# Frequency Electronics Inc: Form 10-Q for the period ended Oct 31, 2022

- Company: [Frequency Electronics Inc](/companies/feim.md) (CIK 39020)
- Form: 10-Q
- Filed: 2022-12-20
- Accepted by EDGAR: Dec 20, 2022, 16:25 ET
- Period: 2022-10-31
- Accession: 0001185185-22-001436
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/39020/000118518522001436/freqelec20221031_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/39020/000118518522001436/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-10-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-08-01 to 2022-10-31 | $8.9m | us-gaap:Revenues |
| Revenue | 6 months, 2022-05-01 to 2022-10-31 | $17.2m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2022-08-01 to 2022-10-31 | $8.6m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2022-05-01 to 2022-10-31 | $16.8m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2022-08-01 to 2022-10-31 | $350.0k | us-gaap:GrossProfit |
| Gross profit | 6 months, 2022-05-01 to 2022-10-31 | $345.0k | us-gaap:GrossProfit |
| Research and development | 3 months, 2022-08-01 to 2022-10-31 | $599.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2022-05-01 to 2022-10-31 | $1.7m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2022-08-01 to 2022-10-31 | $2.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2022-05-01 to 2022-10-31 | $4.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-08-01 to 2022-10-31 | −$2.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2022-05-01 to 2022-10-31 | −$5.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-08-01 to 2022-10-31 | $18.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2022-05-01 to 2022-10-31 | $63.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-08-01 to 2022-10-31 | $1.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2022-05-01 to 2022-10-31 | $2.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-08-01 to 2022-10-31 | −$2.3m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2022-05-01 to 2022-10-31 | −$5.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-08-01 to 2022-10-31 | −$0.25 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2022-05-01 to 2022-10-31 | −$0.58 | us-gaap:EarningsPerShareDiluted |
| Diluted shares (weighted) | 3 months, 2022-08-01 to 2022-10-31 | 9,326,347 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2022-05-01 to 2022-10-31 | 9,317,143 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2022-05-01 to 2022-10-31 | −$466.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2022-05-01 to 2022-10-31 | $729.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2022-10-31 | $10.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-10-31 | $55.2m | us-gaap:AssetsCurrent |
| Total assets | at 2022-10-31 | $83.1m | us-gaap:Assets |
| Current liabilities | at 2022-10-31 | $26.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-10-31 | $42.1m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-10-31 | $40.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 27,015 characters.

*“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 Part I, Item 1A (Risk Factors) of the Form 10-K 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, except as required by law.

### Critical Accounting Policies and Estimates

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in the Form 10-K. 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 three and six months ended October 31, 2022.

#### 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.

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. The Company evaluates the amount of development risk associated with new contracts which entail the development of new or significantly modified products and incorporates additional costs to cover these risks. These are estimates based on the Company’s best judgement, but because this entails estimations based on products not heretofore developed, there is risk that the estimates may ultimately prove to be incorrect and that costs are impacted.

Contract costs include all direct material, direct labor, 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.

### COVID-19 Pandemic Update, and Other Macroeconomic Factors

The full impact of the COVID-19 pandemic continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic may ultimately have on the Company’s financial condition, liquidity, and future financial results. For the three and six months ended October 31, 2022, the Company had been impacted by employee absenteeism related to direct or indirect effects of the COVID-19 pandemic, delays in the receipt of anticipated new contracts from customers administratively affected by the pandemic, and limited availability or delivery delays of parts and materials from vendors affected by the pandemic. FEI-Zyfer’s operations were particularly affected, as evidenced by decreases in sales and gross margin during fiscal year 2022, which continued during the three and six months ended October 31, 2022. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the continuing changing dynamics of the COVID-19 pandemic the Company is not able to estimate the potential adverse effects on its operations, financial condition, or liquidity for the remainder of fiscal year 2023. The Company has returned to essentially normal operations at its various locations. At its locations, Frequency continues to follow federal and state guidelines with an emphasis on employee safety.

