freqelec20230131

freqelec20230131_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the Quarterly Period ended January 31, 2023

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

For the transition period from to

Commission File No. 1-8061

FREQUENCY ELECTRONICS, INC.

(Exact name of Registrant as specified in its charter)

Delaware	11-1986657
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y.	11553
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: 516-794-4500

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock (par value $1.00 per share)	FEIM	NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller Reporting Company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding of registrant’s Common Stock, par value $1.00 per share, as of March 14, 2023 – 9,353,440

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

TABLE OF CONTENTS

	Page No.
Part I. Financial Information:

Item 1 - Financial Statements:

Condensed Consolidated Balance Sheets – January 31, 2023 (unaudited) and April 30, 2022 (as revised)	3

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Three and Nine Months Ended January 31, 2023 and 2022 (unaudited)	4

Condensed Consolidated Statements of Cash Flows Nine Months Ended January 31, 2023 and 2022 (unaudited)	5

Condensed Consolidated Statements of Changes in Stockholders’ Equity Three and Nine Months Ended January 31, 2023 and 2022 (unaudited)	6-7

Notes to Condensed Consolidated Financial Statements (unaudited)	8-15

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	16-22

Item 3 - Quantitative and Qualitative Disclosures About Market Risk	23

Item 4 - Controls and Procedures	23

Part II. Other Information:

Item 1A – Risk Factors	25

Item 6 - Exhibits	25

Signatures	26

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands except par value)

	January 31,			April 30,
	2023			2022
	(UNAUDITED)			(As Revised)
ASSETS:
Current assets:
Cash and cash equivalents	$	12,854		$	11,561
Marketable securities		-			9,964
Accounts receivable, net of allowance for doubtful accounts of $111 at January 31, 2023 and April 30, 2022		5,129			4,291
Contract assets		8,266			8,857
Inventories, net		20,562			19,906
Prepaid income taxes		98			269
Prepaid expenses and other		1,056			1,162
Total current assets		47,965			56,010
Property, plant and equipment, at cost, net of accumulated depreciation and amortization		7,733			8,564
Goodwill		617			617
Cash surrender value of life insurance		10,295			9,855
Other assets		888			909
Right-of-Use assets – operating leases		7,745			8,805
Total assets	$	75,243		$	84,760

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable – trade	$	1,556		$	1,080
Accrued liabilities		3,396			3,696
Loss provision accrual		2,678			4,243
Operating lease liability, current portion		1,751			1,744
Contract liabilities		18,737			11,098
Total current liabilities		28,118			21,861
Deferred compensation		8,357			8,730
Deferred taxes		8			8
Operating lease liability – non-current		6,261			7,353
Other liabilities		125			120
Total liabilities		42,869			38,072
Commitments and contingencies
Stockholders’ equity:
Preferred stock - $1.00 par value; authorized 600 shares, no shares issued		-			-
Common stock - $1.00 par value; authorized 20,000 shares, 9,354 shares issued and 9,353 shares outstanding at January 31, 2023; 9,298 shares issued and 9,297 shares outstanding at April 30, 2022		9,354			9,298
Additional paid-in capital		48,893			57,956
Accumulated deficit		(25,867	)		(20,120	)
Common stock reacquired and held in treasury - at cost (1 share at January 31, 2023 and April 30, 2022)		(6	)		(6	)
Accumulated other comprehensive income		-			(440	)
Total stockholders’ equity		32,374			46,688
Total liabilities and stockholders’ equity	$	75,243		$	84,760

See accompanying notes to condensed consolidated financial statements.

