The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2021 and 2020
1. Summary of Accounting Policies
Basis of Presentation and Principles of Consolidation:
The consolidated financial statements include the accounts of Frequency Electronics, Inc. and its wholly-owned subsidiaries (the “Company” or “Registrant”). References to “FEI” are to the parent company alone and do not refer to any of its subsidiaries. The Company is principally engaged in the design, development and manufacture of precision time and frequency control products and components for microwave integrated circuit applications. See Note 13 for information regarding the Company’s business segments: (1) FEI-NY (which includes the subsidiaries FEI Government Systems, Inc., FEI Communications, Inc., and FEI-Elcom Tech, Inc. (“FEI-Elcom”)), and (2) FEI-Zyfer, Inc. (“FEI-Zyfer”). Intercompany accounts and transactions are eliminated in consolidation.
These consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles (“U.S. GAAP”) and require management to make estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and related notes. Actual results could differ from these estimates.
COVID-19 Pandemic and the CARES Act
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (“COVID-19”) and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified COVID-19 as a pandemic, based on the rapid increase in exposure globally.
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 fiscal year ended April 30, 2021, the Company had been impacted by employee absenteeism related to direct or indirect effects of the COVID 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 the fiscal year. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the changing dynamics of the pandemic the Company is not able to estimate the potential adverse effects on its operations, financial condition, or liquidity for fiscal year 2022. As of April 30, 2021, the Company has begun a return to normal operations and will continue to follow CDC 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 impacted. If so, 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. In the latter part of FY2021, the Company did experience 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.
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.” The CARES Act, among other things, included provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act also appropriated funds for the Small Business Administration (SBA) Paycheck Protection Program loans that are forgivable in certain situations to promote continued employment, as well as Economic Injury Disaster Loans to provide liquidity to small businesses harmed by the COVID-19 pandemic. The Company received a loan under the Paycheck Protection Program (“PPP”) in April 2020, which it repaid in full in May 2020. For more detail regarding the Company’s PPP Loan, see Notes 8 and 12 below.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2021 and 2020
Cash Equivalents:
The Company considers certificates of deposit and other highly liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company places its temporary cash investments with high credit quality financial institutions. Such investments may at times be in excess of the Federal Deposit Insurance Corporation (“FDIC”) and Securities Investor Protection Corporation (“SIPC”) insurance limits. No losses have been experienced on such investments.
Marketable Securities:
Marketable securities consist of corporate debt securities, certificates-of-deposit, and debt securities of U.S. Government agencies. All marketable securities were held in the custody of one financial institution at April 30, 2021 and 2020. Investments in debt securities are categorized as available-for-sale and are carried at fair value, with unrealized gains and losses excluded from income and recorded directly to stockholders’ equity. The Company recognizes gains or losses when securities are sold using the specific identification method.
Allowance for Doubtful Accounts:
Losses from uncollectible accounts receivable are provided for by utilizing the allowance for doubtful accounts method based upon management’s estimate of uncollectible accounts. Management analyzes accounts receivable and the potential for bad debts, customer concentrations, credit worthiness, current economic trends and changes in customer payment terms when evaluating the amount recorded for the allowance for doubtful accounts.
Property, Plant and Equipment:
Property, plant and equipment is recorded at cost and include interest on funds borrowed to finance construction. Expenditures for renewals and betterments are capitalized; maintenance and repairs are charged to income when incurred. When fixed assets are sold or retired, the cost and related accumulated depreciation and amortization are eliminated from the respective accounts and any gain or loss is credited or charged to income.
If events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the long-lived asset, an impairment loss is recognized. No impairment losses have been recognized in the years ended April 30, 2021 and 2020.
Inventories:
Inventories, which consist of finished goods, work-in-process, raw materials and components, are accounted for at the lower of cost (specific and average) and net realizable value.
Depreciation and Amortization:
Depreciation of property, plant and equipment is computed on the straight-line method based upon the estimated useful lives of the assets (40 years for buildings and 3 to 10 years for other depreciable assets). Leasehold improvements and equipment acquired under capital leases are amortized on the straight-line method over the shorter of the term of the lease or the useful life of the related asset.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2021 and 2020
Goodwill:
The Company records goodwill as the excess of purchase price over the fair value of identifiable net assets acquired. Goodwill is tested for impairment, on a reporting unit level qualitatively, on at least an annual basis at year end to determine whether it is more likely than not that the reporting unit’s fair value is less than its carrying amount. If it is determined that the carrying value of goodwill may not be recoverable, the Company will write down the goodwill to an amount to commensurate with the revised value of the acquired assets. The Company measures impairment based on revenue projections, recent transactions involving similar businesses and price/revenue multiples at which they were bought and sold, price/revenue multiples of competitors, and the present market value of publicly-traded companies in the Company’s industry. Management has determined that goodwill is not impaired as of April 30, 2021 and 2020.
Revenue and Cost Recognition:
Revenue is recognized when a performance obligation is satisfied, which is when the expected goods or services are transferred to the customer, in an amount that reflects the consideration to which the Company expects to receive. A performance obligation is a distinct product or service that is transferred to the customer based on the contract. The transaction price is allocated to each performance obligation and is recognized as revenue upon satisfaction of that performance obligation. The Company derives revenue from contracts with customers by units sold with specific specifications and frequencies that are used by a specific customer and contracts where the end user is The United States Government. The Company’s contracts typically include one performance obligation which is satisfied by shipped projects and completed services/reports required in the contract. Control over these performance obligations passes to the customer over time and therefore these revenues are reported in operating results over time using the percentage-of completion (“POC”) cost-to-cost method. Under this method, revenue is recorded based upon the ratio that incurred costs bear to total estimated contract costs with related cost of revenues recorded as the costs are incurred. Each month management reviews estimated contract costs through a process of aggregating actual costs incurred and estimating additional costs to completion based upon the current available information and status of the contract. The effect of any change in the estimated gross margin rate (“GM Rate”) for a contract is reflected in revenues in the period in which the change is known. Provisions for the full amount of anticipated losses on contracts are made in the period in which they become determinable.
For smaller contracts or orders sales of products and services to customers are reported in operating results based upon passage-of-title (“POT”) (i) shipment of the product or (ii) performance of the services pursuant to terms of the customer order. When payment is contingent upon customer acceptance of the installed system, revenue is deferred until such acceptance is received and installation completed. The Company’s products generally carry a one-year warranty, but may vary based on the contract terms.
Some judgment is used in evaluating the financial information for certain contracts to determine an appropriate budget and estimated cost. The Company evaluates this information continuously and bases its judgments on historical experience, design specifications, and expected costs for material and labor.
Contract costs include all direct material, direct labor costs, manufacturing overhead and other direct costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred.
Practical Expedients
The Company expenses sales commissions as sales and marketing expenses in the period they are incurred if the expected amortization period is one year or less.
