{"url_path":"/sec/feim/10-k/2026/item-8","section_key":"item-8","section_title":"Item 8 Financial Statements and Supplementary Data","topic":"sec","document":{"doc_type":"10-K","doc_date":"2026-07-17","source_url":"https://www.sec.gov/Archives/edgar/data/39020/0001185185-26-002997-index.html","accession_number":"0001185185-26-002997","cik":"0000039020","ticker":"FEIM","issuer_name":"FREQUENCY ELECTRONICS INC","edgar_url":"https://www.sec.gov/Archives/edgar/data/39020/0001185185-26-002997-index.html","primary_entity_key":"0000039020","primary_entity_name":"FREQUENCY ELECTRONICS INC"},"word_count":12848,"has_tables":true,"body_markdown":"Item\n8. Financial Statements and Supplementary Data\n\n \n\n**Report\nof Independent Registered Public Accounting Firm**\n\n \n\nBoard\nof Directors and Shareholders\n\nFrequency\nElectronics, Inc.\n\n \n\n**Opinion\non the financial statements**\n\n \n\nWe\nhave audited the accompanying consolidated balance sheets of Frequency Electronics, Inc. (a Delaware corporation) and subsidiaries (the\n“Company”) as of April 30, 2026 and 2025, the related consolidated statements of operations, changes in stockholders’\nequity, and cash flows for each of the two years in the period ended April 30, 2026, and the related notes (collectively referred to\nas the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all\nmaterial respects, the financial position of the Company as of April 30, 2026 and 2025, and the results of its operations and its cash\nflows for each of the two years in the period ended April 30, 2026, in conformity with accounting principles generally accepted in the\nUnited States of America.\n\n \n\n**Basis\nfor opinion**\n\n \n\nThese\nconsolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion\non the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public\nCompany Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company\nin accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission\nand the PCAOB.\n\n \n\nWe\nconducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain\nreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company\nis not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits,\nwe are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion\non the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.\n\n \n\nOur\naudits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error\nor fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding\nthe amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant\nestimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits\nprovide a reasonable basis for our opinion.\n\n \n\n**Critical\naudit matter**\n\n \n\nThe\ncritical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated\nor required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial\nstatements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters\ndoes not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit\nmatter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.\n\n \n\n*Revenue\nrecognized using the percentage-of-completion cost-to-cost method*\n\n* *\n\nAs described further in note 1 to the consolidated financial statements,\nthe Company generates a majority of its revenue from contracts with its customers where revenue is recognized over time using the percentage-of-completion\ncost-to-cost method. Under this method, the Company measures progress towards completion based on the ratio of costs incurred to date\nto total estimated costs to satisfy the Company’s performance obligation. The percentage-of-completion cost-to-cost method requires\nmanagement to use significant estimates and assumptions to estimate costs associated with its contracts with customers. These costs are\nestimated at contract inception and are monitored and updated throughout the duration of the contract. We identified revenue recognized\nusing the percentage-of-completion cost-to-cost method as a critical audit matter.\n\n \n\nThe\nprincipal consideration for our determination that revenue recognized using the percentage-of-completion cost-to-cost method is a critical\naudit matter is management’s use of significant estimates and assumptions in determining the total estimated costs at completion.\nAuditing these estimates and assumptions required especially challenging, subjective, and complex auditor judgment. Table of Contents\n\n \n\n20\n\n[Table of Contents](#TableOfContents)\n\n \n\nOur\naudit procedures related to cost estimates used in recognizing revenue under the percentage-of-completion cost-to-cost method included\nthe following, among others:\n\n \n\n●We\ngained an understanding of the Company’s process to develop the estimates and assumptions used in determining the total estimated\ncosts at completion.\n\n \n\n●We\nevaluated the reasonableness of significant estimates and assumptions used by management to develop its cost estimates through reviewing\nkey terms of the contracts, comparing margin estimates with actual margins generated by similar contracts that have been completed, evaluating\ncosts incurred to date relative to the contracts’ remaining tasks and timeline, and inspecting analyses and documentation used\nto support the cost estimates, as applicable.\n\n \n\n●We\ninquired with project management, engineers, and others directly involved with the execution of contracts to evaluate management’s\nability to satisfy the requirements of the contract, as well as to evaluate project status and challenges which may affect the cost estimates.\n\n \n\n●We\nevaluated contract activity during the period subsequent to April 30, 2026, but before the financial statements were issued, to identify\nchanges in conditions or events that may result in significant changes to the Company’s cost estimates as of April 30, 2026.\n\n \n\n●We\nevaluated the appropriateness of the timing of the incorporation of changes to cost estimates, including evaluating the timeline of key\nevents and knowledge points that led to management’s determination that a change in estimate was necessary.\n\n \n\n●We\nperformed retrospective reviews when evaluating management’s estimation process by comparing actual outcomes to previous estimates.