What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2022-07-14 compared with 2021-06-30 · 1 added, 222 removed, 13 unchanged (94% of the section changed)

Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The common stock of the Company is listed on The Nasdaq Global Market (“NASDAQ”) under the ticker symbol “FEIM.” As of June 23, 2021, the approximate number of holders of record of common stock was 460.

The common stock of the Company is listed on The Nasdaq Global Market (“NASDAQ”) under the ticker symbol “FEIM.” As of July 11, 2022, the approximate number of holders of record of common stock was 440.

DIVIDEND POLICY

10 unchanged sentences

The Company did not make any purchases of stock for the treasury during fiscal years 2022 or 2021.

Selected Financial Data

Not Applicable.

Management ’ s Discussion and Analysis of Financial Condition and Results of Operations

“Safe Harbor ” Statement under the Private Securities Litigation Reform Act of 1995:

The statements in this Annual Report on Form 10-K regarding future earnings and operations and other statements relating to the future constitute “forward-looking” statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements.

Factors that would cause or contribute to such differences include, but are not limited to, the risks associated with health epidemics and pandemics, including the COVID-19 pandemic and similar outbreaks, such as their impact on our financial condition and results of operations and on our ability to continue manufacturing and distributing our products, and the impact of health epidemics and pandemics on general economic conditions, including any resulting recession, our inability to integrate operations and personnel, actions by significant customers or competitors, general domestic and international economic conditions, reliance on key customers, continued acceptance of the Company’s products in the marketplace, competitive factors, new products and technological changes, product prices and raw material costs, dependence upon third-party vendors, competitive developments, changes in manufacturing and transportation costs, the availability of capital, and the outcome of any litigation and arbitration proceedings, including litigation involving the Company’s former Chief Scientist and member of the Board of Directors.

The factors listed above are not exhaustive.

Other sections of this Form 10-K include additional factors that could materially and adversely impact the Company’s business, financial condition and results of operations.

Moreover, the Company operates in a very competitive and rapidly changing environment.

New factors emerge from time to time and it is not possible for management to predict the impact of all these factors on the Company’s business, financial condition or results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results.

Any or all of the forward-looking statements contained in this Form 10-K and any other public statement made by the Company or its management may turn out to be incorrect.

The Company expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Critical Accounting Policies and Estimates

The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements.

The Company believes its most critical accounting policies to be the recognition of revenue and costs on production contracts, income taxes and the valuation of inventory.

Each of these areas requires the Company to make use of reasonable estimates, including estimating the cost to complete a contract, the realizable value of its inventory or the market value of its products.

Changes in estimates can have a material impact on the Company’s financial position and results of operations.

Revenue Recognition

Revenue is recognized when a performance obligation is satisfied, which is when the expected goods or services are transferred to the customer, in an amount that reflects the consideration to which the Company expects to receive.

A performance obligation is a distinct product or service that is transferred to the customer based on the contract.

The transaction price is allocated to each performance obligation and is recognized as revenue upon satisfaction of that performance obligation.

The Company derives revenue from contracts with the government, government prime contractors and commercial companies by units sold with specific contractual performance requirements, in many cases unique to the specific customer and/or application.

The Company’s contracts typically include one performance obligation which is satisfied by shipped projects and completed services/reports required in the contract.

Control over these performance obligations passes to the customer over time and therefore these revenues are reported in operating results over time using the cost-to-cost method.

Under this method, revenue is recorded based upon the ratio that incurred costs bear to total estimated contract costs with related cost of revenues recorded as the costs are incurred.

Each month management reviews estimated contract costs through a process of aggregating actual costs incurred and estimating additional costs to completion based upon the current available information and status of the contract.

The effect of any change in the estimated gross margin rate (“GM Rate”) for a contract is reflected in revenues in the period in which the change is known.

Provisions for the full amount of anticipated losses on contracts are made in the period in which they become determinable.

For smaller contracts or orders, sales of products and services to customers are reported in operating results based upon (i) shipment of the product or (ii) performance of the services pursuant to terms of the customer order.

When payment is contingent upon customer acceptance of the installed system, revenue is deferred until such acceptance is received and installation completed.

The Company’s products generally carry a one-year warranty, but may vary based on the contract terms.

Significant judgment is used in evaluating the financial information for certain contracts to determine an appropriate budget and estimated cost.

