FREQUENCY ELECTRONICS INC

Previous wording

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. In evaluating our ability to recover deferred tax assets in the jurisdiction from which they arise, 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. As of April 30, 2024 and 2023, we have a full valuation allowance against our U.S. deferred tax assets. If these estimates and assumptions change in the future, the Company may be required to reduce its existing valuation allowance resulting in less income tax expense. The Company evaluates the likelihood of realizing its deferred tax assets quarterly.

Current wording

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. 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 evaluating our ability to recover deferred tax assets in the jurisdiction from which they arise, 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. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets will not be realizable, we establish a valuation allowance. For the fiscal year ended April 30, 2025, the valuation allowance decreased by approximately $13.9 million from the prior fiscal year primarily due to releasing the majority of the valuation allowance recorded against the deferred tax asset. The change in estimate occurred in the quarter ended January 31, 2025 because Frequency no longer had cumulative losses in recent years due to significant earnings in the quarter ended January 31, 2025.

Previous wording

For the fiscal year ended April 30, 2024 revenue increased by approximately $14.5 million, or 36% compared to the prior fiscal year. The Company is encouraged by the significant revenue growth in both segments compared to the prior fiscal year. In fiscal year 2024, revenues from satellite programs, one of the Company’s largest business areas, increased by $5.3 million, or 30%, compared to the prior fiscal year. Satellite program revenues for government end-use were 40% and 43% of total revenues for fiscal years 2024 and 2023, respectively. Satellite program revenues for commercial end-use were 2% and 1% of total revenue for fiscal years 2024 and 2023, respectively. Revenues on satellite program contracts are recorded in the FEI-NY segment and are recognized primarily under the percentage-of-completion (“POC”) method. Revenues from non-space U.S. Government/DOD customers increased by approximately $8.7 million, or 43%, in fiscal year 2024 compared to fiscal year 2023. These revenues are recorded in both the FEI-NY and FEI-Zyfer segments and accounted for approximately 52% and 50% of consolidated revenues for fiscal years 2024 and 2023, respectively. Other commercial and industrial sales accounted for approximately 6% of consolidated revenues for both fiscal years 2024 and 2023. Sales in the other commercial and industrial sales area were $3.1 million and $2.6 million for the fiscal year ended April 30, 2024 and the fiscal year ended April 30, 2023, respectively. The majority of the increase in revenue for fiscal year 2024, as compared to fiscal year 2023, was as a result of an increase in sales in the non-space U.S. Government/DOD market.

Current wording

For the fiscal year ended April 30, 2025 revenue increased by approximately $14.5 million, or 26%, compared to the prior fiscal year. The Company is encouraged by the significant revenue growth compared to the prior fiscal year. The majority of the increase in revenue for fiscal year 2025, as compared to fiscal year 2024, was as a result of an increase in sales in the U.S. Government/DOD Satellite market. In fiscal year 2025, revenues from satellite programs, one of the Company’s largest business areas, increased by $17.7 million, or 76%, compared to the prior fiscal year. The increase was due mainly to adjustments in total estimated costs in the current period resulting from efficiencies realized. Satellite program revenues for Government end-use were 53% and 40% of total revenues for fiscal years 2025 and 2024, respectively. Satellite program revenues for commercial end-use were 6% and 2% of total revenue for fiscal years 2025 and 2024, respectively.

Previous wording

For the fiscal year ended April 30, 2024, the gross profit and gross profit percentage increased as a result of several factors. The increase in gross profit dollars was directly related to the significant increase in revenues over the prior fiscal year period as well as the increase in gross margin. The majority of the increase in the gross profit percentage, as compared to the prior fiscal year, was in the FEI-NY segment and was attributed to the Company resolving technical issues on some developmental programs from the prior two fiscal years. The Company does not foresee significant additional technical issues regarding these programs as most of these programs have been completed. In addition, the Company has new programs that are progressing well, and the Company anticipates that they will add to the generation of additional revenue and profit.

Current wording

For the fiscal year ended April 30, 2025, the gross profit and gross profit percentage increased as a result of several factors. The increase in gross profit dollars was directly related to the significant increase in revenues over the prior fiscal year period as well as the increase in gross margin. The majority of the increase in the gross profit percentage, as compared to the prior fiscal year, was in the FEI-NY segment and was attributed to the Company’s performance on several traditional space programs at higher margins, due to favorable cumulative catch-up adjustments, and those programs progressing ahead of schedule. In addition, the Company has new programs that are progressing well, and the Company anticipates that they will generate additional revenue and profit.

