UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark one)
For the Quarterly Period ended
OR
For the transition period from to
Commission File No.
(Exact name of Registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered |
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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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| | Smaller reporting company |
| Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of registrant’s Common Stock, par value $1.00 per share, as of September 11, 2023 –
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
TABLE OF CONTENTS
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Page No. |
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Part I. Financial Information: |
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Condensed Consolidated Balance Sheets – July 31, 2023 (unaudited) and April 30, 2023 |
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Notes to Condensed Consolidated Financial Statements (unaudited) |
7-12 |
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Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations |
13-17 |
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Item 3 - Quantitative and Qualitative Disclosures About Market Risk |
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Part II. Other Information: |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands except par value)
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July 31, |
April 30, |
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2023 |
2023 |
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(UNAUDITED) |
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ASSETS: |
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Current assets: |
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Cash and cash equivalents |
$ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $ |
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Contract assets |
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Inventories |
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Prepaid income taxes |
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Prepaid expenses and other |
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Total current assets |
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Property, plant, and equipment, net |
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Goodwill |
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Cash surrender value of life insurance |
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Other assets |
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Right-of-Use assets – operating leases |
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Total assets |
$ | $ | ||||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY: |
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Current liabilities: |
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Accounts payable |
$ | $ | ||||||
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Accrued liabilities |
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Loss provision accrual |
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Operating lease liability – current portion |
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Contract liabilities |
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Total current liabilities |
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Deferred compensation |
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Deferred taxes |
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Operating lease liability – non-current portion |
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Other liabilities |
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Total liabilities |
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Stockholders’ equity: |
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| Preferred stock - $ |
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| Common stock - $ |
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Additional paid-in capital |
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Accumulated deficit |
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| Common stock reacquired and held in treasury - at cost ( |
( |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
$ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(In thousands except per share data)
(Unaudited)
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Three Months Ended July 31, |
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2023 |
2022 |
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Revenues |
$ | $ | ||||||
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Cost of revenues |
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Gross margin |
( |
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Selling and administrative expenses |
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Research and development expenses |
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Operating income (loss) |
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Other income (expense): |
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Investment income |
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Interest expense |
( |
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Income (loss) before provision for income taxes |
( |
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Provision for income taxes |
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Net Income (loss) |
$ | $ | ( |
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Net income (loss) per common share: |
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Basic and diluted income (loss) per share |
$ | $ | ( |
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Weighted average shares outstanding: |
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Basic and diluted |
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Condensed Consolidated Statements of Comprehensive Income (loss) |
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Net Income (loss) |
$ | $ | ( |
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Unrealized gain (loss) on marketable securities: |
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Change in market value of marketable securities before reclassification, net of tax |
( |
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Reclassification adjustment for realized gains included in net income, net of tax |
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Total unrealized gain on marketable securities, net of tax |
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Comprehensive income (loss) |
$ | $ | ( |
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See accompanying notes to condensed consolidated financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Three Months Ended July 31, |
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2023 |
2022 |
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Cash flows from operating activities: |
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Net income (loss) |
$ | $ | ( |
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Non-cash charges to earnings |
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Net changes in operating assets and liabilities |
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Net cash used in operating activities |
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Cash flows from investing activities: |
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Proceeds on redemption of marketable securities |
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Purchase of marketable securities |
