What changed in this filing

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Item 1. Financial Statements

2021-03-12 compared with 2020-12-11 · 339 added, 112 removed, 365 unchanged (55% of the section changed)

7 unchanged sentences

Marketable securities

Accounts receivable, net of allowance for doubtful accounts of $183 at October 31, 2020 and April 30, 2020

Accounts receivable, net of allowance for doubtful accounts of $183 at January 31, 2021 and April 30, 2020

Costs and estimated earnings in excess of billings, net

8 unchanged sentences

Current liabilities:

Line of credit

Accounts payable – trade

13 unchanged sentences

Common stock - $1.00 par value;

authorized 20,000 shares, 9,176 shares issued and 9,175 shares outstanding at October 31, 2020;

authorized 20,000 shares, 9,194 shares issued and 9,193 shares outstanding at January 31, 2021;

9,164 shares issued and 9,121 shares outstanding at April 30, 2020

1 unchanged sentence

Accumulated deficit

Common stock reacquired and held in treasury - at cost (1 share at October 31, 2020 and 43 shares at April 30, 2020)

Common stock reacquired and held in treasury - at cost (1 share at January 31, 2021 and 43 shares at April 30, 2020)

Accumulated other comprehensive income

4 unchanged sentences

and SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands except per share data)

Six Months Ended October 31,

Three Months Ended October 31,

Three Months Ended January 31,

Nine Months Ended January 31,

Condensed Consolidated Statements of Operations

Cost of revenues

Gross margin (loss)

Selling and administrative expenses

Research and development expenses

Operating (loss) income

Operating loss

Other income (expense):

2 unchanged sentences

Other income (expense), net

Income (loss) before provision for income taxes

Loss before provision for income taxes

Provision for income taxes

Net income (loss)

Net income (loss) per common share:

Basic and diluted earnings (loss) per share

Net loss per common share:

Basic and diluted loss per share

Weighted average shares outstanding:

Condensed Consolidated Statements of Comprehensive Income (Loss)

Net income (loss)

Unrealized gain (loss) on marketable securities:

Basic and Diluted

Condensed Consolidated Statements of Comprehensive Loss

Unrealized (loss) gain on marketable securities:

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

1 unchanged sentence

Total unrealized (loss) gain on marketable securities, net of tax

Comprehensive income (loss)

Comprehensive loss

See accompanying notes to condensed consolidated financial statements.

3 unchanged sentences

(In thousands)

Six Months Ended October 31,

Nine Months Ended January 31,

Cash flows from operating activities:

Net income (loss)

Non-cash charges to earnings

Net changes in operating assets and liabilities

Net cash provided by operating activities

Net cash provided by (used in) operating activities

Cash flows from investing activities:

6 unchanged sentences

Proceeds from UBS line of credit

Repayment of UBS line of credit

Net cash used in financing activities

Net decrease in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

7 unchanged sentences

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Three and Six Months Ended October 31, 2020

Three and Nine Months Ended January 31, 2021

(In thousands except share data)

4 unchanged sentences

Balance at April 30, 2020

Contribution of stock to 401(k) plan

Stock-based compensation expense

Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price

Other comprehensive income, net of tax

Net income (loss)

Contribution of stock to

compensation expense

Exercise of stock options

and stock appreciation

rights - net of shares

tendered for exercise price

Other comprehensive

income, net of tax

Balance at July 31, 2020

Contribution of stock to 401(k) plan

Stock-based compensation expense

Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price

Other comprehensive income, net of tax

Net income (loss)

Contribution of stock to

compensation expense

Exercise of stock options

and stock appreciation

rights - net of shares

tendered for exercise price

Other comprehensive

loss, net of tax

Balance at October 31, 2020

Contribution of stock to

compensation expense

Exercise of stock options

and stock appreciation

rights - net of shares

tendered for exercise price

Other comprehensive

loss, net of tax

Balance at January 31, 2021

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Three and Six Months Ended October 31, 2019

Three and Nine Months Ended January 31, 2020

(In thousands except share data)