The Company faces various future COVID-19 related risks. The Company is dependent on its workforce to design and manufacture its products. If significant portions of the Company’s workforce are unable to work effectively, or if the U.S. Government, state and/or other customers or supplier operations are curtailed due to illness, quarantines, government actions, facility closures, or other restrictions, the Company’s operations may be negatively impacted. If faced with any of these factors, the Company may be unable to perform fully on its contracts and costs may increase. These cost increases may not be fully recoverable or adequately covered by insurance. For example, in the latter part of fiscal year 2021, the Company experienced some operational disruptions due to the need to vacate certain areas of the facilities for cleaning and disinfecting resulting from employees being potentially exposed to COVID-19 or following positive COVID-19 test results. Also, certain Company vendors have been unable to deliver materials on time due to COVID-19 related impacts to their workforces or their supply chains. These delays impacted the Company’s production costs and schedules. Vendor delivery performance is being closely monitored and alternate sources of supply are generally available and, in some cases, are being established.

In addition to the impacts of the COVID-19 pandemic, the Company’s financial condition, liquidity, and future financial results may also be affected by other macroeconomic factors. For example, due to continuing geopolitical circumstances resulting in increased inflation, energy and commodity prices may continue escalating which may adversely affect the Company’s financial results.

### RESULTS OF OPERATIONS

The table below sets forth for the three and six months ended October 31, 2022 and 2021, 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:

| Revenues | Three months Periods ended October 31, 2022 | 2021 | Six months 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| FEI-NY | 85.8% | 80.2% | 84.7% | 79.3% |
| FEI-Zyfer | 17.4 | 20.5 | 19.2 | 22.3 |
| Less intersegment revenues | (3.2) | (0.7) | (3.9) | (1.6) |
|  | 100.0 | 100.0 | 100.0 | 100.0 |
| Cost of revenues | 96.1 | 68.4 | 98.0 | 68.5 |
| Gross margin | 3.9 | 31.6 | 2.0 | 31.5 |
| Selling and administrative expenses | 22.7 | 18.6 | 23.4 | 26.3 |
| Research and development expenses | 6.7 | 10.7 | 10.0 | 10.6 |
| Operating income (loss) | (25.5) | 2.3 | (31.4) | (5.4) |
| Other income (loss), net | (0.4) | 1.5 | (0.3) | 1.2 |
| Provision for income taxes | 0.0 | 0.0 | - | - |
| Net income (loss) | (25.9)% | 3.8% | (31.7)% | (4.2)% |

### Revenues

*(in thousands)*

| Segment | Three months Periods ended October 31, 2022 | 2021 | Change |  | Six months 2022 | 2021 | Change |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| FEI-NY | $7,680 | $10,381 | $(2,701) | (26.0)% | $14,534 | $20,543 | $(6,009) | (29.3)% |
| FEI-Zyfer | 1,561 | 2,648 | (1,087) | (41.0) | 3,292 | 5,783 | (2,491) | (43.1) |
| Intersegment revenues | (292) | (93) | (199) | NM | (673) | (436) | (237) | 54.4 |
|  | $8,949 | $12,936 | $(3,987) | (30.8)% | $17,153 | $25,890 | $(8,737) | (33.7)% |

For the three months ended October 31, 2022 revenues from commercial and U.S. Government communication satellite programs accounted for approximately 48% of consolidated revenues compared to approximately 51% of consolidated revenues during this same period in the prior fiscal year. Revenues 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, accounted for approximately 44% of consolidated revenues for the three months ended October, 31, 2022 compared to approximately 39% of consolidated revenue during the same period in the prior fiscal year. Other commercial and industrial revenues for the three months ended October 31, 2022 accounted for approximately 8% of consolidated revenue compared to 10% in the same period of the prior fiscal year. The decrease in revenue for this quarter was due to delays in contract awards, delays in meeting program milestones, and minor technical challenges that have been, or will be, resolved reasonably quickly. It is believed that these issues are only temporary timing issues and we expect revenue to increase in the future.