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Purchase of fixed assets |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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Net cash used in financing activities |
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Net decrease in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
$ | $ | ||||||
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Supplemental disclosures of cash flow information: |
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Cash paid during the period for: |
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Interest |
$ | $ | ||||||
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Income Taxes |
$ | $ | ||||||
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Cash refunded during the period for: |
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Income Taxes |
$ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
Three Months Ended July 31, 2023 and 2022
(In thousands except share data)
(Unaudited)
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Additional |
Treasury stock |
Accumulated other | ||||||||||||||||||||||||||||||
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Common Stock |
paid in |
Accumulated |
(at cost) |
comprehensive | ||||||||||||||||||||||||||||
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Shares |
Amount |
capital |
Deficit |
Shares |
Amount |
Income (loss) |
Total |
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Balance at April 30, 2023 |
$ | $ | $ | ( |
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) | $ | - | $ | |||||||||||||||||||||
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Contribution of stock to 401(k) plan |
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Stock-based compensation expense |
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Net income |
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Balance at July 31, 2023 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | - | $ | |||||||||||||||||||||
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Additional |
Treasury stock |
Accumulated other |
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Common Stock |
paid in |
Accumulated |
(at cost) |
comprehensive |
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Shares |
Amount |
capital |
Deficit |
Shares |
Amount |
Income (loss) |
Total |
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Balance at April 30, 2022 |
$ | $ | $ | ( |
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Contribution of stock to 401(k) plan |
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Stock-based compensation expense |
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Other comprehensive income, net of tax |
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Net loss |
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Balance at July 31, 2022 |
$ | $ | $ | ( |
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See accompanying notes to condensed consolidated financial statements.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE A – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management of Frequency Electronics, Inc. (the “Company”), the accompanying unaudited condensed consolidated interim financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly, in all material respects, the condensed consolidated financial position of the Company as of July 31, 2023 and the results of its operations, changes in stockholders’ equity for the three months ended July 31, 2023 and 2022, and cash flows for the three months ended July 31, 2023 and 2022. The April 30, 2023 condensed consolidated balance sheet was derived from audited financial statements. These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP’). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated interim financial statements should be read in conjunction with the annual consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2023, filed on July 27, 2023 with the Securities and Exchange Commission (the “Form 10-K”). The results of operations for such interim periods are not necessarily indicative of the operating results for the full fiscal year.
COVID-19 Pandemic, and Other Macroeconomic Factors
On May 5, 2023, the World Health Organization (“WHO”) announced an end to the global health emergency related to the coronavirus originating in Wuhan, China (“COVID-19”). Additionally, on May 11, 2023 the Public Health Emergency declared by the U.S. Department of Health and Human Services expired.
Certain Company vendors continue to deliver materials with longer lead times due to COVID-19 related impacts to their workforces or their supply chains. These delays have impacted the Company’s production schedules, and increased costs associated with procurement of materials and services. The Company continues to monitor these and its other vendors and, if necessary, seek alternative suppliers, or, in certain cases, re-design products using alternative parts and materials.
NOTE B – EARNINGS (LOSS) PER SHARE
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Three months ended July 31, |
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2023 |
2022 |
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Weighted average shares outstanding: |
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Basic EPS shares outstanding (weighted average) |
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Effect of dilutive securities |
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Diluted EPS shares outstanding |
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**
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE C – CONTRACT (LIABILITIES) ASSETS
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July 31, 2023 |
April 30, 2023 |
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Contract assets |
$ | $ | ||||||
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Contract liabilities |
( |
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Contract assets represent revenue recognized on long-term contracts that have not been billed at the balance sheet dates and contract liabilities represent a liability for amounts billed in excess of the revenue recognized, contract liabilities. Amounts are billed to customers pursuant to contract terms. In general, the recorded amounts will be billed and collected or revenue recognized within twelve months of the balance sheet dates. Revenue on these long-term contracts are accounted for over time using the percentage-of-completion (“POC”) method. Fluctuations of contract assets and contract liabilities are due to the timing of funding, amounts billed and revenue recorded. Contract assets increased $
NOTE D – EMPLOYEE BENEFIT PLANS
During the three months ended July 31, 2023, the Company made contributions of
Deferred compensation expense charged to selling and administrative expenses during the three months ended July 31, 2023, were approximately $
NOTE E – INVENTORIES
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July 31, 2023 |
April 30, 2023 |
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Raw Materials and Component Parts |
$ | $ | ||||||
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Work in Progress |
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Finished Goods |
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE F – RIGHT-OF-USE ASSETS AND LEASE LIABILITIES
The Company’s leases primarily represent offices, warehouses, vehicles, manufacturing facilities and Research and Development (“R&D”) facilities which expire at various times through 2029 and are operating leases. Contractual arrangements are evaluated at inception to determine if the agreement contains a lease.
