Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
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 consolidated financial position of the Company as of October 31, 2021 and the results of its operations, changes in stockholders’ equity for the three and six months ended October 31, 2021 and 2020, and cash flows for the six months ended October 31, 2021 and 2020. The April 30, 2021 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 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, 2021, filed on June 30, 2021 with the Securities and Exchange Commission. The results of operations for such interim periods are not necessarily indicative of the operating results for the full fiscal year.
COVID-19 Pandemic
The full impact of the COVID-19 pandemic continues to evolve as of the date of this report. The current resurgence of COVID-19 variants may have additional, unforeseen, impacts. As such, it is uncertain as to the full magnitude that the pandemic may have on the Company’s financial condition, liquidity, and future results of operations. For the six months ended October 31, 2021, the Company was impacted by employee absenteeism related to direct or indirect effects of the COVID-19 pandemic and delays in the receipt of anticipated new contracts from customers due to COVID-19 related administrative delays. Management has taken steps to minimize COVID-19 related impacts to our workforce. Given the changing dynamics of the pandemic, it is not possible for the Company to estimate potential future adverse effects on its operations, financial condition, or liquidity for fiscal year 2022. As of July 31, 2021, the Company had returned to normal operations, and the Company will continue to follow CDC and state guidelines with an emphasis on employee safety.
The Company faces various future COVID-19 related risks, including the possibility of impact from the Omicron variant and other future mutations. 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 fiscal year 2021, the Company did experience some disruption due to the need to vacate certain areas of its facilities for cleaning and disinfecting as a result of employees potentially being exposed to COVID-19 or following positive COVID-19 test results. Also, certain of the Company’s 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.
NOTE B – EARNINGS (LOSS) PER SHARE
Reconciliation of the weighted average shares outstanding for basic and diluted earnings (loss) per share for the three and six months ended October 31, 2021 and 2020, respectively, were as follows:
|
|
Periods ended October 31,
|
|
|
|
Three months
|
|
|
Six months
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS Shares outstanding (weighted average)
|
|
|
9,256,255
|
|
|
|
9,169,758
|
|
|
|
9,246,240
|
|
|
|
9,154,434
|
|
Effect of Dilutive Securities
|
|
|
45,273
|
|
|
|
66,019
|
|
|
|
**
|
|
|
|
51,389
|
|
Diluted EPS Shares outstanding
|
|
|
9,301,528
|
|
|
|
9,235,777
|
|
|
|
9,246,240
|
|
|
|
9,205,823
|
|
** For the six-months ended October 31, 2021 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 that period. The exercisable shares excluded for the three- and six-months ended October 31, 2021 was 198,000 and 223,000 options, respectively. The exercisable shares excluded for the three- and six-month periods ended October 31, 2020 was 303,000 and 436,000 options, respectively.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE C – COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS, NET
At October 31, 2021 and April 30, 2021, billings in excess of costs and estimated earnings and costs and estimated earnings in excess of billings, net, respectively, consisted of the following:
|
|
October 31, 2021
|
|
|
April 30, 2021
|
|
|
|
(In thousands)
|
|
Costs and estimated earnings in excess of billings
|
|
$
|
9,882
|
|
|
$
|
12,640
|
|
Billings in excess of costs and estimated earnings
|
|
|
(13,361
|
)
|
|
|
(10,692
|
)
|
Net (liability) asset
|
|
$
|
(3,479
|
)
|
|
$
|
1,948
|
|
Such amounts represent revenue recognized on long-term contracts that had not been billed at the balance sheet dates or represent a liability for amounts billed in excess of the revenue earned. Amounts are billed to customers pursuant to contract terms. In general, the recorded amounts will be billed and collected and revenue recognized within twelve months of the balance sheet date. Revenue on these long-term contracts is accounted for on the percentage of completion (“POC”) basis. During the three and six months ended October 31, 2021, revenue recognized under POC contracts was approximately $12.2 million and $24.6 million, respectively. During the three and six months ended October 31, 2020, revenue recognized under POC contracts was approximately $12.9 million and $24.6 million, respectively. Anticipated contract losses, if any, are accrued for in the period such determination is made. Contract losses of approximately $31,000 and $47,000 were recorded for the three and six months ended October 31, 2021, respectively. Contract losses of approximately $121,000 and $731,000 were recorded for the three and six months ended October 31, 2020, respectively.
NOTE D –STOCK TRANSACTIONS
During the three and six-month periods ended October 31, 2021, the Company made contributions of 10,779 and 24,030 shares of its common stock, respectively, 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.
