Item 8. Financial Statements and Supplementary Data
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Frequency Electronics, Inc.
Mitchel Field, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Frequency Electronics, Inc. (the “Company”) as of April 30, 2023 and 2022, the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at April 30, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognized Over Time Using Percentage-of-Completion
As described in Note 1 to the consolidated financial statements, 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 United States 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 Percentage-of-Completion (“POC”) cost-to-cost method. Under this method, revenue is recorded based upon the ratio that incurred costs bear to total estimated contract costs.
We identified estimated costs to complete for contracts where revenue is recognized over time using the POC cost-to-cost method as a critical audit matter. The determination of the total estimated costs to complete requires management to make significant estimates and assumptions regarding labor, outside services, materials and overhead costs. Changes in the estimates of these costs can have a significant impact on the revenue recognized each period. Auditing these elements involved especially challenging auditor judgment in evaluating the reasonableness of management’s assumptions and estimates over the duration of these contracts.
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The primary procedures we performed to address this critical audit matter included selecting a sample of contracts for testing and performing the following procedures:
●
Agreeing the key terms to contracts and comparing estimated costs at completion as of the current year-end to the estimated costs at completion as of the prior year-end.
●
Testing the Company’s estimated costs to complete by performing a retrospective review to identify changes in contract gross margin and assessing the reasonableness of such changes.
●
Testing the Company’s estimated costs to complete by evaluating subsequent events activity for changes in conditions that may result in significant changes to estimated costs to complete the contract selected for testing.
●
Evaluating management’s ability to prepare and estimate the remaining costs to complete for contracts in process as of the balance sheet date by performing inquiries of certain of the Company’s operations and accounting personnel.
●
Testing the mathematical accuracy of management’s calculation of the estimated costs at completion.
/s/ BDO USA, P.A.
We have served as the Company’s auditor since 2020.
Melville, New York
July 27, 2023
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except par value)
April 30,
April 30,
2023
2022
ASSETS:
Current assets:
Cash and cash equivalents
$
12,049
$
11,561
Marketable securities
-
9,964
Accounts receivable, net of allowance for doubtful accounts of $ 111 at April 30, 2023 and April 30, 2022
4,622
4,291
Contract assets
10,009
8,857
Inventories, net
20,526
19,906
Prepaid income taxes
30
269
Prepaid expenses and other
1,071
1,162
Total current assets
48,307
56,010
Property, plant, and equipment, net
7,093
8,564
Goodwill
617
617
Cash surrender value of life insurance
10,220
9,855
Other assets
877
909
Right-of-Use assets – operating leases
7,382
8,805
Total assets
$
74,496
$
84,760
LIABILITIES AND STOCKHOLDERS ’ EQUITY:
Current liabilities:
Accounts payable – trade
$
1,464
$
1,080
Accrued liabilities
3,934
3,696
Loss provision accrual
1,544
4,243
Operating lease liability, current portion
1,753
1,744
Contract liabilities
18,586
11,098
Total current liabilities
27,281
21,861
Deferred compensation
8,314
8,730
Deferred taxes
8
8
Operating lease liability – non-current
5,883
7,353
Other liabilities
124
120
Total liabilities
41,610
38,072
Contingencies (Note 16)
Stockholders’ equity:
Preferred stock - $ 1.00 par value; authorized 600 shares, no shares issued
-
-
Common stock - $ 1.00 par value; authorized 20,000 shares, 9,374 shares issued and 9,373 shares outstanding at April 30, 2023; 9,298 shares issued and 9,297 shares outstanding at April 30, 2022
9,374
9,298
Additional paid-in capital
49,136
57,956
Accumulated deficit
( 25,621
)
( 20,120
)
Common stock reacquired and held in treasury -
at cost ( 1 share at April 30, 2023 and April 30, 2022)
( 3
)
( 6
)
Accumulated other comprehensive income (loss)
-
( 440
)
Total stockholders’ equity
32,886
46,688
Total liabilities and stockholders ’ equity
$
74,496
$
84,760
The accompanying notes are an integral part of these consolidated financial statements.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
(In thousands, except per share data)
Years Ended April 30,
2023
2022
Consolidated Statements of Operations
Revenues
$
40,777
$
48,296
Cost of revenues
32,928
39,697
Gross margin
7,849
8,599
Selling and administrative expenses
9,372
11,662
Research and development expenses
3,149
4,975
Operating loss
( 4,672
)
( 8,038
)
Other income (expense):
(Loss) income on Investments
( 606
)
199
Loss on disposal of asset
-
( 110
)
Loss on impairment of Morion
-
( 796
)
Interest expense
( 156
)
( 77
)
Other income (expense), net
7
160
Loss before provision from income taxes
( 5,427
)
( 8,662
)
Provision from income taxes
74
1
Net loss
$
( 5,501
)
$
( 8,663
)
Net loss per common share:
Basic and diluted loss per share
$
( 0.59
)
$
( 0.93
)
Weighted average shares outstanding:
Basic and diluted
9,337
9,266
Consolidated Statements of Comprehensive Income (Loss)
Net loss
$
( 5,501
)
$
( 8,663
)
Unrealized gain (loss) on marketable securities:
Change in market value of marketable securities before reclassification, net of tax
( 179
)
( 726
)
Reclassification adjustment for realized gains (loss) included in net income, net of tax
619
( 5
)
Total unrealized gain (loss) on marketable securities, net of tax
440
( 731
)
Comprehensive loss
$
( 5,061
)
$
( 9,394
)
The accompanying notes are an integral part of these consolidated financial statements.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Years Ended April 30,
2023
2022
Cash flows from operating activities:
Net loss
$
( 5,501
)
$
( 8,663
)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
2,434
3,025
Non-cash lease expense
( 39
)
( 16
)
Provision for losses on accounts receivable, inventories, other assets and warranty reserve
567
328
Loss (gain) on marketable securities
784
( 6
)
Loss on sale of fixed and other assets, net
34
163
Loss on impairment of Morion
-
796
Employee benefit plans expense
1,054
842
Stock-based compensation expense
197
247
Changes in operating assets and liabilities:
Accounts receivable
( 332
)
1,574
Contract assets
( 1,110
)
5,246
Inventories
( 1,220
)
( 464
)
Prepaid expenses and other
91
( 171
)
Other assets
( 366
)
5,541
Accounts payable - trade
384
( 1
)
Accrued liabilities
217
( 1,355
)
Contract liabilities
7,487
( 1,414
)
Loss provision accrual
( 2,699
)
4,185
Income taxes refundable
239
175
Other liabilities
( 1,046
)
( 5,996
)
Net cash provided by operating activities
1,175
4,036
Cash flows from investing activities:
Purchase of marketable securities
( 1,382
)
( 2,511
)
Proceeds from sale or redemption of marketable securities
10,967
2,089
Capital expenditures
( 918
)
( 1,860
)
Net cash provided by (used in) investing activities
8,667
( 2,282
)
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
488
1,754
Cash and cash equivalents at beginning of year
11,561
9,807
Cash and equivalents at end of year
$
12,049
$
11,561
The accompanying notes are an integral part of these consolidated financial statements.