New York lease. In February 2019, the Company entered into an agreement to lease a building to be used as a corporate headquarters office and manufacturing facility in Mitchell Field, NY (“New York lease”). The New York lease expires September 30, 2029 and contains renewal options, early termination, rent abatement, and escalation clauses that are factored into our determination of lease payments when appropriate. We include options to extend or terminate leases in the Right-of-Use (ROU) operating lease asset and liability when it is reasonably certain we will exercise these options. As of July 31, 2023 lease options were not included in the calculation of the ROU operating lease asset and liability. ROU assets and lease liabilities are recorded based on the present value of future lease payments which will factor in certain qualifying initial direct costs incurred as well as any lease incentives that may have been received. Lease expenses for operating lease payments are recognized on a straight-line basis over the lease term.
California lease. In October 2017, the Company entered into an agreement to lease a building to be used as an office and manufacturing facility in Garden Grove, CA (“California Lease”). The California lease expires January 31, 2025 and contains renewal options, early termination, rent abatement, and escalation clauses that are factored into our determination of lease payments when appropriate. We include options to extend or terminate leases in the ROU operating lease asset and liability when it is reasonably certain we will exercise these options. As of July 31, 2023 lease options were not included in the calculation of the ROU operating lease asset and liability. ROU assets and lease liabilities are recorded based on the present value of future lease payments which will factor in certain qualifying initial direct costs incurred as well as any lease incentives that may have been received. Lease expenses for operating lease payments are recognized on a straight-line basis over the lease term.
New Jersey lease. In February 2022, the Company entered into an agreement to lease a building to be used as an office and manufacturing facility in Northvale, NJ (“New Jersey lease”). The New Jersey lease expires January 31, 2025 and contains renewal options, early termination, rent abatement, and escalation clauses that are factored into our determination of lease payments when appropriate. We include options to extend or terminate leases in the ROU operating lease asset and liability when it is reasonably certain we will exercise these options. As of July 31, 2023 lease options were not included in the calculation of the ROU operating lease asset and liability. ROU assets and lease liabilities are recorded based on the present value of future lease payments which will factor in certain qualifying initial direct costs incurred as well as any lease incentives that may have been received. Lease expenses for operating lease payments are recognized on a straight-line basis over the lease term.
The Company elected the practical expedient for short-term leases which allows leases with terms of 12 months or less to be recorded on a straight-line basis over the lease term without being recognized on the consolidated balance sheets.
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Classification |
July 31, 2023 |
April 30, 2023 |
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Assets |
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Operating lease ROU assets |
ROU assets - operating leases |
$ | $ | |||||||
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Liabilities |
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Operating lease liabilities (short-term) |
Operating lease liability - current portion |
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Operating lease liabilities (long-term) |
Operating lease liability - non-current portion |
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Total lease liabilities |
$ | $ | ||||||||
Total operating lease expense was $
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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Fiscal Year Ending April 30, |
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(in thousands) |
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Remainder of 2024 |
$ | |||
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2025 |
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2026 |
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2027 |
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2028 |
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Thereafter |
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Total lease payments |
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Less imputed interest |
( |
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Present value of future lease payments |
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Less current obligations under leases |
( |
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Long-term lease obligations |
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As of July 31, 2023 and 2022, the weighted-average remaining lease term for all operating leases was
NOTE G – SEGMENT INFORMATION
The Company operates under
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| (1) | FEI-NY – operates out of New York and its operations consist principally of precision time and frequency control products used in
The FEI-NY segment also includes the operations of the Company’s wholly owned subsidiary, FEI-Elcom. FEI-Elcom, in addition to its own product line, provides design and technical support for the FEI-NY segment’s communication satellite business. |
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(2) |
FEI-Zyfer – operates out of California and its products incorporate Global Positioning System (GPS) technologies into systems and subsystems for secure communications, both government and commercial, and other locator applications. This segment also provides sales and support for the Company’s wireline telecommunications family of products, including US5G, which are sold in the U.S. market. |
The Company measures segment performance based on total revenues and profits generated by each geographic location rather than on the specific types of customers or end-users. Consequently, the Company determined that the segments indicated above most appropriately reflect the way the Company’s management views the business.
