10-Q 1 freqelec20201031_10q.htm FORM 10-Q freqelec20201031_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549 

 


 

FORM 10-Q

 


 

(Mark one)

 

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

 

For the Quarterly Period ended October 31, 2020

OR

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

 

For the transition period from __________ to __________

 

Commission File No. 1-8061

 

FREQUENCY ELECTRONICS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

11-1986657

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y.

11553

(Address of principal executive offices)

(Zip Code)

 

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

 

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

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock (par value $1.00 per share)

FEIM

 NASDAQ Global Market

 

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

 

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

 

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

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒ 

Smaller Reporting Company ☒

Emerging growth company ☐

 

 

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

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

The number of shares outstanding of Registrant’s Common Stock, par value $1.00 as of December 10, 2020 – 9,177,963

  

 

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

 

TABLE OF CONTENTS

 

 

Page No.

Part I. Financial Information:

 

 

 

Item 1 - Financial Statements:

 

 

 

Condensed Consolidated Balance Sheets – October 31, 2020 (unaudited) and April 30, 2020

3

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Six and Three Months Ended October 31, 2020 and 2019 (unaudited)

4

 

 

Condensed Consolidated Statements of Cash Flows Six Months Ended October 31, 2020 and 2019 (unaudited)

5

 

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity Three and Six Months Ended October 31, 2020 (unaudited)

6

                  

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity Three and Six Months Ended October 31, 2019 (unaudited)

7

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8-17

 

 

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

18-24

 

 

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

25

 

 

Item 4 - Controls and Procedures

25

 

 

Part II. Other Information:

 

 

 

Item 1 - Legal Proceedings

26

 

 

Item 6 - Exhibits

27

 

 

Signatures

28

 

 

 

 

PART I. FINANCIAL INFORMATION  

Item 1.  Financial Statements

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands except par value)

 

   

October 31,

   

April 30,

 
   

2020

   

2020

 
   

(UNAUDITED)

         

ASSETS:

               

Current assets:

               

Cash and cash equivalents

  $ 3,654     $ 3,808  

Marketable securities

    9,948       10,570  

Accounts receivable, net of allowance for doubtful accounts of $183 at October 31, 2020 and April 30, 2020

    10,298       4,392  

Costs and estimated earnings in excess of billings, net

    3,201       6,953  

Inventories, net

    21,028       22,958  

Prepaid income taxes

    460       849  

Prepaid expenses and other

    2,333       1,705  

Total current assets

    50,922       51,235  

Property, plant and equipment, at cost, net of accumulated depreciation and amortization

    10,511       11,267  

Goodwill

    617       617  

Cash surrender value of life insurance

    15,174       14,790  

Other assets

    2,160       2,503  

Right-of-Use assets – operating leases

    10,235       10,864  

Total assets

  $ 89,619     $ 91,276  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY:

               

Current liabilities:

               

Line of credit

    3,000       -  

Accounts payable – trade

  $ 1,188     $ 1,424  

Accrued liabilities

    5,351       3,982  

Loss provision accrual

    92       748  

Operating lease liability

    1,612       1,869  

Current debt

    -       4,965  

Total current liabilities

    11,243       12,988  

Deferred compensation

    14,411       14,258  

Deferred taxes

    8       8  

Operating lease liability – non-current

    8,937       9,444  

Other liabilities

    364       342  

   Total liabilities

    34,963       37,040  

Commitments and contingencies

               

Stockholders’ equity:

               

Preferred stock - $1.00 par value; authorized 600 shares, no shares issued

    -       -  

Common stock - $1.00 par value; authorized 20,000 shares, 9,176 shares issued and 9,175 shares outstanding at October 31, 2020; 9,164 shares issued and 9,121 shares outstanding at April 30, 2020

    9,176       9,164  

Additional paid-in capital

    57,071       56,914  

Accumulated deficit

    (12,070 )     (12,137 )
      54,177       53,941  

Common stock reacquired and held in treasury - at cost (1 share at October 31, 2020 and 43 shares at April 30, 2020)

    (6 )     (195 )

Accumulated other comprehensive income

    485       490  

Total stockholders’ equity

    54,656       54,236  

Total liabilities and stockholders’ equity

  $ 89,619     $ 91,276  

 

See accompanying notes to condensed consolidated financial statements.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

 (In thousands except per share data)

(Unaudited)

 

   

Six Months Ended October 31,

   

Three Months Ended October 31,

 
   

2020

   

2019

   

2020

   

2019

 

Condensed Consolidated Statements of Operations

                               

Revenues

  $ 26,940     $ 21,641     $ 13,990     $ 9,087  

Cost of revenues

    17,530       18,870       8,668       10,269  

Gross margin (loss)

    9,410       2,771       5,322       (1,182 )

Selling and administrative expenses

    7,352       4,743       4,124       2,290  

Research and development expenses

    2,177       3,731       979       1,450  

Operating (loss) income

    (119 )     (5,703 )     219       (4,922 )
                                 

Other income (expense):

                               

Investment income

    157       224       50       45  

Interest expense

    (75 )     (50 )     (36 )     (25 )

Other income (expense), net

    129       58       113       2  

Income (loss) before provision for income taxes

    92       (5,471 )     346       (4,900 )

Provision for income taxes

    25       29       17       9  

Net income (loss)

  $ 67     $ (5,500 )   $ 329     $ (4,909 )
                                 

Net income (loss) per common share:

                               

Basic and diluted earnings (loss) per share

  $ 0.01     $ (0.61 )   $ 0.04     $ (0.54 )
                                 

Weighted average shares outstanding:

                               

Basic

    9,154       9,037       9,170       9,072  

Diluted

    9,206       9,037       9,236       9,072  
                                 

Condensed Consolidated Statements of Comprehensive Income (Loss)

                         

Net income (loss)

  $ 67     $ (5,500 )   $ 329     $ (4,909 )
                                 

Unrealized gain (loss) on marketable securities:

                               

Change in market value of marketable securities before reclassification, net of tax

    5       207       (176 )     72  

Reclassification adjustment for realized gains included in net income, net of tax

    (10 )     (1 )     -       -  

Total unrealized (loss) gain on marketable securities, net of tax

    (5 )     206       (176 )     72  
                                 

Comprehensive income (loss)

  $ 62     $ (5,294 )   $ 153     $ (4,837 )

 

See accompanying notes to condensed consolidated financial statements.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

 (In thousands)

(Unaudited)

 

   

Six Months Ended October 31,

 
   

2020

   

2019

 

Cash flows from operating activities:

               

Net income (loss)

  $ 67     $ (5,500 )

Non-cash charges to earnings

    2,580       3,939  

Net changes in operating assets and liabilities

    (667 )     1,741  

 Net cash provided by operating activities

    1,980       180  
                 

Cash flows from investing activities:

               

Proceeds on redemption of marketable securities

    1,521       2,480  

Purchase of marketable securities

    (909 )     (2,463 )

Purchase of fixed assets and other assets

    (781 )     (1,274 )

Net cash used in investing activities

    (169 )     (1,257 )
                 

Net cash used in financing activities:

               

Repayment of PPP Loan

    (4,965 )     -  

Proceeds from UBS line of credit

    3,000       -  

Net cash used in financing activities

    (1,965 )     -  
                 

Net decrease in cash and cash equivalents

    (154 )     (1,077 )
                 

Cash and cash equivalents at beginning of period

    3,808       3,683  
                 

Cash and cash equivalents at end of period

  $ 3,654     $ 2,606  
                 
                 

Supplemental disclosures of cash flow information:

               

Cash paid during the period for:

               

Interest

  $ 46     $ 50  

Cash refunded during the period for:

               

Income Taxes

  $ 477     $ 467  

 

See accompanying notes to condensed consolidated financial statements.

 

 

FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Three and Six Months Ended October 31, 2020

(In thousands except share data)

(Unaudited) 

 

                   

Additional

           

Treasury stock

   

Accumulated other

         
   

Common Stock

   

paid in

   

Accumulated

   

(at cost)

   

comprehensive

         
   

Shares

   

Amount

   

capital

   

Deficit

   

Shares

   

Amount

   

Income (loss)

   

Total

 

Balance at April 30, 2020

    9,163,940     $ 9,164     $ 56,914     $ (12,137 )     42,696     $ (195 )   $ 490     $ 54,236  

Contribution of stock to 401(k) plan

                    68               (14,926 )     68               136  

Stock-based compensation expense

                    54                                       54  

Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price

                    (109 )             (23,808 )     109               -  

Other comprehensive income, net of tax

                                                    171       171  

Net income (loss)

                            (262 )                             (262 )

Balance at July 31, 2020

    9,163,940     $ 9,164     $ 56,927     $ (12,399 )     3,962     $ (18 )   $ 661     $ 54,335  

 

                                                               

Contribution of stock to 401(k) plan

    9,496       9       86                                       95  

Stock-based compensation expense

                    73                                       73  

Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price

    2,654       3       (15 )             (2,586 )     12               (0 )

Other comprehensive income, net of tax

                                                    (176 )     (176 )

Net income (loss)

                            329                               329  

Balance at October 31, 2020

    9,176,090     $ 9,176     $ 57,071     $ (12,070 )     1,376     $ (6 )   $ 485     $ 54,656  

 

See accompanying notes to condensed consolidated financial statements.

 

 

FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Three and Six Months Ended October 31, 2019

(In thousands except share data)

(Unaudited) 

 

                   

Additional

           

Treasury stock

   

Accumulated other

         
   

Common Stock

   

paid in

   

Accumulated

   

(at cost)

   

comprehensive

         
   

Shares

   

Amount

   

capital

   

Deficit

   

Shares

   

Amount

   

Income (loss)

   

Total

 

Balance at April 30, 2019

    9,163,940     $ 9,164     $ 56,831     $ (2,111 )     183,661     $ (841 )   $ 46     $ 63,089  

Contribution of stock to 401(k) plan

                    74               (10,906 )     50               124  

Stock-based compensation expense

                    80                                       80  

Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price

                    (189 )             (41,325 )     189               -  

Other comprehensive income, net of tax

                                                    134       134  

Net loss

                            (591 )                             (591 )

Balance at July 31, 2019

    9,163,940     $ 9,164     $ 56,796     $ (2,702 )     131,430     $ (602 )   $ 180     $ 62,836  

 

                                                               

Contribution of stock to 401(k) plan

                    66               (8,703 )     39               105  

Stock-based compensation expense

                    64                                       64  

Exercise of stock options and stock appreciation rights - net of shares tendered for exercise price

                    (268 )             (58,387 )     268               -  

Other comprehensive income, net of tax

                                                    72       72  

Net loss

                            (4,909 )                             (4,909 )

Balance at October 31, 2019

    9,163,940     $ 9,164     $ 56,658     $ (7,611 )     64,340     $ (295 )   $ 252     $ 58,168  

 

See accompanying notes to condensed consolidated financial statements.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE A – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In the opinion of management of Frequency Electronics, Inc. (the “Company”), the accompanying unaudited condensed consolidated interim financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly, in all material respects, the consolidated financial position of the Company as of October 31, 2020 and the results of its operations, changes in Stockholders’ Equity for the three and six months ended October 31, 2020 and 2019, and cash flows for the six months ended October 31, 2020 and 2019.  The April 30, 2020 condensed consolidated balance sheet was derived from audited financial statements.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“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, 2020, filed on July 29, 2020 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 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 (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

 

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. 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. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the potential adverse effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2021.