\n\n \n\n●We\nrecalculated revenue and gross profit recognized during the year based on the Company’s measurement of its progress towards completion.\n\n \n\n/s/\nGRANT THORNTON LLP\n\n \n\nWe\nhave served as the Company’s auditor since 2023.\n\n \n\nMelville,\nNew York\n\nJuly\n16, 2026\n\n \n\n21\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. and SUBSIDIARIES**\n\nConsolidated\nBalance Sheets\n\n(In\nthousands, except par value)\n\n \n\n  \nApril 30,  \nApril 30, \n\n  \n2026  \n2025 \n\nASSETS: \n   \n  \n\nCurrent assets: \n   \n  \n\nCash and cash equivalents \n$1,603  \n$4,720 \n\nAccounts receivable, net of allowances of $39 at April 30, 2026 and $110 at April 30, 2025 \n 4,740  \n 5,914 \n\nContract assets \n 17,277  \n 17,914 \n\nInventories \n 22,618  \n 23,487 \n\nPrepaid income taxes \n 221  \n - \n\nPrepaid expenses and other \n 1,517  \n 1,071 \n\nTotal current assets \n 47,976  \n 53,106 \n\nProperty, plant, and equipment, net \n 7,105  \n 6,188 \n\nDeferred taxes \n 14,084  \n 12,045 \n\nGoodwill \n 218  \n 617 \n\nCash surrender value of life insurance and assets held in trust \n 11,744  \n 10,882 \n\nRight-of-use assets – operating leases \n 7,409  \n 8,659 \n\nRestricted cash \n 1,331  \n 1,365 \n\nOther assets \n 839  \n 875 \n\nTotal assets \n$90,706  \n$93,737 \n\n  \n    \n   \n\nLIABILITIES AND STOCKHOLDERS’ EQUITY: \n    \n   \n\nCurrent liabilities: \n    \n   \n\nAccounts payable – trade \n$2,979  \n$1,359 \n\nAccrued liabilities \n 6,482  \n 5,899 \n\nLoss provision accrual \n 103  \n 460 \n\nIncome taxes payable \n -  \n 103 \n\nOperating lease liability, current portion \n 2,002  \n 2,027 \n\nContract liabilities \n 9,418  \n 13,607 \n\nTotal current liabilities \n 20,984  \n 23,455 \n\nDeferred compensation \n 7,664  \n 7,933 \n\nOperating lease liability, non-current portion \n 5,648  \n 6,729 \n\nOther liabilities \n 7  \n - \n\nTotal liabilities \n 34,303  \n 38,117 \n\nContingencies (Note 15) \n    \n   \n\nStockholders’ equity: \n    \n   \n\nPreferred stock - $1.00 par value; authorized 600 shares, no shares issued and outstanding \n -  \n - \n\nCommon stock - $1.00 par value; authorized 20,000 shares, 9,925 shares issued and 9,869 shares outstanding at April 30, 2026; 9,717 shares issued and 9,704 shares outstanding at April 30, 2025 \n 9,925  \n 9,717 \n\nAdditional paid-in capital \n 45,506  \n 42,475 \n\nRetained earnings \n 2,756  \n 3,659 \n\nCommon stock reacquired and held in treasury at cost (56 shares at April 30, 2026 and 13 shares at April 30, 2025) \n (1,784) \n (231)\n\nTotal stockholders’ equity \n 56,403  \n 55,620 \n\nTotal liabilities and stockholders’ equity \n$90,706  \n$93,737 \n\n \n\nThe\naccompanying notes are an integral part of these consolidated financial statements.\n\n \n\n22\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. and SUBSIDIARIES**\n\nConsolidated\nStatements of Operations\n\n(In\nthousands, except per share data)\n\n \n\n  \nYears Ended April 30, \n\n  \n2026  \n2025 \n\nConsolidated Statements of Operations \n   \n  \n\nRevenues \n$63,227  \n$69,811 \n\nCost of revenues \n 44,831  \n 39,714 \n\nGross margin \n 18,396  \n 30,097 \n\nSelling and administrative expenses \n 15,403  \n 12,289 \n\nResearch and development expenses \n 5,994  \n 6,076 \n\nOperating (loss) income \n (3,001) \n 11,732 \n\n  \n    \n   \n\nOther income (expense): \n    \n   \n\nIncome on investments \n 673  \n 519 \n\nInterest expense \n (87) \n (104)\n\nOther expense, net \n (493) \n (3)\n\n(Loss) income before benefit from income taxes \n (2,908) \n 12,144 \n\nBenefit from income taxes \n (2,005) \n (11,542)\n\nNet (loss) income \n$(903) \n$23,686 \n\n  \n    \n   \n\nNet (loss) income per common share: \n    \n   \n\nBasic (loss) income per share \n$(0.09) \n$2.46 \n\nDiluted (loss) income per share \n$(0.09) \n$2.46 \n\n  \n    \n   \n\nWeighted average shares outstanding: \n    \n   \n\nBasic \n 9,783  \n 9,612 \n\nDiluted \n 9,783  \n 9,615 \n\n \n\nThe\naccompanying notes are an integral part of these consolidated financial statements.\n\n \n\n23\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. and SUBSIDIARIES**\n\nConsolidated\nStatements of Cash Flows\n\n(In\nthousands)\n\n \n\n  \nYears Ended April 30, \n\n  \n2026  \n2025 \n\nCash flows from operating activities: \n   \n  \n\nNet (loss) income \n$(903) \n$23,686 \n\n  \n    \n   \n\nAdjustments to reconcile net income to net cash (used in) provided by operating activities: \n    \n   \n\nDepreciation and amortization \n 1,888  \n 2,055 \n\nAmortization of operating leases \n 2,459  \n 1,895 \n\n(Recovery) provision for losses on accounts receivable, other assets, and warranty reserve \n (201) \n 314 \n\nProvision for inventory reserve \n (323) \n 1,248 \n\nDeferred taxes \n (2,039) \n (12,053)\n\n(Recovery) loss provision accrual \n (357) \n 56 \n\nLoss on sale of fixed and other assets \n 55  \n 3 \n\nDerecognition of goodwill \n 399  \n - \n\nInventory write off due to restructuring \n 3,768  \n - \n\nEmployee benefit plans expense \n 1,655  \n 1,399 \n\nStock-based compensation expense \n 1,974  \n 1,161 \n\nChanges in operating assets and liabilities: \n    \n   \n\nAccounts receivable \n 1,245  \n (1,300)\n\nContract assets \n 772  \n (7,706)\n\nInventories \n (2,577) \n (1,303)\n\nPrepaid expenses and other \n (446) \n 125 \n\nOther assets \n (825) \n (661)\n\nAccounts payable - trade \n 1,620  \n (989)\n\nAccrued liabilities \n 578  \n 1,135 \n\nContract liabilities \n (4,189) \n (8,032)\n\nOperating lease liabilities \n (2,315) \n (1,947)\n\nPrepaid income taxes \n (324) \n 140 \n\nOther liabilities \n (632) \n (654)\n\nNet cash provided by (used in) operating activities \n 1,282  \n (1,428)\n\n  \n    \n   \n\nCash flows from investing activities: \n    \n   \n\nCapital expenditures \n (2,859) \n (1,808)\n\nNet cash used in investing activities \n (2,859) \n (1,808)\n\n  \n    \n   \n\nCash flows from financing activities: \n    \n   \n\nPayment of dividend \n -  \n (9,567)\n\nPurchase of treasury stock \n (1,574) \n (377)\n\nNet cash used in financing activities \n (1,574) \n (9,944)\n\n  \n    \n   \n\nNet decrease in cash and cash equivalents and restricted cash \n (3,151) \n (13,180)\n\n  \n    \n   \n\nCash and cash equivalents and restricted cash at beginning of year \n 6,085  \n 19,265 \n\n  \n    \n   \n\nCash and cash equivalents and restricted cash at end of year \n$2,934  \n$6,085 \n\n \n\nThe\naccompanying notes are an integral part of these consolidated financial statements.