4 unchanged sentences

Balance at April 30, 2019

Contribution of stock to 401(k) plan

Stock-based compensation expense

Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price

Other comprehensive income, net of tax

Contribution of stock to

compensation expense

Exercise of stock options

and stock appreciation

rights - net of shares

tendered for exercise price

Other comprehensive

income, net of tax

Balance at July 31, 2019

Contribution of stock to 401(k) plan

Stock-based compensation expense

Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price

Other comprehensive income, net of tax

Contribution of stock to

compensation expense

Exercise of stock options

and stock appreciation

rights - net of shares

tendered for exercise price

Other comprehensive

income, net of tax

Balance at October 31, 2019

Contribution of stock to

compensation expense

Exercise of stock options

and stock appreciation

rights - net of shares

tendered for exercise price

Other comprehensive

income, net of tax

Balance at January 31, 2020

See accompanying notes to condensed consolidated financial statements.

4 unchanged sentences

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 consolidated financial position of the Company as of October 31, 2020 and the results of its operations, changes in Stockholders’ Equity for the three and six months ended October 31, 2020 and 2019, and cash flows for the six months ended October 31, 2020 and 2019.

(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 consolidated financial position of the Company as of January 31, 2021 and the results of its operations, changes in Stockholders’ Equity for the three and nine months ended January 31, 2021 and 2020, and cash flows for the nine months ended January 31, 2021 and 2020.

The April 30, 2020 condensed consolidated balance sheet was derived from audited financial statements.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“U.S.

These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S.

GAAP have been condensed or omitted.

2 unchanged sentences

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.

1 unchanged sentence

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.

For the three months ended January 31, 2021, the Company was impacted by employee absenteeism related to direct or indirect effects of the COVID pandemic and delays in the receipt of anticipated new contracts from customers administratively affected by the pandemic, particularly in Zyfer’s operations as evidenced by the related decrease in sales and gross margin during the quarter.

Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce.

1 unchanged sentence

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.

The Company is dependent on its workforce to design and manufacture its products.

If significant portions of the Company’s workforce are unable to work effectively, or if the U.S.

Government, state and/or other customers or supplier operations are curtailed due to illness, quarantines, government actions, facility closures, or other restrictions in connection with the COVID-19 pandemic, the Company’s operations may 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.

In this scenario, 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.

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.

The Company did experience some disruption due to the need to vacate certain areas of the facilities as some employees had been potentially exposed to COVID or following positive COVID test results to allow for cleaning and disinfecting.

Certain of the Company’s vendors have been unable to deliver materials on time due to the COVID-19 outbreak.

8 unchanged sentences

NOTE B – EARNINGS PER SHARE

Reconciliation of the weighted average shares outstanding for basic and diluted loss per share for the six and three months ended October 31, 2020 and 2019, respectively, were as follows:

Periods ended October 31,

Reconciliation of the weighted average shares outstanding for basic and diluted loss per share for the three and nine months ended January 31, 2021 and 2020, respectively, were as follows:

Periods ended January 31,

Weighted average shares outstanding:

2 unchanged sentences

Diluted EPS Shares outstanding

**For the six and three-month periods ended October 31, 2019 dilutive securities are excluded from the calculation of earnings per share since the inclusion of such shares would be antidilutive due to the net loss for those periods.

The exercisable shares excluded for the three and six months ended October 31, 2020 are 303,000 and 436,000 options, respectively.

The exercisable shares excluded as of October 31, 2019 are 178,000 options for both periods.

The effect of dilutive securities would have been 239,866 options and 230,670 options for the six and three-month periods ended October 31, 2019, respectively.

**For the three and nine-month periods ended January 31, 2021 and 2020 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, 2021 are 229,000 and 331,000 options, respectively.

The effect of dilutive securities would have been 74,684 options and 59,154 options for the three- and nine-month periods ended January 31, 2021, respectively.