 

The Company faces various risks related to COVID-19 outbreak. The Company is dependent on its workforce to deliver its products primarily to the U.S. Government. 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 in connection with the COVID-19 pandemic, the Company’s operations may be impacted. The Company may be unable to perform fully on its contracts and costs may increase as a result of the COVID-19 outbreak. These cost increases may not be fully recoverable or adequately covered by insurance.  Since the COVID-19 outbreak began, no facilities have been fully shut down (other than temporarily for disinfecting) and such measures to disinfect facilities have not had a significant impact on production. Certain of the Company’s vendors have been unable to deliver materials on time due to the COVID-19 outbreak.  Such delays have had a minor impact on the Company’s production schedules to date, but vendor delivery performance is being closely monitored and alternate sources of supply are generally available if necessary. 

 

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes 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 outbreak. 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 Note K below.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE B – EARNINGS PER SHARE

 

Reconciliation of the weighted average shares outstanding for basic and diluted loss per share for the six and three months ended October 31, 2020 and 2019, respectively, were as follows: 

 

   

Periods ended October 31,

 
   

Six months

   

Three months

 
   

2020

   

2019

   

2020

   

2019

 

Weighted average shares outstanding:

                               

Basic EPS Shares outstanding (weighted average)

    9,154,434       9,036,732       9,169,758       9,072,141  

Effect of Dilutive Securities

    51,389       **       66,019       **  

Diluted EPS Shares outstanding

    9,205,823       9,036,732       9,235,777       9,072,141  

 

**For the six and three-month periods ended October 31, 2019 dilutive securities are excluded from the calculation of earnings per share since the inclusion of such shares would be antidilutive due to the net loss for those periods. The exercisable shares excluded for the three and six months ended October 31, 2020 are 303,000 and 436,000 options, respectively. The exercisable shares excluded as of October 31, 2019 are 178,000 options for both periods. The effect of dilutive securities would have been 239,866 options and 230,670 options for the six and three-month periods ended October 31, 2019, respectively.

 

NOTE C – COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS, NET

 

At October 31, 2020 and April 30, 2020, costs and estimated earnings in excess of billings, net, consisted of the following:

 

   

October 31, 2020

   

April 30, 2020

 
   

(In thousands)

 

Costs and estimated earnings in excess of billings

  $ 13,858     $ 10,460  

Billings in excess of costs and estimated earnings

    (10,657 )     (3,507 )

Net asset

  $ 3,201     $ 6,953  

 

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 or 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 six and three months ended October 31, 2020, revenue recognized under POC contracts was approximately $24.6 million and $12.9 million, respectively. During the six and three months ended October 31, 2019, revenue recognized under POC contracts was approximately $19.1 million and $7.7 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. Contract losses of approximately $731,000 and $121,000 were recorded for the six and three months ended October 31, 2020, respectively. Contract losses recognized for the six and three months ended October 31, 2019 were approximately $1.9 million and $1.6 million, respectively.

 

NOTE D – TREASURY STOCK TRANSACTIONS

 

During the six month period ended October 31, 2020, the Company made contributions of 24,422 shares of its common stock and common stock held in treasury 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.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE E – INVENTORIES

 

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

 

   

October 31, 2020

   

April 30, 2020

 
   

(In thousands)

 

Raw Materials and Component Parts

  $ 12,822     $ 15,470  

Work in Progress

    6,799       6,104  

Finished Goods

    1,407       1,384  
    $ 21,028     $ 22,958  

 

The amounts above are net of reserves of $7.0 million and $6.6 million as of October 31, 2020 and April 30, 2020, 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 generally 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.

 

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.

 

Effective May 1, 2019, the Company adopted ASU 2016-02. The table below presents ROU assets and liabilities recorded on the respective consolidated balance sheets, related to ASU 2016-02 (in thousands):

 

 

Classification

 

October 31, 2020

   

April 30, 2020

 
     

(unaudited)

         

Assets

                 

Operating lease ROU assets

Right-of-Use assets leases

  $ 10,235     $ 10,864  
                   

Liabilities

                 

Operating lease liabilities (short-term)

Lease liability, current

    1,612       1,869  

Operating lease liabilities (long-term)

Lease liability, non-current

    8,937       9,444  

Total lease liabilities

  $ 10,549     $ 11,313  

 

Total operating lease expense was $1.2 million and $500,000 for the six and three 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 on the unaudited condensed consolidated statements of operations. Total operating lease expense was approximately $1.0 million and $504,000 for the six and three months, respectively, ended October 31, 2019, respectively, the majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses on the unaudited condensed consolidated statements of operations.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the unaudited consolidated balance sheet as of October 31, 2020:

 

Fiscal Year Ending April 30,

 

(in thousands)

 
         

Remainder of 2021

  $ 756  

2022

    1,809  

2023

    1,829  

2024

    1,834  

2025

    1,723  

Thereafter

    5,492  

Total lease payments

    13,443  

Less imputed interest

    (2,894 )

Present value of future lease payments

    10,549  

Less current obligations under leases

    (1,612 )

Long-term lease obligations

    8,937  

 

As of October 31, 2020, the weighted-average remaining lease term for all operating leases was 7.9 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, 2020 was 6.20%.