\n\n \n\n24\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. and SUBSIDIARIES**\n\nConsolidated\nStatements of Cash Flows\n\n(In\nthousands)\n\n(Continued)\n\n \n\n  \nYears Ended April 30, \n\n  \n2026  \n2025 \n\nSupplemental disclosures of cash flow information: \n   \n  \n\nCash paid during the year for: \n   \n  \n\nInterest \n$87  \n$104 \n\nIncome taxes \n$351  \n$371 \n\n  \n    \n   \n\nNon-cash investing and financing activities: \n    \n   \n\nRight-of-use assets obtained in exchange for operating lease liabilities \n$438  \n$4,122 \n\n \n\nThe\naccompanying notes are an integral part of these consolidated financial statements.\n\n \n\n25\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nConsolidated\nStatements of Changes in Stockholders’ Equity\n\nYears\nended April 30, 2026 and 2025\n\n(In\nthousands, except share data)\n\n \n\n  \n   \n   \nAdditional  \nRetained\n\nearnings  \nTreasury stock  \nAccumulated\n\nother  \n  \n\n  \nCommon Stock  \npaid in  \n(accumulated  \n(at cost)  \ncomprehensive  \n  \n\n  \nShares  \nAmount  \ncapital  \ndeficit)  \nShares  \nAmount  \nIncome (loss)  \nTotal \n\nBalance at April 30, 2024 \n 9,511,560  \n$9,512  \n$50,334  \n$(20,027) \n 741  \n$(3) \n$-  \n$39,816 \n\nExercise of stock options \n 1,819  \n 2  \n (151) \n    \n (11,917) \n 149  \n    \n - \n\nContribution of stock to 401(k) plan \n 70,100  \n 70  \n 831  \n -  \n -  \n -  \n -  \n 901 \n\nStock-based compensation expense \n 133,520  \n 133  \n 1,028  \n -  \n -  \n -  \n -  \n 1,161 \n\nShares withheld on employee taxes on vested equity\nawards \n -  \n -  \n -  \n -  \n 24,264  \n (377) \n -  \n (377)\n\nDividends \n -  \n -  \n (9,567) \n -  \n -  \n -  \n -  \n (9,567)\n\nNet income \n -  \n -  \n -  \n 23,686  \n -  \n -  \n -  \n 23,686 \n\nBalance at April 30, 2025 \n 9,716,999  \n$9,717  \n$42,475  \n$3,659  \n 13,088  \n$(231) \n$-  \n$55,620 \n\n  \n    \n    \n    \n    \n    \n    \n    \n   \n\nContribution of stock to 401(k) plan \n 36,067  \n 36  \n 1,250  \n -  \n -  \n -  \n -  \n 1,286 \n\nStock-based compensation expense \n 171,629  \n 172  \n 1,781  \n -  \n (1,650) \n 21  \n -  \n 1,974 \n\nShares withheld on employee taxes on vested equity\nawards \n -  \n -  \n -  \n -  \n 44,389  \n (1,574) \n -  \n (1,574)\n\nNet loss \n -  \n -  \n -  \n (903) \n -  \n -  \n -  \n (903)\n\nBalance at April 30, 2026 \n 9,924,695  \n$9,925  \n$45,506  \n$2,756  \n 55,827  \n$(1,784) \n$           -  \n$56,403 \n\n \n\nThe\naccompanying notes are an integral part of these consolidated financial statements.\n\n \n\n26\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS\n\nApril\n30, 2026 and 2025\n\n \n\n1.\nSummary of Accounting Policies\n\n \n\n**Organization**\n\n** **\n\nThe\nCompany is principally engaged in the design, development and manufacture of precision time and frequency control products and components\nfor microwave integrated circuit applications.\n\n \n\n**Basis\nof Presentation and Principles of Consolidation**:\n\n \n\nThe consolidated financial statements include the accounts of Frequency\nElectronics, Inc. and its wholly-owned subsidiaries (the “Company” or “Registrant”). References to “FEI”\nare to the parent company alone and do not refer to any of its subsidiaries. See Note 13 for information regarding the Company’s\nbusiness segments: (1) FEI-NY (which includes the subsidiaries FEI Government Systems, Inc., FEI Communications, Inc., and until April\n30, 2026, included FEI-Elcom Tech, Inc. (“FEI-Elcom”)), and (2) FEI-Zyfer, Inc. (“FEI-Zyfer”). Effective as of\nApril 30, 2026, FEI-Elcom converted into a Delaware limited liability company; however, the ongoing business operations of FEI-Elcom will\ncontinue under the FEI-NY segment. For more information regarding the Company’s restructuring, see “Restructuring” below.\nIntercompany accounts and transactions are eliminated in consolidation.\n\n \n\n**Use\nof Estimates:**\n\n** **\n\nThese\nconsolidated financial statements have been prepared in conformity with United States generally accepted accounting principles (“U.S.\nGAAP”) and require management to make estimates and assumptions that affect amounts reported and disclosed in the consolidated\nfinancial statements and related notes. Actual results could differ from these estimates. Significant estimates include, but are not\nlimited to, accounting for revenue recognition using a cost-to-cost input model, inventory reserves, deferred compensation plans, impairment\nof goodwill and other long-lived assets, stock-based compensation, and income taxes including deferred income taxes.\n\n** **\n\n**Cash\nEquivalents:**\n\n \n\nThe\nCompany considers certificates of deposit and other highly liquid investments with maturities of three months or less when purchased\nto be cash equivalents. The Company places its temporary cash investments with high credit quality financial institutions. Such investments\nmay at times be in excess of the Federal Deposit Insurance Corporation (“FDIC”) and Securities Investor Protection Corporation\ninsurance limits. No losses have been experienced on such investments.\n\n  \n\n**Accounts\nReceivable and Allowance for Credit Losses:**\n\n \n\nAccounts\nreceivable, net, consists of amounts collectible from customers recorded at the original invoiced amount. Management analyzes accounts\nreceivable and the potential for credit losses based on customer concentrations, credit worthiness, current economic trends and changes\nin customer payment terms. Accounts receivable are recorded at their stated amount, less allowance for credit losses. When it is determined\namounts are not recoverable, the receivable is written off against the allowance.