FREQUENCY ELECTRONICS INC 10-Q

Item 1. Financial Statements FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands, except par value) October 31, April 30, 2024 2024 (UNAUDITED) ASSETS: Current assets: Cash and cash equivalents $ 9,698 $ 18,320 Accounts receivable, net of allowances of $ 110 at October 31, 2024 and April 30, 2024 4,088 4,614 Contract assets 12,092 10,523 Inventories 25,480 23,431 Prepaid income taxes 12 37 Prepaid expenses and other 1,578 1,196 Total current assets 52,948 58,121 Property, plant, and equipment, net 6,274 6,438 Goodwill 617 617 Cash surrender value of life insurance 10,443 10,221 Right-of-use assets – operating leases 5,276 6,036 Restricted cash 1,342 945 Other assets 875 875 Total assets $ 77,775 $ 83,253 LIABILITIES AND STOCKHOLDERS ’ EQUITY: Current liabilities: Accounts payable $ 1,330 $ 2,348 Accrued liabilities 3,975 4,765 Loss provision accrual 244 404 Income taxes payable - - Operating lease liability - current portion 1,301 1,640 Contract liabilities 22,659 21,639 Total current liabilities 29,509 30,796 Deferred compensation 8,011 8,088 Deferred taxes 19 8 Operating lease liability – non-current portion 4,044 4,545 Total liabilities 41,583 43,437 Stockholders’ equity: Preferred stock - $ 1.00 par value; authorized 600 shares, no shares issued - - Common stock - $ 1.00 par value; authorized 20,000 shares, 9,621 shares issued and 9,604 shares outstanding at October 31, 2024; 9,512 shares issued and 9,511 shares outstanding at April 30, 2024 9,617 9,512 Additional paid-in capital 41,683 50,334 Accumulated deficit ( 14,943 ) ( 20,027 ) Common stock reacquired and held in treasury - at cost ( 13 shares at October 31, 2024 and 1 share at April 30, 2024) ( 165 ) ( 3 ) Total stockholders’ equity 36,192 39,816 Total liabilities and stockholders ’ equity $ 77,775 $ 83,253 See accompanying notes to condensed consolidated financial statements. 3 Table of Contents FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES Condensed Consolidated Statements of Operations and Comprehensive Income (In thousands, except per share data) (Unaudited) Three Months Ended October 31, Six Months Ended October 31, 2024 2023 2024 2023 Condensed Consolidated Statements of Operations Revenues $ 15,820 $ 13,575 $ 30,898 $ 25,984 Cost of revenues 8,201 9,245 16,580 16,786 Gross margin 7,619 4,330 14,318 9,198 Selling and administrative expenses 3,388 2,552 6,234 4,853 Research and development expenses 1,613 840 3,101 1,347 Operating income 2,618 938 4,983 2,998 Other income (expense): Investment income (expense) 203 ( 106 ) 427 ( 86 ) Interest expense ( 27 ) ( 29 ) ( 53 ) ( 60 ) Other expense, net ( 1 ) - ( 1 ) - Income before provision for income taxes 2,793 803 5,356 2,852 Provision for income taxes 139 6 272 13 Net income $ 2,654 $ 797 $ 5,084 $ 2,839 Net income per common share: Basic and diluted income per share $ 0.28 $ 0.08 $ 0.53 $ 0.30 Weighted average shares outstanding: Basic and diluted 9,585 9,399 9,562 9,392 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Six Months Ended October 31, 2024 2023 Cash flows from operating activities: Net income $ 5,084 $ 2,839 Non-cash charges to earnings 2,534 2,191 Net changes in operating assets and liabilities ( 5,266 ) ( 8,011 ) Net cash provided by (used in) operating activities 2,352 ( 2,981 ) Cash flows from investing activities: Purchase of property, plant, and equipment, and other assets ( 848 ) ( 360 ) Net cash used in investing activities ( 848 ) ( 360 ) Cash flows from financing activities: Payment of dividend ( 9,567 ) - Purchase of Treasury stock ( 162 ) - Net cash used in financing activities ( 9,729 ) - Net decrease in cash and cash equivalents and restricted cash ( 8,225 ) ( 3,341 ) Cash and cash equivalents and restricted cash at beginning of period 19,265 12,049 Cash and cash equivalents and restricted cash at end of period $ 11,040 $ 8,708 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 53 $ 60 Income taxes $ 45 9 See accompanying notes to condensed consolidated financial statements. 5 Table of Contents FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Changes in Stockholders’ Equity Three and Six months ended October 31, 2024 and 2023 (In thousands, except share data) (Unaudited) Additional Treasury stock Accumulated other Common Stock paid in Accumulated (at cost) comprehensive Shares Amount capital Deficit Shares Amount Income (loss) Total Balance at April 30, 2024 9,511,560 $ 9,512 $ 50,334 $ ( 20,027 ) 741 $ ( 3 ) $ - $ 39,816 Contribution of stock to 401(k) plan 26,457 26 215 - - - - 241 Stock-based compensation expense 27,815 28 316 - - - - 344 Shares withheld on employee taxes on vested equity awards - - - - 4,569 ( 62 ) - ( 62 ) Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price 1,819 2 ( 2 ) - - - - - Dividends payable - - ( 9,567 ) - - - - ( 9,567 ) Net income - - - 2,430 - - - 2,430 Balance at July 31, 2024 9,567,651 $ 9,568 $ 41,296 $ ( 17,597 ) 5,310 $ ( 65 ) $ - $ 33,202 Contribution of stock to 401(k) plan 17,577 17 195 - - - - 212 Stock-based compensation expense 32,127 32 192 - - - - 224 Shares withheld on employee taxes on vested equity awards - - - - 7,893 ( 100 ) - ( 100 ) Dividends payable - - 9,567 - - - - 9,567 Dividends paid - - ( 9,567 ) - - - - ( 9,567 ) Net income - - - 2,654 - - - 2,654 