Previous wording

In fiscal years ended April 30, 2024 and 2023, selling and administrative expenses (“SG&A”) were 18% and 23% of consolidated revenues, respectively. While total SG&A expenses increased in fiscal year 2024, as compared to the prior fiscal year, SG&A expenses decreased as a percentage of revenue in fiscal year 2024, due to increased revenue as well as the Company successfully monitoring costs given the current economic conditions.

Current wording

In fiscal years ended April 30, 2025 and 2024, selling and administrative expenses (“SG&A”) were 18% of consolidated revenues in both periods. While total SG&A expenses increased in fiscal year 2025, as compared to the prior fiscal year, SG&A expenses remained consistent as a percentage of revenue in fiscal year 2025. The approximately $2.1 million dollar increase is made up of mainly payroll related items such as, 401K expense, stock option expense, and bonus accrual. In addition to these expenses, trade show and related costs also increased during fiscal year 2025 as well.

Previous wording

As a percentage of consolidated revenue, R&D expense for the fiscal years ended April 30, 2024 and 2023 were 6% and 8%, respectively. The Company funded R&D amount was slightly higher in fiscal year 2024 as compared to the previous fiscal year, reflecting the Company’s commitment to maintaining its technical excellence. The Company expects future R&D investment to be in line with, or even potentially above historical commitments.

Current wording

As a percentage of consolidated revenue, R&D expense for the fiscal years ended April 30, 2025 and 2024 were 9% and 6%, respectively. The Company funded R&D amount was higher in fiscal year 2025 as compared to the previous fiscal year, partially because the previous fiscal year R&D expenditures was lower than planned and some of the expenses were subsequently captured in fiscal year 2025. The increase in R&D expense also reflects the Company’s commitment to maintaining its technical excellence. The Company expects future R&D investment to be in line with, or even potentially above, historical spending.

Previous wording

For the fiscal year ended April 30, 2024, the Company recorded operating income of $5.0 million compared to an operating loss of $4.7 million in the prior fiscal year. The change from an operating loss to operating income, year over year, is attributable to the Company’s significant increase in revenue and margin during fiscal year 2024, along with the positive effects of cost cutting measures instituted by management.

Current wording

For the fiscal year ended April 30, 2025, the Company recorded operating income of $11.7 million compared to an operating income of $5.0 million in the prior fiscal year. The increase is mainly attributable to the Company’s significant increase in revenue and gross margin during fiscal year 2025, as noted above, from traditional space programs that have been executed ahead of schedule, well within budgets, and performed well technologically. The positive effects of cost cutting measures instituted by management have also contributed to the increase.

Previous wording

For the fiscal year ended April 30, 2024, the Company recorded an income tax benefit of $130,000. For the fiscal year ended April 30, 2023, the Company recorded an income tax provision of $74,000.

Current wording

For the fiscal year ended April 30, 2025, the Company recorded an income tax benefit of $11.5 million. For the fiscal year ended April 30, 2024, the Company recorded an income tax benefit of $0.1 million.

Previous wording

The Company’s effective tax rate of (2.4)% for fiscal year 2024 differs from the U.S. federal statutory rate of 21% primarily due to state taxes, an income tax benefit for a reduction in the uncertain tax position liability in connection with the expiration of the statute of limitations, and the reduction in the valuation allowance due to a decrease in the deferred tax asset for which no tax benefit was provided. (See Note 13 to the Consolidated Financial Statements for a reconciliation of the actual tax benefit to the expected tax provision at the federal statutory rate.)

Current wording

The Company’s effective tax rate of (95.0)% for fiscal year 2025 differs from the U.S. federal statutory rate of 21% primarily due to a reduction of the valuation allowance. (See Note 13 to the Consolidated Financial Statements for a reconciliation of the actual tax benefit to the expected tax provision at the federal statutory rate.)

Previous wording

As of April 30, 2024, the Company has U.S. federal net operating losses of $24.2 million of which $8.5 million begins to expire in fiscal year 2025 through fiscal year 2038, including $2.0 million which is subject to annual limitation under Internal Revenue Code Section 382. The remaining U.S. federal net operating losses of $15.7 million have an indefinite carry-forward period. The U.S. federal capital loss carry-forward of $0.8 million expires in fiscal years 2025 and 2028. U.S. federal R&D credits of $1.0 million begin to expire in fiscal year 2036 through fiscal year 2040. The Company also has state net operating loss carryforwards, and state tax credits that expire in various years and amounts.