The Company evaluates this information continuously and bases its judgments on historical experience, design specifications, and expected costs for material and labor.

Contract costs include all direct material, direct labor costs, manufacturing overhead and other direct costs related to contract performance.

Selling, general and administrative costs are charged to expense as incurred.

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.

Our income tax expense, deferred tax asset and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid.

Significant judgments and estimates are required in the determination of the consolidated income tax expense.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future.

In evaluating our ability to recover deferred tax assets in the jurisdiction from which they arise, we consider all positive and negative evidence, including the reversal of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of recent operations.

As of April 30, 2021 and 2020, we have a full valuation allowance against our U.S.

net deferred tax assets.

If these estimates and assumptions change in the future, the Company may be required to reduce its existing valuation allowance resulting in less income tax expense.

The Company evaluates the likelihood of realizing its deferred tax assets quarterly.

Tax benefits are recognized for an uncertain tax position when, in the Company’s judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority.

For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority.

The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances and when new information becomes available.

Such adjustments are recognized entirely in the period in which they are identified.

The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by the Company.

While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes its liability for unrecognized tax benefits is adequate.

Interest and penalties recognized on income taxes are recorded as income tax expense.

COVID-19 Pandemic Update

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 pandemic”) and the risks to the international community as the virus spread globally beyond its point of origin.

In March 2020, the WHO classified the COVID-19 pandemic as a pandemic, based on the rapid increase in exposure globally.

The Company’s priority during the COVID-19 pandemic 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 June 30, 2021, the Company was aware of fifteen employees that have had confirmed cases of COVID-19 since the COVID-19 pandemic 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 pandemic 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 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 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.

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 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.

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

Given the changing dynamics of the pandemic and the global responses to curb its spread, including the progress on vaccine distribution, the Company is not able to estimate any future effects of the COVID-19 pandemic on its future results of operations, financial condition, or liquidity.

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 pandemic.

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 8 in Part II, Item VIII of this Annual Report on Form 10-K.

RESULTS OF OPERATIONS

Consolidated Results

The table below sets forth for the fiscal years ended April 30, 2021 and 2020, the percentage of consolidated net sales represented by certain items in the Company’s consolidated statements of operations:

Fiscal Years Ended April 30,

Less intersegment revenues

Cost of revenues

Selling and administrative expenses

Research and development expenses

Operating loss

Other income (loss), net

Benefit from income taxes

Net income (loss)

Fiscal Years Ended April 30,

(in thousands)

Intersegment revenues

Fiscal 2021 revenues from satellite programs, one of the Company’s largest business areas, increased by $6.6 million, or 32%, compared to the prior fiscal year.

Satellite program revenues for government end-use were 42% and 41% of total revenues for fiscal years 2021 and 2020, respectively.

Satellite program revenues for commercial end-use were 7% and 9% of total revenue for Fiscal 2021 and Fiscal 2020, respectively.

Revenues on satellite program contracts are recorded in the FEI-NY segment and are recognized primarily under the Percentage-of-Completion (“POC”) method.

Revenues from non-space U.S.

Government/DOD customers increased by approximately $7.8 million, or 46%, in Fiscal 2021 compared to Fiscal 2020.

These revenues are recorded in both the FEI-NY and FEI-Zyfer segments and accounted for approximately 46% and 41% of consolidated revenues for fiscal years 2021 and 2020, respectively.

For the year ended April 30, 2021, other commercial and industrial sales accounted for approximately 5% of total revenues compared to approximately 10% for fiscal year 2020.

Sales in this business area were $2.5 million for the year ended April 30, 2021 compared to $4.2 million for the preceding year.

Fiscal Years Ended April 30,

(in thousands)

Gross Profit Percentage

For the fiscal year ended April 30, 2021, the gross profit and gross profit percentage both increased compared to the prior fiscal year.

The higher gross profit and gross profit percentage increased significantly as compared to the same periods in fiscal year 2020.

The increase in gross profit and gross profit percentage was due to several programs identified in prior periods that incurred higher engineering costs associated with solving technical issues while the programs were in their development phase, prior to manufacturing and which have now been completed or are near completion.

Selling and Administrative Expenses

Fiscal Years Ended April 30,

(in thousands)

In fiscal years ended April 30, 2021 and 2020, selling and administrative expenses (“SG&A”) were 24% and 28%, respectively, of consolidated revenues.