The Company expenses costs, other than sales commissions, to obtain a contract in the period for which they are incurred as these amounts would have been incurred even if the contract had not been obtained.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2021 and 2020
Disaggregation of Revenue
Total revenue recognized over time as POC method was approximately $50.2 million and $38.0 million of the $54.3 million and $41.5 million reported for the years ended April 30, 2021 and 2020, respectively. The amounts by segment and product line were as follows:
|
|
Year Ended April 30, 2021
|
|
|
|
(In thousands)
|
|
|
|
POC
|
|
|
POT Revenue
|
|
|
Total Revenue
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
39,225
|
|
|
$
|
3,175
|
|
|
$
|
42,400
|
|
FEI-Zyfer
|
|
|
10,993
|
|
|
|
2,842
|
|
|
|
13,835
|
|
Intersegment
|
|
|
(10
|
)
|
|
|
(1,971
|
)
|
|
|
(1,981
|
)
|
Revenue
|
|
$
|
50,208
|
|
|
$
|
4,046
|
|
|
$
|
54,254
|
|
|
|
Year Ended April 30, 2020
|
|
|
|
(In thousands)
|
|
|
|
POC
|
|
|
POT Revenue
|
|
|
Total Revenue
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
28,720
|
|
|
$
|
3,031
|
|
|
$
|
31,751
|
|
FEI-Zyfer
|
|
|
9,210
|
|
|
|
1,704
|
|
|
|
10,914
|
|
Intersegment
|
|
|
(88
|
)
|
|
|
(1,070
|
)
|
|
|
(1,158
|
)
|
Revenue
|
|
$
|
37,842
|
|
|
$
|
3,665
|
|
|
$
|
41,507
|
|
|
|
Years Ended April 30,
|
|
|
|
(in thousands)
|
|
|
|
2021
|
|
|
2020
|
|
Revenues by Product Line:
|
|
|
|
|
|
|
|
|
Satellite Revenue
|
|
$
|
26,980
|
|
|
$
|
20,422
|
|
Government Non-Space Revenue
|
|
|
24,775
|
|
|
|
16,939
|
|
Other Commercial & Industrial Revenue
|
|
|
2,499
|
|
|
|
4,146
|
|
Consolidated revenues
|
|
$
|
54,254
|
|
|
$
|
41,507
|
|
Comprehensive Income (Loss):
Comprehensive income (loss) consists of net income or loss and other comprehensive income/loss. Other comprehensive income/loss includes changes in unrealized gains or losses, net of tax, on securities (for Fiscal 2021 and Fiscal 2020, debt securities) available for sale during the year.
Research and Development Expenses:
The Company engages in R&D activities to identify new applications for its core technologies, to improve existing products and to improve manufacturing processes to achieve cost reductions and manufacturing efficiencies. R&D costs include direct labor, manufacturing overhead, direct materials and contracted services. Such costs are expensed as incurred. The Company also engages in customer-funded R&D activity. The customer funds received in connection therewith appear in revenues and the associated expenses are included in cost of revenues and are not included in R&D expenses.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2021 and 2020
Income Taxes:
The Company recognizes deferred tax liabilities and assets based on the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established and adjusted when necessary to increase or reduce deferred tax assets to the amount expected to be realized.
The Company analyzes its tax positions under accounting standards which prescribe recognition thresholds that must be met before a tax benefit is recognized in the financial statements and provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. An entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. Interest and penalties recognized on income taxes are recorded as income tax expense.
Earnings/Loss per Share:
Basic earnings/loss per share are computed by dividing net earnings/loss by the weighted average number of shares of common stock outstanding. Diluted earnings per share are computed by dividing net earnings by the sum of the weighted average number of shares of common stock and the if-converted effect of unexercised stock options and stock appreciation rights (“SARs”). Diluted earnings per share are not computed where the if-converted effect of such items would be anti-dilutive.
Fair Values of Financial Instruments:
Cash and cash equivalents, marketable securities, short-term credit obligations and debt and cash surrender value of life insurance are reflected in the accompanying consolidated balance sheets at amounts considered by management to reasonably approximate fair value based upon the nature of the instrument and current market conditions. Management is not aware of any factors that would significantly affect the value of these amounts. The Company also has an investment in a privately-held Russian company, Morion. The Company is unable to reasonably estimate a fair value for this investment.
Equity-based Compensation:
The cost of employee services received in exchange for awards of equity instruments are based on the grant-date fair value of the award. We recognize the fair value of the award as compensation expense over the period during which an employee is required to provide service in exchange for the award.
Concentration of Credit Risk:
Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and cash equivalents and trade receivables. The Company maintains cash accounts at several commercial banks at which the balances exceed FDIC limits. The Company has not experienced any losses on such amounts. Concentration of credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising the Company’s customer base and their dispersion across geographic areas, principally within the U.S. The Company routinely addresses the financial strength of its customers and, as a consequence, believes that its receivable credit risk exposure is limited. The Company does not require customers to post collateral.
New Accounting Pronouncements:
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under ASU 2017-04, goodwill impairment will be tested by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2022, with early adoption permitted. The Company will not be adopting ASU 2017-04 early, and is in the process of determining the effect that ASU 2017-04 may have. However, the Company expects the new standard to have an immaterial effect on its consolidated financial statements.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2021 and 2020
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance is effective for fiscal years beginning after December 15, 2022. The Company is evaluating the effect, if any, the update will have on its consolidated financial statements when adopted in fiscal year 2023.
2. Earnings per Share
Reconciliations of the weighted average shares outstanding for basic and diluted income (loss) per share for the years ended April 30, 2021 and 2020, respectively, were as follows:
|
|
For the Years Ended April 30,
|
|
|
|
2021
|
|
|
2020
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic EPS Shares outstanding (weighted average)
|
|
|
9,177,537
|
|
|
|
9,073,609
|
|
Effect of Dilutive Securities
|
|
|
70,888
|
|
|
|
251,878
|
|
Diluted EPS Shares outstanding
|
|
|
9,248,425
|
|
|
|
9,325,487
|
|
For the year ended April 30, 2020, dilutive securities noted in the above table are excluded from the calculation of earnings per share since the inclusion of such shares would be antidilutive due to the net loss for the period. Additionally, there are anti-dilutive shares excluded in the above table for fiscal years ended April 30, 2021 and 2020 of 345,800 and 896,375, respectively.
3. Costs and Estimated Earnings in Excess of Billings, Net
At April 30, 2021 and 2020, costs and estimated earnings in excess of billings, net, consisted of the following (in thousands):
|
|
April 30, 2021
|
|
|
April 30, 2020
|
|
Costs and estimated earnings in excess of billings
|
|
$
|
12,640
|
|
|
$
|
10,460
|
|
Billings in excess of costs and estimated earnings
|
|
|
(10,692
|
)
|
|
|
(3,507
|
)
|
Net asset
|
|
$
|
1,948
|
|
|
$
|
6,953
|
|
Such amounts represent revenue recognized on long-term contracts that have not been billed at the balance sheet dates or represent a liability for amounts billed in excess of the revenue recognized. Amounts are billed to customers pursuant to contract terms. In general, the recorded amounts will be billed and collected or revenue recognized within twelve months of the balance sheet dates. Revenue on these long-term contracts is accounted for on the POC basis. During the years ended April 30, 2021 and 2020, revenue recognized under POC contracts was approximately $50.2 million and $38.0 million, respectively. If contract losses are anticipated, costs and estimated earnings in excess of billings are reduced for the full amount of such losses when they are determinable. Total contract losses for the fiscal years ended April 30, 2021 and 2020 were approximately $1.0 million and $2.4 million, respectively.
