
|
|
|
|
|
|
|
10.5 |
|
|
(17) |
|
|
|
|
|
|
|
|
10.6* |
|
Registrant’s Cash or Deferral Profit Sharing Plan and Trust under Internal Revenue Code Section 401, dated April 1, 1985 |
|
(6) |
|
|
|
|
|
|
|
10.7 |
|
Amendment dated Jan. 1, 1988 to Registrant’s Cash or Deferred Profit Sharing Plan and Trust under Section 401 of Internal Revenue Code |
|
(8) |
|
|
|
|
|
|
|
10.8* |
|
|
(18) |
|
|
|
|
|
|
|
|
10.9* |
|
|
(19) |
|
|
|
|
|
|
|
|
10.10* |
|
Employment Agreement effective as of May 1, 2018, between Stanton Sloane and the Registrant |
|
(21) |
|
10.11 |
Promissory Note, dated April 12, 2020, by and between Registrant and JPMorgan Chase Bank, N.A. |
Filed herewith |
||
|
16.1 |
(22) |
|||
|
|
|
|
|
|
|
21 |
|
|
Filed herewith |
|
|
|
|
|
|
|
|
23.1 |
|
|
Filed herewith |
|
|
|
|
|
|
|
|
23.2 |
Filed herewith | |||
|
31.1 |
|
|
Filed herewith |
|
|
|
|
|
|
|
|
31.2 |
|
|
Filed herewith |
|
|
|
|
|
|
|
|
32 |
|
|
Filed herewith |
|
|
|
|
|
|
|
|
101 |
The following materials from the Frequency Electronics, Inc. Annual Report on Form 10-K for the fiscal year ended April 30, 2020 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations and Comprehensive Loss, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Changes in Stockholders’ Equity and (v) Notes to Consolidated Financial Statements |
* Denoted compensatory plans or arrangements or management contracts
NOTES:
|
|
(1) |
Filed with the SEC as an exhibit, numbered as indicated above, to the registration statement of Registrant on Form S-1, File No. 2-29609, which exhibit is incorporated herein by reference. |
|
|
(2) |
Filed with the SEC as Exhibit 3.2 to the registration statement of Registrant on Form S-1, File No. 2-71727, which exhibit is incorporated herein by reference. |
|
|
(3) |
[Intentionally Omitted] |
|
|
(4) |
Filed with the SEC as Exhibit 10.1 to a current report of Registrant on Form 8-K, File No. 1-08061, on May 4, 2018, which exhibit is incorporated herein by reference. |
|
|
(5) |
Filed with the SEC as Exhibit 3.3 to the annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended April 30, 1985, which exhibit is incorporated herein by reference. |
|
|
(6) |
Filed with the SEC as Exhibit 10.16 to the annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended April 30, 1986, which exhibit is incorporated herein by reference. |
|
|
(7) |
Filed with the SEC as Exhibit 3.4 to the annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended April 30, 1987, which exhibit is incorporated herein by reference. |
|
|
(8) |
Filed with the SEC as Exhibit 10.24 to the annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended April 30, 1989, which exhibit is incorporated herein by reference. |
|
|
(9) |
Filed with the SEC as an exhibit, numbered as indicated above, to the annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended April 30, 1990, which exhibit is incorporated herein by reference. |
|
|
(10) |
[Intentionally Omitted] |
|
|
(11) |
Filed with the SEC as Exhibit 2.1 to the current report of Registrant on Form 8-K, File No. 1-8061, on February 27, 2012, which exhibit is incorporated herein by reference. |
|
|
(12) |
[Intentionally Omitted] |
|
|
(13) |
Filed with the SEC as Exhibit 3.1 to a current report of the Registrant on Form 8-K, File No. 1-8061, on June 25, 2020, which exhibit is incorporated herein by reference. |
|
|
(14) |
Filed with the SEC as Exhibit 10.1 to a current report of the Registrant on Form 8-K, File No. 1-8061, on September 16, 2016, which exhibit is incorporated herein by reference. |
|
|
(15) |
Filed with the SEC as Exhibit 10.13 to the annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended April 30, 1998, which exhibit is incorporated herein by reference. |
|
|
(16) |
Filed with the SEC as Exhibit 10.1 to a current report of the Registrant on Form 8-K, File No. 1-8061, on October 4, 2005, which exhibit is incorporated herein by reference. |
|
|
(17) |
Filed with the SEC as Exhibit 10.13 to the annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended April 30, 2018, which exhibit is incorporated herein by reference. |
|
|
(18) |
Filed with the SEC as Exhibit 10.17 to Amendment No. 1 on Form 10-K/A to the annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended April 30, 2018, which exhibit is incorporated herein by reference. |
|