NOTE C – COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS, NET

At October 31, 2020 and April 30, 2020, costs and estimated earnings in excess of billings, net, consisted of the following:

October 31, 2020

At January 31, 2021 and April 30, 2020, costs and estimated earnings in excess of billings, net, consisted of the following:

January 31, 2021

April 30, 2020

4 unchanged sentences

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.

In general, the recorded amounts will be billed and collected and revenue recognized within twelve months of the balance sheet date.

Revenue on these long-term contracts is accounted for on the percentage of completion (“POC”) basis.

During the six and three months ended October 31, 2020, revenue recognized under POC contracts was approximately $24.6 million and $12.9 million, respectively.

During the six and three months ended October 31, 2019, revenue recognized under POC contracts was approximately $19.1 million and $7.7 million, respectively.

During the three and nine months ended January 31, 2021, revenue recognized under POC contracts was approximately $10.8 million and $35.6 million, respectively.

During the three and nine months ended January 31, 2020, revenue recognized under POC contracts was approximately $8.5 million and $28.5 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.

Contract losses of approximately $731,000 and $121,000 were recorded for the six and three months ended October 31, 2020, respectively.

Contract losses recognized for the six and three months ended October 31, 2019 were approximately $1.9 million and $1.6 million, respectively.

Contract losses of approximately $144,000 and $876,000 were recorded for the three and nine months ended January 31, 2021, respectively.

Contract losses recognized for the three and nine months ended January 31, 2020 were approximately $290,000 and $2.4 million, respectively.

NOTE D – TREASURY STOCK TRANSACTIONS

During the six month period ended October 31, 2020, the Company made contributions of 24,422 shares of its common stock and common stock held in treasury to the Company’s profit-sharing plan and trust under Section 401(k) of the Internal Revenue Code.

During the nine-month period ended January 31, 2021, the Company made contributions of 30,538 shares of its common stock and common stock held in treasury to the Company’s profit-sharing plan and trust under Section 401(k) of the Internal Revenue Code.

Commencing in the second quarter of the current fiscal year the Company began issuing newly issued shares to satisfy contributions to the 401(k).

Previously the Company issued treasury stock to satisfy these contributions.

Such contributions are in accordance with the Company’s discretionary match of employee voluntary contributions to this plan.

2 unchanged sentences

Notes to Condensed Consolidated Financial Statements

NOTE E – INVENTORIES

NOTE E – INVENTORIES, NET

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

October 31, 2020

January 31, 2021

April 30, 2020

3 unchanged sentences

Finished Goods

The amounts above are net of reserves of $7.0 million and $6.6 million as of October 31, 2020 and April 30, 2020, respectively.

The amounts above are net of reserves of $7.2 million and $6.6 million as of January 31, 2021 and April 30, 2020, respectively.

NOTE F – RIGHT-OF-USE ASSETS AND LEASE LIABILITIES

9 unchanged sentences

Classification

October 31, 2020

January 31, 2021

April 30, 2020

6 unchanged sentences

Total lease liabilities

Total operating lease expense was $1.2 million and $500,000 for the six and three months ended October 31, 2020, respectively, the majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses on the unaudited condensed consolidated statements of operations.

Total operating lease expense was approximately $1.0 million and $504,000 for the six and three months, respectively, ended October 31, 2019, respectively, the majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses on the unaudited condensed consolidated statements of operations.

Total operating lease expense was $500,000 and $1.5 million for the three and nine months ended January 31, 2021, respectively, the majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses in the unaudited condensed consolidated statements of operations.

Total operating lease expense was approximately $504,000 and $1.5 million for the three and nine months, ended January 31, 2020, respectively, the majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses on the unaudited condensed consolidated statements of operations.

FREQUENCY ELECTRONICS, INC.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the unaudited consolidated balance sheet as of October 31, 2020:

Fiscal Year Ending April 30,

6 unchanged sentences

Long-term lease obligations

As of October 31, 2020, the weighted-average remaining lease term for all operating leases was 7.9 years.

As of January 31, 2021, the weighted-average remaining lease term for all operating leases was 7.6 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 October 31, 2020 was 6.20%.