Balance at October 31, 2024 9,617,355 $ 9,617 $ 41,683 $ ( 14,943 ) 13,203 $ ( 165 ) $ - $ 36,192 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, 2023 9,373,776 $ 9,374 $ 49,136 $ ( 25,621 ) 741 $ ( 3 ) $ - $ 32,886 Contribution of stock to 401(k) plan 17,013 17 96 - - - - 113 Stock-based compensation expense - - 128 - - - - 128 Net income - - - 2,042 - - - 2,042 Balance at July 31, 2023 9,390,789 $ 9,391 $ 49,360 $ ( 23,579 ) 741 $ ( 3 ) $ - $ 35,169 Contribution of stock to 401(k) plan 12,885 13 75 - - - - 88 Stock-based compensation expense 750 1 201 - - - - 202 Net income - - - 797 - - - 797 Balance at October 31, 2023 9,404,424 $ 9,405 $ 49,636 $ ( 22,782 ) 741 $ ( 3 ) $ - $ 36,256 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE A – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS In the opinion of management of Frequency Electronics, Inc. (the “Company”), the accompanying unaudited condensed consolidated interim financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly, in all material respects, the condensed consolidated financial position of the Company as of October 31, 2024 and the results of its operations, changes in stockholders’ equity for the three and six months ended October 31, 2024 and 2023, and cash flows for the six months ended October 31, 2024 and 2023. The April 30, 2024 condensed consolidated balance sheet was derived from audited financial statements. These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated interim financial statements should be read in conjunction with the annual consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2024, filed on August 2, 2024 with the Securities and Exchange Commission (the “Form 10-K”). The results of operations for such interim periods are not necessarily indicative of the operating results for the full fiscal year. NOTE B – EARNINGS PER SHARE Reconciliation of the weighted average shares outstanding for basic and diluted income per share (“EPS”) for the three and six months ended October 31, 2024 and 2023, respectively, were as follows: Periods ended October 31, Three months Six months 2024 2023 2024 2023 Weighted average shares outstanding: Basic EPS shares outstanding (weighted average) 9,585,357 9,399,052 9,561,848 9,391,714 Effect of dilutive securities ** ** ** ** Diluted EPS shares outstanding 9,585,357 9,399,052 9,561,848 9,391,714 ** For the three and six months ended October 31, 2024 and 2023, dilutive securities are excluded from the calculation of EPS since the inclusion of such shares would be antidilutive. The exercisable shares excluded for the three and six months ended October 31, 2024 were 76,000 shares. The exercisable shares excluded for the three and six months ended October 31, 2023 were 97,000 shares. On July 22, 2024 the Company’s Board of Directors declared a special cash dividend of $ 1.00 per share of common stock. The special dividend was paid on August 29, 2024, to stockholders of record as of the close of business on August 8, 2024. The total amount of the special dividend payment was approximately $ 9.6 million. NOTE C – CONTRACT ASSETS AND LIABILITIES Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date on contracts with customers. Contract assets are transferred to accounts receivable when the rights become unconditional. Contract liabilities primarily relate to contracts where advance payments or deposits have been received, but performance obligations have not yet been satisfied, and therefore, revenue has not been recognized. During the three and six months ended October 31, 2024, we recognized $ 8.3 million and $ 16.0 million, respectively, of our contract liabilities at April 30, 2024 as revenue. During the three and six months ended October 31, 2023, we recognized $ 4.4 million and $ 8.1 million, respectively, of our contract liabilities at April 30, 2023 as revenue. If contract losses are anticipated, a loss provision is recorded for the full amount of such losses when they are determinable. Contract losses for three and six months ended October 31, 2024 were approximately $ 0.2 million in both periods, offset by a loss reduction of approximately $ 0.3 million, mostly related to additional funding. Total contract losses for three and six months ended October 31, 2023 were approximately $ 1.4 million and $ 1.5 million, respectively. The liability for contract losses is presented as loss provision accrual within the consolidated balance sheets. 7 Table of Contents FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE D – EMPLOYEE BENEFIT PLANS During the three and six months ended October 31, 2024, the Company made contributions of 17,577 shares and 44,034 shares, respectively, of its common stock to the Company’s profit-sharing plan and trust under Section 401(k) of the Internal Revenue Code. During the three and six months ended October 31, 2023, the Company made contributions of 12,885 shares and 29,898 shares, respectively, of its common stock to the Company’s profit-sharing plan and trust under Section 401(k) of the Internal Revenue Code. Such contributions are in accordance with the Company’s discretionary match of employee voluntary contributions to this plan. Deferred compensation expense charged to selling and administrative expenses during the three and six