|
(19) |
Filed with the SEC as Exhibit 10.18 to Amendment No. 1 on Form 10-K/A to the annual report of Registrant on Form 10-K, File No. 1-8061, for the year ended April 30, 2018, which exhibit is incorporated herein by reference. |
|
|
(20) |
[Intentionally Omitted] |
|
(21) |
Filed with the SEC as Exhibit 10.11 to the annual report of the Registrant on Form 10-K, File No. 1-8061, for the year ended April 30, 2019, which exhibit is incorporated herein by reference. | |
|
(22) |
Filed with the SEC as Exhibit 16.1 to a current report of the Registrant on Form 8-K, File No. 1-8061, on July 30, 2019, which exhibit is incorporated herein by reference. |
None.
Pursuant to the requirements of Section 13 or 15(d) 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. |
|
|
|
|
By: |
/s/ Stanton Sloane |
|
|
Stanton Sloane |
|
|
President and CEO |
|
|
(Principal Executive Officer) |
|
|
|
|
By: |
/s/ Steven L. Bernstein |
|
|
Steven L. Bernstein |
|
|
Chief Financial Officer, Secretary and Treasurer |
|
|
(Principal Financial and Accounting Officer) |
Dated: July 29, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
|
/s/ Joel Girsky |
|
Director |
|
7/29/20 |
|
Joel Girsky |
|
|
|
|
|
|
|
|
|
|
|
/s/ Jonathan Brolin |
|
Lead Independent Director |
|
7/29/20 |
|
Jonathan Brolin |
|
|
|
|
|
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/s/ Richard Schwartz |
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Director |
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7/29/20 |
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Richard Schwartz |
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/s/ Stanton D. Sloane |
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Director, President and CEO |
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7/29/20 |
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Stanton D. Sloane |
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/s/ Russell M. Sarachek |
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Chairman of the Board |
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7/29/20 |
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Russell M. Sarachek |
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/s/ General Lance W. Lord |
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Director |
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7/29/20 |
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General Lance W. Lord |
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Exhibit 4.2
DESCRIPTION OF CAPITAL STOCK
General
The following is a description of the material terms of the capital stock of Frequency Electronics, Inc. (the “Company”). This description is not complete and is qualified by reference to the Company’s amended and restated certificate of incorporation (the “Certificate of Incorporation”) and its amended and restated bylaws (the “Bylaws”). The Certificate of Incorporation and the Bylaws are filed as exhibits to the Company’s Annual Report on Form 10-K and incorporated by reference herein. Additionally, the following description of certain provisions of Delaware law is not complete and is qualified by reference to the Delaware General Corporation Law (“DGCL”).
Under the Certificate of Incorporation, the Company’s authorized capital stock consists of 12,000,000 shares of common stock, $1.00 par value per share (“Common Stock”), and (b) 600,000 shares of preferred stock, $1.00 par value per share (“Preferred Stock,” and collectively with Common Stock, “Capital Stock”).
All outstanding shares of Common Stock are duly authorized, validly issued, fully-paid and non-assessable.
Common Stock
Voting Rights
Each holder of Common Stock is entitled to one vote for each share of Common Stock held on all matters submitted to a vote of stockholders, except as otherwise expressly provided in the Certificate of Incorporation or required by applicable law. The Certificate of Incorporation does not provide for cumulative voting for the election of directors.
Dividend Rights
Holders of Common Stock are entitled to receive dividends as may be declared from time to time by the Company’s board of directors (the “Board”) out of funds legally available therefor and in the sole discretion of the Board, except as otherwise provided by law or the Certificate of Incorporation.