The weighted average discount rate for operating leases as of January 31, 2021 was 6.17%.

NOTE G – SEGMENT INFORMATION

12 unchanged sentences

Consequently, the Company determined that the segments indicated above most appropriately reflect the way the Company’s management views the business.

The accounting policies of the two segments are the same as those described in the “Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2020, filed on July 29, 2020 with the Securities and Exchange Commission.

The accounting policies of the two segments are the same as those described in the “Summary of Significant Accounting Policies” in the fiscal year-end financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2020, filed on July 29, 2020 with the Securities and Exchange Commission.

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.

4 unchanged sentences

The tables below present information about reported segments with reconciliation of segment amounts to consolidated amounts as reported in the condensed consolidated statements of operations or the condensed consolidated balance sheets for each of the periods (in thousands):

Periods ended October 31,

Periods ended January 31,

less intersegment revenues

Consolidated revenues

Operating profit (loss):

Consolidated operating (loss) income

October 31, 2020

Operating (loss) income:

Consolidated operating loss

January 31, 2021

April 30, 2020

2 unchanged sentences

Consolidated identifiable assets

Total revenue recognized over time as POC and Passage of Title (“POT”) were approximately $24.6 million and $2.3 million, respectively, for the six months ended October 31, 2020.

The amounts recognized over time as POC and POT were approximately $19.1 million and $2.5 million, respectively, for the six months ended October 31, 2019.

Total revenue recognized over time as POC and Passage of Title (“POT”) were approximately $35.6 million and $3.1 million, respectively, for the nine months ended January 31, 2021.

The amounts recognized over time as POC and POT were approximately $28.5 million and $2.8 million, respectively, for the nine months ended January 31, 2020.

The amounts by segment and product line were as follows:

Six Months Ended October 31,

Three Months Ended January 31,

(In thousands)

Total Revenue

FREQUENCY ELECTRONICS, INC.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

Three Months Ended October 31,

Nine Months Ended January 31,

(In thousands)

Total Revenue

Periods ended October 31,

Periods ended January 31,

(in thousands)

10 unchanged sentences

This investment of approximately $800,000 is included in other assets in the accompanying condensed consolidated balance sheets.

During the six months ended October 31, 2020 and 2019, the Company acquired product from Morion in the aggregate amount of approximately $268,000 and $380,000, respectively, and during the six months ended October 31, 2019 the Company sold product and training services to Morion in the aggregate amount of approximately $49,000, included in revenues in the condensed consolidated statements of operations as part of the FEI-NY segment.

During the three months ended October 31, 2020 and 2019, the Company acquired product from Morion in the aggregate amount of approximately $118,000 and $135,000, respectively, and during three months ended October 31, 2019 the Company sold product and training services to Morion in the aggregate amount of approximately $2,000, included in revenues in the condensed consolidated statements of operations as part of the FEI-NY segment.

During the six months ended October 31, 2020 and 2019, the Company received dividends from Morion in the amount of approximately $105,000 and $125,000, respectively, which is included in other income, net in the condensed consolidated statements of operations as part of the FEI-NY segment.

During the three months ended January 31, 2021 and 2020, the Company acquired product from Morion in the aggregate amount of approximately $199,000 and $332,000, respectively, included in cost of revenues in the condensed consolidated statements of operations as part of the FEI-NY segment.

During the nine months ended January 31, 2021 and 2020, the Company acquired product from Morion in the aggregate amount of approximately $467,000 and $712,000, respectively, and during the nine months ended January 31, 2020, the Company sold product and training services to Morion in the aggregate amount of approximately $49,000, included in revenues in the condensed consolidated statements of operations as part of the FEI-NY segment.

The Company did not receive dividends from Morion during the three months ended January 31, 2021.

During the three months ended January 31, 2020, the Company received a dividend from Morion in the amount of approximately 125,000, which is included in other income, net in the condensed consolidated statements of operations as part of the FEI-NY segment.

During the nine months ended January 31, 2021 and 2020, the Company received dividends from Morion in the amount of approximately $105,000 and $250,000, respectively, which is included in other income, net in the condensed consolidated statements of operations as part of the FEI-NY segment.