Current wording

As of April 30, 2025, the Company has U.S. federal net operating losses of $5 million of which $1.7 million begins to expire in fiscal year 2026 through fiscal year 2031. The U.S. federal net operating losses of $5 million includes $1.7 million which is subject to an annual limitation under Internal Revenue Code Section 382. The remaining U.S. federal net operating losses of $3.4 million have an indefinite carry-forward period. The U.S. federal capital loss carry-forward of $0.8 million expires in fiscal years 2028. U.S. federal R&D credits of $0.7 million begin to expire in fiscal year 2038 through fiscal year 2045. The Company also has state net operating loss carryforwards, and state tax credits that expire in various years and amounts.

Previous wording

Net cash provided by operations was $8.7 million in fiscal year 2024 compared to cash provided by operations of $1.2 million in fiscal year 2023. The Company’s balance sheet continues to reflect a highly liquid position with working capital of $27.3 million at April 30, 2024 as compared to $21.0 million at April 30, 2023. Included in working capital at April 30, 2024 was $18.3 million consisting of cash and cash equivalents. The Company’s current ratio at April 30, 2024 was 1.9 to 1 compared to 1.8 to 1, at the end of prior fiscal year.

Current wording

Net cash used in operations was $1.4 million in fiscal year 2025 compared to net cash provided by operations of $8.7 million in fiscal year 2024. The Company’s balance sheet continues to reflect a highly liquid position with working capital of $29.7 million at April 30, 2025 as compared to $27.3 million at April 30, 2024. Included in working capital at April 30, 2025 was $4.7 million consisting of cash and cash equivalents. The Company’s current ratio at April 30, 2025 was 2.3 to 1, compared to 1.9 to 1 at April 30, 2024.

Previous wording

During fiscal years 2024 and 2023, the Company incurred $4.4 million and $5.0 million, respectively, in non-cash charges to earnings, including adjustments relating to net assets and liabilities for operating leases, loss provision accrual, provision for a note receivable, depreciation and amortization expense, inventory adjustments, warranty and accounts receivable reserves and certain employee benefit plan expenses, including accounting for stock-based compensation. During fiscal year 2024, operating cash was increased as a result of decreases in loss on provision accrual and other liabilities and increases in contract assets and inventory, partially offset by an increase in contract liabilities and net income. During fiscal year 2023, operating cash was increased by decreases in loss on provision accrual and other liabilities and increases in contract assets and inventory, partially offset by an increase in contract liabilities.

Current wording

During fiscal years 2025 and 2024, the Company incurred $5.9 million and $4.4 million, respectively, in non-cash charges to earnings, including adjustments relating to net assets and liabilities for operating leases, loss provision accrual, deferred tax assets, depreciation and amortization expense, inventory adjustments, warranty and accounts receivable reserves and certain employee benefit plan expenses, including accounting for stock-based compensation. During fiscal year 2025, cash provided by operations was mainly due to increases in net income, mainly in the U.S. Government/DOD Satellite market, and deferred tax assets primarily due to the reduction of the valuation allowance, and partially offset by a decrease in contract liabilities and contract assets. During fiscal year 2024, cash flows relating to operating activities increased as a result of decreases in the loss provision accrual and other liabilities and increases in contract assets and inventory, partially offset by an increase in contract liabilities and net income.

Previous wording

Net cash used in investing activities for the fiscal year ended April 30, 2024 was $1.5 million compared to $8.7 million provided by investing activities for the fiscal year ended April 30, 2023. In fiscal year 2024, there were no investing activities related to sales of marketable securities net of the purchases of marketable securities and there were purchases of capital expenditures of $1.5 million. In fiscal year 2023, investing activities included the proceeds related to sales of marketable securities net of the purchases of marketable securities of $9.6 million and purchases of capital expenditures of $0.9 million.

Current wording

Net cash used in investing activities for the fiscal year ended April 30, 2025 was $1.8 million compared to $1.5 million used in investing activities for the fiscal year ended April 30, 2024 all relating to purchases of capital expenditures.

Previous wording

There was no cash used in financing activities for the fiscal year ended April 30, 2024. Net cash used in financing activities for the fiscal year ended April 30, 2023 was approximately $9.4 million related to a special dividend payout.

Current wording

Net cash used in financing activities for the fiscal year ended April 30, 2025 was $9.9 million, of which $9.6 million was related to a special cash dividend payment of $1.00 per share of common stock paid on August 29, 2024. There was no cash used in financing activities for the fiscal year ended April 30, 2024.