4. Inventories, Net
Inventories, net at April 30, 2021 and 2020, respectively, consisted of the following (in thousands):
|
|
April 30, 2021
|
|
|
April 30, 2020
|
|
Raw Materials and Component Parts
|
|
$
|
12,386
|
|
|
$
|
15,470
|
|
Work in Progress
|
|
|
6,259
|
|
|
|
6,104
|
|
Finished Goods
|
|
|
1,016
|
|
|
|
1,384
|
|
|
|
$
|
19,661
|
|
|
$
|
22,958
|
|
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2021 and 2020
Inventory reserves included in inventory were $7.3 and $6.6 million for the fiscal years ended April 30, 2021 and 2020, respectively.
5. Property, Plant and Equipment, Net
Property, plant and equipment, net at April 30, 2021 and 2020, consisted of the following (in thousands):
|
|
April 30, 2021
|
|
|
April 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Buildings and building improvements
|
|
$
|
2,721
|
|
|
$
|
2,692
|
|
Machinery, equipment and furniture
|
|
|
59,136
|
|
|
|
57,916
|
|
|
|
|
61,857
|
|
|
|
60,608
|
|
Less accumulated depreciation
|
|
|
(52,245
|
)
|
|
|
(49,341
|
)
|
|
|
$
|
9,612
|
|
|
$
|
11,267
|
|
Depreciation and amortization expense was $2.9 million and $3.0 million for the fiscal years ended April 30, 2021 and 2020, respectively.
Maintenance and repairs charged to operations was approximately $827,000 and $706,000 for the fiscal years ended April 30, 2021 and 2020, respectively.
6. Right-of-Use Assets and Lease Liabilities
The Company’s leases primarily represent offices, warehouses, vehicles, manufacturing and R&D facilities which expire at various times through 2029 and are operating leases. Contractual arrangements are evaluated at inception to determine if the agreement contains a lease. Certain lease agreements contain renewal options, rent abatement, and escalation clauses that are factored into our determination of lease payments when appropriate. ROU assets and lease liabilities are recorded based on the present value of future lease payments which will factor in certain qualifying initial direct costs incurred as well as any lease incentives that may have been received. Lease expenses for operating lease payments are recognized on a straight-line basis over the lease term. Lease terms may factor in options to extend or terminate the lease.
The Company elected the practical expedient for short-term leases which allows leases with terms of twelve months or less to be recorded on a straight-line basis over the lease term without being recognized on the consolidated balance sheet.
The table below presents ROU assets and lease liabilities recorded on the consolidated balance sheets as follows:
|
Classification
|
|
April 30, 2021
|
|
|
April 30, 2020
|
|
|
|
|
(In thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Operating lease ROU assets
|
Right-of-Use assets leases
|
|
$
|
9,773
|
|
|
$
|
10,864
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities (short-term)
|
Lease liability, current
|
|
|
1,715
|
|
|
|
1,869
|
|
Operating lease liabilities (long-term)
|
Lease liability, non-current
|
|
|
8,366
|
|
|
|
9,444
|
|
Total lease liabilities
|
|
$
|
10,081
|
|
|
$
|
11,313
|
|
Total operating lease expense was approximately $1.6 million for the fiscal years ended April 30, 2021 and 2020, the majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses on the consolidated statements of operations. In addition, we made cash payments of $2.0 million and $1.7 million for operating leases during the fiscal years ended April 30, 2021 and 2020, respectively, which are included in cash flows from operating activities in our consolidated statement of cash flows. As of April 30, 2021, the Company had no operating lease liabilities that had not commenced.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2021 and 2020
The table below reconciles the undiscounted cash flows for each of the first five fiscal years and total of the remaining fiscal years to the operating lease liabilities recorded on the consolidated balance sheet as of April 30, 2021:
Fiscal Year Ending April 30,
|
|
(in thousands)
|
|
|
|
|
|
|
2022
|
|
$
|
1,766
|
|
2023
|
|
|
1,802
|
|
2024
|
|
|
1,834
|
|
2025
|
|
|
1,723
|
|
Thereafter
|
|
|
5,542
|
|
Total lease payments
|
|
|
12,667
|
|
Less imputed interest
|
|
|
(2,586
|
)
|
Present value of future lease payments
|
|
|
10,081
|
|
Less current obligations under leases
|
|
|
(1,715
|
)
|
Long-term lease obligations
|
|
$
|
8,366
|
|
As of April 30, 2021, the weighted-average remaining lease term for all operating leases was 7.4 years. The Company does not generally have access to the rate implicit in the leases and therefore utilized the Company’s borrowing rate as the discount rate. The weighted average discount rate for operating leases as of April 30, 2021 was 6.19%.
7. Marketable Securities
The cost, gross unrealized gains, gross unrealized losses and fair market value of available-for-sale securities at April 30, 2021 and 2020, respectively, were as follows (in thousands):
|
|
April 30, 2021
|
|
|
|
Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair Market Value
|
|
Fixed income securities
|
|
$
|
10,022
|
|
|
$
|
393
|
|
|
$
|
(102
|
)
|
|
$
|
10,313
|
|
|
|
April 30, 2020
|
|
|
|
Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair Market Value
|
|
Fixed income securities
|
|
$
|
10,081
|
|
|
$
|
495
|
|
|
$
|
(6
|
)
|
|
$
|
10,570
|
|
The following table presents the fair value and unrealized losses, aggregated by investment type and length of time that individual securities have been in a continuous unrealized loss position (in thousands):
|
|
Less than 12 months
|
|
|
12 Months or more
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
April 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
$
|
1,793
|
|
|
$
|
(52
|
)
|
|
$
|
614
|
|
|
$
|
(50
|
)
|
|
$
|
2,407
|
|
|
$
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
$
|
380
|
|
|
$
|
(6
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
380
|
|
|
$
|
(6
|
)
|
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2021 and 2020
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 April 30, 2021 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.
Proceeds from the sale or redemption of available-for-sale securities and the resulting gross realized gains and losses included in the determination of net income (loss) for the years ended April 30, 2021 and 2020, respectively, were as follows (in thousands):
|
|
For the years ended April 30,
|
|
|
|
2021
|
|
|
2020
|
|
Proceeds
|
|
$
|
2,498
|
|
|
$
|
3,539
|
|
Gross realized gains
|
|
$
|
28
|
|
|
$
|
-
|
|
Gross realized losses
|
|
$
|
-
|
|
|
$
|
(1
|
)
|
Maturities of fixed income securities classified as available-for-sale at April 30, 2021 were as follows (at cost, in thousands):
Current
|
|
$
|
3,490
|
|
Due after one year through five years
|
|
|
4,498
|
|
Due after five years
|
|
|
2,034
|
|
|
|
$
|
10,022
|
|
The fair value accounting framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The levels of the fair value hierarchy are described below:
|
Level 1
|
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
|
|
|
|
|
Level 2
|
Inputs to the valuation methodology include:
-Quoted prices for similar assets or liabilities in active markets;
-Quoted prices for identical or similar assets or liabilities in inactive markets;
-Inputs other than quoted prices that are observable for the asset or liability; and
-Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
|
|
Level 3
|
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The Company’s money market, business account, and U.S. securities 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.