Morion is a less than wholly-owned subsidiary of Gazprombank, a state-owned Russian bank.

4 unchanged sentences

Notes to Condensed Consolidated Financial Statements

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.

As previously disclosed, in light of Morion’s relationship with Gazprombank, in 2020, the Company 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.

The Company’s voluntary disclosure to OFAC related solely to delays in collection of accounts receivable that exceeded then-applicable payment windows set forth in sanctions regulations and did not relate to any other type of payment or transaction.

On February 17, 2021, the Company received a Cautionary Letter from OFAC indicating that OFAC has completed its review of the matter.

According to OFAC, the Cautionary Letter was issued instead of pursuing a civil monetary penalty or taking other enforcement action.

NOTE I – FAIR VALUE OF FINANCIAL INSTRUMENTS

The cost, gross unrealized gains, gross unrealized losses, and fair market value of available-for-sale securities at October 31, 2020 and April 30, 2020, respectively, were as follows (in thousands):

October 31, 2020

The cost, gross unrealized gains, gross unrealized losses, and fair market value of available-for-sale securities at January 31, 2021 and April 30, 2020, respectively, were as follows (in thousands):

January 31, 2021

Gross Unrealized Gains

10 unchanged sentences

12 Months or more

October 31, 2020

January 31, 2021

Fixed Income Securities

4 unchanged sentences

Notes to Condensed Consolidated Financial Statements

During the six and three months ended October 31, 2020, the Company sold or redeemed available-for-sale securities of approximately $1.5 million and $796,000, respectively, realizing gains of approximately $12,000 and $9,000, respectively.

Maturities of fixed income securities classified as available-for-sale at October 31, 2020 were as follows, at cost (in thousands):

During the three and nine months ended January 31, 2021, the Company sold or redeemed available-for-sale securities of approximately $477,000 and $2.0 million, respectively, realizing gains of approximately $15,000 and $26,000, respectively.

Maturities of fixed income securities classified as available-for-sale at January 31, 2021 were as follows, at cost (in thousands):

Due after one year through five years

33 unchanged sentences

NOTE K – CREDIT FACILITY

As of October 31, 2020, the Company had available credit with UBS Bank USA at variable terms based on its securities holdings under an advisory arrangement, under which the Company has borrowed $3 million.

As of January 31, 2021, the Company had available credit with UBS Bank USA at variable terms based on its securities holdings under an advisory arrangement.

On May 6, 2020 the Company borrowed $3 million under this arrangement and on January 4, 2021 this loan was repaid in full.

On April 12, 2020, the Company received proceeds from a PPP Loan in the amount of $4,964,810 from JPMorgan Chase Bank, N.A.

7 unchanged sentences

In circumstances where there is sufficient negative evidence indicating that the deferred tax assets will not be realizable, we establish a valuation allowance.

As of October 31, 2020, and April 30, 2020, the Company maintained a full valuation allowance against its deferred tax assets.

As of January 31, 2021, and April 30, 2020, 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.

29 unchanged sentences

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, which could result from an unfavorable outcome arising out of these matters.

FREQUENCY ELECTRONICS, INC.

and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

In addition, Mr.

6 unchanged sentences

He seeks an award for allegedly past due deferred compensation benefits plus interest, clarification as to his future rights to deferred compensation benefits, and attorneys’ fees and costs.

FREQUENCY ELECTRONICS, INC.

and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

On June 2, 2020, the Company filed a petition for a stay of arbitration and related declaratory relief against Mr.

8 unchanged sentences

Bloch’s motion on September 8, 2020.

The case was therefore transferred to the County of Nassau, and assigned to the same Judge hearing the other cases between the parties.

At this time, the Company does not have sufficient information to determine the likelihood of success of this petition.

The case was therefore transferred to the County of Nassau, and assigned to the same Judge hearing the other cases between the parties ( Frequency Electronics, Inc.

Bloch , Index No.

611405/2020).