\n\n \n\n**Property,\nPlant and Equipment:**\n\n \n\nProperty,\nplant and equipment is recorded at cost, net of accumulated depreciation and amortization. Expenditures for betterments are capitalized;\nmaintenance and repairs are charged to operations when incurred. When fixed assets are sold or retired, the cost and related accumulated\ndepreciation and amortization are eliminated from the respective accounts and any gain or loss is credited or charged to operations.\n\n \n\nIf\nevents or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the Company estimates\nthe future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash\nflows (undiscounted and without interest charges) is less than the carrying amount of the long-lived asset, an impairment loss is recognized\nbased on the excess of the carrying amount over the fair value of the long-lived asset. No impairment losses have been recognized in\nthe years ended April 30, 2026 and 2025.\n\n** **\n\n**Depreciation\nand Amortization:**\n\n \n\nDepreciation\nof property, plant and equipment is computed on the straight-line method based upon the estimated useful lives of the assets (40 years\nfor buildings and 3 to 10 years for machinery, equipment, furniture, and other depreciable assets). Leasehold improvements are amortized\non the straight-line method over the lesser of the lease term or the estimated useful life of the asset.\n\n \n\n27\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n \n\n**Inventories:**\n\n \n\nInventories,\nwhich consist of raw materials, work-in-process and finished goods are stated at the lower of cost or net realizable value, with cost\ndetermined on the first-in, first-out method. The cost of work-in-process and finished goods generally include the cost of materials,\nlabor, overhead and other costs that are directly related to their production. The Company reviews its inventories quarterly to determine\nreserves for excess or obsolete inventory based upon historical sales trends, expected production usage, and other factors. Changes to\ninventory are charged to cost of revenues in the period when such changes are identified.\n\n \n\nInventories\nrepresent raw materials, work-in-process, and finished goods that relate to non-customized products sold to customers at a point in time.\nInventories also represent raw materials and in-process and completed components parts that are used in multiple customer projects but\nhave not been allocated to a specific customer project or incorporated in the creation of customized products that are sold to specific\ncustomers over a period of time.\n\n \n\n**Goodwill:**\n\n \n\nThe\nCompany records goodwill as the excess of purchase price over the fair value of identifiable net assets acquired. The Company performs\na qualitative evaluation of events and circumstances impacting each reporting unit to determine the likelihood of goodwill impairment.\nBased on this evaluation, if it is determined that it is more likely than not that the fair value of a reporting unit exceeds its carrying\namount, no further evaluation is necessary. Otherwise, the Company will perform a quantitative impairment test to compare the fair value\nof a reporting unit to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, goodwill\nof the reporting unit is not impaired. If the carrying value of the reporting unit, including goodwill, exceeds its fair value, a goodwill\nimpairment loss will be recognized in an amount equal to that excess. Due to the restructuring of FEI-Elcom at April 30, 2026 goodwill\nhas been written down in full. Management has determined that goodwill was not impaired as of April 30, 2025, based on its qualitative\nassessment of impairment for the period.\n\n \n\n**Revenue\nand Cost Recognition:**\n\n \n\nRevenue\nis recognized when or as performance obligations are satisfied, which is when control over goods or services are transferred to the customer,\nin an amount that reflects the consideration to which the Company expects to receive. A performance obligation is a distinct product\nor service that is transferred to the customer based on the contract. The transaction price is allocated to each performance obligation\nand is recognized as revenue upon satisfaction of that performance obligation.\n\n \n\nThe\nCompany derives a majority of its revenue through contracts with customers that involve the sale of goods and services with specifications,\nfrequencies and significant customization to address the requirements of a specific customer and contracts where the end user is the\nU.S. Government. These contracts generally include one performance obligation, which is typically a customized product or a series of\ndistinct customized products. Control over this performance obligation transfers to the customer over time as the Company creates the\ncustomized product because such product does not have an alternative use to the Company and the contract provides the Company with an\nenforceable right to payment for performance completed to date. In certain cases, the customer also controls the product as it is being\ncreated by the Company. Accordingly, revenue is reported in operating results over time using the percentage-of-completion (“POC”)\ncost-to-cost method. Under this method, revenue is recorded based on the ratio of costs incurred over total estimated contract costs.