UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the Quarterly Period ended July 31, 20222023

OR

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

For the transition period from                      to                      

Commission File No. 1-8061

FREQUENCY ELECTRONICS, INC.

(Exact name of Registrant as specified in its charter)

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

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

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

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

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding of registrant’s Common Stock, par value $1.00 per share, as of September 13, 202211, 2023 – 9,313,5099,390,046

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands except par value)

See accompanying notes to condensed consolidated financial statements.

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive LossIncome (Loss)

(In thousands except per share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Three Months Ended July 31, 20222023 and 20212022

(In thousands except share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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 July 31, 20222023 and the results of its operations, changes in stockholders’ equity for the three months ended July 31, 20222023 and 2021,2022, and cash flows for the three months ended July 31, 20222023 and 2021.2022. The April 30, 20222023 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, 2022,2023, filed on July 14, 202227, 2023 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.

COVID-19 Pandemic, and Other Macroeconomic Factors

The full impact ofOn May 5, 2023, the COVID-19 pandemic continues to evolve as of the date of this report. As such, it is uncertain asWorld Health Organization (“WHO”) announced an end to the full magnitude that the pandemic may ultimately have on the Company’s financial condition, liquidity, and future financial results. For the three months ended July 31, 2022, the Company has been impacted by employee absenteeismglobal health emergency related to direct or indirect effects of the COVID-19 pandemic, delayscoronavirus originating in Wuhan, China (“COVID-19”). Additionally, on May 11, 2023 the receipt of anticipated new contracts from customers administratively affectedPublic Health Emergency declared by the pandemicU.S. Department of Health and limited availability or delivery delays of parts and materials from vendors affected by the pandemic. FEI-Zyfer’s operations were particularly affected as evidenced by decreases in sales and gross margin during fiscal year 2022, which continued during the three months ended July 31, 2022. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the continuing changing dynamics of the COVID-19 pandemic the Company is not able to estimate the potential adverse effects on its operations, financial condition, or liquidity for the remainder of fiscal year 2023. As of July 31, 2022, the Company has returned to essentially normal operations and will continue to follow federal and state guidelines with an emphasis on employee safety.Human Services expired.

The Company faces various future COVID-19 related risks, and risks resulting from geopolitical conflicts. The Company is dependent on its workforce to design and manufacture its products. If significant portions of the Company’s workforce are unable to work effectively, or if the U.S. Government, state and/or other customers or supplier operations are curtailed due to illness, quarantines, government actions, facility closures, or other restrictions, the Company’s operations may be negatively impacted. If faced with any of these factors, the Company may be unable to perform fully on its contracts and costs may increase. These cost increases may not be fully recoverable or adequately covered by insurance. Due to continuing geopolitical circumstances resulting in increased inflation, energy and commodity prices may continue escalating which may adversely affect the Company’s financial results. Also, certainCertain Company vendors have been unablecontinue to deliver materials on timewith 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 schedules. Vendor delivery performance is being closely monitoredservices. The Company continues to monitor these and alternate sources of supply are generally availableits other vendors and, if necessary, seek alternative suppliers, or, in somecertain cases, are being established.re-design products using alternative parts and materials.

NOTE B – EARNINGS (LOSS) PER SHARE

Reconciliation of the weighted average shares outstanding for basic and diluted earningsincome (loss) per share (“EPS”) for the three-monthsthree months ended July 31, 20222023 and 2021,2022, respectively, were as follows:

** For the three-monthsthree months ended July 31, 20222023 and 2021,2022, dilutive securities are excluded from the calculation of earnings per share since the inclusion of such shares would be antidilutive due to the net loss for those periods.antidilutive. The exercisable shares excluded for the three-monthsthree months ended July 31, 2023 and 2022 were 155,000 options and 2021 were 357,125 shares and 372,000 shares,options, respectively.