months ended October 31, 2024, was approximately $ 140,000 and $ 283,000 , respectively. Payments made related to deferred compensation, inclusive of approximately $ 26,000 and $ 53,000 , respectively, of interest expense, were approximately $ 179,000 and $ 358,000 for the same periods. Deferred compensation expense charged to selling and administrative expenses during the three and six months ended October 31, 2023, was approximately $ 109,000 and $ 217,000 , respectively. Payments made related to deferred compensation, inclusive of approximately $ 29,000 and $ 60,000 , respectively, of interest expense were approximately $ 175,000 and $ 361,000 for the same periods. NOTE E – INVENTORIES Inventories, which are reported at the lower of cost and net realizable value, consisted of the following (in thousands): October 31, 2024 April 30, 2024 Raw materials and component parts $ 15,515 $ 14,939 Work in progress 9,431 8,035 Finished goods 534 457 $ 25,480 $ 23,431 NOTE F – RIGHT-OF-USE ASSETS AND LEASE LIABILITIES The Company’s leases primarily represent offices, warehouses, vehicles, manufacturing facilities and Research and Development (“R&D”) facilities which expire at various times through 2029 and are operating leases. Contractual arrangements are evaluated at inception to determine if the agreement contains a lease. The Company elected the practical expedient for short-term leases which allows leases with terms of 12 months or less to be recorded on a straight-line basis over the lease term without being recognized on the consolidated balance sheets. The table below presents right-of-use (“ROU”) assets and liabilities recorded on the respective consolidated balance sheets as follows (in thousands): October 31, 2024 April 30, 2024 Assets Operating lease ROU assets $ 5,276 $ 6,036 Liabilities Operating lease liabilities (short-term) 1,301 1,640 Operating lease liabilities (long-term) 4,044 4,545 Total lease liabilities $ 5,345 $ 6,185 Total operating lease expense was $ 0.5 million and $ 0.9 million for the three and six months ended October 31, 2024, respectively, the majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses on the unaudited condensed consolidated statements of operations. Total operating lease expense was $ 0.5 million and $ 0.9 million for the three and six months ended October 31, 2023, respectively, the majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses on the unaudited condensed consolidated statements of operations. 8 Table of Contents FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) The maturities of lease liabilities at October 31, 2024 are as follows: Fiscal Year Ending April 30, ( in thousands ) Remainder of 2025 $ 662 2026 1,362 2027 964 2028 1,262 2029 1,389 Thereafter 587 Total lease payments 6,226 Less imputed interest ( 881 ) Present value of future lease payments 5,345 Less current obligations under leases ( 1,301 ) Long-term lease obligations 4,044 As of October 31, 2024 and 2023, the weighted-average remaining lease term for all operating leases was 4.70 years and 5.27 years, respectively. The Company does not generally have access to the rate implicit in the leases and therefore selected a rate that is reflective of companies with similar credit ratings for secured debt as the discount rate. The weighted average discount rate for operating leases as of October 31, 2024 and 2023, was 6.38 % and 6.28 %, respectively. NOTE G – 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 communication 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. 9 Table of Contents FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) The accounting policies of the two segments are the same as those described in “Note 1. Summary of Accounting Policies” to the consolidated financial statements included in the Form 10-K. The Company evaluates the performance of its segments and allocates resources to them based on operating profit (loss). Investment income (expense), interest expense, and other expense, net, as reported in the Condensed Consolidated Statement of Operations and Comprehensive Income, are not allocated to or disclosed for each reportable segment and reconcile segment operating income (loss) to income before provision of income taxes. All acquired assets, including intangible assets, are included in the assets of the applicable reporting segment. The tables below present information about reported segments with reconciliation of segment amounts to consolidated amounts as reported in the condensed consolidated statements of operations or the consolidated balance sheets for each of the periods (in thousands): Periods ended October 31, Three months Six months 2024 2023 2024 2023 Revenues: FEI-NY $ 11,518 $ 9,271 $ 22,494 $ 18,762 FEI-Zyfer 4,559 4,756 8,831 8,023 less intersegment revenues ( 257 ) ( 452 ) ( 427 ) ( 801 ) Consolidated revenues $ 15,820 $ 13,575 $ 30,898 $ 25,984 Operating income: FEI-NY $ 2,402 $ ( 231 ) $ 3,779 $ 1,249 FEI-Zyfer 253 1,484 1,393 2,163 less intersegment profit 164 ( 79 ) 149 ( 140 ) Corporate ( 201 ) ( 236 ) ( 338 ) ( 274 ) Consolidated operating income $ 2,618 $ 938 $ 4,983 $ 2,998 October 31, 2024 April 30, 2024 Identifiable assets: FEI-NY $ 38,607 $ 36,512 FEI-Zyfer 15,622 15,696 less intersegment balances ( 88 ) ( 237 ) Corporate 23,634 