In its order dated February 10, 2021 and entered on February 16, 2021, the Court denied the Company’s petition for a stay of arbitration and ordered the parties to proceed to arbitration.

On February 16, 2021, the Company filed a Notice of Appeal of that order.

The Company intends to perfect its appeal in the coming months.

At this time, the Company does not have sufficient information to determine the likelihood of success of this appeal.

On June 5, 2020, Mr.

8 unchanged sentences

Bloch’s petition, and he opposed the motion on July 2, 2020.

The motion is currently pending.

On September 11, 2020, the Court granted Respondents’ application for an interim stay of the arbitration pending the Court’s determination of the Company’s petition for a stay of arbitration (described above), Mr.

Bloch’s petition for the appointment of an arbitrator, and other outstanding motions.

Respondents 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.

In its orders dated February 10, 2021 and entered on February 16, 2021, the Court granted Mr.

Bloch’s petition for the appointment of an arbitrator, denied the Company’s motion to dismiss that petition, and denied a motion previously filed by the Company for an interim stay of arbitration.

On February 16, 2021, the Company filed a Notice of Appeal of those orders.

The Company intends to perfect its appeal in the coming months.

Respondents dispute all of Bloch’s claims and intend to continue to vigorously defend the Company in the appeal process.

The likelihood of any outcome of this appeal cannot be determined at this time.

FREQUENCY ELECTRONICS, INC.

and SUBSIDIARIES

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 the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2020, filed on July 29, 2020 with the Securities and Exchange Commission 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.

Critical Accounting Policies and Estimates

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2020, filed on July 29, 2020 with the Securities and Exchange Commission.

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 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 nine and three months ended January 31, 2021.

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.

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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.

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.

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 January 31, 2021 and April 30, 2020.

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.

COVID-19 Outbreak Update

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 remaining operational.

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 facilities; mandating handwashing and use of hand sanitizer; requiring social distancing and, requiring face coverings; encouraging, and in some cases, requiring remote work for those employees who can work from home; and disinfecting facilities.

As of March 15, 2021, the Company was aware of fourteen employees that have had confirmed cases of COVID-19 since the COVID-19 outbreak began, with one fatality.

Additional employees have been absent or self-quarantined due to possible COVID exposure, although not having tested positive.

Since the COVID-19 outbreak began, facilities have remained open except for needing to temporarily vacate certain areas for cleaning and disinfecting) following employees either testing positive for COVID or because they had been exposed or possibly exposed to third parties who were positive.

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 Company also believes the pandemic has impacted customers, resulting in delays with respect to anticipated new orders.

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 future effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity.

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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 Small Business Administration (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 the COVID-19 outbreak.

The Company received a loan under the Paycheck Protection Program in April 2020, which it repaid in full in May 2020.

For more detail regarding the Company’s PPP Loan, see Note K in Part I, Item I of this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS

The table below sets forth for the three and nine months ended January 31, 2021 and 2020, 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:

Periods ended January 31,

Less intersegment revenues

Cost of revenues

Selling and administrative expenses

Research and development expenses

Operating loss

Other income (loss), net

Provision for income taxes

Periods ended January 31,

Intersegment revenues

For the three months ended January 31, 2021 revenues from commercial and U.S.

Government satellite programs increased approximately $0.5 million, as compared to the same period of fiscal year 2020, and accounted for approximately 50% of consolidated revenues compared to approximately 55% of consolidated revenues during this same period in fiscal year 2020.

The change in revenue is related to timing of contract awards.

Revenues on these contracts are recognized primarily 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, increased $2.3 million as compared to the same period of fiscal year 2020, and accounted for approximately 47% of consolidated revenues compared to approximately 33% of consolidated revenues during this same period in fiscal year 2020.

Other commercial and industrial revenues for the three months ended January 31, 2021 were $0.4 million and represented approximately 3% of consolidated revenues compared to $1.2 million, or 12% of consolidated revenues, in the same period of the prior fiscal year.

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and SUBSIDIARIES

For the nine months ended January 31, 2021 revenues from commercial and U.S.