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FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Continued)
Years Ended April 30,
2023
2022
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest
$
129
$
77
Income taxes
$
7
$
15
Cash refund during the year for:
Income taxes
$
176
$
183
The accompanying notes are an integral part of these consolidated financial statements.
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FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
Years ended April 30, 2023 and 2022
(In thousands, except share data)
Additional
Treasury stock
Accumulated other
Common Stock
paid in
Accumulated
(at cost)
comprehensive
Shares
Amount
capital
Deficit
Shares
Amount
Income (loss)
Total
Balance at April 30, 2021
9,226,268
$
9,226
$
57,355
$
( 11,457
)
1,375
$
( 6
)
$
291
$
55,409
Contribution of stock to 401(k) plan
44,224
44
382
-
-
-
-
426
Stock-based compensation expense
16,216
16
231
-
-
-
-
247
Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price
11,470
12
( 12
)
-
-
-
-
-
Other comprehensive loss, net of tax
-
-
-
-
-
-
( 731
)
( 731
)
Net loss
-
-
-
( 8,663
)
-
-
-
( 8,663
)
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
61,897
62
351
-
( 634
)
3
-
416
Stock-based compensation expense
13,701
14
183
-
-
-
-
197
Other comprehensive income, net of tax
-
-
-
-
-
-
440
440
Dividends paid
-
-
( 9,354
)
-
-
-
-
( 9,354
)
Net loss
-
-
-
( 5,501
)
-
-
-
( 5,501
)
Balance at April 30, 2023
9,373,776
$
9,374
$
49,136
$
( 25,621
)
741
$
( 3
)
$
-
$
32,886
The accompanying notes are an integral part of these consolidated financial statements.
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FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2023 and 2022
1. Summary of Accounting Policies
Basis of Presentation and Principles of Consolidation :
The consolidated financial statements include the accounts of Frequency Electronics, Inc. and its wholly-owned subsidiaries (the “Company” or “Registrant”). References to “FEI” are to the parent company alone and do not refer to any of its subsidiaries. The Company is principally engaged in the design, development and manufacture of precision time and frequency control products and components for microwave integrated circuit applications. See Note 13 for information regarding the Company’s business segments: (1) FEI-NY (which includes the subsidiaries FEI Government Systems, Inc., FEI Communications, Inc., and FEI-Elcom Tech, Inc. (“FEI-Elcom”)), and (2) FEI-Zyfer, Inc. (“FEI-Zyfer”). Intercompany accounts and transactions are eliminated in consolidation.
These consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles (“U.S. GAAP”) and require management to make estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and related notes. Actual results could differ from these estimates.
COVID-19 Pandemic and the CARES Act
On May 5, 2023, the World Health Organization (“WHO”) announced an end to the global health emergency related to the coronavirus originating in Wuhan, China (“COVID-19”). Additionally, on May 11, 2023 the Public Health Emergency declared by the U.S. Department of Health and Human Services expired.
Certain Company vendors continue to deliver materials with longer lead times due to COVID-19 related impacts to their workforces or their supply chains. These delays have impacted the Company’s production schedules, and increased costs associated with procurement of materials and services. The Company continues to monitor these and its other vendors and, if necessary, seek alternative suppliers, or, in certain cases, re-design products using alternative parts and materials.
Cash Equivalents:
The Company considers certificates of deposit and other highly liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company places its temporary cash investments with high credit quality financial institutions. Such investments may at times be in excess of the Federal Deposit Insurance Corporation (“FDIC”) and Securities Investor Protection Corporation insurance limits. No losses have been experienced on such investments.
Marketable Securities:
Marketable securities consisted 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 during the fiscal year ended April 30, 2023. Investments in debt securities were categorized as available-for-sale and were carried at fair value, with unrealized gains and losses excluded from income and recorded directly to stockholders’ equity. The Company recognized gains or losses when securities were sold using the specific identification method. The Company liquidated all holdings related to marketable securities during the fiscal year ended April 30, 2023.
Allowance for Doubtful Accounts:
Losses from uncollectible accounts receivable are provided for by utilizing the allowance for doubtful accounts method based upon management’s estimate of uncollectible accounts. Management analyzes accounts receivable and the potential for bad debts, customer concentrations, credit worthiness, current economic trends and changes in customer payment terms when evaluating the amount recorded for the allowance for doubtful accounts.
Property, Plant and Equipment:
Property, plant and equipment is recorded at cost and include interest on funds borrowed to finance construction. Expenditures for renewals and betterments are capitalized; maintenance and repairs are charged to operations when incurred. When fixed assets are sold or retired, the cost and related accumulated depreciation and amortization are eliminated from the respective accounts and any gain or loss is credited or charged to operations.
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FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2023 and 2022
If events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the long-lived asset, an impairment loss is recognized. No impairment losses have been recognized in the years ended April 30, 2023 and 2022.
Inventories:
Inventories, which consist of raw materials and components, work-in-process and finished goods are accounted for at the lower of cost (specific and average) and net realizable value.
Depreciation and Amortization:
Depreciation of property, plant and equipment is computed on the straight-line method based upon the estimated useful lives of the assets ( 40 years for buildings and 3 to 10 years for other depreciable assets). Leasehold improvements are amortized on the straight-line method over the lesser of the lease term or the estimated useful life of the asset.
Goodwill:
The Company records goodwill as the excess of purchase price over the fair value of identifiable net assets acquired. Goodwill is tested for impairment, on a reporting unit level qualitatively, on at least an annual basis at fiscal year end to determine whether it is more likely than not that the reporting unit’s fair value is less than its carrying amount. If it is determined that the carrying value of goodwill may not be recoverable, the Company will write down the goodwill to an amount to commensurate with the revised value of the acquired assets. The Company measures fair value based on revenue projections, recent transactions involving similar businesses and price/revenue multiples at which they were bought and sold, price/revenue multiples of competitors, and the present market value of publicly-traded companies in the Company’s industry. Management has determined that goodwill was not impaired as of April 30, 2023 and 2022.