Liquidation Rights
Pursuant to Delaware law, in the event of the liquidation, dissolution, or winding-up of the Company, the remaining assets legally available for distribution to stockholders shall be distributed ratably among the holders of Common Stock.
Other Rights
Holders of Common Stock have no preemptive rights and no right to convert their Common Stock into any other securities. The Common Stock is not subject to any redemption or sinking fund provisions.
Preferred Stock
The Board may issue shares of Preferred Stock from time to time in series or otherwise without further stockholder action. The Board has the authority to make designations regarding any Preferred Stock it issues, including preferences, voting powers and relative, participating, optional or other special rights and qualifications, limitations or restrictions of such Preferred Stock.
Anti-Takeover Provisions
Certain provisions of the Certificate of Incorporation and the Bylaws and Delaware law could have an anti-takeover effect and could delay, discourage or prevent a tender offer or takeover attempt that a stockholder might consider to be in its best interests, including attempts that might otherwise result in a premium being paid over the market price of the Common Stock.
Certificate of Incorporation and Bylaw Provisions
The Certificate of Incorporation and the Bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in the Company’s management without the consent of the Board, including, among other things:
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● |
no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; |
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the right of the Board to elect a director to fill a vacancy in the Board, which prevents stockholders from being able to fill vacancies on the Board; |
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the requirement that a special meeting of stockholders may be called only by the Chairperson of the Board, the Company’s president or the Board; |
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the ability of the Board, by majority vote, to amend the Bylaws, which may allow the Board to take additional actions to prevent a hostile acquisition and inhibit the ability of an acquirer to amend the Bylaws to facilitate a hostile acquisition; |
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advance notice procedures with which stockholders must comply to nominate candidates to the Board or to propose matters to be acted upon at a stockholders’ meeting, which may preclude stockholders from bringing matters before a meeting of stockholders or from making nominations for directors at a meeting of stockholders if the proper procedures are not followed; and |
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● |
the requirement that a business combination with any party that beneficially owns 5% or more of the Capital Stock then entitled to vote on the election of directors be approved by the affirmative vote of (i) not less than 75% of the outstanding shares of Capital Stock entitled to vote on the election of directors and (ii) not less than a majority of all outstanding shares of Capital Stock, in each case, excluding all Capital Stock owned by the acquiring party and subject to certain exceptions and qualifications provided in the Certificate of Incorporation. |
Delaware Law
The Company is subject to Section 203 of the DGCL, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years after the date that such stockholder became an interested stockholder, with the following exceptions:
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before such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; |
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upon the closing of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction began, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned by (i) persons who are directors and also officers and (ii) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or |
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on or after such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of the stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. |
In general, Section 203 defines business combination to include the following:
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any merger or consolidation involving the corporation and the interested stockholder; |
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any sale, transfer, pledge, or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; |
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subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; |
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any transaction involving the corporation that has the effect of increasing the proportionate share of the stock or any class or series of the corporation beneficially owned by the interested stockholder; or |
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the receipt by the interested stockholder of the benefit of any loss, advances, guarantees, pledges, or other financial benefits by or through the corporation. |
In general, Section 203 defines an “interested stockholder” as an entity or person who, together with the person’s affiliates and associates, beneficially owns, or within three years prior to the time of determination of interested stockholder status did own, 15% or more of the outstanding voting stock of the corporation.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is American Stock Transfer & Trust Company, LLC “(AST)”
Listing
The Common Stock is listed on the NASDAQ Global Market under the symbol “FEIM.”
Exhibit 10.11
NOTE
|
Date |
April 12, 2020 |
|
Note Amount |
$ 4,964,810.86 |
|
Borrower |
Frequency Electronics, Inc. |
|
Lender |
JPMorgan Chase Bank, N.A. |
|
1. |
PROMISE TO PAY. |
Borrower promises to pay to the order of Lender the N o t e A mount, plus interest on the unpaid principal balance at the Note Rate, and all other amounts required by this Note.
|
2. |
DEFINITIONS. |
“CARES Act” means the Coronavirus Aid, Relief, and Economic Security Act.
“Deferral Period” means the six month period beginning on the date of this Note.
“Loan” means the loan evidenced by this Note.
“Maturity Date” means twenty-four (24) months from the date of this Note.