31,282 Consolidated identifiable assets $ 77,775 $ 83,253 Total revenue recognized over time as Percentage of Completion (“POC”) and Passage of Title (“POT”) was approximately $ 15.1 million and $ 0.7 million, respectively, of the $ 15.8 million reported for the three months ended October 31, 2024. Total revenue recognized over time as POC and POT was approximately $ 29.6 million and $ 1.3 million, respectively, of the $ 30.9 million reported for the six months ended October 31, 2024. Total revenue recognized over time as POC and POT was approximately $ 12.3 million and $ 1.3 million, respectively, of the $ 13.6 million reported for the three months ended October 31, 2023. Total revenue recognized over time as POC and POT was approximately $ 24.0 million and $ 2.0 million, respectively, of the $ 26.0 million reported for the six months ended October 31, 2023. The amounts by segment and product line were as follows (in thousands): Three Months Ended October 31, 2024 2023 POC POT Total POC POT Total Revenue Revenue Revenue Revenue Revenue Revenue FEI-NY $ 10,842 $ 676 $ 11,518 $ 7,894 $ 1,377 $ 9,271 FEI-Zyfer 4,282 277 4,559 4,402 354 4,756 Intersegment - ( 257 ) ( 257 ) - ( 452 ) ( 452 ) Revenues $ 15,124 $ 696 $ 15,820 $ 12,296 $ 1,279 $ 13,575 10 Table of Contents FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) Six Months Ended October 31, 2024 2023 POC POT Total POC POT Total Revenue Revenue Revenue Revenue Revenue Revenue FEI-NY $ 21,349 $ 1,145 $ 22,494 $ 16,569 $ 2,193 $ 18,762 FEI-Zyfer 8,283 548 8,831 7,449 574 8,023 Intersegment - ( 427 ) ( 427 ) - ( 801 ) ( 801 ) Revenues $ 29,632 $ 1,266 $ 30,898 $ 24,018 $ 1,966 $ 25,984 Periods ended October 31, Three months Six months 2024 2023 2024 2023 Revenues by product line: Satellite revenue $ 9,390 $ 4,664 $ 17,653 $ 9,522 Government non-space revenue 5,839 8,201 12,110 15,080 Other commercial & industrial revenue 591 710 1,135 1,382 Consolidated revenues $ 15,820 $ 13,575 $ 30,898 $ 25,984 NOTE H – 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 previously licensed certain technology to Morion. The Company’s investment consists of 4.6 % of Morion’s outstanding shares. However, due to the Russia Ukraine conflict and resulting sanctions the future status of FEI’s investment in Morion became uncertain and accordingly, such investment was entirely written of in fiscal year 2022. Accordingly, the carrying value of this investment was $ 0 as of October 31, 2024 and April 30, 2024. During the three and six months ended October 31, 2024 and 2023, the Company did not acquire any product from Morion. During the three and six months ended October 31, 2024 and 2023, the Company did not receive dividends from Morion. Prior purchases of materials from Morion consisted mainly of quartz crystal blanks, which were used in the fabrication of quartz resonators. However, on October 30, 2024, the U.S. Department of Treasury’s Office of Foreign Assets Control designated Morion as a Specially Designated National, resulting in the blocking of all Morion property and property interests. As a result, the Company has terminated all commercial relationships with Morion, including the licensing of technology to Morion and the purchase of any products from Morion. The Company has established alternate sources of supply with respect to items previously acquired from Morion. The Company is also capable of fabricating the crystal blanks in-house. NOTE I – RESTRICTED CASH As of October 31, 2024 restricted cash consisted of approximately $ 1.3 million related to a letter of credit required for contractual restrictions during the period of performance for one of the Company’s contracts. As of April 30, 2024 restricted cash consisted of approximately $ 945,000 related to a letter of credit required for contractual restrictions during the period of performance for one of the Company’s contracts. Restricted cash is classified as current or non-current based on the remaining performance period of the contract. A reconciliation of cash and cash equivalents and restricted cash from the condensed consolidated balance sheets to the condensed consolidated statements of cash flows is shown below (in thousands): October 31, 2024 April 30, 2024 Cash and cash equivalents $ 9,698 $ 18,320 Restricted cash 1,342 945 Total cash and cash equivalents and restricted cash $ 11,040 $ 19,265 11 Table of Contents FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE J – RECENT ACCOUNTING PRONOUNCEMENTS In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which expands on the required disclosure of incremental segment information. The new guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is evaluating the effect on its consolidated financial statements when adopted in fiscal year 2025 but does not expect the effect to be material. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), which requires companies to annually disclose categories in the effective tax rate reconciliation and additional information about income taxes paid. The new guidance is effective for annual periods beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is in the process of evaluating the impact that the adoption of ASU No. 2023-09 will have to the financial statements and related disclosures. NOTE K – DEFERRED INCOME TAXES Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. As required by the authoritative guidance on accounting for income taxes, we evaluate the realization of deferred tax assets on a jurisdictional basis at each reporting date. We consider all positive and negative evidence, including the reversal of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of recent operations. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets will not be realizable, we establish a valuation allowance. As of October 31, 2024, and April 30, 2024, the Company maintained a full valuation allowance against its deferred tax assets. If these estimates and assumptions change in the future, the Company may be required to adjust its existing valuation allowance resulting in changes to deferred income tax expense. It is reasonably possible the existing valuation allowance will be reduced within the next 12 months. 12 Table of Contents FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES Item 2. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations “Safe Harbor ” Statement under the Private Securities Litigation Reform Act of 1995 : The statements in this Quarterly Report on Form 10-Q regarding future earnings and operations and other statements relating to the future constitute “forward-looking” statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include but are not limited to, our inability to integrate operations and personnel, actions by significant customers or competitors, general domestic and international economic conditions, reliance on key customers, including the U.S government, 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, other supply chain related issues, increasing costs for materials, operating related expenses, competitive developments, changes in manufacturing and transportation costs, the availability of capital, the outcome of any litigation and arbitration proceedings, and failure to maintain an effective system of internal controls over financial reporting.. The factors listed above are not exhaustive. Other sections of this Form 10-Q and in Part I, Item 1A (Risk Factors) of the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2024 (the “Form 10-K”) include additional factors that could materially and adversely impact the Company’s business, financial condition and results of operations. Moreover, the Company operates in a very competitive and rapidly changing environment. New factors emerge from time to time and it is not possible for management to predict the impact of all these factors on the Company’s business, financial condition or results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Form 10-Q and any other public statement made by the Company or its management may turn out to be incorrect. The Company expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Critical Accounting Policies and Estimates The Company believes its most critical accounting policies to be the recognition of revenue and costs on production contracts and the valuation of inventory. Both of these areas require the Company to make use of reasonable estimates including estimating the cost to complete a contract, the realizable value of its inventory and the market value of its products. Changes in estimates can have a material impact on the Company’s financial position and results of operations. The Company’s significant accounting policies did not change during the three and six months ended October 31, 2024. Revenue Recognition Revenues are reported in operating results predominantly over time using the cost-to-cost method. Under this method, revenue is recorded based upon the ratio that incurred costs bear to total estimated contract costs with related cost of revenues recorded as the costs are incurred. Each month management reviews estimated contract costs through a process of aggregating actual costs incurred and estimating additional costs to completion based upon the current available information regarding labor, outside services, materials, overhead costs, and status of the contract. The effect of any change in the estimated gross margin rate (“GM Rate”) for a contract is reflected in revenues in the period in which the change is known. Provisions for the full amount of anticipated losses on contracts are made in the period in which they become determinable. Significant judgment is used in evaluating the financial information for certain contracts to determine an appropriate budget and estimated cost. The Company evaluates this information continuously and bases its judgments on historical experience, design specifications, and expected costs for material and labor. Inventories In accordance with industry practice, inventoried costs contain amounts relating to contracts and programs with long production cycles, a portion of which will not be realized within one year. Inventory write downs are established for slow-moving materials based on percentage of usage over a ten-year period, obsolete items on a gradual basis over five years with no usage and costs incurred on programs for which production-level orders cannot be determined as probable. Such write-downs are based upon management’s experience and estimates for future business. Any changes arising from revised estimates are reflected