Revenue and Cost Recognition:
Revenue is recognized when a performance obligation is satisfied, which is when the expected goods or services are transferred to the customer, in an amount that reflects the consideration to which the Company expects to receive. A performance obligation is a distinct product or service that is transferred to the customer based on the contract. The transaction price is allocated to each performance obligation and is recognized as revenue upon satisfaction of that performance obligation. The Company derives revenue from contracts with customers by units sold with specific specifications and frequencies that are used by a specific customer and contracts where the end user is the U.S. 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 Percentage-of-Completion (“POC”) 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 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 passage-of-title (“POT”) (i) shipment of the product or (ii) performance of the services pursuant to terms of the customer order. When payment is contingent upon customer acceptance of the installed system, revenue is deferred until such acceptance is received and installation completed. The Company’s products generally carry a one-year warranty, but may vary based on the contract terms.
Some judgment is used in evaluating the financial information for certain contracts 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.
.
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FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2023 and 2022
Contract costs include all direct material, direct labor costs, manufacturing overhead and other direct costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred.
Practical Expedients
The Company expenses sales commissions as sales and marketing expenses in the period they are incurred if the expected amortization period is one year or less.
The Company expenses costs, other than sales commissions, to obtain a contract in the period for which they are incurred as these amounts would have been incurred even if the contract had not been obtained.
Disaggregation of Revenue
Total revenue recognized over time as POC method was approximately $ 39.1 million and $ 46.4 million of the $ 40.8 million and $ 48.3 million reported for the years ended April 30, 2023 and 2022, respectively. The amounts by segment and product line were as follows:
Fiscal Year Ended April 30, 2023
(In thousands)
POC Revenue
POT Revenue
Total Revenue
FEI-NY
$
29,800
$
2,514
$
32,314
FEI-Zyfer
9,283
649
9,932
Intersegment
-
( 1,469
)
( 1,469
)
Revenue
$
39,083
$
1,694
$
40,777
Fiscal Year Ended April 30, 2022
(In thousands)
POC Revenue
POT Revenue
Total Revenue
FEI-NY
$
39,618
$
1,539
$
41,157
FEI-Zyfer
6,770
1,057
7,827
Intersegment
( 1
)
( 687
)
( 688
)
Revenue
$
46,387
$
1,909
$
48,296
Fiscal Years Ended April 30,
(in thousands)
2023
2022
Revenues by Product Line:
Satellite Revenue
$
17,918
$
26,092
Government Non-Space Revenue
20,282
19,593
Other Commercial & Industrial Revenue
2,577
2,611
Consolidated revenues
$
40,777
$
48,296
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FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2023 and 2022
Comprehensive Income (Loss):
Comprehensive income (loss) consists of net income or loss and other comprehensive income/loss. Other comprehensive income/loss includes changes in unrealized gains or losses, net of tax, on securities (for fiscal year 2023 and fiscal year 2022, debt securities) available for sale during the year.
Research and Development Expenses:
The Company engages in R&D activities to identify new applications for its core technologies, to improve existing products and to improve manufacturing processes to achieve cost reductions and manufacturing efficiencies. R&D costs include direct labor, manufacturing overhead, direct materials and contracted services. Such costs are expensed as incurred. The Company also engages in customer-funded R&D activity. The customer funds received in connection therewith appear in revenues and the associated expenses are included in cost of revenues and are not included in R&D expenses.
Income Taxes:
The Company recognizes deferred tax liabilities and assets based on the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established and adjusted when necessary to increase or reduce deferred tax assets to the amount expected to be realized.
The Company analyzes its tax positions under accounting standards which prescribe recognition thresholds that must be met before a tax benefit is recognized in the financial statements and provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. An entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. Interest and penalties recognized on income taxes are recorded as income tax expense.
Earnings/Loss per Share:
Basic earnings/loss per share are computed by dividing net earnings/loss by the weighted average number of shares of common stock outstanding. Diluted earnings per share are computed by dividing net earnings by the sum of the weighted average number of shares of common stock and the if-converted effect of unexercised stock options and stock appreciation rights (“SARs”). Diluted earnings per share are not computed where the if-converted effect of such items would be anti-dilutive.
Fair Values of Financial Instruments:
Cash and cash equivalents, marketable securities, short-term credit obligations and debt and cash surrender value of life insurance are reflected in the accompanying consolidated balance sheets at amounts considered by management to reasonably approximate fair value based upon the nature of the instrument and current market conditions. Management is not aware of any factors that would significantly affect the value of these amounts. The Company also has an investment in a privately-held Russian company, Morion, Inc. (“Morion”), see Note 10 for additional information.
Equity-based Compensation:
The cost of employee services received in exchange for awards of equity instruments are based on the grant-date fair value of the award. We recognize the fair value of the award as compensation expense over the period during which an employee is required to provide service in exchange for the award.
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FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2023 and 2022
Concentration of Credit Risk:
Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and cash equivalents and trade receivables. The Company maintains cash accounts at several commercial banks at which the balances exceed FDIC limits. The Company has not experienced any losses on such amounts. Concentration of credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising the Company’s customer base and their dispersion across geographic areas, principally within the U.S. The Company routinely addresses the financial strength of its customers and, as a consequence, believes that its receivable credit risk exposure is limited. The Company does not require customers to post collateral.
New Accounting Pronouncements:
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under ASU 2017-04, goodwill impairment will be tested by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2022, with early adoption permitted.
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 2024.
2. Earnings per Share
Reconciliations of the weighted average shares outstanding for basic and diluted (loss) earnings per share for the fiscal years ended April 30, 2023 and 2022, respectively, were as follows:
For the Fiscal Years Ended April 30,
2023
2022
Weighted average shares outstanding:
Basic EPS Shares outstanding (weighted average)
9,337,444
9,265,934
Effect of Dilutive Securities
**
**
Diluted EPS Shares outstanding
9,337,444
9,265,934
** For the fiscal years ended April 30, 2023 and 2022, dilutive securities noted in the above table are excluded from the calculation of (loss) earnings per share since the inclusion of such shares would be antidilutive due to the net loss for the period. Additionally, there are anti-dilutive shares excluded in the above table for fiscal years ended April 30, 2023 and 2022 of 243,625 and 193,000 , respectively.
3. Contract (Liabilities) Assets
At April 30, 2023 and 2022, contract (liabilities) assets, consisted of the following (in thousands):
April 30, 2023
April 30, 2022
Contract Assets
$
10,009
$
8,857
Contract Liabilities
( 18,586
)
( 11,098
)
Contract assets and contract liabilities at April 30, 2021, were $ 14,460 and ($ 12,512 ), respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
April 30, 2023 and 2022 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 POC basis. Fluctuations of contract assets and contract liabilities are due to the timing of funding, amounts billed, and revenue recorded. Contract assets increased $ 1.1 million during fiscal year 2023, primarily due to recognition of revenue related to the satisfaction or partial satisfaction of performance obligations during fiscal year 2023 for which we have not yet billed out customers. Contract liabilities increased $ 7.5 million during fiscal year 2023, primarily due to payments received in excess of revenue recognized on these performance obligations. During fiscal year 2023, we recognized $ 7.1 million of our contract liabilities at April 30, 2022 as revenue. During fiscal year 2022, we recognized $ 17.2 million of our contract liabilities at April 30, 2021 as revenue. During the fiscal years ended April 30, 2023 and 2022, revenue recognized under POC contracts was approximately $ 39.1 million and $ 46.4 million, respectively. If contract losses are anticipated, a loss provision is recorded for the full amount of such losses when they are determinable. Total contract losses for the fiscal years ended April 30, 2023 and 2022 were approximately $ 429,000 and $ 4.2 million, respectively.