Stock compensation expenses, which are included in total SG&A, were $160,000 and $144,000 in Fiscal 2021 and Fiscal 2020, respectively.

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), deferred compensation and insurance expense.

Research and Development Expenses

Fiscal Years Ended April 30,

(in thousands)

As a percentage of consolidated revenue, R&D expense for the years ended April 30, 2021 and 2020 was approximately 9% and 12%, respectively.

The approximately $0.4 million decrease in R&D expense year over year was due to the fact that 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.

The funds received in connection with customer funded R&D appears in revenues and the associated expenses are included in cost of revenues and are not included in the table above.

Although funding is obtained from customers, the Company retains the rights to any products developed.

The Company believes that internally generated cash and cash reserves are adequate to fund its R&D activity.

Operating Loss

Fiscal Years Ended April 30,

(in thousands)

For the fiscal year ended April 30, 2021, the Company recorded an operating loss of $1.0 million compared to an operating loss of $10.9 million in the prior year.

The decrease in the operating loss in the fiscal year ended April 30, 2021 reflects improvement in revenues, gross profit and gross profit percentage.

Other Income (Expense), net

Fiscal Years Ended April 30,

(in thousands)

Investment income

Interest expense

Other income (expense), net

Investment income is derived primarily from the Company’s holdings of marketable securities, which primarily consist of fixed income securities.

Earnings on securities may vary based on fluctuating interest rates, dividend payout levels, and the timing of purchases, sales, redemptions or maturities of securities.

Included in other income (expenses) for the fiscal year ended April 30, 2021 was the collection of the $1 million note that was due relating to the sale of Gilliam to a European entity on April 26, 2018.

For the fiscal year ended April 30, 2020 a provision related to the note receivable arising from the sale of Gillam was included in other income (expenses), which was due Fiscal 2021.

Income Tax (Benefit)

Fiscal Years Ended April 30,

(in thousands)

Fiscal Years Ended April 30,

(in thousands)

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

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted.

Intended to provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act includes provisions, among others, allowing for the carryback of net operating losses generated in tax years 2018, 2019 and 2020, refunds of alternative minimum tax credits, temporary modifications to the limitations placed on the tax deductibility of net interest expense, and technical corrections so that qualified improvement property can be immediately expensed under Internal Revenue Code (“IRC”) Section 168(k) and net operating losses arising in tax years beginning in 2017 and ending in 2018 can be carried back two years and forward twenty years.

For the fiscal year ended April 30, 2021, the Company recorded an income tax benefit of $(204,000) primarily due to a reduction in the uncertain tax position liability in connection with the expiration of the statute of limitations.

The Company recorded an income tax benefit of $(1,742,000) in the fiscal year ended April 30, 2020 primarily due to the enactment of the CARES Act, which allows for the carryback of net operating losses to prior tax years in which the Company was subject to U.S.

federal income tax.

The Company’s effective tax rate of (42.7)% for Fiscal 2021 differs from the U.S.

federal statutory rate of 21% primarily due to the tax effects related to (i) recognition of previously unrecognized tax benefits, (ii) state and local taxes, (iii) and a change in the valuation allowance.

(See Note 12 to the Consolidated Financial Statements for a reconciliation of the actual tax benefit to the expected tax provision at the federal statutory rate.)

As of April 30, 2021, the Company has U.S.

federal net operating losses of $24.3 million of which $16.4 million begins to expire in Fiscal 2026 through Fiscal 2038, including $3.4 million which is subject to annual limitation under IRC Section 382.

The remaining U.S.

federal net operating losses of $7.9 million have an indefinite carry-forward period.

federal capital loss carry-forward of $10.0 million expires in Fiscal 2023.

federal R&D credits of $0.7 million begin to expire in Fiscal 2036 through Fiscal 2040.

The Company also has state net operating loss carryforwards, and state tax credits that expire in various years and amounts.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operations was $12.2 million in fiscal year 2021 compared to cash used in operations of $1.4 million in fiscal year 2020.

The Company’s balance sheet continues to reflect a highly liquid position with working capital of $40.6 million at April 30, 2021 as compared to $37.5 million at April 30, 2020.

Included in working capital at April 30, 2021 was $20.1 million consisting of cash, cash equivalents and short-term investments.

The Company’s current ratio at April 30, 2021 was 6.0 to 1 compared to 3.7 to 1 at the end of the prior fiscal year.