 

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 Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2020, filed on July 29, 2020 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,

 
   

Six months

   

Three months

 
   

2020

   

2019

   

2020

   

2019

 

Revenues:

                               

FEI-NY

  $ 20,996     $ 16,794     $ 11,156     $ 7,784  

FEI-Zyfer

    7,353       5,701       3,430       2,000  

less intersegment revenues

    (1,409 )     (854 )     (596 )     (697 )

Consolidated revenues

  $ 26,940     $ 21,641     $ 13,990     $ 9,087  

 

Operating profit (loss):

                               

FEI-NY

  $ (582 )   $ (5,475 )   $ 41     $ (4,296 )

FEI-Zyfer

    667       (44 )     306       (561 )

Corporate

    (204 )     (184 )     (128 )     (65 )

Consolidated operating (loss) income

  $ (119 )   $ (5,703 )   $ 219     $ (4,922 )

 

   

October 31, 2020

   

April 30, 2020

 

Identifiable assets:

               

FEI-NY

  $ 42,472     $ 44,599  

FEI-Zyfer

    14,089       13,344  

less intersegment balances

    -       (8,586 )

Corporate

    33,058       41,919  

Consolidated identifiable assets

  $ 89,619     $ 91,276  

 

Total revenue recognized over time as POC and Passage of Title (“POT”) were approximately $24.6 million and $2.3 million, respectively, for the six months ended October 31, 2020. The amounts recognized over time as POC and POT were approximately $19.1 million and $2.5 million, respectively, for the six months ended October 31, 2019. The amounts by segment and product line were as follows:

 

   

Six Months Ended October 31,

 
   

2020

   

2019

 
   

(In thousands)

   

(In thousands)

 
   

POC Revenue

   

POT Revenue

   

Total Revenue

   

POC Revenue

   

POT Revenue

   

Total Revenue

 

FEI-NY

  $ 18,857     $ 2,139     $ 20,996     $ 14,297     $ 2,497     $ 16,794  

FEI-Zyfer

    5,744       1,609       7,353       4,925       776       5,701  

Intersegment

    (10 )     (1,399 )     (1,409 )     (76 )     (778 )     (854 )

Revenue

  $ 24,591     $ 2,349     $ 26,940     $ 19,146     $ 2,495     $ 21,641  

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

   

Three Months Ended October 31,

 
   

2020

   

2019

 
   

(In thousands)

   

(In thousands)

 
   

POC Revenue

   

POT Revenue

   

Total Revenue

   

POC Revenue

   

POT Revenue

   

Total Revenue

 

FEI-NY

  $ 10,235     $ 921     $ 11,156     $ 6,139     $ 1,645     $ 7,784  

FEI-Zyfer

    2,706       724       3,430       1,602       398       2,000  

Intersegment

    (1 )     (595 )     (596 )     (50 )     (647 )     (697 )

Revenue

  $ 12,940     $ 1,050     $ 13,990     $ 7,691     $ 1,396     $ 9,087  

 

   

Periods ended October 31,

 
   

(in thousands)

 
   

Six months

   

Three months

 
   

2020

   

2019

   

2020

   

2019

 

Revenues by Product Line:

                               

Satellite Revenue

  $ 14,228     $ 9,431     $ 7,576     $ 5,537  

Government Non-Space Revenue

    10,855       9,005       5,520       2,261  

Other Commercial & Industrial Revenue

    1,857       3,205       894       1,289  

Consolidated revenues

  $ 26,940     $ 21,641     $ 13,990     $ 9,087  

 

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 condensed consolidated balance sheets. During the six months ended October 31, 2020 and 2019, the Company acquired product from Morion in the aggregate amount of approximately $268,000 and $380,000, respectively, and during the six months ended October 31, 2019 the Company sold product and training services to Morion in the aggregate amount of approximately $49,000, included in revenues in the condensed consolidated statements of operations as part of the FEI-NY segment. During the three months ended October 31, 2020 and 2019, the Company acquired product from Morion in the aggregate amount of approximately $118,000 and $135,000, respectively, and during three months ended October 31, 2019 the Company sold product and training services to Morion in the aggregate amount of approximately $2,000, included in revenues in the condensed consolidated statements of operations as part of the FEI-NY segment. During the six months ended October 31, 2020 and 2019, the Company received dividends from Morion in the amount of approximately $105,000 and $125,000, respectively, which is included in other income, net in the condensed 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)

 

In light of Morion’s relationship with Gazprombank, the Company recently 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 relates solely to delays in collection of accounts receivable that exceeded then-applicable payment windows set forth in sanctions regulations and do not relate to any other type of payment or transaction.  On July 22, 2020, OFAC informed the Company that it is conducting a civil investigation of the matter. 

 

The ongoing OFAC civil investigation subjects the Company to a number of financial and business risks.  OFAC has broad enforcement discretion, and the imposition of sanctions, fines or remedial measures could have a material adverse effect on the Company’s business, prospects, reputation, financial condition, liquidity, results of operations or cash flows. Given the matter is in an early stage, however, the Company does not have sufficient information to (i) determine whether any liability (including penalties, sanctions, or remedial actions) as a result of the voluntary disclosure is probable or (ii) estimate the magnitude of any liability.  While we are currently unable to predict what if any actions OFAC might take, or what the likely outcome of any such actions might be, or estimate the range of reasonably possible fines or penalties, such outcome may be material.  Also, the Company is unable to predict the duration, scope, result or related costs of the investigation, including legal fees.

 

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, 2020 and April 30, 2020, respectively, were as follows (in thousands):

 

   

October 31, 2020

 
   

Cost

   

Gross Unrealized Gains

   

Gross Unrealized Losses

   

Fair Market Value

 

 Fixed income securities

  $ 9,463     $ 530     $ (45 )   $ 9,948  

 

   

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

 

October 31, 2020

                                               

Fixed Income Securities

  $ 380     $ (5 )   $ 983     $ (40 )   $ 1,363     $ (45 )

 

April 30, 2020

                                               

Fixed Income Securities

  $ 380     $ (6 )   $ -     $ -     $ 380     $ (6 )

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

During the six and three months ended October 31, 2020, the Company sold or redeemed available-for-sale securities of approximately $1.5 million and $796,000, respectively, realizing gains of approximately $12,000 and $9,000, respectively.

 

Maturities of fixed income securities classified as available-for-sale at October 31, 2020 were as follows, at cost (in thousands):

 

Current

  $ 3,267  

Due after one year through five years

    3,257  

Due after five years

    2,939  
    $ 9,463  

 

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.

 

NOTE J – RECENT 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.

 

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.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE K – CREDIT FACILITY

 

As of October 31, 2020, the Company had available credit with UBS Bank USA at variable terms based on its securities holdings under an advisory arrangement, under which the Company has borrowed $3 million. On April 12, 2020, the Company received proceeds from a PPP Loan in the amount of $4,964,810 from JPMorgan Chase Bank, N.A. as the Lender, pursuant to the SBA Paycheck Protection Program under the 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, 2020, and April 30, 2020, 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.

 

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 seeks 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 seeks an order that the Company is 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, which could result from an unfavorable outcome arising out of these matters.

 

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 is 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 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. 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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. At this time, the Company does not have sufficient information to determine the likelihood of success of this petition.

 

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 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. The motion is currently pending. On September 11, 2020, the Court granted Respondents’ application for an interim stay of the arbitration pending the Court’s determination of the Company’s petition for a stay of arbitration (described above), Mr. Bloch’s petition for the appointment of an arbitrator, and other outstanding motions. Respondents dispute all of Bloch’s claims and intend to continue to vigorously defend the Company in this special proceeding. The likelihood of any outcome of this proceeding cannot be determined at this time.

 

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:

 

The statements in this quarterly report on Form 10-Q regarding future earnings and operations and other statements relating to the future constitute “forward-looking” statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, the risks associated with health epidemics and pandemics, including the COVID-19 pandemic and similar outbreaks, such as their impact on our financial condition and results of operations and on our ability to continue manufacturing and distributing our products, and the impact of health epidemics and pandemics on general economic conditions, including any resulting recession, our inability to integrate operations and personnel, actions by significant customers or competitors, general domestic and international economic conditions, reliance on key customers, continued acceptance of the Company’s products in the marketplace, competitive factors, new products and technological changes, product prices and raw material costs, dependence upon third-party vendors, competitive developments, changes in manufacturing and transportation costs, the availability of capital, and the outcome of any litigation and arbitration proceedings. The factors listed above are not exhaustive. Other sections of this Form 10-Q and in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2020, filed on July 29, 2020 with the Securities and Exchange Commission include additional factors that could materially and adversely impact the Company’s business, financial condition and results of operations. Moreover, the Company operates in a very competitive and rapidly changing environment. New factors emerge from time to time and it is not possible for management to predict the impact of all these factors on the Company’s business, financial condition or results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Form 10-Q and any other public statement made by the Company or its management may turn out to be incorrect. The Company expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Critical Accounting Policies and Estimates

 

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2020, filed on July 29, 2020 with the Securities and Exchange Commission.  The Company believes its most critical accounting policies to be the recognition of revenue and costs on production contracts, income taxes, and the valuation of inventory.  Each of these areas requires the Company to make use of reasonable estimates including estimating the cost to complete a contract, the realizable value of its inventory and the market value of its products.  Changes in estimates can have a material impact on the Company’s financial position and results of operations. The Company’s significant accounting policies did not change during the six and three months ended October 31, 2020.

 

Revenue Recognition

 

Revenue is recognized when a performance obligation is satisfied, which is when the expected goods or services are transferred to the customer, in an amount that reflects the consideration to which the Company expects to receive. A performance obligation is a distinct product or service that is transferred to the customer based on the contract. The transaction price is allocated to each performance obligation and is recognized as revenue upon satisfaction of that performance obligation. The Company derives revenue from contracts with customers by units sold with specific specifications and frequencies that are used by a specific customer and contracts where the end user is the government. The Company’s contracts typically include one performance obligation which is satisfied by shipped projects and completed services/reports required in the contract.  Control over these performance obligations passes to the customer over time and therefore these revenues are reported in operating results over time using the cost-to-cost method.  Under this method, revenue is recorded based upon the ratio that incurred costs bear to total estimated contract costs with related cost of revenues recorded as the costs are incurred.  Each month management reviews estimated contract costs through a process of aggregating actual costs incurred and estimating additional costs to completion based upon the current available information 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.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

 

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

 

Significant judgment is used in evaluating the financial information for certain contracts to determine an appropriate budget and estimated cost. The Company evaluates this information continuously and bases its judgments on historical experience, design specifications, and expected costs for material and labor. 

 

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. 

 

Inventory

 

In accordance with industry practice, inventoried costs contain amounts relating to contracts and programs with long production cycles, a portion of which will not be realized within one year.  Inventory write downs are established for slow-moving materials based on percentage of usage over a ten-year period, obsolete items on a gradual basis over five years with no usage and costs incurred on programs for which production-level orders cannot be determined as probable.  Such write-downs are based upon management’s experience and expectations for future business.  Any changes arising from revised expectations are reflected in cost of revenues in the period the revision is made.

 

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 October 31, 2020 and April 30, 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.

 

COVID-19 Outbreak Update

 

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 (the “COVID-19 outbreak”) and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

 

The Company’s priority during the COVID-19 outbreak has been to protect the health and safety of its employees while remaining operational. Within the limitations imposed by governmental health and safety procedures, the Company has continued to manufacture its full range of products at its facilities. The Company has educated employees about COVID-19 symptoms and hygiene best practices. The Company’s policies also include taking an employee’s temperature before entering facilities; mandating handwashing; requiring social distancing and, where social distancing is difficult, requiring face coverings; encouraging, and in some cases, requiring remote work for those employees who can work from home; and disinfecting facilities.

 

As of December 11, 2020, the Company was aware of five employees that have had confirmed cases of COVID-19 since the COVID-19 outbreak began, with no fatalities. Additional employees have been absent or self-quarantined due to COVID-19; however, such absences have not had a significant impact on production. Additionally, since the COVID-19 outbreak began, facilities have remained open (other than temporary closures for disinfecting) and such measures to disinfect facilities have not had a significant impact on production. Certain of the Company’s vendors have been unable to deliver materials on time due to the COVID-19 outbreak. Such delays have negatively impacted the Company’s production, and the Company plans to continue to monitor these and its other vendors and, if necessary, seek alternative suppliers.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

 

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. 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. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2021.

 

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes 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 outbreak. The Company received a loan under the Paycheck Protection Program in April 2020, which it repaid in full in May 2020. For more detail regarding the Company’s PPP Loan, see Note K in Part I, Item I of this Quarterly Report on Form 10-Q.

 

RESULTS OF OPERATIONS

 

The table below sets forth for the six and three months ended October 31, 2020 and 2019, respectively, the percentage of consolidated revenues represented by certain items in the Company’s condensed consolidated statements of operations or notes to the condensed consolidated financial statements:

 

   

Six months

   

Three months

 
   

Periods ended October 31,

 
   

2020

   

2019

   

2020

   

2019

 

Revenues

                               

FEI-NY

    77.9

%

    77.6

%

    79.7

%

    85.7

%

FEI-Zyfer

    27.3       26.3       24.5       22.0  

Less intersegment revenues

    (5.2 )     (3.9 )     (4.2 )     (7.7 )
      100.0       100.0       100.0       100.0  

Cost of revenues

    65.1       87.2       62.0       113.0  

   Gross margin

    34.9       12.8       38.0       (13.0 )

Selling and administrative expenses

    27.3       21.9       29.5       25.2  

Research and development expenses

    8.1       17.3       7.0       16.0  

   Operating (loss) income

    (0.5 )     (26.4 )     1.5       (54.2 )

Other income (loss), net

    0.8       1.1       0.9       0.3  

Provision (benefit) for income taxes

    0.1       0.1       0.1       0.1  

   Net income (loss)

    0.4

%

    (25.2

)%

    2.5

%

    (54.0

)%

 

Revenues

 

   

Six months

   

Three months

 
   

Periods ended October 31,

 

Segment

 

2020

   

2019

   

Change

   

2020

   

2019

   

Change

 

FEI-NY

  $ 20,996     $ 16,794     $ 4,202       25.0

%

  $ 11,156     $ 7,784     $ 3,372       43.3

%

FEI-Zyfer

    7,353       5,701       1,652       29.0       3,430       2,000       1,430       71.5  

Intersegment revenues

    (1,409 )     (854 )     (555 )     65.0       (596 )     (697 )     101       (14.5 )
    $ 26,940     $ 21,641     $ 5,299       24.5

%

  $ 13,990     $ 9,087     $ 4,903       54.0

%

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

 

For the six months, ended October 31, 2020 revenues from commercial and U.S. Government satellite programs increased approximately $4.8 million, as compared to the same period of fiscal year 2020, and accounted for approximately 53% of consolidated revenues compared to approximately 44% of consolidated revenues during this same period in fiscal year 2020. The change in revenue is related to timing of contract awards.  Revenues on these contracts are recognized primarily under the POC method.  Revenues from the satellite market are recorded in the FEI-NY segment. Revenues from non-space U.S. Government/Department of Defense (“DOD”) customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, increased $1.9 million as compared to the same period of fiscal year 2020, and accounted for approximately 40% of consolidated revenues compared to approximately 42% of consolidated revenues during this same period in fiscal year 2020. Other commercial and industrial revenues for the six months ended October 31, 2020 were $1.9 million and represented approximately 7% of consolidated revenues compared to $3.2 million, or 14% of consolidated revenues, in the same period of the prior fiscal year.

 

For the three months ended October 31, 2020 revenues from commercial and U.S. Government satellite programs increased approximately $2.0 million, as compared to the same period of fiscal year 2020, and accounted for approximately 54% of consolidated revenues compared to approximately 61% of consolidated revenues during this same period in fiscal year 2020. The change in revenue is related to timing of contract awards.  Revenues on these contracts are recognized primarily under the POC method.  Revenues from the satellite market are recorded in the FEI-NY segment. Revenues from non-space U.S. Government/DOD customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, increased $3.3 million as compared to the same period of fiscal year 2020, and accounted for approximately 39% of consolidated revenues compared to approximately 25% of consolidated revenues during this same period in fiscal year 2020. Other commercial and industrial revenues for the three months ended October 31, 2020 were $0.9 million and represented approximately 6% of consolidated revenues compared to $1.3 million, or 14% of consolidated revenues, in the same period of the prior fiscal year.

 

Gross Margin (loss) 

 

   

Six months

   

Three months

 
   

Periods ended October 31,

 
   

2020

   

2019

   

Change

   

2020

   

2019

   

Change

 
    $ 9,410     $ 2,771     $ 6,639       NM     $ 5,322     $ (1,182 )   $ 6,504       NM  

GM Rate

    34.9

%

    12.8

%

                    38.0

%

    (13.0

)%

               

 

 

For the six and three-month periods ended October 31, 2020, gross margin and GM Rate increased significantly as compared to the same periods in fiscal year 2020. The increase in gross margin and GM Rate was due to several programs identified in prior periods that had higher engineering costs incurred that were in the development phase that have since been completed or are near completion.

 

Selling and Administrative Expenses

 

 

Six months

   

Three months

 
 

Periods ended October 31,

 
 

2020

   

2019

   

Change

   

2020

   

2019

   

Change

 
  $ 7,352     $ 4,743     $ 2,609       55.0

%

  $ 4,124     $ 2,290     $ 1,834       80.1

%

 

For the six months ended October 31, 2020 and 2019, selling and administrative (“SG&A”) expenses were approximately 27% and 22%, respectively, of consolidated revenues.  For the three months ended October 31, 2020 and 2019, SG&A expenses were approximately 30% and 25%, respectively, of consolidated revenues.  The increase in SG&A expenses is mainly due to increase in professional fees (relating to litigation for which we expect insurance reimbursement for a portion of the legal fees) of $1.3M and $1.6M for the three and six month periods, respectively, and additional insurance costs.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

 

Research and Development Expense

 

 

Six months

   

Three months

 
 

Periods ended October 31,

 
 

2020

   

2019

   

Change

   

2020

   

2019

   

Change

 
  $ 2,177     $ 3,731     $ (1,554 )     (41.7

)%

  $ 979     $ 1,450     $ (471 )     (32.5

)%

 

Research and development (“R&D”) expenditures represent investments intended to keep the Company’s products at the leading edge of time and frequency technology and enhance future competitiveness.   The R&D rate for the six-month period ended October 31, 2020 was 8% of sales compared to 17% of sales for the same period of the previous fiscal year.  The R&D rate for the three-month period ended October 31, 2020 was 7% of sales compared to 16% of sales for the same period of the previous fiscal year. The Company’s R&D expense decreased year over year as previous R&D efforts have ended and turned into production; however, the Company plans to continue to invest in R&D to keep its products at the state of the art.

 

Operating Profit (Loss)

 

 

Six months

   

Three months

 
 

Periods ended October 31,

 
 

2020

   

2019

   

Change

   

2020

   

2019

   

Change

 
  $ (119 )   $ (5,703 )   $ 5,584       (97.9

)%

  $ 219     $ (4,922 )   $ 5,141       NM  

 

The Company’s results for the six and three-month periods ended October 31, 2020 reflect improvements in revenues, gross margin and GM rate. The Company is pleased with this trend. As referenced above by the percentages for the six and three-month periods ended October 31, 2020, operating profit (loss) has made a significant improvement from the same period of the prior fiscal year. Based upon our bookings and backlog we are expecting the improving trend to continue. 

 

Other Income (Expense), net

 

   

Six months

   

Three months

 
   

Periods ended October 31,

 
   

2020

   

2019

   

Change

   

2020

   

2019

   

Change

 

Investment income

  $ 157     $ 224     $ (67 )     (29.9

)%

  $ 50     $ 45     $ 5       11.1

%

Interest expense

    (75 )     (50 )     (25 )     50.0

%

    (36 )     (25 )     (11 )     44.0

%

Other income (expense), net

    129       58       71       NM       113       2       111       NM  
    $ 211     $ 232     $ (21 )     (9.1

)%

  $ 127     $ 22     $ 105       NM  

 

Investment income is derived primarily from the Company’s holdings of marketable securities.  Earnings on securities may vary based on fluctuating interest rates, dividend payout levels, and the timing of purchases, sales, redemptions or maturities of securities. For the six-month period ended October 31, 2020 investment income includes a $105,000 dividend from Morion, compared to a $125,000 dividend from Morion in the same period in fiscal 2020.

 

Income Tax Provision  

 

 

Six months

   

Three months

 
 

Periods ended October 31,

 
 

2020

   

2019

   

Change

   

2020

   

2019

   

Change

 
  $ 25     $ 29     $ (4 )     (13.8

)%

  $ 17     $ 9     $ 8       88.9

%

 

     

Six months

   

Three months

 
     

Periods ended October 31,

 
     

2020

   

2019

   

2020

   

2019

 

Effective tax rate on pre-tax book income (loss):

    27.2

%

    (0.5

)%

    4.9

%

    (0.2

)%

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

 

The estimated annual effective tax rate for the fiscal year ending April 30, 2021 is 0%. This calculation reflects estimated income tax expense based on our current year annual pretax income forecast which is offset by the estimated change in the current year valuation allowance. The Company maintains a full valuation allowance against its deferred tax assets.

 

For the six months ended October 31, 2020, the Company recorded a discrete income tax provision of $25,000, which primarily consisted of an accrual of interest for unrecognized tax benefits. For the six months ended October 31, 2019, the Company recorded a discrete income tax provision of $28,900, which primarily consisted of an accrual of interest for unrecognized tax benefits.

 

For the three months ended October 31, 2020, the Company recorded an income tax provision of $17,000, which included a discrete income tax provision of $9,000 primarily related to an accrual of interest for unrecognized tax benefits. For the three months ended October 31, 2019, the Company recorded a discrete income tax provision of $9,000, which primarily consisted of an accrual of interest for unrecognized tax benefits. 

 

The effective tax rate for the six months ended October 31, 2020 is an income tax provision of 27.2% on pretax income of $92,000 compared to an income tax provision of (0.5)% on a pretax loss of $5,471,000 in the comparable prior fiscal year period. The effective tax rate for the six months ended October 31, 2020 differs from the U.S. statutory rate of 21% primarily due to state taxes, a discrete income tax provision related to the accrual of interest for unrecognized tax benefits, and domestic losses for which the Company is not recognizing an income tax benefit.

 

The effective tax rate for the three months ended October 31, 2020 is an income tax provision of 4.9% on pretax income of $346,000 compared to an income tax provision of (0.2)% on a pretax loss of $4,900,000 in the comparable prior fiscal year period. The effective tax rate for the three months ended October 31, 2020 differs from the U.S. statutory rate of 21% primarily due to state taxes, a discrete income tax provision related to the accrual of interest for unrecognized tax benefits, and domestic losses for which the Company is not recognizing an income tax benefit.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s consolidated balance sheet continues to reflect a strong working capital position of $39.7 million at October 31, 2020 and $38.3 million at April 30, 2020.  Included in working capital at October 31, 2020 and April 30 2020 is $13.6 million and $14.4 million, respectively, consisting of cash, cash equivalents, and marketable securities.  The Company’s current ratio at October 31, 2020 was 4.5 to 1 compared to 3.9 to 1 as of April 30, 2020.

 

Net cash provided by operating activities for the six months ended October 31, 2020 was $1.9 million compared to $180,000 in the comparable prior fiscal 2020 period.  The increase cash flow in the fiscal 2021 period resulted mainly due to the net income in the current fiscal year period as compared to a net loss in the prior fiscal year, as well as an increase in accounts receivable balances offset by a decrease in inventory amounts.  For the six-month periods ended October 31, 2020 and 2019, the Company incurred approximately $2.6 million and $3.9 million, respectively, of non-cash operating expenses including ROU assets and liabilities for leases, loss provision accrual, depreciation and amortization, inventory reserve adjustments, and accruals for employee benefit programs.

 

Net cash used in investing activities for the six months ended October 31, 2020 was $200,000 compared to $1.3 million for the six months ended October 31, 2019. During the six months ended October 31, 2020 approximately $900,000 of marketable securities were purchased compared to $2.5 million for the same period of fiscal 2020. The Company acquired property, plant and equipment in the amount of approximately $800,000 for the six-month period ended October 31, 2020 compared to $1.3 million for the six-month period ended October 31, 2019. The Company may continue to invest in cash equivalents as dictated by its investment strategy. 

 

Net cash used in financing activities for the six months ended October 31, 2020 was approximately $2.0 million related to the repayment of the PPP Loan and the amounts borrowed against the Company’s line of credit with UBS Bank USA. There was no cash used in financing activities for the six months ended October 31, 2019.

 

The Company has been authorized by its Board to repurchase up to $5 million worth of shares of its common stock when appropriate opportunities arise.  As of October 31, 2020, the Company has repurchased approximately $4 million of its common stock out of the $5 million authorization.  For the six months ended October 31, 2020 and 2019 there were no repurchases of shares.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

 

The Company will continue to expend resources to develop, improve and acquire products for space applications, guidance and targeting systems, and communication systems which management believes will result in future growth and profitability. The Company anticipates securing additional customer funding for a portion of its R&D activities and will allocate internal funds depending on market conditions and identification of new opportunities.  The Company expects internally generated cash will be adequate to fund these R&D efforts.  The Company may also pursue acquisitions to expand its range of products and may use internally generated cash and external funding in connection with such acquisitions.

 

As of October 31, 2020, the Company’s consolidated funded backlog was approximately $42 million compared to $36 million at April 30, 2020, the end of fiscal 2020.  Approximately 79% of this backlog is expected to be realized in the next twelve months.  As of October 31, 2020, there are no amounts included in backlog under cost-plus fixed-fee (“CPFF”) contracts that have not been funded.  The Company excludes from backlog any contracts or awards for which it has not received authorization to proceed. On fixed price contracts, the Company excludes any unfunded portion. Over time, as partially funded contracts become fully funded, the Company will add the additional funding to its backlog. The backlog is subject to change for various reasons, including possible cancellation of orders, change orders, terms of the contracts and other factors beyond the Company’s control. Accordingly, the backlog is not necessarily indicative of the revenues or profits (losses) which may be realized when the results of such contracts are reported.

 

The Company believes that its liquidity is adequate to meet its operating and investment needs through at least December 11, 2021 and the foreseeable future.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements, that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

 

FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable to smaller reporting companies. 

 

Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report.  Based on their evaluation, the Company’s chief executive officer and chief financial officer have concluded that, as of October 31, 2020, the Company’s disclosure controls and procedures were effective.

 

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.  Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. 

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended October 31, 2020 to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 

 

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

 

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 seeks 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 seeks an order that the Company is 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, which could result from an unfavorable outcome arising out of these matters.

 

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 is 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 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. At this time, the Company does not have sufficient information to determine the likelihood of success of this petition.

 

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 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 Company’s motion on July 2, 2020. The motion is currently pending. On September 11, 2020, the Court granted Respondents’ application for an interim stay of the arbitration pending the Court’s determination of the Company’s petition for a stay of arbitration (described above), Mr. Bloch’s petition for the appointment of an arbitrator, and other outstanding motions. Respondents dispute all of Bloch’s claims and intend to continue to vigorously defend the Company in this special proceeding. The likelihood of any outcome of this proceeding cannot be determined at this time.

 

 

Item 6.  Exhibits

 

31.1 -

Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2 -

Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32 -

Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101-

The following materials from the Frequency Electronics, Inc. Quarterly Report on Form 10-Q for the quarter ended October 31, 2020 formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss, (iii) Condensed Consolidated Statements of Cash Flows, (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity and (v) Notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

FREQUENCY ELECTRONICS, INC.

(Registrant)

   

Date: December 11, 2020

By:   /s/   Steven L. Bernstein                                

Steven L. Bernstein

Chief Financial Officer, Secretary and Treasurer

Signing on behalf of the registrant and as principal financial officer

 

 

 

 

 

28