\nThis method provides a faithful depiction of the transfer of the customized product to the customer because the costs incurred represent\nthe Company’s inputs towards satisfying the performance obligation. Each month management reviews estimated contract costs through\na process of aggregating actual costs incurred and estimating additional costs to complete based on current available information, project\nstatus, historical experience with similar contracts, changes to product specifications, and other factors. The estimation of total costs\nthrough completion is complicated and subject to many variables. Total cost estimates can be affected by a number of factors such as\nchanges in the assessment of the nature and complexity of the work; design challenges including changes to design specifications; technical\nchallenges including those related to quality control; production challenges including those resulting from the timeliness of customer\nfunding, and the unavailability or reduced productivity of qualified labor; supplier challenges including the cost, availability, and\nquality of raw materials and subcontractor services; changes in laws or regulations; actions necessary for long-term customer satisfaction;\nand natural disasters or other matters. Changes in these cost estimates could result in the recognition of unfavorable cumulative catch-up\nadjustments to the Company’s operating results of the period when such changes are made. Costs to satisfy the performance obligation,\nwhich include direct materials, direct labor, manufacturing overhead and other direct costs, are expensed as incurred except when the\nCompany determines that the total estimated costs through completion will exceed total revenue, resulting in a contract loss. Such contract\nloss is accrued for immediately in the period when the loss is identified.\n\n \n\n28\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n \n\nThe\nCompany also derives its revenue through contracts or purchase orders from customers that involve the sale of goods and services that\nare not significantly customized and therefore, such goods and services have an alternative use to the Company because they can be resold\nto other customers. These contracts typically include one performance obligation, which is a non-customized product or service ordered\nby the customer. Control over this performance obligation transfers to the customer and revenue is recorded at a point time when passage-of-title\n(“POT”) occurs as reflected by either (i) shipment of the product or (ii) performance of the services, which are generally\ncompleted within a very short period. When payment is contingent upon customer acceptance, revenue is deferred until such acceptance\nis received. Costs directly related to the production of a non-customized product are capitalized in inventory and are generally expensed\nwhen the product is shipped to or accepted by the customer. Cost of services are expensed as incurred. \n\n \n\nContract\ncosts include all direct material costs, direct labor costs, manufacturing overhead and other direct costs related to contract performance.\nSelling, general and administrative costs are charged to expense as incurred.\n\n \n\n*Practical\nExpedients*\n\n \n\nThe\nCompany expenses sales commissions as sales and marketing expenses in the period they are incurred if the expected amortization period\nis one year or less.\n\n \n\nThe\nCompany expenses costs, other than sales commissions, to obtain a contract in the period for which they are incurred as these amounts\nwould have been incurred even if the contract had not been obtained.\n\n \n\nThe\nCompany elected the practical expedient to account for shipping and handling activities that occur after the customer has obtained control\nof a good as fulfillment activities rather than as a promised service.\n\n \n\nThe\nCompany elected the practical expedient not to disclose the transaction price allocated to the remaining performance obligations because\nthe duration of the Company’s contracts is typically one year or less in consideration of the customer’s option to terminate\nits contract for convenience without incurring a substantive termination penalty.\n\n \n\nPayments\nunder long-term contracts may be received before or after revenue is recognized. The U.S. Government customer typically withholds payment\nof a small portion of the contract price until contract completion. Therefore, long-term contracts typically generate unbilled receivables\n(contract assets) but may generate advances and progress billings (contract liabilities). Long-term contracts are typically negotiated\nwith a schedule of milestones, with criteria to be met, which are billed on completion. Long-term contract unbilled receivables and advances\nand progress billings are not considered a significant financing component because they are intended to protect either the customer or\nthe Company in the event that some or all of the obligations under the contract are not completed. In addition, the Company does not\nassess whether a significant financing component exists if the period between when the Company performs its obligations under the contract\nand when the customer pays is one year or less.\n\n \n\n29\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n \n\n*Disaggregation\nof Revenue*\n\n \n\nTotal\nrevenue recognized over time using the POC method was approximately $57.7 million and $65.8 million of the $63.2 million and $69.8 million\nreported for the years ended April 30, 2026 and 2025, respectively. The amounts by segment and product line were as follows:\n\n \n\n  \nFiscal Year Ended April 30, 2026 \n\n  \n(In thousands) \n\n  \nPOC\n\n Revenue  \nPOT\n\nRevenue  \nTotal\n\nRevenue \n\nFEI-NY \n$40,263  \n$5,388  \n$45,651 \n\nFEI-Zyfer \n 17,421  \n 4,310  \n 21,731 \n\nIntersegment \n -  \n (4,155) \n (4,155)\n\nRevenue \n$57,684  \n$5,543  \n$63,227 \n\n \n\n  \nFiscal Year Ended April 30, 2025 \n\n  \n(In thousands) \n\n  \nPOC\n\n Revenue  \nPOT\n\nRevenue  \nTotal\n\nRevenue \n\nFEI-NY \n$49,585  \n$3,684  \n$53,269 \n\nFEI-Zyfer \n 16,206  \n 2,454  \n 18,660 \n\nIntersegment \n -  \n (2,118) \n (2,118)\n\nRevenue \n$65,791  \n$4,020  \n$69,811 \n\n \n\n  \nFiscal Years Ended April 30, \n\n  \n(in thousands) \n\n  \n2026  \n2025 \n\nRevenues by Product Line: \n   \n  \n\nSatellite revenue \n$23,128  \n$40,897 \n\nGovernment non-space revenue \n 38,011  \n 26,549 \n\nOther commercial & industrial revenue \n 2,088  \n 2,365 \n\nConsolidated revenues \n$63,227  \n$69,811 \n\n \n\n30\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n \n\n**Research\nand Development:**\n\n \n\nThe\nCompany engages in R&D activities to identify new applications for its core technologies, to improve existing products and to improve\nmanufacturing processes to achieve cost reductions and manufacturing efficiencies. R&D costs include basic research, applied research,\nconcept formulation studies, design, development, related test activities, and all associated direct labor, manufacturing overhead, direct\nmaterials and contracted services. Such costs are expensed as incurred. The Company also, from time to time, engages in customer-funded\nR&D activity. Any customer funds received in connection therewith would appear in revenues and the associated expenses are included\nin cost of revenues. Additionally, some of our programs include engineering and development efforts which are also incorporated in costs\nto complete the program and are recognized in revenues and costs of revenues.