The accounting policies of the two segments are the same as those described in “Note 1. Summary of Accounting Policies” to the consolidated financial statements included in the Form 10-K. The Company evaluates the performance of its segments and allocates resources to them based on operating profit (loss), which is defined as income before investment (expense) income, interest expense, other income (expense), and taxes. All acquired assets, including intangible assets, are included in the assets of the applicable reporting segment.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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Three Months Ended July 31, |
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2023 |
2022 |
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Revenues: |
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FEI-NY |
$ | $ | ||||||
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FEI-Zyfer |
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less intersegment revenues |
( |
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Consolidated revenues |
$ | $ | ||||||
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Operating income (loss): |
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FEI-NY |
$ | $ | ( |
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FEI-Zyfer |
( |
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less intersegment margin |
( |
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Corporate |
( |
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Consolidated operating income (loss) |
$ | $ | ( |
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July 31, 2023 |
April 30, 2023 |
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Identifiable assets: |
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FEI-NY |
$ | $ | ||||||
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FEI-Zyfer |
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less intersegment balances |
( |
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Corporate |
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Consolidated identifiable assets |
$ | $ | ||||||
Total revenue recognized over time as POC and Passage of Title (“POT”) was approximately $
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Three Months Ended July 31, |
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2023 |
2022 |
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POC |
POT |
Total |
POC |
POT |
Total |
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Revenue |
Revenue | Revenue |
Revenue |
Revenue | Revenue | |||||||||||||||||||
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FEI-NY |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
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FEI-Zyfer |
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Intersegment |
( |
) | ( |
) | ( |
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Revenue |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
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Three Months Ended July 31, |
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2023 |
2022 |
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Revenues by product line: |
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Satellite revenue |
$ | $ | ||||||
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Government non-space revenue |
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Other commercial & industrial revenue |
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Consolidated revenues |
$ | $ | ||||||
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE H – INVESTMENT IN MORION, INC.
The Company has an investment in Morion, Inc. (“Morion”), a privately held Russian company, which manufactures high precision quartz resonators and crystal oscillators. The Company has also licensed certain technology to Morion. During the three months ended July 31, 2023 and 2022, the Company did not acquire any product from Morion. During the three months ended July 31, 2023 and 2022, the Company did not receive dividends from Morion,
The Company’s investment consists of
Due to the current Russia-Ukraine conflict and resulting sanctions, the future status of the Company’s equity investment in Morion is uncertain. In response to these conditions, in connection with the preparation of the audited financial statements included in the Form 10-K for the fiscal year ended April 30, 2022, as amended, the Company impaired its investment in Morion in full. The likelihood of future sales to, purchases from, and dividend payments from Morion is remote.
NOTE I – RECENT ACCOUNTING PRONOUNCEMENTS
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under ASU 2017-04, goodwill impairment will be tested by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2022, with early adoption permitted. ASU 2017-04 was adopted, effective May 1, 2023, with no material impact to the consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance is effective for fiscal years beginning after December 15, 2022. ASU 2016-13 was adopted, effective May 1, 2023, with no material impact to the consolidated financial statements.
NOTE J – CREDIT FACILITY
As of July 31, 2023, the Company had no borrowings pursuant to a credit facility. As of April 30, 2023, the Company retired its advisory credit arrangement with UBS Bank USA. Prior to retiring the advisory credit arrangement, no borrowings were made during fiscal 2023.
NOTE K – DEFERRED INCOME TAXES
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future.