4. Inventories, Net
Inventories, net, at April 30, 2023 and 2022, consisted of the following (in thousands):
April 30, 2023
April 30, 2022
Raw Materials and Component Parts
$
12,460
$
11,683
Work in Progress
7,547
7,746
Finished Goods
519
477
$
20,526
$
19,906
Inventory reserves included in inventory were $ 8.1 million and $ 7.5 million for the fiscal years ended April 30, 2023 and 2022, respectively.
5. Property, Plant and Equipment, Net
Property, plant and equipment, net, at April 30, 2023 and 2022, consisted of the following (in thousands):
April 30, 2023
April 30, 2022
Buildings and building improvements
$
2,597
$
2,576
Machinery, equipment and furniture
60,792
59,948
63,389
62,524
Less accumulated depreciation
( 56,296
)
( 53,960
)
$
7,093
$
8,564
Depreciation and amortization expense was $ 2.4 million and $ 2.8 million for the fiscal years ended April 30, 2023 and 2022, respectively.
Maintenance and repairs charged to operations was approximately $ 409,000 and $ 677,000 for the fiscal years ended April 30, 2023 and 2022, respectively.
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FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2023 and 2022
6. Right-of-Use Assets and Lease Liabilities
The Company’s leases primarily represent offices, warehouses, vehicles, manufacturing and R&D facilities which expire at various times through 2029 and are operating leases. Contractual arrangements are evaluated at inception to determine if the agreement contains a lease.
New York lease. In February 2019, the Company entered into an agreement to lease a building to be used as a corporate headquarters office and manufacturing facility in Mitchell Field, NY (“New York lease”). The New York lease expires 9/30/2029 and contains renewal options, early termination, rent abatement, and escalation clauses that are factored into our determination of lease payments when appropriate. We include options to extend or terminate leases in the ROU operating lease asset and liability when it is reasonably certain we will exercise these options. As of April 30, 2023 lease options were not included in the calculation of the ROU operating lease asset and liability. Right-of-Use (ROU) assets and lease liabilities are recorded based on the present value of future lease payments which will factor in certain qualifying initial direct costs incurred as well as any lease incentives that may have been received. Lease expenses for operating lease payments are recognized on a straight-line basis over the lease term. Lease terms may factor in options to extend or terminate the lease.
California lease. In October 2017, the Company entered into an agreement to lease a building to be used as an office and manufacturing facility in Garden Grove, CA (“California Lease”). The California lease expires 1/31/2025 and contains renewal options, early termination, rent abatement, and escalation clauses that are factored into our determination of lease payments when appropriate. We include options to extend or terminate leases in the ROU operating lease asset and liability when it is reasonably certain we will exercise these options. As of April 30, 2023 lease options were not included in the calculation of the ROU operating lease asset and liability. Right-of-Use (ROU) assets and lease liabilities are recorded based on the present value of future lease payments which will factor in certain qualifying initial direct costs incurred as well as any lease incentives that may have been received. Lease expenses for operating lease payments are recognized on a straight-line basis over the lease term. Lease terms may factor in options to extend or terminate the lease.
New Jersey lease. In February 2022, the Company entered into an agreement to lease a building to be used as an office and manufacturing facility in Northvale, NJ (“New Jersey lease”). The New Jersey lease expires 1/31/2025 and contains renewal options, early termination, rent abatement, and escalation clauses that are factored into our determination of lease payments when appropriate. We include options to extend or terminate leases in the ROU operating lease asset and liability when it is reasonably certain we will exercise these options. As of April 30, 2023 lease options were not included in the calculation of the ROU operating lease asset and liability. Right-of-Use (ROU) assets and lease liabilities are recorded based on the present value of future lease payments which will factor in certain qualifying initial direct costs incurred as well as any lease incentives that may have been received. Lease expenses for operating lease payments are recognized on a straight-line basis over the lease term. Lease terms may factor in options to extend or terminate the lease.
The Company elected the practical expedient for short-term leases which allows leases with terms of twelve months or less to be recorded on a straight-line basis over the lease term without being recognized on the consolidated balance sheet.
The table below presents ROU assets and lease liabilities recorded on the consolidated balance sheets as follows:
Classification
April 30, 2023
April 30, 2022
(In thousands)
Assets
Operating lease ROU assets
Right-of-Use assets leases
$
7,382
$
8,805
Liabilities
Operating lease liabilities (short-term)
Lease liability, current
1,753
1,744
Operating lease liabilities (long-term)
Lease liability, non-current
5,883
7,353
Total lease liabilities
$
7,636
$
9,097
Total operating lease expense was approximately $ 1.9 million and $ 1.6 million for the fiscal years ended April 30, 2023 and 2022, respectively, the majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses on the consolidated statements of operations. In addition, the Company made cash payments of $ 1.9 million and $ 2.0 million for operating leases during the fiscal years ended April 30, 2023 and 2022, respectively, which are included in cash flows from operating activities in our consolidated statements of cash flows. As of April 30, 2023, the Company had no operating lease liabilities that had not commenced.
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FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2023 and 2022
The table below reconciles the undiscounted cash flows for each of the next five fiscal years and total of the remaining fiscal years to the operating lease liabilities recorded on the consolidated balance sheet as of April 30, 2023:
Fiscal Year Ending April 30,
( in thousands )
2024
1,806
2025
1,832
2026
1,317
2027
937
2028
1,262
Thereafter
1,976
Total lease payments
9,130
Less imputed interest
( 1,494
)
Present value of future lease payments
7,636
Less current obligations under leases
( 1,753
)
Long-term lease obligations
$
5,883
As of April 30, 2023 and 2022, the weighted-average remaining lease term for all operating leases was 5.6 years and 6.3 years, respectively. The Company does not generally have access to the rate implicit in the leases, therefore, we use a discount rate based on our incremental borrowing rate, which is determined using our credit rating and information available as of the commencement date. The weighted average discount rate for operating leases as of April 30, 2023 and 2022, was 6.23 % and 6.16 %, respectively.