Previous wording

The Company will continue to expend resources to develop, improve and acquire products for space and other applications, which management believes will result in future growth and profitability. During fiscal year 2024, the Company secured partial customer funding for a portion of its R&D efforts. The customer funds received in connection therewith appear in revenues and are not included in R&D expenses. For fiscal year 2025, 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 as in fiscal 2024. The Company expects internally generated cash will be adequate to fund these future 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.

Current wording

The Company will continue to expend resources for R&D to develop, improve and acquire products for space applications, guidance and targeting systems, and communication systems that 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.

Previous wording

During fiscal year 2024, as in fiscal year 2023, the impact of inflation on the Company’s business was due to increases in costs for materials and services. The Company believes this may continue to impact expenses in fiscal year 2025 and future years.

Current wording

During fiscal year 2025, as in fiscal year 2024, the impact of inflation on the Company’s business was an increases in costs for materials and services. The Company believes this may continue to impact expenses in fiscal year 2026 and future years.

Previous wording

As of April 30, 2024, the Company had an accumulated deficit of $20.0 million. The Company believes that its cash, as of April 30, 2024, and cash flows from operations will provide sufficient liquidity to meet its operating needs in the normal course of business in both the short-term (next twelve months from the date of issuance of these consolidated financial statements) and in the long-term (beyond the next twelve months).

Current wording

As of April 30, 2025, the Company had retained earnings of $3.7 million. The Company believes that its cash, as of April 30, 2025, and cash flows from operations will provide sufficient liquidity to meet its operating needs in the normal course of business in both the short-term (next twelve months from the date of issuance of these consolidated financial statements) and in the long-term (beyond the next twelve months).

Previous wording

In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2023-07,Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which expands on the required disclosure of incremental segment information. The new guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is evaluating the effect on its consolidated financial statements when adopted in fiscal year 2025 but does not expect the effect to be material.

Current wording

In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2023-07,Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which expands on the required disclosure of incremental segment information. The new guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. We adopted the new standard effective April 30, 2025. As a result, we have enhanced our segment disclosures to include the presentation of cost of revenues by segment and the disclosure of our Chief Operating Decision Maker (“CODM”). The adoption of this ASU has no material effect on the consolidated financial statements and only affects our disclosure.

Previous wording

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. During the fiscal years ended April 30, 2024 and 2023, the Company acquired product from Morion in the aggregate amount of approximately $89,000 and $196,000, respectively. During the fiscal years ended April 30, 2024 and 2023, the Company sold no product and no training services to Morion, and the Company received no dividends from Morion.

Current wording

The Company’s investment consists of 4.6% of Morion’s outstanding shares, accordingly, the Company accounts for its investment in Morion on a cost basis. During the fiscal year ended April 30, 2025, the Company acquired no product from Morion. During the fiscal year ended April 30, 2024, the Company acquired product from Morion in the aggregate amount of approximately $89,000. During the fiscal years ended April 30, 2025 and 2024, the Company sold no product and no training services to Morion, and the Company received no dividends from Morion.

Previous wording

Due to the Russia-Ukraine conflict and resulting sanctions, the future status of FEI’s equity investment in Morion is uncertain. In response to these conditions, in connection with the preparation of the audited financial statements included in the 2022 Form 10-K, the Company impaired its investment in Morion in full. The likelihood of future sales to, purchases, and dividend payments from Morion is questionable.

Current wording

Due to the Russia-Ukraine conflict and resulting sanctions, the future status of FEI’s equity investment in Morion is uncertain. In response to these conditions, in connection with the preparation of the audited financial statements included in the 2022 Form 10-K, the Company impaired its investment in Morion in full.

Previous wording

Purchases of materials from Morion consist mainly of quartz crystal blanks which are used in the fabrication of quartz resonators. In the event that these items become unavailable from Morion, the Company is in the process of establishing alternate sources of supply. The Company is also capable of fabricating the crystal blanks in-house.

Current wording

Prior purchases of materials from Morion consisted mainly of quartz crystal blanks, which were used in the fabrication of quartz resonators. However, on October 30, 2024, the U.S. Department of Treasury’s Office of Foreign Assets Control designated Morion as a Specially Designated National, resulting in the blocking of all Morion property and property interests. As a result, the Company has terminated all commercial relationships with Morion, including the licensing of technology to Morion and the purchase of any products from Morion. The Company has established alternate sources of supply with respect to items previously acquired from Morion. The Company is also capable of fabricating the crystal blanks in-house.