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE C – CONTRACT (LIABILITIES) ASSETS NET

At July 31, 20222023 and April 30, 2022,2023, contract (liabilities) assets net,and contract liabilities, consisted of the following:following (in thousands):

Such amountsContract assets represent revenue recognized on long-term contracts that have not been billed at the balance sheet dates orand contract liabilities represent a liability for amounts billed in excess of the revenue recognized.recognized, contract liabilities. 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 onover time using the percentage-of-completion (“POC”) basis.method. Fluctuations of contract assets and contract liabilities are due to the timing of funding, amounts billed and revenue recorded. Contract assets increased $1.0 million during the three months ended July 31, 2023, primarily due to revenue recognized during the three months ended July 31, 2023 for which we have not yet billed our customers. Contract liabilities increased $0.2 million during the three months ended July 31, 2023, primarily due to payments received in excess of revenue recognized on these performance obligations. During the three months ended July 31, 2023, we recognized $3.7 million of our contract liabilities at April 30, 2023 as revenue. During three months ended July 31, 2022, we recognized $2.5 million of our contract liabilities at April 30, 2022 as revenue. During the three months ended July 31, 2023 and 2021,2022, revenue recognized under POC contracts was approximately $7.9$11.7 million and $12.4$7.9 million, respectively. If contract losses are anticipated, a loss provision is recorded for the full amount of such losses when they are determinable. ContractTotal contract losses, recorded in cost of approximately $1.2 million and $16,000 were recordedrevenue, for the three months ended July 31, 2023 and 2022 were approximately $139,000 and 2021,$1.2 million, respectively.

NOTE D –STOCK TRANSACTIONS– EMPLOYEE BENEFIT PLANS

During the three-month periodthree months ended July 31, 2022,2023, the Company made contributions of 16,70817,013 shares, 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 months ended July 31, 2023, were approximately $138,000, inclusive of approximately $38,000 of interest expense. Payments made related to deferred compensation were approximately $185,000 for the same period. Deferred compensation expense charged to selling and administrative expenses during the three months ended July 31, 2022, were approximately $127,000, inclusive of approximately $17,000 of interest expense. Payments made related to deferred compensation were approximately $161,000 for the same period.

NOTE E – INVENTORIES NET

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

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Inventory reserves included in inventory were $7.7 million and $7.5 million as of July 31, 2022 and April 30, 2022, respectively. Reserve amounts relateNotes to raw materials and component parts and work in progress.Condensed Consolidated Financial Statements

(Unaudited)

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

The Company’s leases primarily represent offices, warehouses, vehicles, manufacturing facilities and manufacturingResearch and Development (“R&D&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. Certain

New York lease. In February 2019, the Company entered into an agreement to lease agreements containa building to be used as a corporate headquarters office and manufacturing facility in Mitchell Field, NY (“New York lease”). The New York lease expires September 30, 2029 and contains renewal options, early termination, rent abatement, and escalation clauses that are factored into our determination of lease payments when appropriate. Right-of-use (“ROU”)We include options to extend or terminate leases in the Right-of-Use (ROU) operating lease asset and liability when it is reasonably certain we will exercise these options. As of July 31, 2023 lease options were not included in the calculation of the ROU operating lease asset and liability. 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

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 January 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 lease.ROU operating lease asset and liability when it is reasonably certain we will exercise these options. As of July 31, 2023 lease options were not included in the calculation of the ROU operating lease asset and liability. 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.

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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 sheet.sheets.

The table below presents ROU assets and liabilities recorded on the respective consolidated balance sheets as follows:follows (in thousands):

Total operating lease expense was $481,000$454,000 and $506,000$481,000 for the three-monthsthree months ended July 31, 20222023 and 2021,2022, respectively, the majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses on the unaudited condensed consolidated statements of operations.

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The table below reconciles the undiscounted cash flows for each of the first four fiscal years and total of the remaining fiscal years to the operating lease liabilities recorded on the unaudited condensed consolidated balance sheet as of July 31, 2022:2023:

As of July 31, 2023 and 2022, the weighted-average remaining lease term for all operating leases was 5.43 years and 6.15 years.years, respectively. The Company does not generally have access to the rate implicit in the leases and therefore utilized the Company’s borrowingselected 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 July 31, 2023 and 2022, was 6.18%.

FREQUENCY ELECTRONICS, INC.6.23% and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)6.18%, respectively.

NOTE G – SEGMENT INFORMATION

The Company operates under two reportable segments based on the geographic locations of its subsidiaries:

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 the “Summary“Note 1. Summary of Significant Accounting Policies” into the fiscal year-endconsolidated 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), which is defined as income before investment (expense) income, interest expense, other income (expense), and taxes. All acquired assets, including intangible assets, are included in the assets of boththe applicable reporting segments.segment.