For the six months ended October 31, 2022 revenues from commercial and U.S. Government communication satellite programs accounted for approximately 46% of consolidated revenues compared to approximately 52% of consolidated revenues during this same period in the prior fiscal year. Revenues from non-space U.S. Government/DOD customers accounted for approximately 47% of consolidated revenues for the six months ended October, 31, 2022 compared to approximately 41% of consolidated revenue during the same period in the prior fiscal year. Other commercial and industrial revenues for the six months ended October 31, 2022 and 2021 accounted for approximately 8% of consolidated revenue. The decrease in revenue for the six months ended October 31, 2022 was due to delays in contract awards, delays in meeting program milestones, minor technical challenges that have been, or will be, resolved reasonably quickly, and funding limitations. It is believed that these issues are only temporary timing issues and we expect revenue to increase in the future.

### Gross Margin

*(in thousands)*

|  | Three months Periods ended October 31, 2022 | 2021 | Change |  | Six months 2022 | 2021 | Change |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
|  | $350 | $4,091 | $(3,741) | (91.4)% | $345 | $8,152 | $(7,807) | (95.8)% |
| GM Rate | 3.9% | 31.6% |  |  | 2.0% | 31.5% |  |  |

For the three-month and six-month periods ended October 31, 2022, gross margin and GM Rate decreased compared to the same respective periods in the prior fiscal year. The decrease in gross margin and GM Rate was due to increased engineering costs on development phase programs that experienced particularly complex technical challenges that have since been resolved, minor technical challenges that have been, or will be, resolved reasonably quickly, and the negative cost impacts on some programs due to supply chain delays. Gross margin was also affected by under absorption of costs due to the decrease in sales during the three-month and six-month periods ended October 31, 2022.

### Selling and Administrative Expenses

*Periods ended October 31,*

*(in thousands)*

| Three months 2022 | 2021 | Change |  | Six months 2022 | 2021 | Change |  |
| ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| $2,034 | $2,411 | $(377) | (15.6)% | $4,026 | $6,805 | $(2,779) | (40.8)% |

For the three months ended October 31, 2022 and 2021, selling, and administrative (“SG&A”) expenses were approximately 23% and 19%, respectively, of consolidated revenues. The decrease in SG&A expenses for the three months ended October 31, 2022 as compared to the prior year period was largely due to a decrease in professional fees and deferred compensation, partially offset by a one-time expense related to severance packages relating to the previously announced labor reduction.

For the six months ended October 31, 2022 and 2021, SG&A expenses were approximately 23% and 26%, respectively, of consolidated revenues. The decrease in SG&A expenses for the six months ended October 31, 2022 as compared to the prior year period was largely due to decrease in professional fees, as well as a one-time reduction to stock option expense related to forfeitures and deferred compensation expense. The Company continues to monitor expenses looking for additional cost-effective reductions going forward.

### Research and Development Expenses

*Periods ended October 31,*

*(in thousands)*

| Three months 2022 | 2021 | Change |  | Six months 2022 | 2021 | Change |  |
| ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| $599 | $1,377 | $(778) | (56.5)% | $1,709 | $2,732 | $(1,023) | (37.4)% |

21

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 three-month period ended October 31, 2022 was 7% of sales compared to 11% of sales for the same period of the prior fiscal year. The R&D rate for the six-month period ended October 31, 2022 was 10% of sales compared to 11% of sales for the same period of the prior fiscal year. R&D decreases for both periods of fiscal year 2023 were primarily due to the resolution in fiscal 2022 of technical challenges of projects now in the production phase. The Company plans to continue to invest in R&D in the future to keep its products at the state of the art.

### Operating (Loss) Income

*Periods ended October 31,*

*(in thousands)*

| Three months 2022 | 2021 | Change |  | Six months 2022 | 2021 | Change |  |
| ---: | ---: | ---: | --- | ---: | ---: | ---: | --- |
| $(2,283) | $303 | $(2,586) | NM | $(5,390) | $(1,385) | $(4,005) | NM |

During the three-month and six-month periods ended October 31, 2022, operating losses resulted largely from the decrease in revenue coupled with the additional costs mentioned above in the “Gross Margin” section.

### Other Income (Expense), net

*(in thousands)*

|  | Three months Periods ended October 31, 2022 | 2021 | Change |  | Six months 2022 | 2021 | Change |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment (expense) income | $(12) | $98 | $(110) | NM | $24 | $191 | $(167) | (87.4)% |
| Interest expense | (18) | (20) | 2 | (10.0)% | (63) | (40) | (23) | 57.5% |
| Other income (expense), net | - | 118 | (118) | (100.0)% | - | 158 | (158) | (100.0)% |
|  | $(30) | $196 | $(226) | NM | $(39) | $309 | $(348) | NM |

Investment (expense) 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.