“Note Rate” means an interest rate of 0.98% Per Annum and interest shall accrue on the unpaid principal balance computed on the basis of the actual number of days elapsed in a year of 360 days.
“Per Annum” means for a year deemed to be comprised of 360 days.
“SBA” means the Small Business Administration, an Agency of the United States of America.
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3. |
CONDITIONS PRECEDENT TO FUNDING OF LOAN. |
Before the funding of the Loan, the following conditions must be satisfied:
|
A. |
Lender has approved the request for the Loan. |
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B. |
Lender has received approval from SBA to fund the Loan. |
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4. |
PAYMENT TERMS. |
Borrower will pay this Note as follows:
|
A. |
No Payments During Deferral Period. There shall be no payments due by Borrower during the Deferral Period. |
|
B. |
Principal and Interest Payments. Commencing one month after the expiration of the Deferral Period, and continuing on the same day of each month thereafter until the Maturity Date, Borrower shall pay to Lender monthly payments of principal and interest, each in such equal amount required to fully amortize the principal amount outstanding on the Note on the last day of the Deferral Period by the Maturity Date. |
|
C. |
Maturity Date. On the Maturity Date, Borrower shall pay to Lender any and all unpaid principal plus accrued and unpaid interest plus interest accrued during the Deferral Period. This Note will mature on the Maturity Date. |
|
D. |
If any payment is due on a date for which there is no numerical equivalent in a particular calendar month then it shall be due on the last day of such month. If any payment is due on a day that is not a Business Day, the payment will be made on the next Business Day. The term "Business Day" means a day other than a Saturday, Sunday or any other day on which national banking associations are authorized to be closed. |
|
E. |
Payments shall be allocated among principal and interest at the discretion of Lender unless otherwise agreed or required by applicable law. Notwithstanding, in the event the Loan, or any portion thereof, is forgiven pursuant to the Paycheck Protection Program under the federal CARES Act, the amount so forgiven shall be applied to principal. |
|
F. |
Borrower may prepay this Note at any time without payment of any premium. |
|
5. |
CERTIFICATIONS. |
Borrower certifies as follows:
|
A. |
Current economic uncertainty makes this Loan necessary to support the ongoing operations of Borrower. |
|
B. |
Loan funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. |
|
C. |
During the period beginning on February 15, 2020 and ending on December 31, 2020, Borrower has not and will not receive another loan under this program. |
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D. |
Borrower was in operation on February 15, 2020 and (i) had employees for whom it paid salaries and payroll taxes, or (ii) paid independent contractors as reported on a 1099-Misc. |
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6. |
AGREEMENTS. |
Borrower understands and agrees, and waives and releases Lender, as follows:
|
A. |
The Loan would be made under the SBA’s Paycheck Protection Program. Accordingly, it must be submitted to and approved by the SBA. There is limited funding available under the Paycheck Protection Program and so all applications submitted will not be approved by the SBA. |
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B. |
Lender is participating in the Payroll Protection Program to help businesses impacted by the economic impact from COVID-19. However, Lender anticipates high volume and there may be processing delays and system failures along with other issues that interfere with submission of your application to SBA. Lender does not represent or guarantee that it will submit the application before SBA funding is no longer available or at all. You agree that Lender is not responsible or liable to you (i) if the application is not submitted to the SBA until after SBA stops approving applications, for any reason or (ii) if the application is not processed. You forever release and waive any claims against Lender concerning failure to obtain the Loan. This release and waiver applies to but is not limited to any claims concerning Lender’s (i) pace, manner or systems for processing or prioritizing applications, or (ii) representations by Lender regarding the application process, the Paycheck Protection Program, or availability of funding. This agreed to release and waiver supersedes any prior communications, understandings, agreements or communications on the issues set forth herein. |
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C. |
Forgiveness of the Loan is only available for principal that is used for the limited purposes that qualify for forgiveness under SBA requirements, and that to obtain forgiveness, Borrower must request it and must provide documentation in accordance with the SBA requirements, and certify that the amounts Borrower is requesting to be forgiven qualify under those requirements. Borrower also understand that Borrower shall remain responsible under the Loan for any amounts not forgiven, and that interest payable under the Loan will not be forgiven but that the SBA may pay the Loan interest on forgiven amounts. |