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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):

Total revenue recognized over time as POC and Passage of Title (“POT”) werewas approximately $11.7 million and $0.7 million, respectively, of the $12.4 million reported for the three months ended July 31, 2023. Total revenue recognized over time as POC and POT was approximately $8.0 million and $0.3 million, respectively, of the $8.2 million reported for the three months ended July 31, 2022. Total revenue recognized over time as POC and POT were approximately $12.4 million and $0.6 million, respectively, of the $13.0 million reported for the three months ended July 31, 2021. The amounts by segment and product line were as follows:follows (in thousands):

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE H – INVESTMENT IN MORION, INC.

The Company has an investment in Morion, Inc. (“Morion”), a privately held Russian company, which manufactures high precision quartz resonators and crystal oscillators. The Company has also licensed certain technology to Morion. During the three months ended July 31, 20222023 and 2021,2022, the Company acquireddid not acquire any product from Morion in the aggregate amount of approximately $0 and $85,000, respectively.Morion. During the three months ended July 31, 20222023 and 2021,2022, the Company did not receive dividends from Morion.Morion,

The Company’s investment consists of 4.6% of Morion’s outstanding shares, accordingly, the Company accounts for its investment in Morion on the cost basis. 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 sectoral sanctions identifications (“SSI”) pursuant to Executive Order 13662, which prohibits certain transactions, including certain extensions of credit, with an entity designated as an SSI or certain affiliates of an entity designated as an SSI. On July 16, 2014, after the Company’s investment in Morion, Gazprombank was designated as an SSI.

Due to the current Russia-Ukraine conflict and resulting sanctions, the future status of the Company’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 Form 10-K for the fiscal year ended April 30, 2022, as amended, 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. The likelihood of future sales to, purchases from, and dividend payments from Morion is questionable.

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE I – FAIR VALUE OF FINANCIAL INSTRUMENTS

The cost, gross unrealized gains, gross unrealized losses and fair market value of available-for-sale securities at July 31, 2022 and April 30, 2022, respectively, were as follows (in thousands):

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):

The Company regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. The Company does not believe that its investments in marketable securities with unrealized losses at July 31, 2022 were other-than-temporary due to market volatility of the security’s fair value, analysts’ expectations and the Company’s ability to hold the securities for a period of time sufficient to allow for any anticipated recoveries in market value.

During the three months ended July 31, 2022, the Company sold or redeemed available-for-sale securities of approximately $1.0 million realizing losses of approximately $20,000.

Maturities of fixed income securities classified as available-for-sale at July 31, 2022 were as follows, at cost (in thousands):

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).

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The levels of the fair value hierarchy are described below:

The asset 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 are valued on a Level 1 basis. The Company’s fixed income corporate debt securities and certificates of deposit are valued on a Level 2 basis. Level 2 securities are valued at the closing prices and are consistent with quoted prices of similar assets reported in active markets.remote.

NOTE JI – RECENT ACCOUNTING PRONOUNCEMENTS

In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under ASU 2017-04, goodwill impairment will be tested by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2022, with early adoption permitted. The Company will not be adopting ASU 2017-04 early,was adopted, effective May 1, 2023, with no material impact to the consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance is ineffective for fiscal years beginning after December 15, 2022. ASU 2016-13 was adopted, effective May 1, 2023, with no material impact to the processconsolidated financial statements.

NOTE J – CREDIT FACILITY

As of determining the effect that ASU 2017-04 may have. However,July 31, 2023, the Company expectshad no borrowings pursuant to a credit facility. As of April 30, 2023, the new standardCompany retired its advisory credit arrangement with UBS Bank USA. Prior to have an immaterial effect on its consolidated financial statements when adopted inretiring the advisory credit arrangement, no borrowings were made during fiscal year 2024.2023.

NOTE K – CREDIT FACILITYDEFERRED INCOME TAXES

As of July 31, 2022, the Company had available credit with UBS Bank USA at variable terms based on its securities holdings under an advisory arrangement, under which no borrowings have been made.