8. Debt Obligations
As of April 30, 2021, 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. On April 12, 2020, the Company received proceeds from a loan in the amount of $4,964,810 (the “PPP Loan”) from JPMorgan Chase Bank, N.A. as the lender, pursuant to the Small Business Administration Paycheck Protection Program under the CARES Act. The PPP Loan was repaid in full on May 6, 2020.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2021 and 2020
9. Accrued Liabilities
Accrued liabilities at April 30, 2021 and 2020, respectively, consisted of the following (in thousands):
|
|
2021
|
|
|
2020
|
|
Vacation and other compensation
|
|
$
|
1,564
|
|
|
$
|
1,437
|
|
Incentive compensation
|
|
|
550
|
|
|
|
107
|
|
Payroll taxes
|
|
|
167
|
|
|
|
379
|
|
Warranty reserve
|
|
|
439
|
|
|
|
527
|
|
Commissions
|
|
|
329
|
|
|
|
345
|
|
Deferred compensation payable
|
|
|
704
|
|
|
|
704
|
|
Other
|
|
|
1,492
|
|
|
|
1,187
|
|
|
|
$
|
5,245
|
|
|
$
|
4,686
|
|
10. Investment in Morion, Inc.
The Company has an investment in Morion, a privately-held Russian company, which manufactures high precision quartz resonators and crystal oscillators. The Company has also licensed certain technology to Morion.
The Company’s investment consists of 4.6% of Morion’s outstanding shares, accordingly, the Company accounts for its investment in Morion on the cost basis. This investment of approximately $800,000 is included in other assets in the accompanying consolidated balance sheets. During the fiscal years ended April 30, 2021 and 2020, the Company acquired product from Morion in the aggregate amount of approximately $710,000 and $888,000, respectively. During the fiscal years ended April 30, 2021 and 2020, the Company sold product and training services to Morion in the aggregate amount of approximately $94,000 and $85,000, respectively, included in revenues in the consolidated statements of operations as part of the FEI-NY segment. During the fiscal years ended April 30, 2021 and 2020, the Company received dividends from Morion in the amount of approximately $105,000 and $250,000, respectively, which is included in other income, net in the consolidated statements of operations as part of the FEI-NY segment.
Morion is a less than wholly-owned subsidiary of Gazprombank, a state-owned Russian bank. The U.S. Ukraine-related sanctions regime has since 2014 included a list of SSI pursuant to Executive Order 13662, which prohibits certain transactions, including certain extensions of credit, with an entity designated as an SSI or certain affiliates of an entity designated as an SSI. On July 16, 2014, after the Company’s investment in Morion, Gazprombank was designated as an SSI.
As previously disclosed, in light of Morion’s relationship with Gazprombank, in 2020, the Company evaluated, with the assistance of external legal counsel, certain sales to Morion and the timing of payments by Morion to the Company in connection with those sales to determine whether payments by Morion may have inadvertently constituted extensions of credit in violation of Directive 1 under Executive Order 13662. The Company determined that certain payments by Morion – the majority of which occurred more than five years ago – were not timely. Following the evaluation, on May 7, 2020, the Company voluntarily disclosed its findings to the Office of Foreign Assets Control (“OFAC”). The Company’s voluntary disclosure to OFAC related solely to delays in collection of accounts receivable that exceeded then-applicable payment windows set forth in sanctions regulations and did not relate to any other type of payment or transaction. On February 17, 2021, the Company received a Cautionary Letter from OFAC indicating that OFAC has completed its review of the matter. According to OFAC, the Cautionary Letter was issued instead of pursuing a civil monetary penalty or taking other enforcement action.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2021 and 2020
11. Employee Benefit Plans
Profit Sharing Plan:
The Company provides its U.S.-based employees with a profit-sharing plan and trust under § 401(k) of the IRC. This plan allows all eligible employees to defer a portion of their income through voluntary contributions to the plan. In accordance with the provisions of the plan, the Company can make discretionary matching contributions in the form of cash or common stock. For the years ended April 30, 2021 and 2020, the Company contributed 41,118 and 39,403 shares of common stock, respectively. The approximate value of these shares at the date of contribution was $419,000 and $417,000 in fiscal years 2021 and 2020, respectively. Contributed shares are drawn from the Company’s common stock held in treasury, and are removed at the Company’s original cost of acquisition of such shares on a specific identification basis, and from the Company’s common stock. In addition to changes in the treasury stock accounts, during fiscal years 2021 and 2020, such transactions increased additional paid in capital by $325,000 and $236,000, respectively. As of April 30, 2021, the plan held a total of 498,115 shares, which were allocated to the accounts of the individual participants. As of April 30, 2020, the plan held a total of 507,204 shares, which were allocated to the accounts of the individual participants.
Income Incentive Pool:
The Company maintains incentive bonus programs for certain employees which are based on operating profits of the individual subsidiaries to which the employees are assigned. The Company also adopted a plan for the President and Chief Executive Officer of the Company, which the formula is based on consolidated pre-tax profits. The incentive bonus recorded for the fiscal year ended April 30, 2021 was $550,000. There was no incentive bonus recorded for the fiscal year ended April 30, 2020.
Employee Stock Plans:
The Company has various stock plans, some of which have been approved by the Company’s stockholders, for key management employees, including officers and directors who are employees, certain consultants and independent members of the Board of Directors. The plans are Nonqualified Stock Options (“NQSO”) plans, Incentive Stock Option (“ISO”) plans, and SAR plans. Under these plans, options or SAR are granted at the discretion of the Stock Option Committee at an exercise price not less than the fair market value of the Company’s common stock on the date of grant.
Typically, options and SARs vest over a four-year period from the date of grant. The options and SARs generally expire ten years after the date of grant (the most recent SARs awards expire in five years) and are subject to certain restrictions on transferability of the shares obtained on exercise. Under the Company’s 2005 Stock Award Plan (“Plan”) the Company provided option holders the opportunity to exercise stock options either by paying the exercise price for the shares or to do a cashless exercise whereby the individual receives the net number of shares of stock equal in value to the exercised number of shares times the difference between the current market value of the Company’s stock and the exercise price. Under the Plan, instruments granted under other plans which expire, are canceled, or are tendered in the exercise of such instruments, increase the shares available under the Plan.
As of April 30, 2021, eligible employees and directors had been granted total SARs representing approximately 2,445,000 shares of the Company’s common stock, of which approximately 615,000 shares were outstanding and approximately 538,000 shares with a weighted average exercise price of $10.06 were exercisable. There were no SARs granted during the fiscal year 2021. When the SARs become exercisable, the Company will settle the SARs by issuing to exercising recipients the number of shares of stock from common stock or treasury stock, if available, equal to the appreciated value of the Company’s stock between the grant date and exercise date. At the time of exercise, the quantity of shares under the SARs grant equal to the exercise value divided by the then market value of the shares will be returned to the pool of available shares for future grant under the Plan. During the year ended April 30, 2021, employees exercised SARs representing 247,500 shares of the Company’s common stock and received 58,331 shares of Company stock. The difference of 189,169 shares was returned to the pool of available shares and may be used for future grants.
The excess of the consideration received over the par value of the common stock or cost of treasury stock issued under both types of option plans is recognized as an increase in additional paid-in capital.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2021 and 2020
The following table summarizes information about stock option and SARs activity for the years ended April 30, 2021 and 2020:
|
|
Stock Options and Stock Appreciation Rights
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Contractual Term
|
|
Intrinsic Value
|
|
Outstanding – April 30, 2019
|
|
|
1,499,750
|
|
|
$
|
9.17
|
|
3.0 years
|
|
|
6,660,150
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Exercised
|
|
|
(171,250
|
)
|
|
|
5.48
|
|
|
|
$
|
781,680
|
|
Expired or Canceled
|
|
|
(269,000
|
)
|
|
|
9.26
|
|
|
|
|
|
|
Outstanding – April 30, 2020
|
|
|
1,059,500
|
|
|
$
|
9.74
|
|
2.2 years
|
|
$
|
5,416,783
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Exercised
|
|
|
(247,500
|
)
|
|
|
8.42
|
|
|
|
|
573,418
|
|
Expired or Canceled
|
|
|
(197,000
|
)
|
|
|
10.96
|
|
|
|
|
|
|
Outstanding – April 30, 2021
|
|
|
615,000
|
|
|
$
|
9.88
|
|
1.8 years
|
|
$
|
2,141,905
|
|
Exercisable
|
|
|
537,500
|
|
|
$
|
10.06
|
|
1.8 years
|
|
$
|
1,959,463
|
|
Available for future grants
|
|
|
755,923
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2021, total unrecognized compensation cost related to non-vested options and SARs under the plans was approximately $120,000. These costs are expected to be recognized over a weighted average period of 1.0 years.
During the years ended April 30, 2021 and 2020, 85,625 and 100,625 shares, respectively, vested, the fair value of which was approximately $274,000 and $339,000, respectively.
Stock-based compensation costs capitalized as part of work in process inventory or included in the cost of sales of programs on which the Company recognizes revenue under the POC method were approximately $103,000 and $110,000 for the years ended April 30, 2021 and 2020, respectively. Selling and administrative expenses included stock-based compensation expense of approximately $160,000 and $144,000 for the years ended April 30, 2021 and 2020, respectively.
The Company classifies cash flows resulting from the tax benefits from tax deductions recognized upon the exercise of stock options or SARs (tax benefits) as operating cash flows. The Company did not recognize any tax benefits from the exercise of stock options and SARs for the fiscal years presented.
Restricted Stock Plan and Other Issuances:
During fiscal year 1990, the Company adopted a Restricted Stock Plan which provided that key management employees could be granted rights to purchase an aggregate of 375,000 shares of the Company’s common stock. The grants, transferability restrictions and purchase price were determined at the discretion of a special committee of the Board of Directors. The purchase price could not be less than the par value of the common stock. Transferability of shares is restricted for a four-year period, except in the event of a change in control as defined therein. As a result of the adoption by the Company’s stockholders of the 2005 Stock Award Plan, the Restricted Stock Plan was discontinued. No additional grants will be made under this plan. As of April 30, 2020, there are no outstanding shares available for purchase.
During the year ended April 30, 2021 and 2020 the Company issued 950 shares from common stock and 1,850 shares from treasury stock, respectively, to select employees for milestone years of service to the Company. These shares are shares of the Company’s common stock and are fully vested at time of issuance.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2021 and 2020
In fiscal year 2020 the Company elected to issue Restricted Stock Units (“RSUs”) to directors, officers, and other key employees pursuant to the 2005 Stock Award Plan. The fair value of these awards is equivalent to the market value of the Company’s common stock on the grant date. RSUs are not shares of the Company’s common stock and do not have any rights or privileges thereof, including voting or dividend rights. On the applicable vesting date, the holder of an RSU becomes entitled to a share of the Company’s common stock. RSUs are subject to certain restrictions and forfeiture provisions prior to vesting.
In fiscal year 2021 the Company elected to issue Performance Stock Units (“PSUs”) to an officer of the Company. The fair value of these awards is equivalent to the market value of the Company’s common stock on the grant date and requires an assessment of the probability that the specified performance criteria will be achieved, which is updated at each reporting date. PSUs are not shares of the Company’s common stock and do not have any rights or privileges thereof, including voting or dividend rights. On the applicable vesting date, subject to the attainment of the specified performance criteria, the holder of a PSU becomes entitled to a share of the Company’s common stock. PSUs are subject to certain restrictions and forfeiture provisions, in addition to performance vesting conditions, prior to vesting.
The following table summarizes activity for the RSUs and PSUs awards that reduce available capacity under the 2005 Stock Award Plan for the years ended April 30, 2021 and 2020:
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Balance – April 30, 2019
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
13,000
|
|
|
|
11.38
|
|
Balance – April 30, 2020
|
|
|
13,000
|
|
|
|
11.38
|
|
Granted
|
|
|
47,250
|
|
|
|
10.03
|
|
Vested
|
|
|
(3,250
|
)
|
|
|
11.38
|
|
Balance – April 30, 2021
|
|
|
57,000
|
|
|
|
10.26
|
|
Deferred Compensation Agreements:
The Company has a series of agreements with key employees providing for the payment of benefits upon retirement or death. Under these agreements, each key employee receives specified retirement payments for the remainder of the employee’s life with a minimum payment of ten years’ benefits to either the employee or his or her beneficiaries. The agreements also provide for lump sum payments upon termination of employment without cause and reduced benefits upon early retirement. The Company pays the benefits out of its working capital but has also purchased whole life or term life insurance policies on the lives of certain of the participants to cover the optional lump sum obligations of the agreements upon the death of the participant. Deferred compensation expense charged to selling and administrative expenses during the years ended April 30, 2021 and 2020 was approximately $1.1 million and $640,000, respectively.
Life Insurance Policies and Cash Held in Trust:
The whole-life insurance policies on the lives of certain participants covered by deferred compensation agreements have been placed in a trust. Upon the death of any insured participant, cash received from life insurance policies in excess of the Company’s deferred compensation obligations to the estate or beneficiaries of the deceased, are also placed in the trust. These assets belong to the Company until a change of control event, as defined in the trust agreement, should occur. At that time, the Company is required to add sufficient cash to the trust so as to match the deferred compensation liability described above. Such funds will be used to continue the deferred compensation arrangements following a change of control.
12. Income Taxes
On March 27, 2020, the CARES Act was enacted to provide economic relief to those impacted by the COVID-19 pandemic. The CARES Act includes provisions, among others, allowing for the carryback of net operating losses generated in tax years 2018, 2019 and 2020, refunds of alternative minimum tax credits, temporary modifications to the limitations placed on the tax deductibility of net interest expense, and technical corrections so that qualified improvement property can be immediately expensed under IRC § 168(k) and net operating losses arising in tax years beginning in 2017 and ending in 2018 can be carried back two years and forward twenty years.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2021 and 2020
The (benefit) provision for income taxes consisted of the following (in thousands):
|
|
Year Ended April 30,
|
|
|
|
2021
|
|
|
2020
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(119
|
)
|
|
$
|
(1,713
|
)
|
State
|
|
|
(85
|
)
|
|
|
(37
|
)
|
Current (benefit) provision
|
|
|
(204
|
)
|
|
|
(1,750
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
9
|
|
State
|
|
|
-
|
|
|
|
(1
|
)
|
Deferred tax (benefit) provision
|
|
|
-
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Total (benefit) provision
|
|
$
|
(204
|
)
|
|
$
|
(1,742
|
)
|
The following table reconciles the reported income tax (benefit) provision, recorded primarily due to the (i) recognition of previously unrecognized tax benefits, (ii) state and local taxes, (iii) and a change in the valuation allowance, with the amount computed using the federal statutory income tax rate (in thousands):
|
|
Year Ended April 30,
|
|
|
|
2021
|
|
|
2020
|
|
Statutory rate
|
|
$
|
100
|
|
|
$
|
(2,471
|
)
|
State and local tax
|
|
|
69
|
|
|
|
(417
|
)
|
Valuation allowance on deferred tax assets
|
|
|
961
|
|
|
|
2,009
|
|
Nondeductible expenses
|
|
|
2
|
|
|
|
(134
|
)
|
Uncertain tax positions
|
|
|
(898
|
)
|
|
|
-
|
|
Nontaxable life insurance cash value increase
|
|
|
(63
|
)
|
|
|
(73
|
)
|
Taxable life insurance gain
|
|
|
128
|
|
|
|
-
|
|
Stock Compensation
|
|
|
242
|
|
|
|
-
|
|
Tax credits
|
|
|
(434
|
)
|
|
|
(46
|
)
|
Change in tax rate
|
|
|
(323
|
)
|
|
|
(120
|
)
|
Impact of CARES Act
|
|
|
-
|
|
|
|
(592
|
)
|
Other items
|
|
|
12
|
|
|
|
102
|
|
Total (benefit) provision
|
|
$
|
(204
|
)
|
|
$
|
(1,742
|
)
|
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2021 and 2020
The components of deferred taxes are as follows (in thousands):
|
|
Year Ended April 30,
|
|
|
|
2021
|
|
|
2020
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Employee benefits
|
|
$
|
4,789
|
|
|
$
|
4,794
|
|
Inventory
|
|
|
1,946
|
|
|
|
1,904
|
|
Accounts receivable
|
|
|
119
|
|
|
|
207
|
|
Tax credits
|
|
|
2,027
|
|
|
|
1,610
|
|
Other assets
|
|
|
883
|
|
|
|
1,073
|
|
Lease Liability
|
|
|
2,593
|
|
|
|
2,807
|
|
Capital Loss carry-forward
|
|
|
2,602
|
|
|
|
2,515
|
|
Net operating loss carryforwards
|
|
|
6,203
|
|
|
|
6,185
|
|
Total deferred tax asset
|
|
|
21,162
|
|
|
|
21,095
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
(666
|
)
|
|
|
(1,518
|
)
|
Right of use asset
|
|
|
(2,514
|
)
|
|
|
(2,696
|
)
|
Other liabilities
|
|
|
(195
|
)
|
|
|
(193
|
)
|
Deferred state income tax
|
|
|
(932
|
)
|
|
|
(842
|
)
|
Net deferred tax asset
|
|
|
16,855
|
|
|
|
15,846
|
|
Valuation allowance
|
|
|
(16,863
|
)
|
|
|
(15,854
|
)
|
Net deferred tax (liability) asset
|
|
$
|
(8
|
)
|
|
$
|
(8
|
)
|
In assessing the potential for realization of deferred tax assets, the Company considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will be realized. A valuation allowance, if needed, reduces the deferred tax assets to the amounts expected to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating loss carryforwards can be utilized. We assess all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, prior earnings history, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable. As of April 30, 2021 and 2020, we have a full valuation allowance against our U.S. net deferred tax assets. If these estimates and assumptions change in the future, the Company may be required to reduce its existing valuation allowance resulting in less income tax expense.
For the year ended April 30, 2021, the valuation allowance increased by approximately $1.0 million from the prior year primarily due an increase in the net deferred tax asset for which no tax benefit was provided.
The Company has a net deferred tax liability related to the tax effect of differences between financial reporting and tax basis of intangible assets that are not expected to reverse within the Company’s net operating loss carryforward periods. The utilization of indefinite lived net operating losses are limited to 80% of taxable income in an annual period.
As of April 30, 2021, the Company has U.S. federal net operating losses of $24.3 million of which $16.4 million begins to expire in Fiscal 2026 through 2038, including $3.4 million which is subject to annual limitation under IRC § 382. The remaining U.S. federal net operating losses of $7.9 million have an indefinite carry-forward period. The U.S. federal capital loss carry-forward of $10.0 million expires in Fiscal 2023. U.S. federal R&D credits of $0.7 million begin to expire in Fiscal 2036 through 2040. The Company also has state net operating loss carryforwards, and state tax credits that expire in various years and amounts.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2021 and 2020
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, is as follows (in thousands):
|
|
2021
|
|
|
2020
|
|
Balance at the beginning of the fiscal year
|
|
$
|
1,354
|
|
|
$
|
1,258
|
|
Additions based on positions taken in the current year
|
|
|
-
|
|
|
|
15
|
|
Additions based on positions taken in prior years
|
|
|
-
|
|
|
|
119
|
|
Decreases based on positions taken in prior years
|
|
|
-
|
|
|
|
(2
|
)
|
Lapse in statute of limitations
|
|
|
(1,235
|
)
|
|
|
(36
|
)
|
Balance at the end of the fiscal year
|
|
$
|
119
|
|
|
$
|
1,354
|
|
The Company recognized $1.2 million of unrecognized benefits during the year ended April 30, 2021 in connection with the lapse of the statute of limitations. Approximately $1.1 million of this amount increased the net operating loss carryforwards which attracted a valuation allowance. The entire amount reflected in the above table at April 30, 2021, if recognized, would reduce our effective tax rate. As of April 30, 2021, and 2020, the Company had $0 and $119,000, respectively, accrued for the payment of interest and penalties. For the fiscal years ended April 30, 2021 and 2020, the Company recognized interest (income) and expense of $(119,000) and $60,000, respectively. Although it is difficult to predict or estimate the change in the Company’s unrecognized tax benefits over the next twelve months, the Company believes no additional amounts will be recognized in the next twelve months.
The Company is subject to taxation in the U.S. federal, various state and local, and foreign jurisdictions. The Company is no longer subject to examination of its U.S. federal income tax returns by the Internal Revenue Service for fiscal years 2017 and prior. The Company is no longer subject to examination by the taxing authorities in foreign jurisdictions for fiscal years 2017 and prior. Net operating losses and tax attributes generated by domestic and foreign entities in closed years and utilized in open years are subject to adjustment by the tax authorities.
13. Segment Information
The Company operates under two reportable segments based on the geographic locations of its subsidiaries:
(1)
|
FEI-NY – operates out of New York and its operations consist principally of precision time and frequency control products used in three principal markets- communication satellites (both commercial and U.S. Government-funded); terrestrial cellular telephone or other ground-based telecommunication stations; and other components and systems for the U.S. military.