### Income Tax Provision

*Periods ended October 31,*

*(in thousands)*

| Three months 2022 | 2021 | Change |  | Six months 2022 | 2021 | Change |  |
| ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| $1 | $2 | $(1) | (50.0)% | $2 | $2 | $- | -% |

|  | Three months Periods ended October 31, 2022 | 2021 | Six months 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Effective tax rate on pre-tax book income (loss): | 0.0% | 0.4% | 0.0% | (0.2)% |

The estimated annual effective tax rate for the fiscal year ending April 30, 2023 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 three months ended October 31, 2022, the Company recorded a discrete income tax provision of $1,000 related to an accrual of interest for unrecognized tax benefits. For the three months ended October 31, 2021, the Company recorded an income tax provision of $1,504.

For the six months ended October 31, 2022, the Company recorded a discrete income tax provision of $2,000 related to an accrual of interest for unrecognized tax benefits. For the six months ended October 31, 2021, the Company recorded an income tax provision of $2,250.

The effective tax rate for the three months ended October 31, 2022 was an income tax provision of 0.0% on pretax loss of $2.3 million compared to an income tax provision of 0.4% on pretax income of $499,000 in the comparable prior fiscal year period. The effective tax rate for the three months ended October 31, 2022 differs from the U.S. federal statutory rate of 21% primarily due to domestic losses for which the Company is not recognizing an income tax benefit.

The effective tax rate for the six months ended October 31, 2022 was an income tax provision of 0.0% on pretax loss of $5.4 million compared to an income tax provision of (0.2)% on pretax loss of $1.1 million in the comparable prior fiscal year period. The effective tax rate for the six months ended October 31, 2022 differs from the U.S. federal statutory rate of 21% primarily due to domestic losses for which the Company is not recognizing an income tax benefit.

The Inflation Reduction Act of 2022 (the “Act”) was signed into U.S. law on August 16, 2022. The Act includes various tax provisions,

including an excise tax on stock repurchases, expanded tax credits for clean energy incentives, and a corporate alternative minimum tax that generally applies to U.S. corporations with average adjusted annual financial statement income over a three-year period in excess of $1 billion. The Company does not expect the Act to materially impact its consolidated financial statements.

### LIQUIDITY AND CAPITAL RESOURCES

The Company’s consolidated balance sheet continues to reflect a strong working capital position of approximately $28.4 million at October 31, 2022 and $34.2 million at April 30, 2022. Included in working capital at October 31, 2022 and April 30, 2022 was $19.7 million and $21.5 million, respectively, consisting of cash, cash equivalents, and marketable securities. The Company’s current ratio at October 31, 2022 was 2.1 to 1 compared to 2.5 to 1 as of April 30, 2022.

Net cash used in operating activities for the six-month period ended October 31, 2022 was approximately $466,000 and net cash provided by operating activities for the six-month period ended October 31, 2021 was approximately $1.7 million. The decrease in cash flow in the first six months of fiscal 2023 was mainly due to an increase in net loss and contract liabilities, partially offset by a decrease in non-cash adjustments, contract assets, and inventory. For the six-month periods ended October 31, 2022 and 2021, the Company incurred approximately $1.2 million and $1.8 million, respectively, of non-cash operating expenses including ROU assets and liabilities for leases, loss provision accrual, depreciation and amortization, inventory reserve adjustments, deferred compensation, and accruals for employee benefit programs.

Net cash used in investing activities for the six-month periods ended October 31, 2022 and 2021 was approximately $975,000 and $845,000, respectively. During the six months ended October 31, 2022 marketable securities were sold or redeemed in the amount of $1.1 million compared to $1.4 million for the same period of fiscal year 2022. During the six months ended October 31, 2022 approximately $1.4 million of marketable securities were purchased compared to $1.2 million for the same period of fiscal year 2022. The Company acquired property, plant, and equipment in the amount of approximately $729,000 and $1.1 million for the six-month periods ended October 31, 2022 and 2021, respectively. The Company may continue to invest in cash equivalents as dictated by its investment strategy.