NOTE L – VALUATION ALLOWANCE ON DEFERRED TAX ASSETS

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 July 31, 2022,2023, and April 30, 2022,2023, 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.

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE M – COMMITMENTS AND CONTINGENCIES

On August 25, 2021, to resolve previously disclosed disputes with Martin B. Bloch the former Chief Scientist of the Company and a former member of the Company’s Board of Directors, the Company entered into 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 Company’s Board of Directors (the “Director Defendants”), and the Compensation Committee of the Company’s Board of Directors, in its capacity as administrator under the deferred compensation agreements, and Mr. Bloch and certain members of Mr. Bloch’s family. Under the Settlement Terms, 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.

Consistent with the Settlement Terms, on September 21, 2021, the Company, the Director of Defendants, the Company’s Compensation Committee and Mr. Bloch and certain members of Mr. Bloch’s family entered into a formal written settlement agreement, providing for the Company’s payment of $6 million in full and complete settlement of all claims asserted and all sums sought by Mr. Bloch in the litigation and arbitration proceedings. This settlement agreement concluded all previously disclosed disputes between Mr. Bloch and the Company, the Director Defendants and the Company’s Compensation Committee. Prior to the termination of Mr. Bloch’s employment and commencement of the litigation and arbitration proceedings, the Company had been regularly accruing amounts pertaining to Mr. Bloch’s post-employment deferred compensation retirement benefits. As of July 31, 2021, the Company had accrued $6 million for deferred compensation and contingent liability in connection with the settlement with Mr. Bloch. The settlement resulted in a net expense of $650,000 to the Company and eliminated further legal expenses with respect to the dispute between Mr. Bloch and the Company. This net expense for financial statement purposes was recognized in selling and administrative expenses on the condensed consolidated statements of operations during the three months ended July 31, 2021.

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, the risks associated with health epidemics and pandemics, including the COVID-19 pandemic and similar outbreaks, such as their impact on our financial condition and results of operations and on our ability to continue manufacturing and distributing our products, and the impact of health epidemics and pandemics on general economic conditions, including any resulting recession, our inability to integrate operations and personnel, actions by significant customers or competitors, general domestic and international economic conditions, reliance on key customers, continued acceptance of the Company’s products in the marketplace, competitive factors, new products and technological changes, product prices and raw material costs, dependence upon third-party vendors, competitive developments, changes in manufacturing and transportation costs, the availability of capital, and the outcome of any litigation and arbitration proceedings. The factors listed above are not exhaustive. Other sections of this Form 10-Q and in Part I, Item 1A (Risk Factors) of 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’s significant accounting policies are described in Note 1 to the consolidated financial statements included in the Form 10-K. The Company believes its most critical accounting policies to be the recognition of revenue and costs on production contracts, income taxes, and the valuation of inventory. Each of these areas requires the Company to make use of reasonable estimates including estimating the cost to complete a contract, the realizable value of its inventory and the market value of its products. Changes in estimates can have a material impact on the Company’s financial position and results of operations. The Company’s significant accounting policies did not change during the three months ended July 31, 2022.2023.

Revenue Recognition

Revenue is recognized when a performance obligation is satisfied, which is when the expected goods or services are transferred to the customer in an amount that reflects the consideration to which the Company expects to receive. A performance obligation is a distinct product or service that is transferred to the customer based on the contract. The transaction price is allocated to each performance obligation and is recognized as revenue upon satisfaction of that performance obligation. The Company derives revenue from contracts with customers by units sold with specific specifications and frequencies that are used by a specific customer and contracts where the end user is the government. The Company’s contracts typically include one performance obligation which is satisfied by shipped projects and completed services/reports required in the contract. Control over these performance obligations passes to the customer over time and therefore these revenuesRevenues 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.

For smaller contracts or orders, sales of products and services to customers are reported in operating results based upon (i) shipment of the product or (ii) performance of the services pursuant to terms of the customer order. When payment is contingent upon customer acceptance of the installed system, revenue is deferred until such acceptance is received and installation completed. The Company’s products generally carry a one-year warranty, but may vary based on the contract terms.

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

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. The Company evaluates the amount of development risk associated with new contracts which entail the development of new or significantly modified products and incorporates additional costs to cover these risks. These are estimates based on the Company’s best judgement, but because this entails estimations based on products not heretofore developed, there is risk that the estimates may ultimately prove to be incorrect and that costs are impacted.