in cost of revenues in the period the revision is made. 13 Table of Contents FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES (Continued) RESULTS OF OPERATIONS The table below sets forth for the three and six months ended October 31, 2024 and 2023, respectively, the percentage of consolidated revenues represented by certain items in the Company’s condensed consolidated statements of operations or notes to the condensed consolidated financial statements: Three months Six months Periods ended October 31, 2024 2023 2024 2023 Revenues FEI-NY 72.8 % 68.3 % 72.8 % 72.2 % FEI-Zyfer 28.8 35.0 28.6 30.9 Less intersegment revenues (1.6 ) (3.3 ) (1.4 ) (3.1 ) 100.0 100.0 100.0 100.0 Cost of revenues 51.8 68.1 53.7 64.6 Gross margin 48.2 31.9 46.3 35.4 Selling and administrative expenses 21.4 18.8 20.2 18.7 Research and development expenses 10.2 6.2 10.0 5.2 Operating income 16.6 6.9 16.1 11.5 Other expense, net 1.1 (1.0 ) 1.2 (0.7 ) Provision for income taxes 0.9 - 0.9 0.1 Net income 16.8 % 5.9 % 16.4 % 10.9 % Revenues Three months Six months Periods ended October 31, (in thousands) Segment 2024 2023 Change 2024 2023 Change FEI-NY $ 11,518 $ 9,271 $ 2,247 24.2 % $ 22,494 $ 18,762 $ 3,732 19.9 % FEI-Zyfer 4,559 4,756 (197 ) (4.1 ) 8,831 8,023 808 10.1 Intersegment revenues (257 ) (452 ) 195 (43.1 ) (427 ) (801 ) 374 (46.7 ) $ 15,820 $ 13,575 $ 2,245 16.5 % $ 30,898 $ 25,984 $ 4,914 18.9 % For the three months ended October 31, 2024, revenues from commercial and U.S. Government communication satellite programs accounted for approximately 59% of consolidated revenues compared to approximately 34% of consolidated revenues during this same period in the prior fiscal year. Revenues are recognized primarily over time under the percentage-of-completion (“POC”) method. Revenues from the satellite market are recorded in the FEI-NY segment. Revenues from non-space U.S. Government/Department of Defense (“DOD”) customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, accounted for approximately 37% of consolidated revenues for the three months ended October, 31, 2024 compared to approximately 60% of consolidated revenue during the same period in the prior fiscal year. Other commercial and industrial revenues for the three months ended October 31, 2024 accounted for approximately 4% of consolidated revenue compared to 5% in the same period of the prior fiscal year. The significant increase in revenue for this quarter, compared to the same quarter in the previous fiscal year, was reflected in the FEI-NY segment and was related an increase of approximately $3.8 million in sales to U.S. Government space customers. For the six months ended October 31, 2024, revenues from commercial and U.S. Government communication satellite programs accounted for approximately 57% of consolidated revenues compared to approximately 37% of consolidated revenues during this same period in the prior fiscal year. Revenues from non-space U.S. Government/DOD customers accounted for approximately 39% of consolidated revenues for the six months ended October, 31, 2024 compared to approximately 58% of consolidated revenue during the same period in the prior fiscal year. Other commercial and industrial revenues for the six months ended October 31, 2024 accounted for approximately 4% of consolidated revenue compared to 5% in the same period of the prior fiscal year. The significant increase in revenue for this six month period, compared to the same period in the previous fiscal year, was reflected in the satellite segment and primarily related to an increase in contract awards from prior periods that moved into production during the six months ended October 31, 2024. 14 Table of Contents FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES (Continued) Gross Margin Three months Six months Periods ended October 31, (in thousands) 2024 2023 Change 2024 2023 Change $ 7,619 $ 4,330 $ 3,289 76.0 % $ 14,318 $ 9,198 $ 5,120 55.7 % Gross margin rate 48.2 % 31.9 % 46.3 % 35.4 % For the three months ended October 31, 2024, both gross margin (“GM”) and GM rate increased compared to the same period in the prior fiscal year. The increase in GM was mainly due to an increase in revenue and the GM rate increase was mainly attributable to a large space program that completed a major milestone in its production. As a result of the completed milestone, risk was mitigated, allowing the release of costs relating to this program, which caused a higher GM for the quarter. For the six months ended October 31, 2024, both GM and GM Rate increased compared to the same period in the prior fiscal year. This is partially due to the program mentioned above that completed a major milestone during the quarter ended October 31, 2024, as well as a significant number of smaller jobs that were completed at higher margins during the six months ended October 31, 2024. As a result, the residual older low margin programs had a smaller impact on results. Selling, General, and Administrative Expenses Three months Six months Periods ended October 31, (in thousands) 2024 2023 Change 2024 2023 Change $ 3,388 $ 2,552 $ 836 32.8 % $ 6,234 $ 4,853 $ 1,381 28.4 % For the three months ended October 31, 2024 and 2023, selling, general, and administrative (“SG&A”) expenses were approximately 21% and 