There was no cash used in or provided by financing activities for the six months ended October 31, 2022 and 2021.

The Company has been authorized by its Board of Directors to repurchase up to $5 million worth of shares of its common stock when appropriate opportunities arise. As of October 31, 2022, the Company has repurchased approximately $4 million of its common stock out of the $5 million authorization. For the six months ended October 31, 2022 and 2021 there were no repurchases of shares.

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, 2022, the Company’s consolidated funded backlog was approximately $56 million compared to $40 million at April 30, 2022, the end of fiscal year 2022. Approximately 82% of this backlog is expected to be realized in the next twelve months. As of October 31, 2022, there were no amounts included in backlog under cost-plus fixed-fee 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 20, 2023 and the foreseeable future.

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, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.

## Controls and procedures

As filed, 8,480 characters.

#### 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, because of the material weaknesses in internal control over financial reporting disclosed below, as of October 31, 2022, the Company’s disclosure controls and procedures were not effective at a reasonable assurance level.

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.

#### Management’s Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of April 30, 2022. In making this assessment, management used the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company’s management initially concluded and disclosed in the Form 10-K that the Company’s internal control over financial reporting was effective as of April 30, 2022.

However, for the reasons discussed below, management conducted a re-assessment of the effectiveness of the Company’s internal control over financial reporting. In conducting its re-assessment of the effectiveness of the Company’s internal control over financial reporting, management concluded that the Company’s internal control over financial reporting was not effective as of April 30, 2022, because of the material weaknesses in internal control over financial reporting discussed below.

As disclosed in the Current Report on Form 8-K filed on December 16, 2022, in the course of preparing the unaudited condensed consolidated financial statements for the second quarter of fiscal 2023, ended October 31, 2022, the Company identified errors related to the calculations and presentation of contract assets and contract liabilities in the Form 10-K.

Following the identification of these prior errors, management re-evaluated the Company’s internal control over financial reporting as of April 30, 2022 and identified material weaknesses in the following areas:

1\. While previously corrected as of April 30, 2022, historically, through April 30, 2022, the Company had presented contract assets and contract liabilities on a net basis on the consolidated balance sheets whereas ASC 606-10-45-1 requires gross presentation. In addition, a formula error was identified whereby the Company had not been grouping contracts assets and contract liabilities properly on a project-by-project basis. As a result, management has concluded that the Company did not effectively design and maintain controls over the completeness and accuracy of the gross presentation of contract assets and contract liabilities and thus a material weakness was identified; and

2\. In connection with the above, as of April 30, 2021 the Company had presented contract assets and contract liabilities on a net basis on the consolidated balance sheets whereas ASC 606-10-45-1 requires gross presentation. During the process of completing the Company’s Form 10-K, management corrected the contract assets and contract liabilities balances in the April 30, 2021 column of the consolidated balance sheet to present them gross as opposed to net as previously filed. However, this should have been identified as a correction of a prior period error and assessed accordingly to determine whether or not a restatement was needed and whether the error was the result of a deficiency in the Company’s internal control over financial reporting. As a result, management has concluded that the Company did not have an adequate control in place for identifying and assessing financial statement errors and thus a material weakness was identified.

As disclosed in the Current Report on Form 8-K filed on December 16, 2022, by the Company, on December 14, 2022, the Company concluded that the items noted above constituted material weaknesses in the Company’s internal control over financial reporting as of April 30, 2022 and continued to exist as of July 31, 2022.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

#### Remediation Plan

To remediate the material weaknesses described above, the Company plans to pursue the following remediation steps:

1\. Review and update, as necessary, the design and documentation of its internal control policies and procedures with respect to its internal control over financial reporting. The Company plans to implement additional formulas and comparative reviews of financial information as a result of issues identified in its policies and procedures as promptly as practical and to satisfy documentation requirements under Section 404 of the Sarbanes-Oxley Act.

2\. Ensure that its internal control over financial reporting is properly designed, documented and operating effectively by (i) enhancing the design of existing control activities and/or implementing additional control activities, as needed, (ii) monitoring the operating effectiveness of those controls, and (iii) ensuring that documentation exists to evidence the performance of those controls.