NOTE E – INVENTORIES, NET
Inventories, which are reported at the lower of cost and net realizable value, consisted of the following:
|
|
October 31, 2021
|
|
|
April 30, 2021
|
|
|
|
(In thousands)
|
|
Raw Materials and Component Parts
|
|
$
|
12,288
|
|
|
$
|
12,386
|
|
Work in Progress
|
|
|
6,689
|
|
|
|
6,259
|
|
Finished Goods
|
|
|
500
|
|
|
|
1,016
|
|
|
|
$
|
19,477
|
|
|
$
|
19,661
|
|
The amounts above are net of reserves of $7.0 million and $7.3 million as of October 31, 2021 and April 30, 2021, respectively.
NOTE F – RIGHT-OF-USE ASSETS AND LEASE LIABILITIES
The Company’s leases primarily represent offices, warehouses, vehicles, and manufacturing and research and development 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. Right-of-use (“ROU”) assets and lease liabilities are recorded based on the present value of future lease payments which 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.
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 twelve months or less to be recorded on a straight-line basis over the lease term without being recognized on the balance sheet.
The table below presents ROU assets and liabilities recorded on the respective consolidated balance sheets as follows:
|
Classification
|
|
October 31, 2021
|
|
|
April 30, 2021
|
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Operating lease ROU assets
|
Right-of-Use assets leases
|
|
$
|
9,087
|
|
|
$
|
9,773
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities (short-term)
|
Lease liability, current
|
|
|
1,779
|
|
|
|
1,715
|
|
Operating lease liabilities (long-term)
|
Lease liability, non-current
|
|
|
7,605
|
|
|
|
8,366
|
|
Total lease liabilities
|
|
$
|
9,384
|
|
|
$
|
10,081
|
|
Total operating lease expense was $500,000 and $1.0 million for the three and six months ended October 31, 2021, respectively, the majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses in the condensed consolidated statements of operations. Total operating lease expense was $500,000 and $1.2 million for the three and six months ended October 31, 2020, respectively, the majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses in the condensed consolidated statements of operations.
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 unaudited condensed consolidated balance sheet as of October 31, 2021:
Fiscal Year Ending April 30,
|
|
(in thousands)
|
|
|
|
|
|
|
Remainder of 2022
|
|
$
|
766
|
|
2023
|
|
|
1,837
|
|
2024
|
|
|
1,849
|
|
2025
|
|
|
1,723
|
|
2026
|
|
|
1,317
|
|
Thereafter
|
|
|
4,174
|
|
Total lease payments
|
|
|
11,666
|
|
Less imputed interest
|
|
|
(2,282
|
)
|
Present value of future lease payments
|
|
|
9,384
|
|
Less current obligations under leases
|
|
|
(1,779
|
)
|
Long-term lease obligations
|
|
|
7,605
|
|
As of October 31, 2021, the weighted-average remaining lease term for all operating leases was 7.0 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 October 31, 2021 was 6.22%.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE G – SEGMENT INFORMATION
The Company operates under two reportable segments based on the geographic locations of its subsidiaries:
|
(1)
|
FEI-NY – operates out of New York and its operations consist principally of precision time and frequency control products used in three principal markets: 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. FEI-Zyfer’s products also incorporate precision time references for terrestrial secure communications and command and control, and frequency products that incorporate GPS. FEI-Zyfer’s GPS capability complements the Company’s existing technologies and permits the combined entities to provide a broader range of embedded systems for a variety of timing functions and anti-spoofing (“SAASM”) applications.