19%, respectively, of consolidated revenues. For the six months ended October 31, 2024 and 2023, SG&A expenses were approximately 20% and 19%, respectively, of consolidated revenues. The increase in SG&A expense during the three and six months ended October 31, 2024, was mainly related to an increase in payroll related expenses, costs from the re-alignment of employees from overhead to SG&A, and costs related to Frequency Electronics’ first Quantum Summit in October 2024. The Company believes the costs related to SG&A will remain fairly consistent throughout the remainder of fiscal year 2025. Research and Development Expenses Three months Six months Periods ended October 31, (in thousands) 2024 2023 Change 2024 2023 Change $ 1,613 $ 840 $ 773 92.0 % $ 3,101 $ 1,347 $ 1,754 130.2 % Research and Development (“R&D”) expenditures represent investments intended to keep the Company’s products at the leading edge of time and frequency technology and enhance future competitiveness. The change in R&D expenditures for the three and six months ended October 31, 2024, as compared to the prior year periods, was primarily due to a focus on advances and modernization of products. The Company plans to continue to invest in R&D in the future to keep its products at the state of the art, however we expect the actual quarterly spend to vary. 15 Table of Contents FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES (Continued) Operating Income Three months Six months Periods ended October 31, (in thousands) 2024 2023 Change 2024 2023 Change $ 2,618 $ 938 $ 1,680 179.1 % $ 4,983 $ 2,998 $ 1,985 66.2 % For the three and six months ended October 31, 2024, operating income increased due to higher revenue and GM percentage, partially offset by higher R&D expenses. The increase is partially due to a large space program that completed a major milestone in its production during the three months ended October 31, 2024, as discussed above, however, the increase is also the result of the successful efforts of the Company to complete complex programs and to work more efficiently in bidding, building and testing our products. The Company believes the improved operating income results for the first half of this fiscal year are a tangible outcome of these efforts. The Company seeks to continue to implement changes to further improve its performance. Other Income (Expense), net Three months Six months Periods ended October 31, (in thousands) 2024 2023 Change 2024 2023 Change Investment (expense) income $ 203 $ (106 ) $ 309 (291.5 )% $ 427 $ (86 ) $ 513 (596.5 )% Interest expense (27 ) (29 ) 2 (6.9 )% (53 ) (60 ) 7 (11.7 )% Other income (expense), net (1 ) - (1 ) 100.0 % (1 ) - (1 ) 100.0 % $ 175 $ (135 ) $ 310 (229.6 )% $ 373 $ (146 ) $ 519 (355.5 )% Other income (expense), net is derived from various sources. The income can come from reclaiming of metal, refunds, interest on deferred trust assets, or the sale of a fixed asset. Interest expense is related to the deferred compensation payments made to retired employees. The majority of the approximately $0.2 million and $0.4 million of investment income for the three and six months ended October 31, 2024, respectively, was from unrealized gains on assets held in the Frequency Electronics, Inc. Deferred Compensation Trust. Provision for Income Tax Three months Six months Periods ended October 31, (in thousands) 2024 2023 Change 2024 2023 Change $ 139 $ 6 $ 133 2,216.7 % $ 272 $ 13 $ 259 1,992.3 % Three months Six months Periods ended October 31, 2024 2023 2024 2023 Effective tax rate on pre-tax book income: 5.0 % 0.7 % 5.1 % 0.5 % 16 Table of Contents FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES (Continued) The estimated annual effective tax rate for the fiscal year ending April 30, 2025 is 5.15%. This calculation reflects estimated income tax expense based on our current year annual pretax income forecast which is offset by the estimated change in the current year valuation allowance. The Company maintains a full valuation allowance against its deferred tax assets. It is reasonably possible the existing valuation allowance will be reduced within the next 12 months. For the three months ended October 31, 2024, the Company recorded an income tax provision of $138,592 which includes a discrete tax income benefit of $9,577. The calculation of the overall income tax provision consists of current U.S. federal and state income taxes. For the three months ended October 31, 2023, the Company recorded an income tax provision of $6,000. For the six months ended October 31, 2024, the Company recorded an income tax provision of $271,522 which includes a discrete tax benefit of $4,222. The calculation of the overall income tax provision consists of current U.S. federal and state income taxes. For the six months ended October 31, 2023, the Company recorded an income tax provision of $13,000. The effective tax rate for the three months ended October 31, 2024 was an income tax provision of 4.96% on pretax income of $2.8 million compared to an income tax provision of .7% on pretax income of $0.8 million in the comparable prior fiscal year period. The effective tax rate for the three months ended October 31, 2024 differs from the U.S. federal statutory rate of 21% primarily due to the valuation allowance, permanent differences, a change in the uncertain tax position liability and state income taxes. The effective six months ended October 31, 2024 was an income tax provision of 5.07% on pretax income of $5.4 million compared to an income tax provision of 0.5% on pretax income of $2.9 million in the comparable prior fiscal year period. The effective tax rate for the six months ended October 31, 2024 differs from the U.S. federal statutory rate of 21% primarily due to the valuation allowance, permanent differences, a change in the uncertain tax position liability and state income taxes. LIQUIDITY AND CAPITAL RESOURCES The Company’s consolidated balance sheets continue to reflect a strong working capital position of approximately $23.4 million at October 31, 2024 and $27.3 million at April 30, 2024. Included in working capital at October 31, 2024 and April 30, 2024 was $9.7 million and $18.3 million, respectively, of cash and cash equivalents. The Company’s current ratio was 1.8 to 1 at October 31, 2024 compared to 1.9 to 1 as of April 30, 2024. Net cash provided by operating activities for the six months ended October 31, 2024 was approximately $2.4 million and net cash used in operating activities for the six months ended October 31, 2023 was $2.9 million. The increase in net cash provided by operating activities in the first six months of fiscal 2025 as compared to the prior fiscal year period was mainly due to an increase in operating income partially offset by increases in inventories levels. For the six months ended October 31, 2024 and 2023, the Company incurred approximately $2.5 million and $2.2 million, respectively, of non-cash operating expenses including amortization of ROU assets, depreciation and amortization, inventory net realizable value adjustments, deferred compensation, and accruals for employee benefit programs. Net cash used in investing activities for the six months ended October 31, 2024 and 2023 was approximately $0.8 million and $0.4 million, respectively. The Company acquired property, plant, and equipment in the amount of approximately $0.8 million and $0.4 million for the six month periods ended October 31, 2024 and 2023, respectively. Net cash used in financing activities for the six months ended October 31, 2024 was $9.7 million, of which $9.6 million was related to a dividend payout special cash dividend of $1.00 per share of common stock paid on August 29, 2024. There were no financing activities for the six months ended October 31, 2023. The Company has been authorized by its Board of Directors to repurchase up to $5.0 million worth of shares of its common stock when appropriate opportunities arise. During the six months ended October 31, 2024, the Company repurchased 4,569 shares and 7,893 shares of outstanding common stock at $13.60 per share and $12.62 per share, respectively. As of October 31, 2024, the Company has repurchased approximately $3.6 million of its common stock out of the $5 million authorization, the majority of which has since been reissued. For the six months ended October 31, 2023, there were no repurchases of shares. The Company will continue to expend resources for R&D to develop, improve and acquire products for space applications, guidance and targeting systems, and communication systems that management believes will result in future growth and profitability. The Company anticipates securing additional customer funding for a portion of its R&D activities and will allocate internal funds depending on market conditions and identification of new opportunities. The Company expects internally generated cash will be adequate to fund these R&D efforts. The Company may also pursue acquisitions to expand its range of products and may use internally generated cash and external funding in connection with such acquisitions. 17 Table of Contents FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES (Continued) As of October 31, 2024, the Company’s consolidated funded backlog was approximately $81 million compared to approximately $78 million at April 30, 2024. Approximately 65% of the backlog, as of October 31, 2024, is expected to be realized in the next twelve months. The Company excludes from backlog any contracts or awards for which it has not received authorization to proceed. On fixed price contracts, the Company excludes any unfunded portion. Over time, as partially funded contracts become fully funded, the Company will add the additional funding to its backlog. The backlog is subject to change for various reasons, including possible cancellation of orders, change orders, terms of the contracts and other factors beyond the Company’s control. Accordingly, the backlog is not necessarily indicative of future revenues or profits (losses) which may be realized when the results of such contracts are reported. The Company believes that its liquidity is adequate to meet its short-term operating and investment needs through at least December 16, 2025 and its long-term operation and investment needs for the foreseeable future thereafter. The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors. 18 Table of Contents FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES (Continued) Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable to smaller reporting companies.