7. Marketable Securities
The cost, gross unrealized gains, gross unrealized losses and fair market value of available-for-sale securities at April 30, 2023 and 2022, respectively, were as follows (in thousands):
April 30, 2023
Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Market Value
Fixed income securities
$
-
$
-
$
-
$
-
April 30, 2022
Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Market Value
Fixed income securities
$
10,403
$
23
$
( 462
)
$
9,964
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2023 and 2022
The following table presents the fair value and unrealized losses, aggregated by investment type and length of time that individual securities have been in a continuous unrealized loss position (in thousands):
Less than 12 months
12 Months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
April 30, 2023
Fixed Income Securities
$
-
$
-
$
-
$
-
$
-
$
-
April 30, 2022
Fixed Income Securities
$
2,349
$
( 146
)
$
5,573
$
( 316
)
$
7,922
$
( 462
)
The Company liquidated all holdings related to Marketable Securities during the fiscal year ended April 30, 2023.
Proceeds from the sale or redemption of available-for-sale securities and the resulting gross realized gains and losses included in the determination of net income (loss) for the years ended April 30, 2023 and 2022, respectively, were as follows (in thousands):
For the years ended April 30,
2023
2022
Proceeds
$
10,967
$
2,089
Gross realized gains
$
-
$
6
Gross realized losses
$
( 784
)
$
-
The fair value accounting framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The levels of the fair value hierarchy are described below:
Level 1
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level 2
Inputs to the valuation methodology include:
-Quoted prices for similar assets or liabilities in active markets;
-Quoted prices for identical or similar assets or liabilities in inactive markets;
-Inputs other than quoted prices that are observable for the asset or liability; and
-Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The Company’s money market, business account, and U.S. securities were valued on a Level 1 basis. The Company’s fixed income corporate debt securities and certificates of deposit were valued on a Level 2 basis. Level 2 securities were valued at the closing prices and are consistent with quoted prices of similar assets reported in active markets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2023 and 2022
8. Debt Obligations
As of April 30, 2022, the Company had available credit with UBS Bank USA at variable terms based on its security holdings under an advisory arrangement, under which no borrowings had been made. As of April 30, 2023, the Company retired its advisory credit arrangement with UBS Bank USA. Prior to retiring the advisory credit arrangement, no borrowings were made during fiscal 2023.
9. Accrued Liabilities
Accrued liabilities at April 30, 2023 and 2022, respectively, consisted of the following (in thousands):
2023
2022
Vacation and other compensation
$
1,408
$
1,523
Incentive compensation
175
100
Payroll taxes
341
112
Warranty reserve
529
519
Commissions
197
263
Deferred compensation payable
762
469
Other
522
710
$
3,934
$
3,696
10. Investment in Morion, Inc.
The Company has an investment in Morion, a privately-held Russian company, which manufactures high precision quartz resonators and crystal oscillators. The Company has also licensed certain technology to Morion.
The Company’s investment consists of 4.6 % of Morion’s outstanding shares, accordingly, the Company accounted for its investment in Morion on the cost basis. During the fiscal years ended April 30, 2023 and 2022, the Company acquired product from Morion in the aggregate amount of approximately $ 196,000 and $ 215,000 , respectively. During the fiscal years ended April 30, 2022, the Company sold product and training services to Morion in the aggregate amount of approximately $ 23,000 , included in revenues in the consolidated statements of operations as part of the FEI-NY segment. During the fiscal year ended April 30, 2022, the Company received dividends from Morion in the amount of approximately $ 123,000 , which is included in other income, net in the consolidated statements of operations as part of the FEI-NY segment. During the fiscal year ended April 30, 2023, the Company sold no product and training devices to Morion, and the Company received no dividends from Morion. Purchases of materials from Morion consist mainly of quartz crystal blanks which are used in the fabrication of quartz resonators. In the event that these items become unavailable from Morion, the Company is in the process of establishing alternate sources of supply. The Company is also capable of fabricating the crystal blanks in-house.
Morion is a less than wholly-owned subsidiary of Gazprombank, a state-owned Russian bank. The U.S. Ukraine-related sanctions regime has since 2014 included a list of 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 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2023 and 2022
Due to the Russia-Ukraine conflict and resulting sanctions, the future status of FEI’s equity investment in Morion is uncertain. In response to these conditions, in connection with the preparation of the audited financial statements included in the 2022 Form 10-K, the Company impaired its investment in Morion in full. The impairment of $ 796,000 is included in other income (expense), net, in the consolidated statements of operations for the fiscal year ended April 30, 2022.
11. Employee Benefit Plans
Profit Sharing Plan:
The Company provides its U.S.-based employees with a profit-sharing plan and trust under § 401(k) of the IRC. This plan allows all eligible employees to defer a portion of their income through voluntary contributions to the plan. In accordance with the provisions of the plan, the Company can make discretionary matching contributions in the form of cash or common stock. For the fiscal years ended April 30, 2023 and 2022, the Company contributed 61,897 and 44,224 shares of common stock, respectively. The approximate value of these shares at the date of contribution was $ 413,000 and $ 426,000 in fiscal years 2023 and 2022, respectively. Contributed shares are drawn from the Company’s common stock and during fiscal years 2023 and 2022, such transactions increased additional paid in capital by $ 351,000 and $ 382,000 , respectively. As of April 30, 2023, the plan held a total of 499,328 shares, which were allocated to the accounts of the individual participants. As of April 30, 2022, the plan held a total of 499,738 shares, which were allocated to the accounts of the individual participants.
Income Incentive Pool:
The Company maintains incentive bonus programs for certain employees that are based on operating profits of the individual subsidiaries to which the employees are assigned. The Company also adopted a plan for the President and Chief Executive Officer of the Company, which the formula is based on consolidated pre-tax profits. The incentive bonus recorded for the fiscal year ended April 30, 2023 was $ 175,000 . The incentive bonus recorded for the fiscal year ended April 30, 2022 was $ 100,000 .
Employee Stock Plans:
The Company has various stock plans, some of which have been approved by the Company’s stockholders, for key management employees, including officers and directors who are employees, certain consultants and independent members of the Board of Directors. The plans are Nonqualified Stock Options (“NQSO”) plans, Incentive Stock Option (“ISO”) plans, and SAR plans. Under these plans, options or SARs are granted at the discretion of the Stock Option Committee at an exercise price not less than the fair market value of the Company’s common stock on the date of grant.
Typically, options and SARs vest over a four -year period from the date of grant. The options and SARs generally expire ten years after the date of grant (the most recent SARs awards, beginning in fiscal year 2017, expire in five years ) and are subject to certain restrictions on transferability of the shares obtained on exercise. Under the Company’s 2005 Stock Award Plan (“Plan”) the Company provided option holders the opportunity to exercise stock options either by paying the exercise price for the shares or to do a cashless exercise whereby the individual receives the net number of shares of stock equal in value to the exercised number of shares times the difference between the current market value of the Company’s stock and the exercise price. Under the Plan, instruments granted under other plans which expire, are canceled, or are tendered in the exercise of such instruments, increase the shares available under the Plan.