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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands except per share data)

(Unaudited)

	Three Months Ended January 31,						Nine Months Ended January 31,
	2023			2022			2023			2022
Condensed Consolidated Statements of Operations
Revenues	$	10,620		$	12,245		$	27,773		$	38,136
Cost of revenues		7,155			9,005			23,963			26,744
Gross margin		3,465			3,240			3,810			11,392
Selling and administrative expenses		2,357			2,832			6,383			9,637
Research and development expenses		783			1,129			2,492			3,861
Operating income (loss)		325			(721	)		(5,065	)		(2,106	)

Other income (expense):
Investment (expense) income, net		(625	)		4			(600	)		195
Interest expense		(18	)		(19	)		(81	)		(59	)
Other income (expense), net		5			2			5			160
Loss before provision for income taxes		(313	)		(734	)		(5,741	)		(1,810	)
Provision for income taxes		3			1			6			3
Net loss	$	(316	)	$	(735	)	$	(5,747	)	$	(1,813	)

Net loss per common share:
Basic and diluted loss per share	$	(0.03	)	$	(0.08	)	$	(0.62	)	$	(0.20	)

Weighted average shares outstanding:
Basic and diluted		9,349			9,279			9,328			9,257

Condensed Consolidated Statements of Comprehensive Income (Loss)
Net loss	$	(316	)	$	(735	)	$	(5,747	)	$	(1,813	)

Unrealized gain (loss) on marketable securities:
Change in market value of marketable securities before reclassification, net of tax		388			(211	)		(179	)		(283	)
Reclassification adjustment for realized gains (losses) included in net income, net of tax		603			2			619			(4	)
Total unrealized gain (loss) on marketable securities, net of tax		991			(209	)		440			(287	)

Comprehensive income (loss)	$	675		$	(944	)	$	(5,307	)	$	(2,100	)

See accompanying notes to condensed consolidated financial statements.

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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended January 31,
	2023			2022
Cash flows from operating activities:
Net loss	$	(5,747	)	$	(1,813	)
Non-cash charges to earnings		2,667			2,870
Net changes in operating assets and liabilities		5,028			2,913
Net cash provided by operating activities		1,948			3,970

Cash flows from investing activities:
Proceeds on redemption of marketable securities		10,967			1,739
Purchase of marketable securities		(1,382	)		(1,846	)
Purchase of fixed assets and other assets		(886	)		(1,534	)
Net cash provided by (used in) investing activities		8,699			(1,641	)

Cash flows from financing activities:
Payment of Dividend		(9,354	)		-
Net cash used in financing activities		(9,354	)		-


Net increase in cash and cash equivalents		1,293			2,329

Cash and cash equivalents at beginning of period		11,561			9,807

Cash and cash equivalents at end of period	$	12,854		$	12,136


Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	54		$	59
Income taxes	$	-			15

Cash refunded during the period for:
Income taxes	$	176		$	-

See accompanying notes to condensed consolidated financial statements.

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FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Three and Nine Months Ended January 31, 2023

(In thousands except share data)

(Unaudited)

					Additional						Treasury stock					Accumulated other
	Common Stock				paid in			Accumulated			(at cost)					comprehensive
	Shares		Amount		capital			Deficit			Shares		Amount			Income (loss)			Total
Balance at April 30, 2022		9,298,178	$	9,298	$	57,956		$	(20,120	)		1,375	$	(6	)	$	(440	)	$	46,688
Contribution of stock to 401(k) plan		16,708		17		105			-			-		-			-			122
Stock-based compensation expense		-		-		(25	)		-			-		-			-			(25	)
Other comprehensive income, net of tax		-		-		-			-			-		-			14			14
Net loss		-				-			(3,117	)		-		-			-			(3,117	)
Balance at July 31, 2022		9,314,886	$	9,315	$	58,036		$	(23,237	)		1,375	$	(6	)	$	(426	)	$	43,682
Contribution of stock to 401(k) plan		18,632		18		89			-			-		-			-			107
Stock-based compensation expense		750		1		28			-			-		-			-			29
Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price																				-
Other comprehensive loss, net of tax		-		-		-						-		-			(565	)		(565	)
Net loss		-				-			(2,314	)		-		-			-			(2,314	)
Balance at October 31, 2022		9,334,268	$	9,334	$	58,153		$	(25,551	)		1,375	$	(6	)	$	(991	)	$	40,939
Contribution of stock to 401(k) plan		7,597		8		46			-			-		-			-			54
Stock-based compensation expense		12,076		12		48			-			-		-			-			60
Other comprehensive income, net of tax		-		-		-						-		-			991			991
Dividends paid						(9,354	)		-											(9,354	)
Net loss		-				-			(316	)		-		-			-			(316	)
Balance at January 31, 2023		9,353,941	$	9,354	$	48,893		$	(25,867	)		1,375	$	(6	)	$	-		$	32,374

See accompanying notes to condensed consolidated financial statements.