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D. |
Forgiveness is not automatic and Borrower must request it. Borrower is not relying on Lender for its understanding of the requirements for forgiveness such as eligible expenditures, necessary records/documentation, or possible reductions due to changes in number of employees or compensation. Rather Borrower will consult the SBA’s program materials. |
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E. |
The application for this Loan is subject to review and that Borrower may not receive the Loan. The Loan also remains subject to availability of funds under the SBA’s Payment Protection Program, and to the SBA issuing an SBA loan number. |
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7. |
DEFAULT. |
Borrower is in default under this Note if Borrower:
|
A. |
Fails to make a payment when due under the Note or otherwise fails to comply with any provision of this Note. |
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B. |
Does not disclose, or anyone acting on its behalf does not disclose, any material fact to Lender or SBA. |
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C. |
Makes, or anyone acting on its behalf makes, a materially false or misleading representation, attestation or certification to Lender or SBA in connection with Borrower’s request for this Loan under the CARES Act, or makes a false certification under paragraph 5 of this Note. |
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D. |
Fails to comply with all of the provisions of this Note. |
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E. |
Becomes the subject of a proceeding under any bankruptcy or insolvency law, has a receiver or liquidator appointed for any part of its business or property, or makes an assignment for the benefit of creditors. |
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F. |
Reorganizes, merges, consolidates, or otherwise changes ownership or business structure without Lender's prior written consent. |
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G. |
Becomes the subject of a civil or criminal action that Lender believes may materially affect Borrower's ability to pay this Note. |
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8. |
LENDER'S RIGHTS IF THERE IS A DEFAULT. |
Without notice or demand and without giving up any of its rights, Lender may:
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A. |
Require immediate payment of all amounts owing under this Note. |
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B. |
Collect all amounts owing from Borrower. |
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C. |
File suit and obtain judgment. |
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9. |
LENDER'S GENERAL POWERS. |
Without notice or Borrower's consent, Lender may incur expenses to collect amounts due under this Note and enforce the terms of this Note. Among other things, the expenses may include reasonable
attorney's fees and costs. If Lender incurs such expenses, it may demand immediate repayment from Borrower or add the expenses to the principal balance;
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10. |
GOVERNING LAW AND VENUE; WHEN FEDERAL LAW APPLIES. |
When SBA is the holder, this Note shall be interpreted and enforced under federal law, including SBA regulations. Lender or SBA may use state or local procedures for filing papers, recording documents, giving notice, foreclosing liens, and other purposes. By using such procedures, SBA does not waive any federal immunity from state or local control, penalty, tax, or liability. As to this Note, Borrower may not claim or assert against SBA any local or state law to deny any obligation, defeat any claim of SBA, or preempt federal law.
If the SBA is not the holder, this Note shall be governed by and construed in accordance with the laws of the State of Ohio where the main office of Lender is located. MATTERS REGARDING INTEREST TO BE CHARGED BY LENDER AND THE EXPORTATION OF INTEREST SHALL BE GOVERNED BY FEDERAL LAW (INCLUDING WITHOUT LIMITATION 12 U.S.C. SECTIONS 85 AND 1831u) AND THE LAW OF THE STATE OF OHIO. Borrower agrees that any legal action or proceeding with respect to any of its obligations under this Note may be brought by Lender in any state or federal court located in the State of Ohio, as Lender in its sole discretion may elect. Borrower submits to and accepts in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of those courts. Borrower waives any claim that the State of Ohio is not a convenient forum or the proper venue for any such suit, action or proceeding. The extension of credit that is the subject of this Note is being made by Lender in Ohio.
|
11. |
SUCCESSORS AND ASSIGNS. |
Under this Note, Borrower includes its successors, and Lender includes its successors and assigns.