As required by the authoritative guidance on accounting for income taxes, we evaluate the realization of deferred tax assets on a jurisdictional basis at each reporting date. We consider all positive and negative evidence, including the reversal of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of recent operations. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets will not be realizable, we establish a valuation allowance. As of July 31, 2023, and April 30, 2023, the Company maintained a full valuation allowance against its deferred tax assets. If these estimates and assumptions change in the future, the Company may be required to adjust its existing valuation allowance resulting in changes to deferred income tax expense.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:
The statements in this quarterly report on Form 10-Q regarding future earnings and operations and other statements relating to the future constitute “forward-looking” statements 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-Q and in Part I, Item 1A (Risk Factors) of the Form 10-K include additional factors that could materially and adversely impact the Company’s business, financial condition and results of operations. Moreover, the Company operates in a very competitive and rapidly changing environment. New factors emerge from time to time and it is not possible for management to predict the impact of all these factors on the Company’s business, financial condition or results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Form 10-Q and any other public statement made by the Company or its management may turn out to be incorrect. The Company expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Critical Accounting Policies and Estimates
The Company believes its most critical accounting policies to be the recognition of revenue and costs on production contracts, and the valuation of inventory. 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 and the market value of its products. Changes in estimates can have a material impact on the Company’s financial position and results of operations. The Company’s significant accounting policies did not change during the three months ended July 31, 2023.
Revenue Recognition
Revenues are reported in operating results predominantly over time using the cost-to-cost method. Under this method, revenue is recorded based upon the ratio that incurred costs bear to total estimated contract costs with related cost of revenues recorded as the costs are incurred. Each month management reviews estimated contract costs through a process of aggregating actual costs incurred and estimating additional costs to completion based upon the current available information regarding labor, outside services, materials, overhead costs, and status of the contract. The effect of any change in the estimated gross margin rate (“GM Rate”) for a contract is reflected in revenues in the period in which the change is known. Provisions for the full amount of anticipated losses on contracts are made in the period in which they become determinable.
Significant judgment is used in evaluating the financial information for certain contracts to determine an appropriate budget and estimated cost. The Company evaluates this information continuously and bases its judgments on historical experience, design specifications, and expected costs for material and labor.
Inventory
In accordance with industry practice, inventoried costs contain amounts relating to contracts and programs with long production cycles, a portion of which will not be realized within one year. Inventory write downs are established for slow-moving materials based on percentage of usage over a ten-year period, obsolete items on a gradual basis over five years with no usage and costs incurred on programs for which production-level orders cannot be determined as probable. Such write-downs are based upon management’s experience and estimates for future business. Any changes arising from revised estimates are reflected in cost of revenues in the period the revision is made.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
RESULTS OF OPERATIONS
The table below sets forth for the three months ended July 31, 2023 and 2022, respectively, the percentage of consolidated revenues represented by certain items in the Company’s condensed consolidated statements of operations or notes to the condensed consolidated financial statements:
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Three Months ended July 31, |
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2023 |
2022 |
|||||||
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Revenues |
||||||||
|
FEI-NY |
76.5 |
% |
83.6 |
% |
||||
|
FEI-Zyfer |
26.3 | 21.1 | ||||||
|
Less intersegment revenues |
(2.8 | ) | (4.7 | ) | ||||
| 100.0 | 100.0 | |||||||
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Cost of revenues |
60.8 | 100.1 | ||||||
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Gross margin |
39.2 | (0.1 | ) | |||||
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Selling and administrative expenses |
18.6 | 24.3 | ||||||
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Research and development expenses |
4.1 | 13.5 | ||||||
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Operating income (loss) |
16.5 | (37.9 | ) | |||||
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Other expense, net |
(0.1 | ) | (0.1 | ) | ||||
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Provision for income taxes |
0.1 | 0.0 | ||||||
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Net income (loss) |
16.5 |
% |
(38.0 |
)% |
||||
Revenues
|
Three months ended July 31, |
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|
(in thousands) |
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|
Segment |
2023 |
2022 |
Change |
|||||||||||||
|
FEI-NY |
$ | 9,490 | $ | 6,854 | $ | 2,636 | 38.5 |
% |
||||||||
|
FEI-Zyfer |
3,267 | 1,732 | 1,535 | 88.6 | ||||||||||||
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Intersegment revenues |
(349 | ) | (382 | ) | 33 | (8.6 | ) | |||||||||
| $ | 12,408 | $ | 8,204 | $ | 4,204 | 51.2 |
% |
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For the three months ended July 31, 2023, revenues from commercial and U.S. Government communication satellite programs accounted for approximately 39% of consolidated revenues compared to approximately 42% of consolidated revenues during this same period in the prior fiscal year. Revenues are recognized primarily over time under the POC method. Revenues from the satellite market are recorded in the FEI-NY segment. Revenues from non-space U.S. Government/Department of Defense (“DOD”) customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, accounted for approximately 55% of consolidated revenues for the three months ended July, 31, 2023 compared to approximately 50% of consolidated revenue during the same period in the prior fiscal year. Other commercial and industrial revenues for the three months ended July 31, 2023 accounted for approximately 5% of consolidated revenue compared to 8% in the same period of the prior fiscal year. The increase in revenue for the three months ended July 31, 2023 was in both segments and primarily related to government non-space programs.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Gross Margin
|
Three Months ended July 31, |
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(in thousands) |
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2023 |
2022 |
Change |
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| $ | 4,868 | $ | (5 | ) | $ | 4,873 | ||||||
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GM Rate |
39.2 |
% |
(0.1 |
)% |
||||||||
For the three months ended July 31, 2023, gross margin and GM Rate increased compared to the same period in the prior fiscal year. The gross margin dollars increased as a direct result of the increase in revenue. The GM Rate increased significantly due to two primary factors. First, many of the technical challenges faced in the early part of last fiscal year have been resolved and, as a result, the related programs are now moving forward. Second, during the three months ended July 31, 2023, there were one-time contractual and other adjustments that also benefited the GM Rate by approximately 8%.
Selling, General, and Administrative Expenses
|
Three Months ended July 31, |
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(in thousands) |
||||||||||||||
|
2023 |
2022 |
Change |
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| $ | 2,302 | $ | 1,992 | $ | 310 | 15.6 |
% |
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For the three months ended July 31, 2023 and 2022, selling, general, and administrative (“SG&A”) expenses were approximately 19% and 24%, respectively, of consolidated revenues. The percentage of consolidated revenue decreased 5% due to an increase in sales for the three months ended July 31, 2023 as compared to the three months ended July 31, 2022. The increase in SG&A expenses for the three months ended July 31, 2023 as compared to the prior year period was largely due to an increase in payroll and associated costs.
Research and Development Expenses
|
Three Months ended July 31, |
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|
(in thousands) |
||||||||||||||
|
2023 |
2022 |
Change |
||||||||||||
| $ | 506 | $ | 1,110 | $ | (604 | ) | (54.4 |
)% |
||||||
R&D expenditures represent investments intended to keep the Company’s products at the leading edge of time and frequency technology and enhance future competitiveness. The decrease in R&D expenditures for the three months ended July 31, 2023, was primarily due to a shift of employees to production orders in order to meet schedule. The Company plans to continue to invest in R&D in the future to keep its products at the state of the art.