The Company believes that its remediation plan will be sufficient to remediate the identified material weaknesses and strengthen its internal control over financial reporting. However, by April 30, 2023, the Company’s next annual reporting date, there may not be sufficient time for the Company to remediate all material weaknesses or, if remediated, to test the operating effectiveness of the remediated controls. As the Company continues to evaluate, and works to improve, its internal control over financial reporting, management may determine that additional measures to address control deficiencies or modifications to the remediation plan are necessary. The Company cannot assure you, however, when it will remediate such weaknesses, nor can it be certain whether additional actions will be required or the costs of any such actions. Moreover, the Company cannot assure you that additional material weaknesses will not arise in the future.

#### Changes in Internal Control Over Financial Reporting

The Company is in the process of implementing certain changes in its internal control over financial reporting to remediate the material weaknesses described above. The implementation of the material aspects of this plan began in the third quarter of fiscal 2023. As a result, there has been no change in the Company’s internal control over financial reporting during the second quarter of fiscal 2023, ended October 31, 2022, that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

## Risk factors

As filed, 4,540 characters.

As disclosed in “Item 1A. Risk Factors” in the Form 10-K, there are a number of risks and uncertainties that could have a material adverse effect on the Company’s business, financial position, results of operations and/or cash flows. There are no material updates or changes to the Company’s risk factors since the filing of the Form 10-K, except for the following:

***The Company has identified material weaknesses in its internal control over financial reporting. The Company’s failure to establish and maintain effective internal control over financial reporting has resulted in a material misstatement of the audited consolidated financial statements in the Form 10-K and could result in material misstatements in its future consolidated financial statements. Additionally, the Company’s failure to establish and maintain effective internal control over financial reporting could result in the Company’s failure to meet its reporting and financial obligations, which in turn could have a negative impact on its financial condition.***

Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial statements. As more fully disclosed in Item 4. “Controls and Procedures,” in the course of preparing the condensed consolidated financial statements for the second quarter of fiscal 2023, ended October 31, 2022, the Company identified revisions related to the calculations, and errors related to the presentation of contract assets and contract liabilities in the Form 10-K. Following the identification of these prior errors and revisions, management re-evaluated the Company’s internal control over financial reporting as of April 30, 2022 and as of July 31, 2022 and identified certain deficiencies, which the Company concluded constituted material weaknesses in the Company’s internal control over financial reporting as of April 30, 2022 and for the three months ended July 31, 2022.

Under standards established by the PCAOB, a material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness in the design of monitoring controls indicates that the Company has not sufficiently developed and/or documented internal controls by which management can review and oversee the Company’s financial information to detect and correct material errors or that the personnel responsible for performing the review did not have the sufficient skill set or knowledge of the subject matter to perform a proper assessment.

As a result of the material weaknesses, the Company’s management concluded that the audited consolidated financial statements included in the Form 10-K were materially misstated. The Company will file an amended Form 10-K/A for the fiscal year ended April 30, 2022.

To remediate the material weaknesses, the Company is in the process of implementing certain changes to its internal controls and reviewing the control environment to help ensure that there are no other material weaknesses. The Company believes that its remediation plan will be sufficient to remediate the identified material weaknesses and strengthen our internal control over financial reporting. However, by April 30, 2023, the Company’s next annual reporting date, there may not be sufficient time to remediate all material weaknesses fully or, if fully remediated, to complete testing of the remediated controls. As the Company continues to evaluate and work to improve its internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan. The Company cannot assure you, however, when it will remediate such weaknesses, nor can the Company be certain of whether additional actions will be required or the costs of any such actions. Moreover, the Company cannot assure you that additional material weaknesses will not arise in the future.

Any failure to remediate the material weaknesses, or the development of new material weaknesses in the Company’s internal control over financial reporting, could result in future material misstatements in its consolidated financial statements and cause the Company to fail to meet its reporting and financial obligations, which in turn could have a negative impact on the Company’s financial condition.

Filed Dec 20, 2022.
Source: SEC EDGAR, the filing index for accession 0001185185-22-001436. Last ingested by Listed: Nov 5, 2026, 18:05 ET. No prices; not investment advice.