As of April 30, 2023, eligible employees and directors had been granted total SARs representing approximately 2,385,000 shares of the Company’s common stock, of which approximately 244,000 shares were outstanding and approximately 244,000 shares with a weighted average exercise price of $ 10.77 were exercisable. There were no SARs granted during the fiscal year 2023. When the SARs become exercisable, the Company will settle the SARs by issuing to exercising recipients the number of shares of stock from common stock or treasury stock, if available, equal to the appreciated value of the Company’s stock between the grant date and exercise date. At the time of exercise, the quantity of shares under the SARs grant equal to the exercise value divided by the then market value of the shares will be returned to the pool of available shares for future grant under the Plan. During the fiscal year ended April 30, 2023, no employees exercised SARs and no shares were granted. There were 185,500 shares returned to the pool of available shares and may be used for future grants under the Plan. Forfeitures are recorded as they occur.
The excess of the consideration received over the par value of the common stock or cost of treasury stock issued under both types of option plans is recognized as an increase in additional paid-in capital.
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FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2023 and 2022
The following table summarizes information about stock option and SARs activity for the years ended April 30, 2023 and 2022:
Stock Options and Stock Appreciation Rights
Weighted Average
Weighted-Average
Grant Date
Remaining
Aggregate
Shares
Exercise Price
Fair Value
Contractual Term
Intrinsic Value
Outstanding – April 30, 2021
615,000
$
9.88
$
6,076,105
1.8 years
$
2,141,905
Granted
-
-
-
Exercised
( 42,875
)
7.30
( 313,056
)
34,660
Expired or Canceled
( 143,000
)
10.48
( 1,498,300
)
Outstanding – April 30, 2022
429,125
$
9.94
$
4,264,749
1.3 years
$
2,141,905
Granted
-
-
-
Exercised
-
-
-
-
Expired or Canceled
( 185,500
)
8.84
( 1,639,970
)
Outstanding – April 30, 2023
243,625
$
10.77
$
2,624,779
0.8 years
$
1,592,089
Exercisable
243,625
$
10.77
$
2,624,779
0.8 years
$
1,592,089
Available for future grants
851,965
As of April 30, 2022, exercisable shares related to options and SARs under the plans totaled 393,500 , weighted-average exercise price was $ 10.06 , grant date fair value was $ 3,956,845 , weighted average remaining contractual term was 1.4 years, and the aggregate intrinsic value was $ 2,989,785 .
As of April 30, 2023, there was no unrecognized compensation cost related to non-vested options and SARs under the plans. As of April 30, 2022, total unrecognized compensation cost related to non-vested options and SARs under the plans was approximately $ 7,000 .
During the fiscal years ended April 30, 2023 and 2022, 35,625 shares and 41,875 shares, respectively, vested, the fair value of which was approximately $ 106,000 and $ 123,000 , respectively.
Stock-based compensation costs, for options and SARs, included in the cost of revenues of programs on which the Company recognizes revenue under the POC method were approximately $ 2,000 and $ 9,000 for the fiscal years ended April 30, 2023 and 2022, respectively. Stock-based compensation expense included in selling and administrative expenses, related to options and SARs, during the fiscal years ended April 30, 2023 and 2022 were approximately $ 0 and $ 45,000 , respectively.
The Company classifies cash flows resulting from the tax benefits from tax deductions recognized upon the exercise of stock options or SARs (tax benefits) as operating cash flows. The Company did not recognize any tax benefits from the exercise of stock options and SARs for the fiscal years presented.
Restricted Stock Plan and Other Issuances:
During fiscal year 1990, the Company adopted a Restricted Stock Plan which provided that key management employees could be granted rights to purchase an aggregate of 375,000 shares of the Company’s common stock. The grants, transferability restrictions and purchase price were determined at the discretion of a special committee of the Board of Directors. The purchase price could not be less than the par value of the common stock. Transferability of shares is restricted for a four-year period, except in the event of a change in control as defined therein. As a result of the adoption by the Company’s stockholders of the 2005 Stock Award Plan, the Restricted Stock Plan was discontinued. No additional grants will be made under this plan. As of April 30, 2023, there are no outstanding shares available for purchase.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2023 and 2022
Under the 2005 Stock Award Plan the Company began issuing Restricted Stock Units (“RSUs”) to eligible employees in fiscal year 2020. The fair value of these awards is equivalent to the market value of the Company’s common stock on the grant date and vests over a period of time. On the applicable vesting date, the holder of an RSU becomes entitled to share of the Company’s common stock. A portion of the RSUs awarded will vest annually until fiscal year 2026. Forfeitures are recorded as they occur.
During the fiscal year ended April 30, 2023 and 2022, the Company issued 1,300 shares from common stock and 1,150 shares from common stock, respectively, to select employees for milestone years of service to the Company. These shares were issued under the 2005 Stock Award Plan, are shares of the Company’s common stock, and are fully vested at time of issuance.
In fiscal year 2021 the Company elected to issue Performance Stock Units (“PSUs”) to an officer of the Company. The fair value of these awards is equivalent to the market value of the Company’s common stock on the grant date and requires an assessment of the probability that the specified performance criteria will be achieved, which is updated at each reporting date. PSUs are not shares of the Company’s common stock and do not have any rights or privileges thereof, including voting or dividend rights. On the applicable vesting date, subject to the attainment of the specified performance criteria, the holder of a PSU becomes entitled to a share of the Company’s common stock. PSUs are subject to certain restrictions and forfeiture provisions, in addition to performance vesting conditions, prior to vesting. A portion of the PSUs awarded will vest, subject to specified performance criteria, annually until fiscal year 2025. Forfeitures are recorded as they occur.
Stock-based compensation costs, related to RSUs and PSUs, included in the cost of revenues of programs on which the Company recognizes revenue under the POC method were approximately $ 186,000 and $ 83,000 for the fiscal years ended April 30, 2023 and 2022, respectively. Stock-based compensation expense, for RSUs and PSUs, included in selling and administrative expenses were approximately $ 200 and $ 99,000 for the fiscal years ended April 30, 2023 and 2022, respectively. The fair value of RSUs and PSUs vested were approximately $ 124,000 and $ 78,000 for the fiscal years ended April 30, 2023 and 2022, respectively.