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FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Three and Nine Months Ended January 31, 2022

(In thousands except share data)

(Unaudited)

					Additional						Treasury stock					Accumulated other
	Common Stock				paid in			Accumulated			(at cost)					comprehensive
	Shares		Amount		capital			Deficit			Shares		Amount			Income (loss)			Total
Balance at April 30, 2021		9,226,268	$	9,226	$	57,355		$	(11,457	)		1,375	$	(6	)	$	291		$	55,409
Contribution of stock to 401(k) plan		13,251		13		117			-			-		-			-			130
Stock-based compensation expense		7,500		8		61			-			-		-			-			69
Other comprehensive income, net of tax		-		-		-			-			-		-			79			79
Net loss		-		-		-			(1,575	)		-		-			-			(1,575	)
Balance at July 31, 2021		9,247,019	$	9,247	$	57,533		$	(13,032	)		1,375	$	(6	)	$	370		$	54,112
Contribution of stock to 401(k) plan		10,779		11		100			-			-		-			-			111
Stock-based compensation expense		250		-		66			-			-		-			-			66
Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price		6,278		6		(6	)		-			-		-			-			-
Other comprehensive loss, net of tax		-		-		-			-			-		-			(157	)		(157	)
Net income		-		-		-			497			-		-			-			497
Balance at October 31, 2021		9,264,326	$	9,264	$	57,693		$	(12,535	)		1,375	$	(6	)	$	213		$	54,629
Contribution of stock to 401(k) plan		7,045		7		63			-			-		-			-			70
Stock-based compensation expense		7,953		8		83			-			-		-			-			91
Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price		5,192		6		(5	)		-			-		-			-			1
Other comprehensive loss, net of tax		-		-		-			-			-		-			(209	)		(209	)
Net loss		-		-		-			(735	)		-		-			-			(735	)
Balance at January 31, 2022		9,284,516	$	9,285	$	57,834		$	(13,270	)		1,375	$	(6	)	$	4		$	53,847

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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 January 31, 2023 and the results of its operations, changes in stockholders’ equity for the three and nine months ended January 31, 2023 and 2022, and cash flows for the nine months ended January 31, 2023 and 2022. The April 30, 2022 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 and Amended Annual Report on Form 10-K and Form 10-K/A for the fiscal year ended April 30, 2022, filed on July 14, 2022 and December 20, 2022, respectively, with the Securities and Exchange Commission (the “Form 10-K” and the “Form 10-K/A”). The results of operations for such interim periods are not necessarily indicative of the operating results for the full fiscal year.

COVID-19 Pandemic, and Other Macroeconomic Factors

The full impact of the COVID-19 pandemic continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic may ultimately have on the Company’s financial condition, liquidity, and future financial results. For three and the nine months ended January 31, 2023, the Company has been impacted by employee absenteeism related to direct or indirect effects of the COVID-19 pandemic, delays in the receipt of anticipated new contracts from customers administratively affected by the pandemic and limited availability or delivery delays of parts and materials from vendors affected by the pandemic. FEI-Zyfer’s operations were particularly affected as evidenced by decreases in sales and gross margin during fiscal year 2022, which continued during the three and nine months ended January 31, 2023. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the continuing changing dynamics of the COVID-19 pandemic the Company is not able to estimate the potential adverse effects on its operations, financial condition, or liquidity for the remainder of fiscal year 2023. The Company has returned to essentially normal operations at its various locations; however, the Company continues to follow federal and state guidelines with an emphasis on employee safety.