Operating Income (Loss)
|
Three Months ended July 31, |
||||||||||
|
(in thousands) |
||||||||||
|
2023 |
2022 |
Change |
||||||||
| $ | 2,060 | $ | (3,107 | ) | $ | 5,167 | ||||
For the three months ended July 31, 2023, operating income increased due to a combination of increased revenue and gross margin, and the effects of certain cost cutting measures instituted by management beginning in fiscal year 2023.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Other Income (Expense), net
|
Three Months ended July 31, |
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(in thousands) |
||||||||||||||||
|
2023 |
2022 |
Change |
||||||||||||||
|
Investment income |
$ | 20 | $ | 36 | $ | (16 | ) | (44.4 |
)% |
|||||||
|
Interest expense |
(31 | ) | (45 | ) | 14 | (31.1 |
)% |
|||||||||
| $ | (11 | ) | $ | (9 | ) | $ | (2 | ) | 22.2 |
% |
||||||
Other income (expense), net is derived from various sources. The income can come from reclaiming of metal, refunds, interest on deferred trust assets, or the sale of a fixed asset. Interest expense is related to the deferred compensation payments made to retired employees.
Income Tax Provision
|
Three Months ended July 31, |
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|
(in thousands) |
||||||||||
|
2023 |
2022 |
Change |
||||||||
| $ | 7 | $ | 1 | $ | 6 | |||||
|
Three Months ended July 31, |
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|
2023 |
2022 |
|||||||
|
Effective tax rate on pre-tax book loss: |
0.3 |
% |
0 |
% |
||||
The estimated annual effective tax rate for the fiscal year ending April 30, 2024 is 0%. This calculation reflects estimated income tax expense based on our current year annual pretax income forecast which is offset by the estimated change in the current year valuation allowance. The Company maintains a full valuation allowance against its deferred tax assets.
For the three months ended July 31, 2023, the Company recorded an income tax provision of $6,894 primarily related to state income taxes and discrete income tax provision related to an accrual of interest for unrecognized tax benefits. For the three months ended July 31, 2022, the Company recorded an income tax provision of $1,000.
The effective tax rate for the three months ended July 31, 2023 was an income tax provision of 0.3% on pretax income of $2.0 million compared to an income tax provision of (0.0)% on pretax loss of $3.1 million in the comparable prior fiscal year period. The effective tax rate for the three months ended July 31, 2023 differs from the U.S. federal statutory rate of 21% primarily due to domestic losses for which the Company is not recognizing an income tax benefit.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
The Inflation Reduction Act of 2022 (the “Act”) was signed into U.S. law on August 16, 2022. The Act includes various tax provisions, including an excise tax on stock repurchases, expanded tax credits for clean energy incentives, and a corporate alternative minimum tax that generally applies to U.S. corporations with average adjusted annual financial statement income over a three-year period in excess of $1 billion. The Company does not expect the Act to materially impact its consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s consolidated balance sheets continue to reflect a strong working capital position of approximately $23.4 million at July 31, 2023 and $21.0 million at April 30, 2023. Included in working capital at July 31, 2023 and April 30, 2023 was $9.1 million and $12.0 million, respectively, of cash and cash equivalents. The Company’s current ratio was 1.9 to 1 at July 31, 2023 compared to 1.8 to 1 as of April 30, 2023.
Net cash used in operating activities for the three months ended July 31, 2023 and 2022 was approximately $2.8 million and $3.6 million, respectively. The increase in operating cash flow in the first three months of fiscal 2024 was mainly due to operating income, offset by an increase in inventory, accounts receivable, and contract assets. For the three months ended July 31, 2023 and 2022, the Company incurred approximately $1.5 million and $816,000, respectively, of non-cash operating expenses including amortization of ROU assets, loss provision accrual, depreciation and amortization, inventory net realizable value adjustments, deferred compensation, and accruals for employee benefit programs.
Net cash used in investing activities for the three months ended July 31, 2023 and 2022 was approximately $187,000 and $741,000, respectively. During the three months ended July 31, 2023, no marketable securities were sold or redeemed compared to $1.0 million for the same period of fiscal year 2023. During the three months ended July 31, 2023 no marketable securities were purchased compared to $1.3 million for the same period of fiscal year 2023. The Company acquired property, plant, and equipment in the amount of approximately $187,000 and $465,000 for the three months ended July 31, 2023 and 2022, respectively.
There was no financing activities for the three months ended July 31, 2023 or the three months ended July 31, 2022.