The FEI-NY segment also includes the operations of the Company’s wholly-owned subsidiary, FEI-Elcom. FEI-Elcom, in addition to its own product line, provides design and technical support for the FEI-NY segment’s satellite business.
|
(2)
|
FEI-Zyfer – operates out of California and its products incorporate Global Positioning System (GPS) technologies into systems and subsystems for secure communications, both government and commercial, and other locator applications. This segment also provides sales and support for the Company’s wireline telecommunications family of products, including US5G, which are sold in the U.S. market.
|
The Company measures segment performance based on total revenues and profits generated by each geographic location rather than on the specific types of customers or end-users. Consequently, the Company determined that the segments indicated above most appropriately reflect the way the Company’s management views the business.
The accounting policies of the two segments are the same as those described in Note 1. The Company evaluates the performance of its segments and allocates resources to them based on operating profit which is defined as income before investment income, interest expense and taxes. All acquired assets, including intangible assets, are included in the assets of both reporting segments.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2021 and 2020
The table below presents information about reported segments for each of the years ended April 30, 2021 and 2020, respectively, with reconciliation of segment amounts to consolidated amounts as reported in the consolidated statements of operations or the consolidated balance sheets for each of the years (in thousands):
|
|
For the Years Ended April 30,
|
|
|
|
2021
|
|
|
2020
|
|
Revenues:
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
42,400
|
|
|
$
|
31,751
|
|
FEI-Zyfer
|
|
|
13,835
|
|
|
|
10,914
|
|
less intersegment revenues
|
|
|
(1,981
|
)
|
|
|
(1,158
|
)
|
Consolidated revenues
|
|
$
|
54,254
|
|
|
$
|
41,507
|
|
Operating (loss) income:
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
(1,067
|
)
|
|
$
|
(9,910
|
)
|
FEI-Zyfer
|
|
|
655
|
|
|
|
(673
|
)
|
less intersegment revenues
|
|
|
(204
|
)
|
|
|
-
|
|
Corporate
|
|
|
(342
|
)
|
|
|
(339
|
)
|
Consolidated operating loss
|
|
$
|
(958
|
)
|
|
$
|
(10,922
|
)
|
|
|
For the Years Ended April 30,
|
|
|
|
2021
|
|
|
2020
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
34,869
|
|
|
$
|
44,599
|
|
FEI-Zyfer
|
|
|
12,888
|
|
|
|
13,344
|
|
less intersegment balances
|
|
|
-
|
|
|
|
(8,586
|
)
|
Corporate
|
|
|
38,259
|
|
|
|
41,919
|
|
Consolidated identifiable assets
|
|
$
|
86,016
|
|
|
$
|
91,276
|
|
Depreciation and amortization (allocated):
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
3,110
|
|
|
$
|
3,192
|
|
FEI-Zyfer
|
|
|
191
|
|
|
|
112
|
|
Corporate
|
|
|
-
|
|
|
|
15
|
|
Consolidated depreciation and amortization expense
|
|
$
|
3,301
|
|
|
$
|
3,319
|
|
Major Customers
The Company’s products are sold to both commercial and governmental customers. For the years ended April 30, 2021 and 2020, approximately 91% and 83%, respectively, of the Company’s sales were made under contracts to the U.S. Government or subcontracts for U.S. Government end-use.
In Fiscal 2021 and 2020, revenues to three and four customers, respectively, of the FEI-NY segment accounted for more than 10% of that segment’s revenues. In Fiscal 2021 and 2020 two and four customers, respectively, also exceeded 10% of the Company’s consolidated revenues. In the FEI-Zyfer segment, three and two customers, respectively, accounted for more than 10% of that segment’s revenues in Fiscal 2021 and 2020.
The loss by the Company of any one of these customers would have a material adverse effect on the Company’s business. The Company believes its relationship with these customers is mutually satisfactory. Sales to the major customers referenced above can include commercial and governmental end users.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2021 and 2020
Foreign Sales
Revenues in each of the Company’s segments include sales to foreign governments or to companies located in foreign countries. For the years ended April 30, 2021 and 2020, revenues, based on the location of the procurement entity and excluding intersegment sales, were derived from the following countries (in thousands):
|
|
2021
|
|
|
2020
|
|
Belgium
|
|
$
|
36
|
|
|
$
|
22
|
|
Brazil
|
|
|
106
|
|
|
|
-
|
|
France
|
|
|
123
|
|
|
|
-
|
|
China
|
|
|
215
|
|
|
|
713
|
|
Russia
|
|
|
94
|
|
|
|
85
|
|
Germany
|
|
|
31
|
|
|
|
13
|
|
Italy
|
|
|
27
|
|
|
|
169
|
|
Israel
|
|
|
82
|
|
|
|
240
|
|
Singapore
|
|
|
32
|
|
|
|
82
|
|
Taiwan
|
|
|
101
|
|
|
|
-
|
|
United Kingdom
|
|
|
261
|
|
|
|
-
|
|
Other
|
|
|
315
|
|
|
|
441
|
|
|
|
$
|
1,423
|
|
|
$
|
1,765
|
|
14. Product Warranties
The Company generally provides its customers with a one-year warranty regarding the manufactured quality and functionality of its products. For some limited products, the warranty period has been extended. The Company establishes warranty reserves based on its product history, current information on repair costs and annual sales levels. As of April 30, 2021 and 2020, respectively, changes in the carrying amount of accrued product warranty costs, reported in accrued expenses on the consolidated balance sheets, were as follows (in thousands):
|
|
2021
|
|
|
2020
|
|
Balance at beginning of year
|
|
$
|
527
|
|
|
$
|
529
|
|
Warranty costs incurred
|
|
|
(619
|
)
|
|
|
(293
|
)
|
Product warranty accrual
|
|
|
531
|
|
|
|
291
|
|
Balance at end of year
|
|
$
|
439
|
|
|
$
|
527
|
|
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2021 and 2020
15. Other Comprehensive Income (Loss)
Changes in Accumulated Other Comprehensive Income (Loss) (“AOCI”) by component and reclassifications from AOCI to Other income (expense), net, for the years ended April 30, 2021 and 2020, respectively, were as follows (in thousands):
|
|
Change in
|
|
|
|
Market Value
|
|
|
|
of Marketable
|
|
|
|
Securities
|
|
Balance April 30, 2019, net of taxes
|
|
|
|
|
|
$
|
46
|
|
Items of other comprehensive income (loss) before reclassification, pretax
|
|
|
|
|
|
|
443
|
|
Tax effect
|
|
|
|
|
|
|
-
|
|
Items of other comprehensive income (loss) before reclassification, net of taxes
|
|
|
|
|
|
|
443
|
|
Reclassification adjustments, pretax **
|
|
|
1
|
|
|
|
|
|
Tax effect
|
|
|
|
|
|
|
1
|
|
Total other comprehensive income (loss), net of taxes
|
|
|
|
|
|
|
444
|
|
Balance April 30, 2020, net of taxes
|
|
|
|
|
|
|
490
|
|
Items of other comprehensive income (loss) before reclassification, pretax
|
|
|
|
|
|
|
(171
|
)
|
Tax effect
|
|
|
|
|
|
|
(6
|
)
|
Items of other comprehensive income (loss) before reclassification, net of taxes
|
|
|
|
|
|
|
(177
|
)
|
Reclassification adjustments, pretax **
|
|
|
(28
|
)
|
|
|
|
|
Tax effect
|
|
|
6
|
|
|
|
(22
|
)
|
Total other comprehensive income (loss), net of taxes
|
|
|
|
|
|
|
(199
|
)
|
Balance April 30, 2021, net of taxes
|
|
|
|
|
|
$
|
291
|
|
**The reclassification adjustments represent net realized gains on the sale or redemption of available-for-sale marketable securities that were reclassified from AOCI to Other income (expense), net.