\n\n** **\n\n**Income\nTaxes:**\n\n \n\nThe\nCompany recognizes deferred tax liabilities and assets based on the expected future tax consequences of events that have been included\nin the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference\nbetween the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences\nare expected to reverse. Valuation allowances are established and adjusted when necessary to increase or reduce deferred tax assets to\nthe amount expected to be realized.\n\n \n\nThe\nCompany analyzes its tax positions under accounting standards which prescribe recognition thresholds that must be met before a tax benefit\nis recognized in the financial statements and provides guidance on de-recognition, classification, interest and penalties, accounting\nin interim periods, disclosure, and transition. Under these standards, the Company may only recognize or continue to recognize tax positions\nthat meet a “more likely than not” threshold. Interest and penalties recognized on income taxes are recorded as income tax\nexpense.\n\n \n\n**Earnings\n(Loss) per Share:**\n\n \n\nBasic\nearnings (loss) per share are computed by dividing net earnings (loss) by the weighted average number of shares of common stock outstanding.\nDiluted earnings (loss) per share are computed by dividing net earnings (loss) by the sum of the weighted average number of shares of\ncommon stock and the if-converted effect of unexercised stock options and stock appreciation rights (“SARs”). Diluted earnings\n(loss) per share excludes the if-converted effect of such items if their inclusion would be anti-dilutive.\n\n \n\n**Fair\nValues of Financial Instruments:**\n\n \n\nCash\nand cash equivalents, restricted cash, accounts receivable, accounts payable, short-term credit obligations, and cash surrender value\nof life insurance are reflected in the accompanying consolidated balance sheets at amounts considered by management to reasonably approximate\nfair value based upon the nature of the instrument and current market conditions. Management is not aware of any factors that would significantly\naffect the value of these amounts. The Company also has an investment in a privately-held Russian company, Morion, Inc. (“Morion”),\nsee Note 9 for additional information. \n\n \n\nThe\nfair value accounting framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair\nvalue. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level\n1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).\n\n \n\nThe\nlevels of the fair value hierarchy are described below:\n\n \n\nLevel 1Inputs\nto the valuation methodology are unadjusted quoted prices for identical assets or liabilities.\n\n \n\nLevel 2Inputs\nto the valuation methodology include: -Inputs other than quoted prices that are observable\nfor the asset or liability; and -Inputs that are derived principally from or corroborated\nby observable market data by correlation or other means.\n\n \n\nLevel 3Inputs\nto the valuation methodology are unobservable and significant to the fair value measurement.\n\n \n\nThe\nasset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input\nthat is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize\nthe use of unobservable inputs. The business account and U.S. securities are valued on a Level 1 basis. The fixed income corporate debt\nsecurities are valued on a Level 2 basis. Level 2 securities are valued at the closing prices and are consistent with quoted prices of\nsimilar assets reported in active markets. See Note 11 for additional information.\n\n \n\n31\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n \n\n**Equity-based\nCompensation:**\n\n \n\nThe\ncost of employee services received in exchange for awards of equity instruments are based on the grant-date fair value of the award.\nWe recognize the fair value of the award as compensation expense over the period during which an employee is required to provide service\nin exchange for the award. For awards with performance conditions, we recognize the fair value of the award as compensation expense when\nit is probable that the performance condition will be achieved. The Company has elected an accounting policy to account for award forfeitures\nas they occur, with no adjustment for estimated forfeitures.\n\n \n\n**Concentration\nof Credit Risk:**\n\n \n\nFinancial\ninstruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and cash equivalents\nand trade receivables. The Company maintains cash accounts at several commercial banks at which the balances exceed FDIC limits. The\nCompany has not experienced any losses on such amounts. Concentration of credit risk with respect to trade receivables is generally diversified\ndue to the large number of entities comprising the Company’s customer base and their dispersion across geographic areas, principally\nwithin the U.S. The Company routinely addresses the financial strength of its customers and, as a consequence, believes that its receivable\ncredit risk exposure is limited. The Company does not require customers to post collateral.