Government satellite programs increased approximately $5.3 million, as compared to the same period of fiscal year 2020, and accounted for approximately 52% of consolidated revenues compared to approximately 47% of consolidated revenues during this same period in fiscal year 2020.

The change in revenue is related to timing of contract awards.

Revenues on these contracts are recognized primarily under the POC method.

Revenues from the satellite market are recorded in the FEI-NY segment.

Revenues from non-space U.S.

Government/DOD customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, increased $3.6 million as compared to the same period of fiscal year 2020, and accounted for approximately 42% of consolidated revenues compared to approximately 41% of consolidated revenues during this same period in fiscal year 2020.

Other commercial and industrial revenues for the nine months ended January 31, 2021 were $2.2 million and represented approximately 6% of consolidated revenues compared to $3.9 million, or 12% of consolidated revenues, in the same period of the prior fiscal year.

Periods ended January 31,

The GM rate for the three-month period ended January 31, 2021, was impacted by engineering cost increases on programs in the development phase and correction of technical issues discovered during testing, as well as COVID related delays in production that impacted revenue, particularly in our Zyfer segment.

The December holiday season also affected revenue during the three-month period ended January 31, 2021.

For the nine-month period ended January 31, 2021, gross margin and GM Rate increased significantly as compared to the same periods in fiscal year 2020.

The increase in gross margin and GM Rate was due to several programs identified in prior periods that had higher engineering costs incurred that were in the development phase that have since been completed or are near completion.

Selling and Administrative Expenses

Periods ended January 31,

For the three months ended January 31, 2021 and 2020, selling and administrative (“SG&A”) expenses were approximately 21% and 38%, respectively, of consolidated revenues.

For the nine months ended January 31, 2021 and 2020, SG&A expenses were approximately 25% and 27%, respectively, of consolidated revenues.

The decrease in SG&A expenses for the three-month period ended January 31, 2021 was mainly due to decreased professional fees, depreciation expense and other expenses.

For the nine-month period ended January 31, 2021, the increase in SG&A expenses was mainly due to increase in professional fees (relating to litigation for which the Company has received insurance reimbursement for a portion of such legal fees).

Research and Development Expense

Periods ended January 31,

Research and development (“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 R&D rate for the three-month period ended January 31, 2021 and 2020 was 11% of sales.

The R&D rate for the nine-month period ended January 31, 2021 was 9% of sales, compared to 15% of sales for the same period of the previous fiscal year.

The Company’s R&D expense decreased year over year as previous R&D efforts have ended and turned into production;

however, the Company plans to continue to invest in R&D to keep its products at the state of the art.

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Operating Loss

Periods ended January 31,

The Company’s results for the three and nine-month periods ended January 31, 2021 reflect improvements in revenues, gross margin and GM rate.

As referenced above by the percentages for the three and nine-month periods ended January 31, 2021, operating loss has made a significant improvement from the same period of the prior fiscal year.

Based upon our bookings and backlog we are expecting the improving trend to continue.

Operating loss for the quarter reflects the confluence of several factors.

COVID related delays in expected bookings was significant and resulted from both delays in the award of anticipated orders by several customers, as well as employee absenteeism related to either direct or indirect effects of COVID.

Certain technical issues resulted in increased engineering costs in the three-months period ended January 31, 2021, as well.

Other Income (Expense), net

Periods ended January 31,

Investment income

Interest expense

Other income (expense), net

Investment income is derived primarily from the Company’s holdings of marketable 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.

For the nine-month period ended January 31, 2021 investment income included a $105,000 dividend from Morion, compared to a $250,000 dividend from Morion in the same period in fiscal 2020.

Income Tax Provision

Periods ended January 31,

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

The estimated annual effective tax rate for the fiscal year ending April 30, 2021 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 January 31, 2021, the Company recorded an income tax provision of $12,000, which included a discrete income tax provision of $12,000 primarily related to an accrual of interest for unrecognized tax benefits.