During fiscal years 2021 and 2020, the Company incurred $4.7 million and $6.4 million, respectively, in non-cash charges to earnings, including adjustments relating to net assets and liabilities for operating leases, loss provision accrual, provision for a note receivable, depreciation and amortization expense, inventory adjustments, warranty and accounts receivable reserves and certain employee benefit plan expenses, including accounting for stock-based compensation.

During fiscal year 2021, operating cash was increased by decreases in costs and estimated earnings in excess of billings and inventory.

During fiscal year 2020, operating cash was decreased by increases in costs and estimated earnings in excess of billings, offset by decreases in accounts receivable, prepaids, and inventory.

Net cash used in investing activities for the fiscal year ended April 30, 2021 was $1.2 million compared to $3.4 million used in investing activities for the fiscal year ended April 30, 2020.

In fiscal year 2021, investing activities included the proceeds related to sales of marketable securities net of the purchases of marketable securities of $46,000 and purchases of capital expenditures of $1.2 million.

In fiscal year 2020, investing activities included the purchase of marketable securities net of proceeds related to sales of marketable securities of $1.9 million and purchases of capital expenditures of $1.5 million.

The Company may continue to invest cash equivalents as dictated by its investment and acquisition strategies.

Cash used in financing activities for the fiscal year ended April 30, 2021 was $5.0 million related to the repayment in full of a loan acquired from JPMorgan Chase Bank, N.A.

as the lender, pursuant to the Small Business Administration Paycheck Protection Program under the CARES Act.

Cash provided by financing activities for the fiscal year ended April 30, 2020 was $5.0 million related to the loan acquired from JPMorgan Chase Bank, N.A.

As of April 30, 2021, the Company had available credit at variable terms based on its securities holdings under an advisory arrangement, under which no borrowings have been made.

The Company will continue to expend resources to develop, improve and acquire products for space and other applications, which management believes will result in future growth and profitability.

During fiscal year 2021, the Company secured partial customer funding for a portion of its R&D efforts.

The customer funds received in connection therewith appear in revenues and are not included in R&D expenses.

For fiscal year 2022, the Company anticipates securing additional customer funding for a portion of its R&D activities and will allocate internal funds depending on market conditions and identification of new opportunities as in fiscal 2021.

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 April 30, 2021, the Company had an accumulated deficit of $11.5 million.

The Company believes that its cash and cash equivalents, as well as marketable securities as of April 30, 2021 and cash flows from operations will provide sufficient liquidity to meet its operating needs in the normal course of business through the next twelve months from the date of issuance of these consolidated financial statements.

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.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2017-04, Intangibles – Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.

Under ASU 2017-04, goodwill impairment will be tested by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.

The new guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2022, with early adoption permitted.

The Company will not be adopting ASU 2017-04 early, and is in the process of determining the effect that ASU 2017-04 may have.

However, the Company expects the new standard to have an immaterial effect on its consolidated financial statements.

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.

The Company is evaluating the effect, if any, the update will have on its consolidated financial statements when adopted in fiscal year 2023.

OTHER MATTERS

The financial information reported herein is not necessarily indicative of future operating results or of the future financial condition of the Company.

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.

The Company’s investment consists of 4.6% of Morion’s outstanding shares, accordingly, the Company accounts for its investment in Morion on the cost basis.

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

During the fiscal years ended April 30, 2021 and 2020, the Company acquired product from Morion in the aggregate amount of approximately $710,000 and $888,000, respectively.

During the fiscal years ended April 30, 2021 and 2020, the Company sold product and training services to Morion in the aggregate amount of approximately $94,000 and $85,000, respectively, included in revenues in the consolidated statements of operations as part of the FEI-NY segment.

During the fiscal years ended April 30, 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 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.

Ukraine-related sanctions regime has since 2014 included a list of sectoral sanctions identifications (“SSI”) pursuant to Executive Order 13662, which prohibits certain transactions, including certain extensions of credit, with an entity designated as an SSI or certain affiliates of an entity designated as an SSI.

On July 16, 2014, after the Company’s investment in Morion, Gazprombank was designated as an SSI.

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 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.

During fiscal year 2021, as in fiscal year 2020, the impact of inflation on the Company’s business was not materially significant.

Quantitative and Qualitative Disclosure about Market Risk

Not applicable

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-K

Item 5. Market for Registrant’s Common Equity