\n\n \n\n**Restructuring:**\n\n** **\n\nDuring the fourth quarter of fiscal 2026, the Company approved a plan\nto exit its FEI-Elcom business. Effective as of April 30, 2026, FEI-Elcom, a wholly-owned subsidiary of the Company, was converted into\na Delaware limited liability company and the ongoing business operations, including the net book value of the assets and liabilities at\nApril 30, 2026, of FEI-Elcom have been transferred to the FEI-NY segment. As FEI-Elcom was already reported within the FEI-NY segment,\nthe restructuring did not result in a change in the financial presentation of any segment information. The remaining workforce will continue\nas employees of FEI-NY while remaining in the New Jersey office location. As a result of the restructuring, the Company recognized approximately\n$3.8 million of inventory write offs included in cost of revenues, approximately $0.4 million of SG&A expense related to severance\nand legal costs, and approximately $0.4 million of other expense for derecognition of goodwill in the consolidated statement of operations.\nAll charges noted related to restructuring have been recorded in the FEI-NY segment. The Company believes that the charges associated\nwith this restructuring are substantially complete as of April 30, 2026.\n\n \n\n**New\nAccounting Pronouncements:**\n\n \n\nIn\nDecember 2023, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2023-09, “Income Taxes (Topic 740):\nImprovements to Income Tax Disclosures” (“ASU 2023-09”). ASU 2023-09 is intended to enhance the transparency and decision\nusefulness of income tax disclosures. The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily\nthrough changes to the rate reconciliation and income taxes paid information. Early adoption is permitted. A public entity can apply\nthe amendments in ASU 2023-09 prospectively or retrospectively to all annual periods beginning after December 15, 2024. The guidance\nwas adopted by the Company prospectively for the year ended April 30, 2026, and the Company, accordingly, made the required changes in\nits income tax related disclosure. See Note 12 for additional information. The adoption of ASU 2023-09 did not have any material impact\non the Company’s audited consolidated financial statements.\n\n \n\nIn\nNovember 2024, the FASB issued ASU No. 2024-03, *Income Statement – Reporting Comprehensive Income – Expense Disaggregation\nDisclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses*. This ASU requires entities to disclose certain expenses,\nincluding purchases of inventory, employee compensation, depreciation, and intangible asset amortization, by caption. Additionally, entities\nmust provide a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively.\nThe amendments are effective for annual reporting periods beginning after December 15, 2026 and interim reporting periods beginning after\nDecember 15, 2027, with early adoption permitted. The Company is currently evaluating the impact this standard will have on the consolidated\nfinancial statements.\n\n \n\nIn\nDecember 2025, the FASB issued ASU No. 2025-11, Interim Reporting (Topic 270): Narrow Scope Improvements, an amendment of the FASB Accounting\nStandards Codification. The amendments in this ASU primarily provide clarification on interim reporting requirements and enhanced disclosure\nrequirements. The amendments also include a disclosure principle to disclose all events since the end of the last annual reporting period\nthat have a material impact on the Company. The ASU is effective for fiscal years beginning after December 15, 2027, and all interim\nreporting periods within applicable annual periods, with early adoption permitted. The Company is currently evaluating the effect that\nthis standard will have on its consolidated financial statements and related disclosures.\n\n \n\n**Reclassifications:**\n\n \n\nCertain amounts in prior years have been reclassified\nto conform to the current year presentation.\n\n \n\n32\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n \n\n2.\nEarnings per Share\n\n \n\nReconciliations\nof the weighted average shares outstanding for basic and diluted earnings per share for the fiscal years ended April 30, 2026 and 2025,\nrespectively, were as follows:\n\n \n\n  \nFor the Fiscal Years Ended\n\nApril 30, \n\n  \n2026  \n2025 \n\nWeighted average shares outstanding: \n   \n  \n\nBasic EPS Shares outstanding (weighted average) \n 9,783,358  \n 9,611,914 \n\nEffect of Dilutive Securities \n **  \n 2,622 \n\nDiluted EPS Shares outstanding \n 9,783,358  \n 9,614,536 \n\n \n\n**For the fiscal year ended April 30, 2026, there were no shares to exclude from the calculation of dilutive securities. There were no shares excluded for the fiscal year ended April 30, 2025.\n\n \n\n3.\nContract Assets and Liabilities\n\n \n\nAt\nApril 30, 2026, 2025, and 2024, contract assets, contract liabilities, and accounts receivable, net consisted of the following (in thousands):\n\n \n\n  \nApril 30,\n\n2026  \nApril 30,\n\n2025  \nApril 30,\n\n2024 \n\n  \n   \n   \n  \n\nContract Assets \n$17,277  \n$17,914  \n$10,523 \n\nContract Liabilities \n$(9,418) \n$(13,607) \n$(21,639)\n\nAccounts receivable, net \n$4,740  \n$5,914  \n$4,614 \n\n \n\nContract assets primarily\nrelate to the Company’s rights to consideration for work completed but not billed at the reporting date on contracts with customers.\nContract assets are transferred to accounts receivable when the rights become unconditional. Contract liabilities primarily relate to\ncontracts where advance payments or deposits have been received, but performance obligations have not yet been satisfied, and therefore,\nrevenue has not been recognized. Contract assets and liabilities arise from timing differences between the satisfaction of performance\nobligations which primarily occur over time as costs are incurred on the contract and billing which are dictated by the terms of the contract\nwith the customer. Contract assets decreased $0.6 million in fiscal year 2026, as a result of reclassifications to accounts receivable\nwhen the right to consideration becomes unconditional, net of additional rights to consideration for work completed but not billed to\ncustomers at the reporting date. Contract liabilities decreased $4.2 million during fiscal year 2026, primarily due to the satisfaction\nof the related performance obligations, net of advance payments received where the related performance obligations have not been satisfied\nat the reporting date. In fiscal year 2026, we recognized $9.3 million of our contract liabilities at April 30, 2025, as revenue. In fiscal\nyear 2025, we recognized $18.3 million of our contract liabilities at April 30, 2024, as revenue. If contract losses are anticipated,\na loss provision is recorded for the full amount of such losses when they are determinable. The liability for contract losses is presented\nas loss provision accrual within the consolidated balance sheets.