The Company has been authorized by its Board of Directors to repurchase up to $5 million worth of shares of its common stock when appropriate opportunities arise. As of July 31, 2023, the Company has repurchased approximately $4 million of its common stock out of the $5 million authorization, the majority of which have since been reissued. For the three months ended July 31, 2023 and 2022 there were no repurchases of shares.
The Company will continue to expend resources for R&D to develop, improve and acquire products for space applications, guidance and targeting systems, and communication systems that management believes will result in future growth and profitability. The Company anticipates securing additional customer funding for a portion of its R&D activities and will allocate internal funds depending on market conditions and identification of new opportunities. The Company expects internally generated cash will be adequate to fund these R&D efforts. The Company may also pursue acquisitions to expand its range of products and may use internally generated cash and external funding in connection with such acquisitions.
As of July 31, 2023, the Company’s consolidated funded backlog was approximately $52 million compared to $57 million at April 30, 2023, the end of fiscal year 2023. Approximately 79% of this backlog is expected to be realized in the next twelve months. The Company excludes from backlog any contracts or awards for which it has not received authorization to proceed. On fixed price contracts, the Company excludes any unfunded portion. Over time, as partially funded contracts become fully funded, the Company will add the additional funding to its backlog. The backlog is subject to change for various reasons, including possible cancellation of orders, change orders, terms of the contracts and other factors beyond the Company’s control. Accordingly, the backlog is not necessarily indicative of future revenues or profits (losses) which may be realized when the results of such contracts are reported.
The Company believes that its liquidity is adequate to meet its short-term operating and investment needs through at least September 14, 2024 and its long-term operation and investment needs for the foreseeable future thereafter.
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
(Continued)
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable to smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on their evaluation, the Company’s chief executive officer and chief financial officer have concluded that, as of July 31, 2023, the Company’s disclosure controls and procedures were effective at a reasonable assurance level.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended July 31, 2023 that has materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1A. Risk Factors
As disclosed in “Item 1A. Risk Factors” in the Form 10-K, there are a number of risks and uncertainties that could have a material adverse effect on the Company’s business, financial position, results of operations and/or cash flows. There are no material updates or changes to the Company’s risk factors since the filing of the Form 10-K.
Item 6. Exhibits
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31.1 - |
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31.2 - |
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32 - |
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101- |
The following materials from the Frequency Electronics, Inc. Quarterly Report on Form 10-Q for the quarter ended July 31, 2023 formatted in eXtensible Business Reporting Language (XBRL): (i) Cover Page, (ii) Condensed Consolidated Balance Sheets, (iii) Condensed Consolidated Statements of Operations and Comprehensive Loss, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Changes in Stockholders’ Equity and (vi) Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within Inline XBRL document. |
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104- |
Cover Page Interaction Data File (formatted as inline XBRL and contained in Exhibit 101). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FREQUENCY ELECTRONICS, INC.
Dated: September 14, 2023
By: /s/ Thomas McClelland
Thomas McClelland
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Steven L. Bernstein
Steven L. Bernstein
Chief Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer)
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Thomas McClelland, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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; and
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.
/s/ Thomas McClelland September 14, 2023
Thomas McClelland
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Steven L. Bernstein, certify that
1. I have reviewed this quarterly report on Form 10-Q 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; and
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.
/s/ Steven L. Bernstein September 14, 2023
Steven L. Bernstein
Chief Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer)
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Certification of CEO
In connection with the Quarterly Report of Frequency Electronics, Inc. (the “Company”) on Form 10-Q for the period ended July 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas McClelland, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; 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/ Thomas McClelland September 14, 2023
Thomas McClelland
President and Chief Executive Officer
******************
Certification of CFO
In connection with the Quarterly Report of Frequency Electronics, Inc. (the “Company”) on Form 10-Q for the period ended July 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven L. Bernstein, Chief Financial Officer, Secretary and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; 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 September 14, 2023
Steven L. Bernstein
Chief Financial Officer, Secretary and Treasurer
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.
This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.