|
12. |
GENERAL PROVISIONS. |
|
A. |
Borrower must sign all documents necessary at any time to comply with the Loan. |
|
B. |
Borrower’s execution of this Note has been duly authorized by all necessary actions of its governing body. The person signing this Note is duly authorized to do so on behalf of Borrower. |
|
C. |
This Note shall not be governed by any existing or future credit agreement or loan agreement with Lender. The liabilities guaranteed pursuant to any existing or future guaranty in favor of Lender shall not include this Note. The liabilities secured by any existing or future security instrument in favor Lender shall not include this Note. |
|
D. |
Lender may exercise any of its rights separately or together, as many times and in any order it chooses. Lender may delay or forgo enforcing any of its rights without giving up any of them. |
|
E. |
Borrower may not use an oral statement of Lender or SBA to contradict or alter the written terms of this Note. |
|
F. |
If any part of this Note is unenforceable, all other parts remain in effect. |
|
G. |
To the extent allowed by law, Borrower waives all demands and notices in connection with this Note, including presentment, demand, protest, and notice of dishonor. |
|
H. |
Borrower's liability under this Note will continue with respect to any amounts SBA may pay Bank based on an SBA guarantee of this Note. Any agreement with Bank under which SBA may guarantee this Note does not create any third party rights or benefits for Borrower and, if SBA pays Bank under such an agreement, SBA or Bank may then seek recovery from Borrower of amounts paid by SBA. |
|
I. |
Lender reserves the right to modify the Note Amount based on documentation received from Borrower. |
|
13. |
ELECTRONIC SIGNATURES. |
Borrower’s electronic signature shall have the same force and effect as an original signature and shall be deemed (i) to be "written" or "in writing" or an “electronic record”, (ii) to have been signed and (iii) to constitute a record established and maintained in the ordinary course of business and an original written record when printed from electronic files. Such paper copies or "printouts," if introduced as evidence in any judicial, arbitral, mediation or administrative proceeding, will be admissible as between the parties to the same extent and under the same conditions as other original business records created and maintained in documentary form.
|
14. |
BORROWER’S NAME AND SIGNATURE: |
Borrower:
Frequency Electronics, Inc.
By:
Printed Name: Steven Bernstein
Title: CFO
Date Signed: April 12, 2020
Exhibit 21
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
List of Subsidiaries of Registrant
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Subsidiary & Name under |
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which business is performed |
Jurisdiction of Incorporation |
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Frequency Electronics, Inc. |
Delaware |
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FEI Zyfer, Inc. |
Delaware |
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FEI-Elcom Tech, Inc. |
Delaware |
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
Frequency Electronics, Inc.
Mitchel Field, New York
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 333-08901, 333-40506, 333-140938, 333-156600, 333-42233 and 333-188952) of Frequency Electronics, Inc. of our report dated July 29, 2020, relating to the consolidated financial statements which appears in this Form 10-K.
/s/ BDO USA, LLP
Melville, New York
July 29, 2020
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements of Frequency Electronics, Inc. on Form S-8 (Nos. 333-08901, 333-40506, 333-140938, 333-156600, 333-42233 and 333-188952) of our report dated July 26, 2019 on our audit of the consolidated financial statements as of April 30, 2019 and for the year then ended, which report is included in this Annual Report on Form 10-K to be filed on or about July 28, 2020.
/s/ EisnerAmper LLP
EISNERAMPER LLP
New York, New York
July 28, 2020
Exhibit 31.1
Certification
I, Stanton Sloane, certify that:
1. I have reviewed this annual report on Form 10-K of Frequency Electronics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: July 29, 2020
By: /s/ Stanton Sloane
Stanton Sloane
President and Chief Executive Officer
Exhibit 31.2
Certification
I, Steven L. Bernstein, certify that:
1. I have reviewed this annual report on Form 10-K of Frequency Electronics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: July 29, 2020
By: /s/ Steven L. Bernstein
Steven L. Bernstein
Chief Financial Officer
Exhibit 32
CERTIFICATION PURSUANT TO
SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
Certification of CEO
In connection with the Annual Report of Frequency Electronics, Inc. (the “Company”) on Form 10-K for the year ended April 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stanton Sloane, President and Chief Executive Officer of the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
(1) |
The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Stanton Sloane July 29, 2020
Stanton Sloane
President and Chief Executive Officer
Certification of CFO
In connection with the Annual Report of Frequency Electronics, Inc. (the “Company”) on Form 10-K for the year ended April 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven L. Bernstein, Chief Financial Officer of the Company, certify, pursuant to Section 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
(1) |
The Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934; and |
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Steven L. Bernstein July 29, 2020
Steven L. Bernstein
Chief Financial Officer
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.