The following table summarizes activity for the RSUs and PSUs awards that reduce available capacity under the 2005 Stock Award Plan for the fiscal years ended April 30, 2023 and 2022:
Weighted-Average
Shares
Grant Date Fair Value
Balance – April 30, 2021
57,000
10.26
Granted
26,250
9.84
Vested
( 15,066
)
10.32
Forfeited
( 2,575
)
9.97
Balance – April 30, 2022
65,609
10.26
Granted
265,000
6.29
Vested
( 12,401
)
10.01
Forfeited
( 24,812
)
9.90
Balance – April 30, 2023
293,396
6.64
Deferred Compensation Agreements:
The Company has a series of agreements with key employees providing for the payment of benefits upon retirement or death. Under these agreements, each key employee receives specified retirement payments for the remainder of the employee’s life with a minimum payment of ten years’ benefits to either the employee or his or her beneficiaries. The agreements also provide for lump sum payments upon termination of employment without cause and reduced benefits upon early retirement. The Company pays the benefits out of its working capital but has also purchased whole life or term life insurance policies on the lives of certain of the participants to cover the optional lump sum obligations of the agreements upon the death of the participant. Deferred compensation expense charged to selling and administrative expenses during the fiscal year ended April 30, 2023 was approximately $ 643,000 . Deferred compensation expense charged to selling and administrative expenses during the fiscal year ended April 30, 2022 was approximately $ 1.1 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2023 and 2022
Life Insurance Policies and Cash Held in Trust:
The whole-life insurance policies on the lives of certain participants covered by deferred compensation agreements have been placed in a trust. Upon the death of any insured participant, cash received from life insurance policies in excess of the Company’s deferred compensation obligations to the estate or beneficiaries of the deceased, are also placed in the trust. These assets belong to the Company until a change of control event, as defined in the trust agreement, should occur. At that time, the Company is required to add sufficient cash to the trust so as to match the deferred compensation liability described above. Such funds will be used to continue the deferred compensation arrangements following a change of control.
12. Income Taxes
The provision for income taxes consisted of the following (in thousands):
Fiscal Year Ended April 30,
2023
2022
Current:
Federal
$
61
$
-
State
13
1
Current provision
74
1
Deferred:
Federal
-
-
State
-
-
Deferred tax provision
-
-
Total provision
$
74
$
1
The following table reconciles the reported income tax provision, recorded primarily due to the (i) recognition of previously unrecognized tax benefits, (ii) state and local taxes, (iii) and a change in the valuation allowance, with the amount computed using the federal statutory income tax rate (in thousands):
Fiscal Year Ended April 30,
2023
2022
Statutory rate
$
( 1,140
)
$
( 1,819
)
State and local tax
110
( 163
)
Valuation allowance on deferred tax assets
( 1,701
)
1,050
Nondeductible expenses
( 9
)
( 11
)
Uncertain tax positions
7
1
Nontaxable life insurance cash value increase
( 49
)
( 47
)
Taxable life insurance gain
8
783
Capital Loss
2,251
-
Stock Compensation
173
86
Tax credits
( 27
)
( 219
)
Change in tax rate
362
209
Other items
89
131
Total provision
$
74
$
1
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FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2023 and 2022
The components of deferred taxes are as follows (in thousands):
Fiscal Year Ended April 30,
2023
2022
Deferred tax assets:
Employee benefits
$
2,739
$
3,047
Inventory
2,507
2,958
Accounts receivable
78
118
Tax credits
2,164
2,306
Other assets
1,001
981
Lease Liability
1,834
2,284
Capital Loss carry-forward
223
2,513
Research & Development
570
-
Net operating loss carryforwards
8,039
7,574
Total deferred tax asset
19,155
21,781
Deferred tax liabilities:
Property, plant and equipment
( 251
)
( 461
)
Right of use asset
( 1,773
)
( 2,211
)
Other liabilities
( 81
)
( 83
)
Deferred state income tax
( 771
)
( 943
)
Net deferred tax asset
16,279
18,083
Valuation allowance
( 16,287
)
( 18,091
)
Net deferred tax liability
$
( 8
)
$
( 8
)
In assessing the potential for realization of deferred tax assets, the Company considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will be realized. A valuation allowance, if needed, reduces the deferred tax assets to the amounts expected to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating loss carryforwards can be utilized. We assess all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable. As of April 30, 2023 and 2022, we have a full valuation allowance against our U.S. net deferred tax assets. If these estimates and assumptions change in the future, the Company may be required to reduce its existing valuation allowance resulting in less income tax expense.
For the fiscal year ended April 30, 2023, the valuation allowance decreased by approximately $ 1.8 million from the prior fiscal year primarily due a decrease in the net deferred tax asset for which no tax benefit was provided.
The Company has a net deferred tax liability related to the tax effect of differences between financial reporting and tax basis of intangible assets that are not expected to reverse within the Company’s net operating loss carryforward periods. The utilization of indefinite lived net operating losses are limited to 80% of taxable income in an annual period.
As of April 30, 2023, the Company has U.S. federal net operating losses of $ 31.3 million of which $ 15.7 million begins to expire in fiscal years 2024 through 2038, including $ 3.1 million which is subject to annual limitation under IRC § 382. The remaining U.S. federal net operating losses of $ 15.6 million have an indefinite carry-forward period. The U.S. federal capital loss carry-forward of $ 0.9 million expires in fiscal years 2025 and 2027. U.S. federal R&D credits of $ 0.9 million begin to expire in fiscal years 2036 through 2040. The Company also has state net operating loss carryforwards, and state tax credits that expire in various years and amounts.
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FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2023 and 2022
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, is as follows (in thousands):
2023
2022
Balance at the beginning of the fiscal year
$
230
$
119
Additions based on positions taken in the current year
-
111
Additions based on positions taken in prior years
-
-
Decreases based on positions taken in prior years
-
-
Lapse in statute of limitations
-
-
Balance at the end of the fiscal year
$
230
$
230
The entire amount reflected in the above table at April 30, 2023, if recognized, would reduce our effective tax rate. As of April 30, 2023, and 2022, the Company had $ 8,325 and $ 1,176 , respectively, accrued for the payment of interest and penalties. For the fiscal years ended April 30, 2023 and 2022, the Company recognized interest of $ 7,149 and $ 1,176 , respectively. Although it is difficult to predict or estimate the change in the Company’s unrecognized tax benefits over the next twelve months, the Company believes $ 119,000 will be recognized in the next twelve months.
The Company is subject to taxation in the U.S. federal, various state and local, and foreign jurisdictions. The Company is no longer subject to examination of its U.S. federal income tax returns by the Internal Revenue Service for fiscal years 2019 and prior. Net operating losses and tax attributes generated in closed years and utilized in open years are subject to adjustment by the tax authorities.
13. Segment Information
The Company operates under two reportable segments based on the geographic locations of its subsidiaries:
(1)
FEI-NY – operates out of New York and its operations consist principally of precision time and frequency control products used in three principal markets- communication satellites (both commercial and U.S. Government-funded); terrestrial cellular telephone or other ground-based telecommunication stations; and other components and systems for the U.S. military.