The Company may continue to face future COVID-19 related risks, and risks resulting from geopolitical conflicts. The Company is dependent on its workforce to design and manufacture its products. If significant portions of the Company’s workforce are unable to work effectively, or if the U.S. Government, and/or other customers or supplier operations are curtailed due to illness, quarantines, government actions, facility closures, or other restrictions, the Company’s operations may be negatively impacted. If faced with any of these factors, the Company may be unable to perform fully on its contracts and costs may increase. These cost increases may not be fully recoverable or adequately covered by insurance. For example, in the latter part of fiscal year 2021, the Company experienced some operation disruptions due to the need to vacate certain areas of the facilities for cleaning and disinfecting resulting from employees being potentially exposed to COVID-19 or following positive COVID-19 test results. Also, certain Company vendors have been unable to deliver materials on time due to COVID-19 related impacts to their workforces or their supply chains. These delays impacted the Company’s production costs and schedules. Vendor delivery performance is being closely monitored and alternate sources of supply are generally available and, in some cases, are being established.

In addition to the impacts of the COVID-19 pandemic, the Company’s financial condition, liquidity, and future financial results may also be affected by other macroeconomic factors. For example, due to continuing geopolitical circumstances resulting in increased inflation, energy and commodity prices may continue escalating which may adversely affect the Company’s financial results.

NOTE B – EARNINGS (LOSS) PER SHARE

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

Periods ended January 31,

Three months

Nine months

2023

2022

2023

2022

Weighted average shares outstanding:

Basic EPS Shares outstanding (weighted average)

9,349,198

9,278,840

9,327,828

9,257,107

Effect of Dilutive Securities

Diluted EPS Shares outstanding

9,349,198

9,278,840

9,327,828

9,257,107

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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

** For the three and nine months ended January 31, 2023 and 2022, dilutive securities are excluded from the calculation of earnings per share since the inclusion of such shares would be antidilutive due to the net loss for those periods. The exercisable shares excluded for the three and nine months ended January 31, 2023 was 243,625 options, respectively. The exercisable shares excluded for the three and nine months ended January 31, 2022 was 223,000 options, respectively.

NOTE C – CONTRACT (LIABILITIES) ASSETS, NET

At January 31, 2023 and April 30, 2022, contract (liabilities) assets, net, consisted of the following:

	January 31, 2023			April 30, 2022
				(As Revised)
	(In thousands)
Contract Assets	$	8,266		$	8,857
Contract Liabilities		(18,737	)		(11,098	)
Net (liability) asset	$	(10,471	)	$	(2,241	)

Such amounts represent revenue recognized on long-term contracts that have not been billed at the balance sheet dates or represent a liability for amounts billed in excess of the revenue recognized. Amounts are billed to customers pursuant to contract terms. In general, the recorded amounts will be billed and collected or revenue recognized within twelve months of the balance sheet dates. Revenue on these long-term contracts are accounted for on the percentage-of-completion (“POC”) basis. During the three and nine months ended January 31, 2023, revenue recognized under POC contracts was approximately $10.2 million and $26.8 million, respectively. During the three and nine months ended January 31, 2022, revenue recognized under POC contracts was approximately $11.8 million and $36.4 million, respectively. If contract losses are anticipated, a loss provision is recorded for the full amount of such losses when they are determinable. Contract losses of approximately $537,000, offset by a loss reduction of approximately $1.0 million, mostly related to additional funding, were recorded for the three months ended January 31, 2023. Contract losses of approximately $1.5 million were recorded for the nine months ended January 31, 2023. Contract losses of approximately $171,000 and $218,000 were recorded for the three and nine months ended January 31, 2022, respectively.

NOTE D –STOCK TRANSACTIONS

During the three and nine-month periods ended January 31, 2023, the Company made contributions of 7,597 and 42,937 shares, respectively, of its common stock to the Company’s profit-sharing plan and trust under Section 401(k) of the Internal Revenue Code. Such contributions are in accordance with the Company’s discretionary match of employee voluntary contributions to this plan.

SEC Form 10-Q filed by Frequency Electronics Inc.