16. Contingencies
On January 28, 2020, Martin B. Bloch, the former Chief Scientist of the Company and a former member of the Company’s Board, filed a complaint against the Company and Jonathan Brolin, Lance W. Lord, Russell M. Sarachek, Richard Schwartz and Stanton D. Sloane, each in their capacity as members of the Board (collectively, the “Director Defendants”), in the Supreme Court of the State of New York, County of Nassau (Bloch v. Frequency Electronics, Inc., et al., Index No. 601369/2020 (N.Y. Sup. Ct. filed Jan. 28, 2020)). Mr. Bloch sought compensatory damages and costs and attorney’s fees, among other things, based on allegations that he was wrongfully terminated “for cause” pursuant to his employment agreement, dated March 17, 2008 and that the Company and the Director Defendants discriminated against him based on his age. Mr. Bloch originally also sought a declaratory judgment and asserted claims for defamation and a derivative claim, purportedly on behalf of the Company alleging that the Director Defendants breached their fiduciary duty in rendering their decision to terminate Mr. Bloch’s employment with the Company. However, Mr. Bloch withdrew these claims from a subsequently filed amended complaint after the Company and the Director Defendants moved to dismiss them. On June 11, 2020, the Company and the Director Defendants filed their answer to the amended complaint. Mr. Bloch filed a motion for summary judgment on June 23, 2020. Mr. Bloch’s motion sought an order that the Company was liable for breach of his employment agreement because he purportedly resigned from the Company before he was terminated. On July 10, 2020, the Company and the Director Defendants opposed Mr. Bloch’s motion and also filed a motion for summary judgment seeking the dismissal of all claims in Mr. Bloch’s amended complaint. On September 23, 2020, the Court denied Mr. Bloch’s motion for summary judgment. It also granted the Company and the Director Defendants’ motion for summary judgment as to all claims, except for one claim for breach of contract against the Company. On October 23, 2020, the Company filed a brief with the Appellate Division, Second Department, seeking a reversal of the lower court’s order to the extent that it denied the Company’s summary judgment motion on the breach of contract claim. Mr. Bloch filed its responsive brief on November 20, 2020. The appeal is currently pending. The Company believes that the Board was justified in its decision to terminate Mr. Bloch “for cause” and that Mr. Bloch’s single surviving claim is entirely without merit. The Company intends to vigorously defend against all of Mr. Bloch’s allegations. At this time, the Company does not have sufficient information to determine whether liability, if any, arising out of these matters is probable or the possible loss, if any, that could result from an unfavorable outcome arising out of these matters.
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
April 30, 2021 and 2020
In addition, Mr. Bloch has initiated two arbitration proceedings under the AAA Rules (Bloch v. Frequency Electronics, Inc., the Compensation Committee of the Board of Directors of Frequency Electronics, Inc., and the Deferred Compensation Plan Agreement Dated March 7, 2008). One arbitration purports to be brought under a deferred compensation agreement dated March 27, 1980 and the other under a second amended and restated deferred compensation agreement, dated March 7, 2008. Bloch submitted his Statement of Claim in one arbitration on May 4, 2020, and in the other arbitration on May 6, 2020. In each proceeding, Mr. Bloch claims that defendants violated ERISA rules by denying him deferred compensation benefits. He seeks an award for allegedly past due deferred compensation benefits plus interest, clarification as to his future rights to deferred compensation benefits, and attorneys’ fees and costs.
On June 2, 2020, the Company filed a petition for a stay of arbitration and related declaratory relief against Mr. Bloch, in the Supreme Court of the State of New York, New York County (Frequency Electronics, Inc. v. Martin B. Bloch, Index No. 652191/2020 (N.Y. Sup. Ct. filed June 2, 2020)). The Company claims that Mr. Bloch may not arbitrate his claims for deferred compensation because he did not timely appeal the Company’s denial of those claims, and because he failed to comply with the arbitration procedures in the applicable deferred compensation agreement. Mr. Bloch filed a motion on June 16, 2020 seeking a change of venue to the County of Nassau, which the Company opposed on July 7, 2020. The Court granted Mr. Bloch’s motion on September 8, 2020. The case was therefore transferred to the County of Nassau, and assigned to the same Judge hearing the other cases between the parties (Frequency Electronics, Inc. v. Martin B. Bloch, Index No. 611405/2020). In its order dated February 10, 2021 and entered on February 16, 2021, the Court denied the Company’s petition for a stay of arbitration and ordered the parties to proceed to arbitration. The Company appealed the court’s denial of its petition to stay arbitration on May 7, 2021. The appeal is currently pending. At this time, the Company does not have sufficient information to determine the likelihood of success of this appeal.
On June 5, 2020, Mr. Bloch filed a petition against the Company, the Compensation Committee of the Company’s Board of Directors, and the Deferred Compensation Plan Agreement Dated March 7, 2008, as amended (“Respondents”), for the appointment of an arbitrator in one of the arbitration proceedings that Mr. Bloch initiated. The petition was filed in the Supreme Court of the State of New York, County of Nassau (Bloch v. Frequency Electronics, Inc. et al., Index No. 605380/2020 (N.Y. Sup. Ct. filed June 5, 2020)). On June 22, 2020, Respondents moved to dismiss Mr. Bloch’s petition, and he opposed the motion on July 2, 2020. In its orders dated February 10, 2021 and entered on February 16, 2021, the Court granted Mr. Bloch’s petition for the appointment of an arbitrator, denied the Company’s motion to dismiss that petition, and denied a motion previously filed by the Company for an interim stay of arbitration. On May 11, 2021, Respondents appealed the Court’s decision granting Mr. Bloch’s petition for the appointment of an arbitrator and denying Respondents’ motion to dismiss that petition. The appeal is currently pending. Respondents dispute all of Bloch’s claims and intend to continue to vigorously defend the Company in the appeal. The likelihood of any outcome of this appeal cannot be determined at this time.
The arbitration panel in the arbitrations initiated by Mr. Bloch was constituted in March 2021. The same panel serves in both arbitrations. On May 6, 2021, Respondents submitted a motion to dismiss the arbitrations on the grounds that Mr. Bloch’s claims are not arbitrable. The motion is fully briefed. The Panel heard oral argument on the motion on June 22, 2021, but has not yet ruled on it. Respondents dispute Mr. Bloch’s claims and intend to defend the arbitrations vigorously. The likelihood of any outcome of these arbitration proceedings cannot be determined at this time.