The FEI-NY segment also includes the operations of the Company’s wholly-owned subsidiary, FEI-Elcom. FEI-Elcom, in addition to its own product line, provides design and technical support for the FEI-NY segment’s satellite business.
(2)
FEI-Zyfer – operates out of California and its products incorporate Global Positioning System (GPS) technologies into systems and subsystems for secure communications, both government and commercial, and other locator applications. This segment also provides sales and support for the Company’s wireline telecommunications family of products, including US5G, which are sold in the U.S. market.
The Company measures segment performance based on total revenues and profits generated by each geographic location rather than on the specific types of customers or end-users. Consequently, the Company determined that the segments indicated above most appropriately reflect the way the Company’s management views the business.
The accounting policies of the two segments are the same as those described in Note 1. The Company evaluates the performance of its segments and allocates resources to them based on operating profit which is defined as income before investment income, interest expense and taxes. All acquired assets, including intangible assets, are included in the assets of both reporting segments.
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FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2023 and 2022
The table below presents information about reported segments for each of the years ended April 30, 2023 and 2022, respectively, with reconciliation of segment amounts to consolidated amounts as reported in the consolidated statements of operations or the consolidated balance sheets for each of the fiscal years (in thousands):
For the Fiscal Years Ended April 30,
2023
2022
Revenues:
FEI-NY
$
32,314
$
41,157
FEI-Zyfer
9,932
7,827
less intersegment revenues
( 1,469
)
( 688
)
Consolidated revenues
$
40,777
$
48,296
Operating loss:
FEI-NY
$
( 4,234
)
$
( 5,679
)
FEI-Zyfer
( 160
)
( 2,104
)
less intersegment revenues
68
79
Corporate
( 346
)
( 334
)
Consolidated operating loss
$
( 4,672
)
$
( 8,038
)
For the Fiscal Years Ended April 30,
2023
2022
Identifiable assets:
FEI-NY
$
39,005
$
40,888
FEI-Zyfer
10,699
10,522
less intersegment balances
( 58
)
( 126
)
Corporate
24,850
33,476
Consolidated identifiable assets
$
74,496
$
84,760
Depreciation and amortization (allocated):
FEI-NY
$
2,229
$
2,798
FEI-Zyfer
205
227
Corporate
-
-
Consolidated depreciation and amortization expense
$
2,434
$
3,025
Major Customers
The Company’s products are sold to both commercial and governmental customers. For the fiscal years ended April 30, 2023 and 2022, approximately 95 % and 94 %, respectively, of the Company’s sales were made under contracts to the U.S. Government or subcontracts for U.S. Government end-use.
In the fiscal year ended April 30, 2023, revenues from four customers, of the FEI-NY segment which each accounted for more than 10% of that segment’s revenues, were $ 7.3 million, $ 5.8 million, $ 5.1 million, and $ 4.0 million. In the fiscal year ended April 30, 2022, revenues from four customers, of the FEI-NY segment which each accounted for more than 10% of that segment’s revenues, were $ 12.6 million, $ 6.1 million, $ 5.0 million, and $ 4.4 million. In the FEI-Zyfer segment two customers, which each accounted for more than 10% of that segment’s revenues, were $ 4.0 million and $ 1.5 million in the fiscal year ended April 30, 2023. In the fiscal year ended April 30, 2022, revenues from two customers, of the FEI-Zyfer segment which each accounted for more than 10% of that segment’s revenues, were $ 1.3 million and $ 1.0 million.
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FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2023 and 2022
The loss by the Company of any one of these customers would have a material adverse effect on the Company’s business. The Company believes its relationship with these customers is mutually satisfactory. Sales to the major customers referenced above can include commercial and governmental end users.
Foreign Sales
Revenues in each of the Company’s segments include sales to foreign governments or to companies located in foreign countries. For the fiscal years ended April 30, 2023 and 2022, revenues, based on the location of the procurement entity were derived from the following countries (in thousands):
For the Fiscal Years Ended April 30,
2023
2022
Domestic
$
39,564
$
47,415
Foreign
1,213
881
$
40,777
$
48,296
As of April 30, 2023 and 2022, there were no material foreign sales to one specific foreign country.
14. Product Warranties
The Company generally provides its customers with a one-year warranty regarding the manufactured quality and functionality of its products. For some limited products, the warranty period has been extended. The Company establishes warranty reserves based on its product history, current information on repair costs and annual sales levels. As of April 30, 2023 and 2022, respectively, changes in the carrying amount of accrued product warranty costs, reported in accrued expenses on the consolidated balance sheets, were as follows (in thousands):
2023
2022
Balance at beginning of year
$
519
$
439
Warranty costs incurred
( 499
)
( 587
)
Product warranty accrual
509
667
Balance at end of year
$
529
$
519
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FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2023 and 2022
15. Other Comprehensive Income (Loss)
Changes in Accumulated Other Comprehensive Income (Loss) (“AOCI”) by component and reclassifications from AOCI to Other income (expense), net, for the fiscal years ended April 30, 2023 and 2022, respectively, were as follows (in thousands):
Change in
Market Value
of Marketable
Securities
Balance April 30, 2021, net of taxes
$
291
Items of other comprehensive income (loss) before reclassification, pretax
( 725
)
Tax effect
( 1
)
Items of other comprehensive income (loss) before reclassification, net of taxes
( 726
)
Reclassification adjustments, pretax **
( 6
)
Tax effect
1
( 5
)
Total other comprehensive income (loss), net of taxes
( 731
)
Balance April 30, 2022, net of taxes
( 440
)
Items of other comprehensive income (loss) before reclassification, pretax
( 344
)
Tax effect
165
Items of other comprehensive income (loss) before reclassification, net of taxes
( 179
)
Reclassification adjustments, pretax **
784
Tax effect
( 165
)
619
Total other comprehensive income (loss), net of taxes
440
Balance April 30, 2023, net of taxes
-
** The reclassification adjustments represent net realized (gains) losses on the sale or redemption of available-for-sale marketable securities that were reclassified from AOCI to Other income (expense), net.
16. Contingencies
On August 25, 2021, the Company settled disputes with Mr. Bloch. Under the Agreement on Material Terms of Settlement (the “Settlement Terms”), dated August 25, 2021, between and among the Company, Jonathan Brolin, Lance W. Lord, Russell M. Sarachek, Richard Schwartz and Stanton D. Sloane, each in their capacity as members of the Board, and the Compensation Committee of the Company’s Board, in its capacity as administrator under the deferred compensation agreements, and Mr. Bloch and certain members of Mr. Bloch’s family, in full and complete settlement of all claims asserted and all sums sought by Mr. Bloch in the litigation and arbitration proceedings, the Company agreed to pay Mr. Bloch $ 6 million on or before September 24, 2021. The final settlement occurred on September 21, 2021.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.