|
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 of Significant Accounting Policies” in the fiscal year-end financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2021, filed on June 30, 2021 with the Securities and Exchange Commission. 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 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 condensed consolidated balance sheets for each of the periods (in thousands):
|
|
Periods ended October 31,
|
|
|
|
Three months
|
|
|
Six months
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
10,381
|
|
|
$
|
11,156
|
|
|
$
|
20,543
|
|
|
$
|
20,996
|
|
FEI-Zyfer
|
|
|
2,648
|
|
|
|
3,430
|
|
|
|
5,783
|
|
|
|
7,353
|
|
less intersegment revenues
|
|
|
(93
|
)
|
|
|
(596
|
)
|
|
|
(436
|
)
|
|
|
(1,409
|
)
|
Consolidated revenues
|
|
$
|
12,936
|
|
|
$
|
13,990
|
|
|
$
|
25,890
|
|
|
$
|
26,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
(64
|
)
|
|
$
|
41
|
|
|
$
|
(1,075
|
)
|
|
$
|
(582
|
)
|
FEI-Zyfer
|
|
|
(132
|
)
|
|
|
306
|
|
|
|
(99
|
)
|
|
|
667
|
|
less intersegment revenues
|
|
|
-
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
Corporate
|
|
|
499
|
|
|
|
(128
|
)
|
|
|
(191
|
)
|
|
|
(204
|
)
|
Consolidated operating income (loss)
|
|
$
|
303
|
|
|
$
|
219
|
|
|
$
|
(1,385
|
)
|
|
$
|
(119
|
)
|
|
|
October 31, 2021
|
|
|
April 30, 2021
|
|
|
|
|
|
|
|
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FEI-NY
|
|
$
|
36,839
|
|
|
$
|
34,869
|
|
|
|
|
|
|
|
|
|
FEI-Zyfer
|
|
|
11,060
|
|
|
|
12,888
|
|
|
|
|
|
|
|
|
|
less intersegment balances
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
33,479
|
|
|
|
38,259
|
|
|
|
|
|
|
|
|
|
Consolidated identifiable assets
|
|
$
|
81,378
|
|
|
$
|
86,016
|
|
|
|
|
|
|
|
|
|
Total revenue recognized over time as POC and Passage of Title (“POT”) were approximately $12.2 million and $0.7 million, respectively, of the $12.9 million reported for the three months ended October 31, 2021. Total revenue recognized over time as POC and POT were approximately $24.6 million and $1.3 million, respectively, of the $25.9 million reported for the six months ended October 31, 2021. The amounts recognized over time as POC and POT were approximately $12.9 million and $1.1 million, respectively, of the $14.0 million reported for the three months ended October 31, 2020. The amount recognized over time as POC and POT were approximately $24.6 million and $2.3 million, respectively, of the $26.9 million for the six months ended October 31, 2020. The amounts by segment and product line were as follows:
|
|
Three Months Ended October 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
POC
|
|
|
POT
|
|
|
Total
|
|
|
POC
|
|
|
POT
|
|
|
Total
|
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
FEI-NY
|
|
$
|
9,928
|
|
|
$
|
453
|
|
|
$
|
10,381
|
|
|
$
|
10,235
|
|
|
$
|
921
|
|
|
$
|
11,156
|
|
FEI-Zyfer
|
|
|
2,300
|
|
|
|
348
|
|
|
|
2,648
|
|
|
|
2,706
|
|
|
|
724
|
|
|
|
3,430
|
|
Intersegment
|
|
|
-
|
|
|
|
(93
|
)
|
|
|
(93
|
)
|
|
|
(1
|
)
|
|
|
(595
|
)
|
|
|
(596
|
)
|
Revenue
|
|
$
|
12,228
|
|
|
$
|
708
|
|
|
$
|
12,936
|
|
|
$
|
12,940
|
|
|
$
|
1,050
|
|
|
$
|
13,990
|
|
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
|
Six Months Ended October 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
POC
|
|
|
POT
|
|
|
Total
|
|
|
POC
|
|
|
POT
|
|
|
Total
|
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Revenue
|
|
FEI-NY
|
|
$
|
19,529
|
|
|
$
|
1,014
|
|
|
$
|
20,543
|
|
|
$
|
18,857
|
|
|
$
|
2,139
|
|
|
$
|
20,996
|
|
FEI-Zyfer
|
|
|
5,100
|
|
|
|
683
|
|
|
|
5,783
|
|
|
|
5,744
|
|
|
|
1,609
|
|
|
|
7,353
|
|
Intersegment
|
|
|
-
|
|
|
|
(436
|
)
|
|
|
(436
|
)
|
|
|
(10
|
)
|
|
|
(1,399
|
)
|
|
|
(1,409
|
)
|
Revenue
|
|
$
|
24,629
|
|
|
$
|
1,261
|
|
|
$
|
25,890
|
|
|
$
|
24,591
|
|
|
$
|
2,349
|
|
|
$
|
26,940
|
|
|
|
Periods ended October 31,
|
|
|
|
(in thousands)
|
|
|
|
Three months
|
|
|
Six months
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Revenues by Product Line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satellite Revenue
|
|
$
|
6,603
|
|
|
$
|
7,576
|
|
|
$
|
13,343
|
|
|
$
|
14,228
|
|
Government Non-Space Revenue
|
|
|
5,099
|
|
|
|
5,520
|
|
|
|
10,590
|
|
|
|
10,855
|
|
Other Commercial & Industrial Revenue
|
|
|
1,234
|
|
|
|
894
|
|
|
|
1,957
|
|
|
|
1,857
|
|
Consolidated revenues
|
|
$
|
12,936
|
|
|
$
|
13,990
|
|
|
$
|
25,890
|
|
|
$
|
26,940
|
|
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.
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 three and six months ended October 31, 2021, the Company acquired product from Morion in the aggregate amount of approximately $34,000 and $120,000, respectively. During the three and six months ended October 31, 2020, the Company acquired product from Morion in the aggregate amount of approximately $118,000 and $268,000, respectively. During the six months ended October 31, 2021 and 2020, the Company received dividends from Morion in the amount of approximately $123,000 and $105,000, 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 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.
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 October 31, 2021 and April 30, 2021, respectively, were as follows (in thousands):
|
|
October 31, 2021
|
|
|
|
Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair Market Value
|
|
Fixed income securities
|
|
$
|
9,746
|
|
|
$
|
313
|
|
|
$
|
(104
|
)
|
|
$
|
9,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2021
|
|
|
|
Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair Market Value
|
|
Fixed income securities
|
|
$
|
10,022
|
|
|
$
|
393
|
|
|
$
|
(102
|
)
|
|
$
|
10,313
|
|
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
|
|
October 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
$
|
1,913
|
|
|
$
|
(22
|
)
|
|
$
|
1,325
|
|
|
$
|
(82
|
)
|
|
$
|
3,238
|
|
|
$
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities
|
|
$
|
1,793
|
|
|
$
|
(52
|
)
|
|
$
|
614
|
|
|
$
|
(50
|
)
|
|
$
|
2,407
|
|
|
$
|
(102
|
)
|
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 October 31, 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.
During the three and six months ended October 31, 2021, the Company sold or redeemed available-for-sale securities of approximately $325,000 and $1.4 million, respectively, realizing gains of approximately $7,000 for the six months ended October 31, 2021.
Maturities of fixed income securities classified as available-for-sale at October 31, 2021 were as follows, at cost (in thousands):
Current
|
|
$
|
3,154
|
|
Due after one year through five years
|
|
|
4,154
|
|
Due after five years
|
|
|
2,438
|
|
|
|
$
|
9,746
|
|
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:
|
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.
NOTE J – RECENT ACCOUNTING PRONOUNCEMENTS
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under ASU 2017-04, goodwill impairment will be tested by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2022, with early adoption permitted. The Company will not be adopting ASU 2017-04 early, and is in the process of determining the effect that ASU 2017-04 may have. However, the Company expects the new standard to have an immaterial effect on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance is effective for fiscal years beginning after December 15, 2022. The Company is evaluating the effect, if any, the update will have on its consolidated financial statements when adopted in fiscal year 2023.
NOTE K – CREDIT FACILITY
As of October 31, 2021, the Company had available credit with UBS Bank USA at variable terms based on its securities holdings under an advisory arrangement. On April 12, 2020, the Company received proceeds from a loan under the Paycheck Protection Program (the “PPP Loan”) in the amount of $4,964,810 from JPMorgan Chase Bank, N.A. as the Lender, pursuant to the Small Business Administration Paycheck Protection Program under the Coronavirus Aid Relief, and Economic Security (“CARES”) Act. The PPP Loan was repaid in full on May 6, 2020.
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 October 31, 2021, and April 30, 2021, 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 January 28, 2020, Martin B. Bloch, the former Chief Scientist of the Company and a former member of the Company’s Board of Directors (the “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 had originally also sought a declaratory judgment and claims for damage to his reputation and a derivative claim 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 removed those 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, which the Company and the Director Defendants opposed on July 10, 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.
In addition, Mr. Bloch sought to initiate 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 was 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 Statements of Claim in both arbitrations on May 4, 2020. In both proceedings, Mr. Bloch claimed that defendants violated ERISA rules by denying him deferred compensation benefits. He sought 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 claimed that Mr. Bloch could 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. On February 16, 2021, the Company filed a Notice of Appeal of that order.
On June 5, 2020, Mr. Bloch filed a petition against the Company, the Compensation Committee of the Company’s Board, 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 sought to initiate. 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 February 16, 2021, the Company filed a Notice of Appeal of those orders.
The arbitration panel in the arbitrations initiated by Mr. Bloch was constituted in March 2021. The same panel served 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.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On August 25, 2021, the Company settled the aforementioned disputes with Mr. Bloch. Under the Agreement on Material Terms of Settlement (the “Settlement Terms”), dated August 25, 2021, between and among the Company, the Director Defendants, and the Compensation Committee, in its capacity as administrator under the deferred compensation agreements, and Mr. Bloch and certain members of Mr. Bloch’s family, in full and complete settlement of all claims asserted and all sums sought by Mr. Bloch in the litigation and arbitration proceedings, the Company has agreed to pay Mr. Bloch $6 million on or before September 24, 2021. 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 will eliminate further legal expenses with respect to the dispute between Mr. Bloch and the Company. This net expense for financial statement purposes has been recognized in selling and administrative expenses on the Condensed Consolidated Statements of Operations for the three months ended July 31, 2021.
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES