FREQUENCY ELECTRONICS INC (FEIM)

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 Annual Report on Form 10-K 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
reliance on key customers, including the U.S. government, the Company’s use of estimates when accounting for contracts, actions
by significant customers or competitors, competitive factors, new products and technological changes, continued acceptance of the Company’s
products in the marketplace, dependence upon third-party vendors, product prices and raw material costs, the Company’s ability
to attract and retain key employees, general domestic and international economic conditions, health epidemics and pandemics, external
disruptions to the Company’s facilities or supply chain, the Company’s operations in a highly regulated industry, the outcome
of any litigation and arbitration proceedings, cybersecurity attacks, volatility in the Company’s stock price, including due to
the relatively low trading volume of its common stock, and failure to maintain an effective system of internal controls over financial
reporting. The factors listed above are not exhaustive.  Other sections of this 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-K 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.

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Critical
Accounting Estimates

The
Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. 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 or the market value of its products. Changes in estimates can have a material impact
on the Company’s financial position and results of operations.

Revenue
Recognition

Revenues
for most contracts 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 regarding labor, outside services, materials, overhead costs
and status of the contract. The effect of any change in the estimated gross margin 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.

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.

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.

Income
Taxes

Our
income tax expense, deferred tax asset and liabilities, and liabilities for unrecognized tax benefits reflect management’s best
estimate of current and future taxes to be paid. Significant judgments and estimates are required in the determination of the consolidated
income tax expense.

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.

The
Company maintains a valuation allowance of approximately $1.4 million against certain deferred tax assets including state tax credits
and capital loss carryforwards because the realization of these tax attributes requires sufficient taxable income be sourced to the respective
state jurisdiction and capital gain income is required to utilize capital losses. The Company will continue to evaluate the realizability
of its deferred tax assets quarterly. Any further increases or decreases in the valuation allowance could have an unfavorable or favorable
impact on the Company’s income tax provision and net income in the period in which such determination is made. As of April 30,
2025, the deferred tax asset is recorded at its more-likely-than-not realizable amount.

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Tax
benefits are recognized for an uncertain tax position when, in the Company’s judgment, it is more likely than not that the position
will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold,
the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate
settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing
circumstances and when new information becomes available. Such adjustments are recognized entirely in the period in which they are identified.
The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as
considered appropriate by the Company. While it is often difficult to predict the final outcome or the timing of resolution of any particular
tax matter, the Company believes its liability for unrecognized tax benefits is adequate.

RESULTS
OF OPERATIONS

Consolidated
Results

The
table below sets forth for the fiscal years ended April 30, 2025 and 2024, the percentage of consolidated net sales represented by certain
items in the Company’s consolidated statements of operations:

Revenues

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.

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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 decreased by approximately $2.4 million, or 8%, in fiscal year 2025 compared
to fiscal year 2024. These revenues are recorded in both the FEI-NY and FEI-Zyfer segments and accounted for approximately 38% and 52%
of consolidated revenues for fiscal years 2025 and 2024, respectively. Other commercial and industrial sales accounted for approximately
3% and 6% of consolidated revenues for fiscal years 2025 and 2024, respectively. Sales in the other commercial and industrial sales area
were $2.4 million and $3.1 million for the fiscal year ended April 30, 2025 and the fiscal year ended April 30, 2024, respectively.

Gross
Profit

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.

Selling
and Administrative Expenses

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.

Research
and Development Expenses

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.

The
funds received in connection with customer funded R&D appears in revenues and the associated expenses are included in cost of revenues
and are not included in the table above. The Company believes that internally generated cash and cash reserves are adequate to fund its
future R&D activity.

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Operating
Income

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.

Other
Income, net

The
change from the prior fiscal year was relatively minimal. All three categories presented were slightly lower in fiscal year 2025 compared
to the prior fiscal year.

Income
Tax (Benefit) Provision

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.

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.)

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.

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On
July 4, 2025, President Trump signed H.R. 1, the “One Big Beautiful Bill Act”, into law.  In accordance with U.S. GAAP,
the Company will account for the tax effects of changes in tax law in the period of enactment which is Q1 of fiscal year 2026. The Company
is currently in the process of analyzing the tax impacts of the law change, but we do not expect a material impact on our financial statements.

LIQUIDITY
AND CAPITAL RESOURCES

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.

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.

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.

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.

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.

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.

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).

RECENT
ACCOUNTING PRONOUNCEMENTS

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.

In
December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”),
which requires companies to annually disclose categories in the effective tax rate reconciliation and additional information about income
taxes paid. The new guidance is effective for annual periods beginning after December 15, 2024, and interim periods within fiscal years
beginning after December 15, 2024, with early adoption permitted. The Company is in the process of evaluating the impact that the adoption
of ASU No. 2023-09 will have to the financial statements and related disclosures.

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OTHER
MATTERS

The
financial information reported herein is not necessarily indicative of future operating results or of the future financial condition
of the Company.

Morion

The
Company has an investment in 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 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.

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.

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.

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.

As
previously disclosed, in light of Morion’s relationship with Gazprombank, in 2020, the Company 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 related solely to delays in collection of accounts receivable
that exceeded then-applicable payment windows set forth in sanctions regulations and did not relate to any other type of payment or transaction.
On February 17, 2021, the Company received a Cautionary Letter from OFAC indicating that OFAC has completed its review of the matter.
According to OFAC, the Cautionary Letter was issued instead of pursuing a civil monetary penalty or taking other enforcement action.

Item 7. 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 Annual Report on Form 10-K 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 reliance on key customers, including the U.S. government, the Company’s use of estimates when accounting for contracts, actions by significant customers or competitors, competitive factors, new products and technological changes, continued acceptance of the Company’s products in the marketplace, dependence upon third-party vendors, product prices and raw material costs, the Company’s ability to attract and retain key employees, general domestic and international economic conditions, health epidemics and pandemics, external disruptions to the Company’s facilities or supply chain, the Company’s operations in a highly regulated industry, the outcome of any litigation and arbitration proceedings, cybersecurity attacks, volatility in the Company’s stock price, including due to the relatively low trading volume of its common stock, and failure to maintain an effective system of internal controls over financial reporting. The factors listed above are not exhaustive. Other sections of this 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-K 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.

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Critical Accounting Estimates

The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. 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 or the market value of its products. Changes in estimates can have a material impact on the Company’s financial position and results of operations.

Revenue Recognition

Revenues for most contracts 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 regarding labor, outside services, materials, overhead costs and status of the contract. The effect of any change in the estimated gross margin 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.

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.

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.

Income Taxes

Our income tax expense, deferred tax asset and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. Significant judgments and estimates are required in the determination of the consolidated income tax expense.

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.

Tax benefits are recognized for an uncertain tax position when, in the Company’s judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances and when new information becomes available. Such adjustments are recognized entirely in the period in which they are identified. The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by the Company. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes its liability for unrecognized tax benefits is adequate.

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RESULTS OF OPERATIONS

Consolidated Results

The table below sets forth for the fiscal years ended April 30, 2024 and 2023, the percentage of consolidated net sales represented by certain items in the Company’s consolidated statements of operations:

Revenues

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.

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Gross Profit

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.

Selling and Administrative Expenses

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.

Research and Development Expenses

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.

The funds received in connection with customer funded R&D appears in revenues and the associated expenses are included in cost of revenues and are not included in the table above. The Company believes that internally generated cash and cash reserves are adequate to fund its future R&D activity.

Operating Income (Loss)

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.

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Other Income (Expense), net

The change from the prior fiscal year was mainly caused by a loss on the sale of the Company’s available-for sale marketable securities in the previous fiscal year. Additionally, interest expense was approximately 30% lower in fiscal year 2024, as compared to the prior fiscal year.

Income Tax (Benefit) Provision

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.

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.)

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.

LIQUIDITY AND CAPITAL RESOURCES

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.

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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.

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.

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.

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.

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.

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).

RECENT ACCOUNTING PRONOUNCEMENTS

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.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), which requires companies to annually disclose categories in the effective tax rate reconciliation and additional information about income taxes paid. The new guidance is effective for annual periods beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is in the process of evaluating the impact that the adoption of ASU No. 2023-09 will have to the financial statements and related disclosures.

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OTHER MATTERS

The financial information reported herein is not necessarily indicative of future operating results or of the future financial condition of the Company.

Morion

The Company has an investment in 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. 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.

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.

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.

As previously disclosed, in light of Morion’s relationship with Gazprombank, in 2020, the Company 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 related solely to delays in collection of accounts receivable that exceeded then-applicable payment windows set forth in sanctions regulations and did not relate to any other type of payment or transaction. On February 17, 2021, the Company received a Cautionary Letter from OFAC indicating that OFAC has completed its review of the matter. According to OFAC, the Cautionary Letter was issued instead of pursuing a civil monetary penalty or taking other enforcement action.

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.

Item 7. 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 Annual Report on Form 10-K 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, other supply chain related issues, increasing costs for materials, operating related expenses, competitive developments, changes in manufacturing and transportation costs, the availability of capital, the outcome of any litigation and arbitration proceedings, and failure to maintain an effective system of internal controls over financial reporting. The factors listed above are not exhaustive. Other sections of this 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-K 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.

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Critical Accounting Estimates

The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. 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 or the market value of its products. Changes in estimates can have a material impact on the Company’s financial position and results of operations.

Revenue Recognition

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 regarding labor, outside services, materials, overhead costs, and status of the contract. The effect of any change in the estimated gross margin 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.

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.

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.

Income Taxes

Our income tax expense, deferred tax asset and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. Significant judgments and estimates are required in the determination of the consolidated income tax expense.

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, 2023 and 2022, 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.

Tax benefits are recognized for an uncertain tax position when, in the Company’s judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances and when new information becomes available. Such adjustments are recognized entirely in the period in which they are identified. The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by the Company. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes its liability for unrecognized tax benefits is adequate.

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RESULTS OF OPERATIONS

Consolidated Results

The table below sets forth for the fiscal years ended April 30, 2023 and 2022, the percentage of consolidated net sales represented by certain items in the Company’s consolidated statements of operations:

Revenues

Fiscal year 2023 revenues from satellite programs, one of the Company’s largest business areas, decreased by $8.2 million, or 31%, compared to the prior fiscal year. Satellite program revenues for government end-use were 43% and 52% of total revenues for fiscal years 2023 and 2022, respectively. Satellite program revenues for commercial end-use were 1% and 2% of total revenue for fiscal year 2023 and 2022, 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 $0.7 million, or 4%, in fiscal year 2023 compared to fiscal year 2022. These revenues are recorded in both the FEI-NY and FEI-Zyfer segments and accounted for approximately 50% and 41% of consolidated revenues for fiscal years 2023 and 2022, respectively. Other commercial and industrial sales accounted for approximately 6% and 5% of consolidated revenues for fiscal years 2023 and 2022, respectively. Sales in this business area were $2.6 million for both the fiscal year ended April 30, 2023 and the fiscal year ended April 30, 2022. The majority of the decrease in sales for fiscal year 2023 was in government satellite programs. This decrease is attributable in part to space programs which were delayed due to engineering issues, and in part to programs which were expected to start during fiscal year 2023 but have been delayed. The Company believes those engineering issues have largely been resolved, and the delayed programs are expected to start during fiscal year 2024 and contribute significantly to sales in fiscal year 2024.

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Gross Profit

For the fiscal year ended April 30, 2023, the gross profit decreased and gross profit percentage increased as the result of several factors. The decrease in gross profit dollars was directly related to the decrease in revenues. Although the gross profit percentage increased slightly in fiscal year 2023 as compared to fiscal year 2022, it remains far below our targeted gross profit percentage range of 35%-40%. However, the Company is encouraged by the fact that the gross profit percentage for the third and fourth quarters of fiscal year 2023 were both over 30%, and the Company anticipates that this trend will continue in fiscal year 2024. The low gross profit percentage for fiscal 2022 and fiscal 2023 started in the fourth quarter of fiscal 2022, when we reported that several developmental stage programs experienced substantially higher than anticipated engineering costs. This continued into the first quarter and partially into second quarter of fiscal year 2023, however, the Company believes those issues have been largely resolved and the gross margin for the third and fourth quarters of fiscal year 2023 has increased to over 30%, as mentioned above.

Selling and Administrative Expenses

In fiscal years ended April 30, 2023 and 2022, selling and administrative expenses (“SG&A”) were 23% and 24% of consolidated revenues, respectively. The decrease in SG&A expenses was mainly due to the decrease in professional fees, deferred compensation expense, stock compensation expense and depreciation expense.

Research and Development Expenses

As a percentage of consolidated revenue, R&D expense for the fiscal years ended April 30, 2023 and 2022 were 8% and 10%, respectively. The $1.8 million decrease in R&D expense year over year was largely due to a renewed focus on correcting the program specific engineering issues identified above as part of an overall effort to return the Company to profitability. It should also be noted that FEI has dedicated resources and made substantial progress on two advanced technology development programs which are externally funded, and thus do not show up as internally funded R&D. That being said, FEI is committed to maintaining its technical excellence, and expects future R&D investment to be in line with, or even potentially above historical commitments.

The funds received in connection with customer funded R&D appears in revenues and the associated expenses are included in cost of revenues and are not included in the table above. The Company believes that internally generated cash and cash reserves are adequate to fund its future R&D activity.

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Operating Loss

For the fiscal year ended April 30, 2023, the Company recorded an operating loss of $4.7 million compared to an operating loss of $8.1 million in the prior fiscal year. The decrease in operating loss was due to changes made affecting the second half of fiscal year 2023. The Company recorded approximately $614,000 of operating income in the second half of fiscal year 2023, a significant improvement from the $5.4 million operating loss for the first half of fiscal year 2023.

Other Income (Expense), net

Losses on investment income was derived primarily from the sale of the Company’s available-for-sale marketable securities, which primarily consisted of fixed income securities, during the fiscal year ended April 30, 2023. Investment income was derived primarily from the Company’s holdings of marketable securities, which primarily consisted of fixed income securities for the fiscal year ended April 30, 2022.

Income Tax Provision

For the fiscal year ended April 30, 2023, the Company recorded an income tax provision of $74,000. For the fiscal year ended April 30, 2022, the Company recorded an income tax provision of $1,000.

The Company’s effective tax rate of (1.3)% for fiscal year 2023 differs from the U.S. federal statutory rate of 21% primarily due to state taxes and domestic losses for which the Company is not recognizing an income tax benefit. (See Note 12 to the Consolidated Financial Statements for a reconciliation of the actual tax benefit to the expected tax provision at the federal statutory rate.)

As of April 30, 2023, the Company has U.S. federal net operating losses of $31.3 million of which $15.7 million begins to expire in fiscal year 2026 through fiscal year 2038, including $3.1 million which is subject to annual limitation under IRC Section 382. The remaining U.S. federal net operating losses of $15.6 million have an indefinite carry-forward period. The U.S. federal capital loss carry-forward of $0.9 million expires in fiscal years 2025 and 2027. U.S. federal R&D credits of $0.9 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.

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LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operations was $1.2 million in fiscal year 2023 compared to cash provided by operations of $4.0 million in fiscal year 2022. The Company’s balance sheet continues to reflect a highly liquid position with working capital of $21.0 million at April 30, 2023 as compared to $34.2 million at April 30, 2022. Included in working capital at April 30, 2023 was $12.0 million consisting of cash and cash equivalents. The Company’s current ratio at April 30, 2023 was 1.8 to 1 compared to 2.6 to 1, at the end of the prior fiscal year.

During fiscal years 2023 and 2022, the Company incurred $5.0 million and $5.4 million, respectively, in non-cash charges to earnings, including adjustments relating to net assets and liabilities for operating leases, loss provision accrual, loss on impairment of Morion, 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 2023, operating cash was increased by decreases in loss on provision accrual and other liabilities and increases in contract assets and inventory, offset by an increase in contract liabilities. During fiscal year 2022, operating cash was increased by a decrease in contract assets and inventory and increases in contract liabilities. Contract liabilities include amounts for programs that are pre-funded for long-lead materials required to be purchased.

Net cash provided by investing activities for the fiscal year ended April 30, 2023 was $8.7 million compared to $2.3 million used in investing activities for the fiscal year ended April 30, 2022. 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. In fiscal year 2022, investing activities included the proceeds related to sales of marketable securities net of the purchases of marketable securities of $422,000 and purchases of capital expenditures of $1.9 million.

Net cash used in financing activities for the fiscal year ended April 30, 2023 was approximately $9.4 million related to a dividend payout. There was no cash used in financing activities for the fiscal year ended April 30, 2022.

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 2023, 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 2024, 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 2023. 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.

During fiscal year 2023, as in fiscal year 2022, 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 2024 and future years.

As of April 30, 2023, the Company had an accumulated deficit of $25.6 million. The Company believes that its cash, as of April 30, 2023, 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).

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under ASU 2017-04, goodwill impairment will be tested by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2022, with early adoption permitted. The Company is evaluating the effect, if any, the update will have 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 2024.

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OTHER MATTERS

The financial information reported herein is not necessarily indicative of future operating results or of the future financial condition of the Company.

Morion

The Company has an investment in 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 accounted for its investment in Morion on the cost basis. During the fiscal years ended April 30, 2023 and 2022, the Company acquired product from Morion in the aggregate amount of approximately $196,000 and $215,000, respectively. During the fiscal year ended April 30, 2022, the Company sold product and training services to Morion in the aggregate amount of approximately $23,000, included in revenues in the consolidated statements of operations as part of the FEI-NY segment. During the fiscal years ended April 30, 2022, the Company received dividends from Morion in the amount of approximately $123,000, which is included in other income, net in the consolidated statements of operations as part of the FEI-NY segment. During the fiscal year ended April 30, 2023, the Company sold no product and training services to Morion, and the Company received no dividends from Morion. 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.

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.

As previously disclosed, in light of Morion’s relationship with Gazprombank, in 2020, the Company 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 related solely to delays in collection of accounts receivable that exceeded then-applicable payment windows set forth in sanctions regulations and did not relate to any other type of payment or transaction. On February 17, 2021, the Company received a Cautionary Letter from OFAC indicating that OFAC has completed its review of the matter. According to OFAC, the Cautionary Letter was issued instead of pursuing a civil monetary penalty or taking other enforcement action.

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 impairment of $796,000 is included in other income (expense), net, in the Consolidated Statements of Operations for the fiscal year ended April 30, 2022. The likelihood of future sales to, purchases, and dividend payments from Morion is questionable.

Item 7. 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 Annual Report on Form 10-K 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, other supply chain related issues, increasing costs for materials, operating related expenses, 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-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-K 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.

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Critical Accounting Policies and Estimates

The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. 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 or the market value of its products. Changes in estimates can have a material impact on the Company’s financial position and results of operations.

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 the government, government prime contractors and commercial companies by units sold with specific contractual performance requirements, in many cases unique to the specific customer and/or application. 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 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.

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.

Income Taxes

Our income tax expense, deferred tax asset and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. Significant judgments and estimates are required in the determination of the consolidated income tax expense.

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, 2022 and 2021, we have a full valuation allowance against our U.S. net 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.

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Tax benefits are recognized for an uncertain tax position when, in the Company’s judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances and when new information becomes available. Such adjustments are recognized entirely in the period in which they are identified. The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by the Company. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes its liability for unrecognized tax benefits is adequate. Interest and penalties recognized on income taxes are recorded as income tax expense.

COVID-19 Pandemic 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 (“COVID-19”) 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 pandemic as a pandemic, based on the rapid increase in exposure globally.

The Company’s priority during the COVID-19 pandemic 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 and use of hand sanitizer; requiring social distancing and, requiring face coverings; encouraging, and in some cases, requiring remote work for those employees who can work from home; and disinfecting facilities.

As of July 8, 2022, the Company was aware of eighty-three employees that have had confirmed cases of COVID-19 since the COVID-19 pandemic began, with one fatality in fiscal year 2021. Additional employees have been absent or self-quarantined due to possible COVID exposure, although not having tested positive. Since the COVID-19 pandemic began, facilities have remained open except for needing to temporarily vacate certain areas for cleaning and disinfecting following employees either testing positive for COVID or because they had been exposed or possibly exposed to third parties who were positive. 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 have impacted the Company’s production schedules, and increased costs associated with procurement of materials and services. The Company continues to monitor these and its other vendors and, if necessary, seek alternative suppliers. The Company also believes the pandemic has impacted customers, resulting in delays with respect to anticipated new orders.

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. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the changing dynamics of the pandemic and the global responses to curb its spread, including the progress on vaccine distribution, the Company is not able to estimate any future effects of the COVID-19 pandemic on its future results of operations, financial condition, or liquidity.

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 pandemic. The Company received a loan under the Paycheck Protection Program in April 2020, which it repaid in full in May 2020.

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RESULTS OF OPERATIONS

Consolidated Results

The table below sets forth for the fiscal years ended April 30, 2022 and 2021, the percentage of consolidated net sales represented by certain items in the Company’s consolidated statements of operations:

Revenues

Fiscal 2022 revenues from satellite programs, one of the Company’s largest business areas, decreased by $0.9 million, or 3%, compared to the prior fiscal year. Satellite program revenues for government end-use were 52% and 42% of total revenues for fiscal years 2022 and 2021, respectively. Satellite program revenues for commercial end-use were 2% and 7% of total revenue for Fiscal 2022 and Fiscal 2021, 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 decreased by approximately $5.2 million, or 21%, in Fiscal 2022 compared to Fiscal 2021. These revenues are recorded in both the FEI-NY and FEI-Zyfer segments and accounted for approximately 41% and 46% of consolidated revenues for fiscal years 2022 and 2021, respectively. For the years ended April 30, 2022 and 2021, other commercial and industrial sales accounted for approximately 5% of total revenues. Sales in this business area were $2.6 million for the year ended April 30, 2022 compared to $2.5 million for the preceding fiscal year. The majority of the decrease in sales for fiscal 2022 were in the FEI-Zyfer segment caused by two main factors. The first was a delay in bookings and the second was the relocation of manufacturing from the California facility to the New York facility. It is important to note that in both cases the revenue was not lost; instead, the Company believes has been shifted into fiscal 2023.

Gross Profit

For the fiscal year ended April 30, 2022, the gross profit and gross profit percentage decreased as the result of several factors. Decreased revenues in the FEI-NY segment, which includes FEI-Elcom, as well as at FEI-Zyfer, had a concomitant impact on absorption.

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Delays in the award of anticipated contracts had a significant down-stream effect on revenue, with a resulting reduction of gross profit. Supply chain impacts resulted in delays on contract execution and caused increased engineering costs necessitated by changing suppliers or reengineering certain subassemblies to replace parts that were unavailable or which had unacceptable delivery schedules. Several developmental stage programs experienced substantially higher than anticipated engineering costs due to problems encountered in the design phase. Additionally, an anticipated settlement of a request for equitable adjustment with respect to one of these programs did not materialize, which would have had the effect of reducing the cost impact. The program is cutting edge technology with extremely challenging specifications. However, the Company believes progress continues to be made and the majority of the challenges have been overcome as of the date of this report.

Selling and Administrative Expenses

In fiscal years ended April 30, 2022 and 2021, selling and administrative expenses (“SG&A”) were 24% of consolidated revenues. Stock compensation expenses, which are included in total SG&A, were $144,000 and $160,000 in Fiscal 2022 and Fiscal 2021, respectively. The decrease in SG&A expenses was mainly due to the decrease in professional fees (relating to litigation for which the Company has received insurance reimbursement for a portion of such legal fees), bonus expenses, and commission expenses.

Research and Development Expenses

As a percentage of consolidated revenue, R&D expense for the years ended April 30, 2022 and 2021 was approximately 10% and 9%, respectively. The approximately $0.3 million increase in R&D expense year over year was due to new and ongoing R&D projects as the Company continues to invest in R&D to keep its products at the state of the art.

The funds received in connection with customer funded R&D appears in revenues and the associated expenses are included in cost of revenues and are not included in the table above. The Company believes that internally generated cash and cash reserves are adequate to fund its R&D activity.

Operating Loss

For the fiscal year ended April 30, 2022, the Company recorded an operating loss of $8.1 million compared to an operating loss of $1.0 million in the prior year. Operating loss was the result of the same factors discussed in gross profit. Of most significance was the impact of increased engineering costs incurred on the developmental programs and the delay in Zyfer bookings, including the relocation of the manufacturing from the California facility to the New York facility.

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Other Income (Expense), net

Investment income is derived primarily from the Company’s holdings of marketable securities, which primarily consist of fixed income 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. Included in other income (expense) for the fiscal year ended April 30, 2022, is a $796,000 impairment charge related to the Company’s investment in Morion. Included in other income (expenses) for the fiscal year ended April 30, 2021 was the collection of the $1 million note that was due relating to the Company’s sale of its Belgium subsidiary, Gilliam-FEI s.a., to a European entity on April 26, 2018.

Income Tax Provision (Benefit)

For the fiscal year ended April 30, 2022, the Company recorded an income tax provision of $1,000. For the fiscal year ended April 30, 2021, the Company recorded an income tax benefit of $(204,000) primarily due to a reduction in the uncertain tax position liability in connection with the expiration of the statute of limitations

The Company’s effective tax rate of (0.0)% for Fiscal 2022 differs from the U.S. federal statutory rate of 21% primarily due to state taxes and domestic losses for which the Company is not recognizing an income tax benefit. (See Note 12 to the Consolidated Financial Statements for a reconciliation of the actual tax benefit to the expected tax provision at the federal statutory rate.)

As of April 30, 2022, the Company has U.S. federal net operating losses of $29.6 million of which $15.9 million begins to expire in Fiscal 2026 through Fiscal 2038, including $3.4 million which is subject to annual limitation under IRC Section 382. The remaining U.S. federal net operating losses of $13.7 million have an indefinite carry-forward period. The U.S. federal capital loss carry-forward of $9.9 million expires in Fiscal 2023. U.S. federal R&D credits of $1.0 million begin to expire in Fiscal 2036 through Fiscal 2040. The Company also has state net operating loss carryforwards, and state tax credits that expire in various years and amounts.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operations was $4.0 million in fiscal year 2022 compared to cash provided by operations of $12.2 million in fiscal year 2021. The Company’s balance sheet continues to reflect a highly liquid position with working capital of $34.2 million at April 30, 2022 as compared to $40.6 million at April 30, 2021. Included in working capital at April 30, 2022 was $21.5 million consisting of cash, cash equivalents and short-term investments. The Company’s current ratio at April 30, 2022 was 2.5 to 1 compared to 3.2 to 1 at the end of the prior fiscal year.

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During fiscal years 2022 and 2021, the Company incurred $5.4 million and $4.7 million, respectively, in non-cash charges to earnings, including adjustments relating to net assets and liabilities for operating leases, loss provision accrual, loss on impairment of Morion, 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 2022, operating cash was increased by decreases in contract assets and inventory and increases in contract liabilities. During fiscal year 2021, operating cash was increased by decreases in inventory and increases in contract assets and contract liabilities. Contract liabilities include amounts for programs that are pre-funded for long-lead materials required to be purchased.

Net cash used in investing activities for the fiscal year ended April 30, 2022 was $2.3 million compared to $1.2 million used in investing activities for the fiscal year ended April 30, 2021. In fiscal year 2022, investing activities included the proceeds related to sales of marketable securities net of the purchases of marketable securities of $422,000 and purchases of capital expenditures of $1.9 million. In fiscal year 2021, investing activities included the proceeds related to sales of marketable securities net of the purchases of marketable securities of $46,000 and purchases of capital expenditures of $1.2 million. The Company may continue to invest cash equivalents as dictated by its investment and acquisition strategies.

There was no cash used in financing activities for the fiscal year ended April 30, 2022. Cash used in financing activities for the fiscal year ended April 30, 2021 was $5.0 million related to the repayment in full of a loan acquired from JPMorgan Chase Bank, N.A. as the lender, pursuant to the Small Business Administration Paycheck Protection Program under the CARES Act. As of April 30, 2022, the Company had available credit at variable terms based on its securities holdings under an advisory arrangement. No borrowings have been made under this advisory arrangement.

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 2022, 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 2023, 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 2022. 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 April 30, 2022, the Company had an accumulated deficit of $20.1 million. The Company believes that its cash and cash equivalents, as well as marketable securities as of April 30, 2022 and cash flows from operations will provide sufficient liquidity to meet its operating needs in the normal course of business through the next twelve months from the date of issuance of these consolidated financial statements.

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.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under ASU 2017-04, goodwill impairment will be tested by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2022, with early adoption permitted. The Company will not be adopting ASU 2017-04 early, and is in the process of determining the effect that ASU 2017-04 may have. However, the Company expects the new standard to have an immaterial effect on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance is effective for fiscal years beginning after December 15, 2022. The Company is evaluating the effect, if any, the update will have on its consolidated financial statements when adopted in fiscal year 2024.

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OTHER MATTERS

The financial information reported herein is not necessarily indicative of future operating results or of the future financial condition of the Company.

Morion

The Company has an investment in 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 accounted for its investment in Morion on the cost basis. During the fiscal years ended April 30, 2022 and 2021, the Company acquired product from Morion in the aggregate amount of approximately $215,000 and $710,000, respectively. During the fiscal years ended April 30, 2022 and 2021, the Company sold product and training services to Morion in the aggregate amount of approximately $23,000 and $94,000, respectively, included in revenues in the consolidated statements of operations as part of the FEI-NY segment. During the fiscal years ended April 30, 2022 and 2021, the Company received dividends from Morion in the amount of approximately $123,000 and $105,000, respectively, which is included in other income, net in the consolidated statements of operations as part of the FEI-NY segment. 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.

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.

As previously disclosed, in light of Morion’s relationship with Gazprombank, in 2020, the Company 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 related solely to delays in collection of accounts receivable that exceeded then-applicable payment windows set forth in sanctions regulations and did not relate to any other type of payment or transaction. On February 17, 2021, the Company received a Cautionary Letter from OFAC indicating that OFAC has completed its review of the matter. According to OFAC, the Cautionary Letter was issued instead of pursuing a civil monetary penalty or taking other enforcement action.

Due to the current 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 this annual report on Form 10-K, the Company impaired its investment in Morion in full. The impairment of $796,000 is included in other income (expense), net, in the Consolidated Statements of Operations for the fiscal year ended April 30, 2022. The likelihood of future sales to, purchases, and dividend payments from Morion is questionable.

INFLATION

During fiscal year 2022, as in fiscal year 2021, the impact of inflation on the Company’s business was due to increases for materials and services throughout fiscal year 2022. The Company believes this may continue to impact expenses in fiscal 2023 and future years.