For the three months ended January 31, 2020, the Company also recorded a discrete income tax provision of $19,000, which primarily consisted of an accrual of interest for unrecognized tax benefits.

For the nine months ended January 31, 2021, the Company recorded a discrete income tax provision of $37,000, which primarily consisted of an accrual of interest for unrecognized tax benefits.

For the nine months ended January 31, 2020, the Company also recorded a discrete income tax provision of $48,000, which primarily consisted of an accrual of interest for unrecognized tax benefits.

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The effective tax rate for the three months ended January 31, 2021 is an income tax provision of (1.5)% on pretax loss of $788,000 compared to an income tax provision of (1.3) % on a pretax loss of $1,527,000 in the comparable prior fiscal year period.

The effective tax rate for the three months ended January 31, 2021 differs from the U.S.

statutory rate of 21% primarily due to state taxes, a discrete income tax provision related to the accrual of interest for unrecognized tax benefits, and domestic losses for which the Company is not recognizing an income tax benefit.

The effective tax rate for the nine months ended January 31, 2021 is an income tax provision of (5.4)% on pretax loss of $696,000 compared to an income tax provision of (0.7)% on a pretax loss of $6,998,000 in the comparable prior fiscal year period.

The effective tax rate for the nine months ended January 31, 2021 differs from the U.S.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s consolidated balance sheet continues to reflect a strong working capital position of $39.3 million at January 31, 2021 and $38.3 million at April 30, 2020.

Included in working capital at January 31, 2021 and April 30, 2020 is $17.7 million and $14.4 million, respectively, consisting of cash, cash equivalents, and marketable securities.

The Company’s current ratio at January 31, 2021 was 6.6 to 1 compared to 3.9 to 1 as of April 30, 2020.

Net cash provided by operating activities for the nine months ended January 31, 2021 was $9.3 million compared to net cash used in operating activities of $760,000 in the comparable prior fiscal 2020 period.

The increase cash flow in the fiscal 2021 period resulted mainly due to a decrease in net loss, accounts receivable, and inventory amounts.

For the nine-month periods ended January 31, 2021 and 2020, the Company incurred approximately $3.4 million and $6.0 million, respectively, of non-cash operating expenses including ROU assets and liabilities for leases, loss provision accrual, depreciation and amortization, inventory reserve adjustments, and accruals for employee benefit programs.

Net cash used in investing activities for the nine months ended January 31, 2021 was $921,000 compared to $2.7 million for the nine months ended January 31, 2020.

During the nine months ended January 31, 2021 marketable securities were sold or redeemed in the amount of $2.0 million compared to $3.0 million for the same period of fiscal 2020.

During the nine months ended January 31, 2021 approximately $1.9 million of marketable securities were purchased compared to $4.1 million for the same period of fiscal 2020.

The Company acquired property, plant and equipment in the amount of approximately $971,000 for the nine-month period ended January 31, 2021 compared to $1.6 million for the nine-month period ended January 31, 2020.

The Company may continue to invest in cash equivalents as dictated by its investment strategy.

Net cash used in financing activities for the nine months ended January 31, 2021 was approximately $5.0 million related to the repayment of the PPP Loan.

There was no cash used in financing activities for the nine months ended January 31, 2020.

The Company has been authorized by its Board to repurchase up to $5 million worth of shares of its common stock when appropriate opportunities arise.

As of January 31, 2021, the Company has repurchased approximately $4 million of its common stock out of the $5 million authorization.

For the nine months ended January 31, 2021 and 2020 there were no repurchases of shares.

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 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 January 31, 2021, the Company’s consolidated funded backlog was approximately $41 million compared to $36 million at April 30, 2020, the end of fiscal 2020.

Approximately 80% of this backlog is expected to be realized in the next twelve months.

As of January 31, 2021, there are no amounts included in backlog under cost-plus fixed-fee (“CPFF”) contracts that have not been funded.

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 the 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 operating and investment needs through at least March 12, 2022 and the foreseeable future.

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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.

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Quantitative and Qualitative Disclosures about Market Risk

Not applicable to smaller reporting companies.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements