Frequency Electronics(FEIM) - 2021 Q2 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements Unaudited financial statements for October 31, 2020, show improved performance, shifting from net loss to net income, with a strong balance sheet and increased operating cash flow Condensed Consolidated Balance Sheets As of October 31, 2020, total assets were $89.6 million, liabilities decreased, and stockholders' equity increased to $54.7 million, improving liquidity Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Oct 31, 2020 (Unaudited) | Apr 30, 2020 | | :--- | :--- | :--- | | Total Current Assets | $50,922 | $51,235 | | Total Assets | $89,619 | $91,276 | | Total Current Liabilities | $11,243 | $12,988 | | Total Liabilities | $34,963 | $37,040 | | Total Stockholders' Equity | $54,656 | $54,236 | Condensed Consolidated Statements of Operations Revenues increased by 24.5% to $26.9 million for the six months ended October 31, 2020, resulting in a net income of $67 thousand, a significant turnaround from a prior-year loss Statement of Operations Summary (in thousands, except per share data) | Metric | Six Months Ended Oct 31, 2020 | Six Months Ended Oct 31, 2019 | Three Months Ended Oct 31, 2020 | Three Months Ended Oct 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $26,940 | $21,641 | $13,990 | $9,087 | | Gross Margin (Loss) | $9,410 | $2,771 | $5,322 | $(1,182) | | Operating (Loss) Income | $(119) | $(5,703) | $219 | $(4,922) | | Net Income (Loss) | $67 | $(5,500) | $329 | $(4,909) | | Basic EPS | $0.01 | $(0.61) | $0.04 | $(0.54) | Condensed Consolidated Statements of Cash Flows Net cash from operating activities significantly increased to $2.0 million for the six months ended October 31, 2020, with a period-end cash balance of $3.7 million Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended Oct 31, 2020 | Six Months Ended Oct 31, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,980 | $180 | | Net cash used in investing activities | $(169) | $(1,257) | | Net cash used in financing activities | $(1,965) | - | | Net decrease in cash and cash equivalents | $(154) | $(1,077) | | Cash and cash equivalents at end of period | $3,654 | $2,606 | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, COVID-19 impact, segment revenue growth, an OFAC investigation regarding Morion, Inc., and ongoing legal proceedings - The company is actively monitoring the impact of the COVID-19 pandemic, but cannot estimate the potential adverse effects on its fiscal year 2021 results; vendor delays have had a minor impact on production schedules to date[33][34] - The company has an investment in Morion, Inc., a Russian company, and due to Morion's relationship with a sanctioned entity, the company voluntarily disclosed potentially untimely payments to the Office of Foreign Assets Control (OFAC), which has opened a civil investigation with unknown outcome and potential liability[61][66][67] - The company is involved in multiple legal proceedings with its former Chief Scientist, Martin B. Bloch, concerning allegations of wrongful termination and disputes over deferred compensation benefits, which the company is vigorously defending against, but the outcome is uncertain[82][83] - In April 2020, the company received a PPP loan of approximately $5.0 million, which was fully repaid in May 2020; as of October 31, 2020, the company has borrowed $3 million under a credit facility with UBS Bank USA[79] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes improved financial results to increased revenues, higher gross margin from program completion, decreased R&D, and a strong liquidity position with growing backlog Results of Operations Revenues grew 24.5% to $26.9 million, driven by satellite and government programs, with gross margin rate improving to 34.9% and operating loss significantly reduced Revenue by Segment (in thousands) | Segment | Six Months Ended Oct 31, 2020 | Six Months Ended Oct 31, 2019 | Change (%) | | :--- | :--- | :--- | :--- | | FEI-NY | $20,996 | $16,794 | 25.0% | | FEI-Zyfer | $7,353 | $5,701 | 29.0% | - For the six months ended Oct 31, 2020, revenue from satellite programs increased by $4.8 million, accounting for 53% of consolidated revenues, up from 44% in the prior year[110] - Gross margin and GM Rate increased significantly due to several programs moving from a high-cost development phase to completion or near-completion[112] - SG&A expenses increased, mainly due to a $1.6 million rise in professional fees for the six-month period, related to litigation for which the company expects partial insurance reimbursement[113] - R&D expenses decreased as previous R&D efforts have ended and transitioned into production, with the R&D rate as a percentage of sales dropping from 17% to 8% for the six-month period[116] Liquidity and Capital Resources Liquidity remains strong with $39.7 million in working capital and a 4.5:1 current ratio, cash from operations improved, and funded backlog increased to $42 million - Working capital stood at $39.7 million at October 31, 2020, up from $38.3 million at April 30, 2020, with the current ratio improving from 3.9 to 1 to 4.5 to 1[126] - Net cash provided by operating activities for the six months ended October 31, 2020, was $1.9 million, compared to $180 thousand in the prior year period[127] - Consolidated funded backlog increased to approximately $42 million as of October 31, 2020, compared to $36 million at April 30, 2020[134] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section is not applicable as the company qualifies as a smaller reporting company - Disclosure about market risk is not required for smaller reporting companies[139] Item 4. Controls and Procedures Management, including CEO and CFO, concluded disclosure controls and procedures were effective as of October 31, 2020, with no material changes to internal controls - The company's chief executive officer and chief financial officer concluded that as of October 31, 2020, the company's disclosure controls and procedures were effective[140] - No changes in internal control over financial reporting occurred during the three months ended October 31, 2020, that have materially affected, or are reasonably likely to materially affect, the company's internal controls[142] Part II. Other Information Item 1. Legal Proceedings The company is involved in ongoing legal disputes with former Chief Scientist Martin B. Bloch regarding wrongful termination, age discrimination, and deferred compensation benefits - Martin B. Bloch, former Chief Scientist, filed a complaint alleging wrongful termination "for cause" and age discrimination; while most claims were dismissed, one claim for breach of contract against the company remains, and an appeal is pending[146] - Mr. Bloch has also initiated two arbitration proceedings claiming denial of deferred compensation benefits in violation of ERISA rules[147] - The company has filed a petition to stay the arbitration, claiming Mr. Bloch did not follow proper procedures, and the court has granted an interim stay of arbitration pending further rulings[148][149] Item 6. Exhibits This section lists exhibits filed with Form 10-Q, including CEO and CFO certifications and XBRL-formatted financial statements - Exhibits filed include CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906[151][152] - The filing includes financial data formatted in eXtensible Business Reporting Language (XBRL)[153] Signatures - The report was duly signed on December 11, 2020, by Steven L. Bernstein, the Chief Financial Officer, Secretary, and Treasurer[156]