Contract costs include all direct material, direct labor, manufacturing overhead and other direct costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred.

Inventory

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 expectationsestimates for future business. Any changes arising from revised expectationsestimates are reflected in cost of revenues in the period the revision is made.

COVID-19 Pandemic Update and CARES Act

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

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

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RESULTS OF OPERATIONS

The table below sets forth for the three months ended July 31, 20222023 and 2021,2022, 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:

Revenues

For the three months ended July 31, 20222023, revenues from commercial and U.S. Government communication satellite programs accounted for approximately 42%39% of consolidated revenues compared to approximately 52%42% of consolidated revenues during this same period in the prior fiscal year. Revenues are recognized primarily over time under the POC method. Revenues from the satellite market are recorded in the FEI-NY segment. Revenues from non-space U.S. Government/Department of Defense (“DOD”) customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, accounted for approximately 50%55% of consolidated revenues for the three months ended July, 31, 20222023 compared to approximately 42%50% of consolidated revenue during the same period in the prior fiscal year. Other commercial and industrial revenues for the three months ended July 31, 20222023 accounted for approximately 8%5% of consolidated revenue comparecompared to 6%8% in the same period of the prior fiscal year. The decreaseincrease in revenue for this quarterthe three months ended July 31, 2023 was duein both segments and primarily related to delay in contract awards, delays in meeting program milestones, and funding limitations. It is believed that these issues are only temporary timing issues and we expect revenue to increase in the future.government non-space programs.

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Gross Margin

For the three-month periodthree months ended July 31, 2022,2023, gross margin and GM Rate decreasedincreased compared to the same period in the prior fiscal year. The decrease in gross margin anddollars increased as a direct result of the increase in revenue. The GM Rate wasincreased significantly due to increased engineering costs on development phase programs that experienced particularly complextwo primary factors. First, many of the technical challenges faced in the early part of last fiscal year have been resolved and, as well as cost impacts on severala result, the related programs resulting from supply chain problems. Gross margin wasare now moving forward. Second, during the three months ended July 31, 2023, there were one-time contractual and other adjustments that also affectedbenefited the GM Rate by under absorption of costs due to the decrease in sales this quarter.approximately 8%.

Selling, General, and Administrative Expenses

For the three months ended July 31, 2023 and 2022, and 2021, selling, general, and administrative (“SG&A”) expenses were approximately 24%19% and 34%24%, respectively, of consolidated revenues. The decreasepercentage of consolidated revenue decreased 5% due to an increase in sales for the three months ended July 31, 2023 as compared to the three months ended July 31, 2022. The increase in SG&A expenses for the three months ended July 31, 20222023 as compared to the prior year period iswas largely due to the decreasean increase in professional fees, as well as a one-time reduction to stock option expense related to forfeiturespayroll and deferred compensation expense.associated costs.

Research and Development Expenses

Research and development (“R&D”)&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 decrease in R&D rateexpenditures for the three-month periodthree months ended July 31, 20222023, was 14% of sales compared to 10% of sales for the same period of the prior fiscal year. R&D decreases for the first quarter of fiscal year 2023 are relatedprimarily due to a focus on projects currentlyshift of employees to production orders in the production phase.order to meet schedule. The Company plans to continue to invest in R&D in the future to keep its products at the state of the art.

Operating Income (Loss)

For the three months ended July 31, 2023, operating income increased due to a combination of increased revenue and gross margin, and the effects of certain cost cutting measures instituted by management beginning in fiscal year 2023.

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Operating Loss

During the three-month period ended July 31, 2022, operating losses resulted largely from the decrease in revenue coupled with the additional cost mentioned above in the gross margin section.

Other Income (Expense), net

InvestmentOther income (expense), net is derived primarily from various sources. The income can come from reclaiming of metal, refunds, interest on deferred trust assets, or the Company’s holdingssale of marketable securities. Earnings on securities may vary based on fluctuating interest rates, dividend payout levels, anda fixed asset. Interest expense is related to the timing of purchases, sales, redemptions or maturities of securities.deferred compensation payments made to retired employees.

Income Tax Provision