\n\n \n\n4.\nInventories\n\n \n\nInventories\nat April 30, 2026 and 2025, consisted of the following (in thousands):\n\n \n\n  \nApril 30,\n\n2026  \nApril 30,\n\n2025 \n\nRaw materials and component parts \n$13,026  \n$14,668 \n\nWork in progress \n 9,205  \n 8,444 \n\nFinished goods \n 387  \n 375 \n\n  \n$22,618  \n$23,487 \n\n \n\nInventory\nreserves included in inventory were $10.0 million and $10.3 million for the fiscal years ended April 30, 2026 and 2025, respectively.\n\n \n\n33\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n \n\n5.\nProperty, Plant and Equipment, net\n\n \n\nProperty,\nplant and equipment, net, at April 30, 2026 and 2025, consisted of the following (in thousands):\n\n \n\n  \nApril 30,\n\n2026  \nApril 30,\n\n2025 \n\n  \n   \n  \n\nBuildings and building improvements \n$3,325  \n$2,923 \n\nMachinery, equipment and furniture \n 36,915  \n 63,347 \n\n  \n 40,240  \n 66,270 \n\nLess accumulated depreciation \n (33,135) \n (60,082)\n\n  \n$7,105  \n$6,188 \n\n \n\nDepreciation\nand amortization expense were $1.9 million and $2.1 million for the fiscal years ended April 30, 2026 and 2025, respectively.\n\n \n\nDuring the second quarter of fiscal year 2026, the Company completed\na comprehensive review of its fully depreciated fixed assets. As a result, the Company identified certain machinery, equipment, and computer\nhardware that was no longer in use or obsolete. The Company wrote off $28.9 million of gross fixed assets that had a net book value of\nzero.\n\n \n\n6.\nRight-of-Use Assets and Lease Liabilities\n\n \n\nThe\nCompany’s leases primarily represent offices, warehouses, vehicles, manufacturing and R&D facilities, which expire at various\ntimes through 2030 and are operating leases. Contractual arrangements are evaluated at inception to determine if the agreement contains\na lease. The leases contain renewal options, early termination, rent abatement, and escalation clauses that are factored into our determination\nof lease payments when appropriate. We include options to extend or terminate leases in the right-of-use (“ROU”) operating\nlease asset and liability when it is reasonably certain we will exercise these options. As of April 30, 2026, lease options were not\nincluded in the calculation of the ROU operating lease asset and liability. ROU assets and lease liabilities are recorded based on the\npresent value of future lease payments which will factor in certain qualifying initial direct costs incurred as well as any lease incentives\nthat may have been received. Lease expenses for operating lease payments are recognized on a straight-line basis over the lease term.\n\n \n\nThe\nCompany elected the practical expedient for short-term leases which allows leases with terms of twelve months or less to be recorded\non a straight-line basis over the lease term without being recognized on the consolidated balance sheet. The Company has also elected\nthe practical expedient to account for lease and non-lease components as a single component.\n\n \n\nThe\ntable below presents ROU assets and lease liabilities recorded on the consolidated balance sheets as follows:\n\n \n\n  \nClassification \nApril 30,\n\n2026  \nApril 30,\n\n2025 \n\n  \n  \n(In thousands) \n\nAssets \n  \n   \n  \n\nRight-of-use assets - operating leases \nRight-of-use assets leases \n$7,409  \n$8,659 \n\n  \n  \n    \n   \n\nLiabilities \n  \n    \n   \n\nOperating lease liabilities, current portion \nLease liability, current \n 2,002  \n 2,027 \n\nOperating lease liabilities, non-current portion \nLease liability, non-current \n 5,648  \n 6,729 \n\nTotal lease liabilities \n  \n$7,650  \n$8,756 \n\n \n\n34\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n \n\nTotal\noperating lease expense was approximately $2.5 million, of which approximately $0.5 million was attributable to variable lease\nexpenses, for fiscal year ended April 30, 2026, the majority of which is included in cost of revenues and the remaining amount in\nselling and administrative expenses on the consolidated statements of operations. Total operating lease expense was approximately\n$1.9 million, of which approximately $0.4 million was attributable to variable lease expenses, for fiscal year ended April 30, 2025,\nthe majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses on the\nconsolidated statements of operations. In addition, the Company made cash payments of $2.3 million and $1.9 million for operating\nleases during the fiscal years ended April 30, 2026 and 2025, respectively, which are included in cash flows from operating\nactivities in our consolidated statements of cash flows. During the year ended April 30, 2026, the Company recorded incremental ROU\nassets and lease liabilities of approximately $0.4 million arising from a new lease for FEI-NY, which commenced during the quarter\nended October 31, 2025. During the year ended April 30, 2025, the Company recorded incremental ROU assets and lease liabilities of\napproximately $4.1 million arising from the third amendment to the FEI-Zyfer lease, which commenced in fiscal year 2025. There were\nno ROU assets or lease liabilities that were recorded for any leases that had not commenced as of April 30, 2026.\n\n \n\nThe\ntable below reconciles the undiscounted cash flows for each of the next five fiscal years and total of the remaining fiscal years to\nthe operating lease liabilities recorded on the consolidated balance sheet as of April 30, 2026:\n\n \n\nFiscal Year Ending April 30,\n\n(in thousands)\n\n  \n  \n\n2027 \n$2,064 \n\n2028 \n 2,388 \n\n2029 \n 2,535 \n\n2030 \n 1,658 \n\n2031 \n 45 \n\nThereafter \n - \n\nTotal lease payments \n 8,690 \n\nLess imputed interest \n (1,040)\n\nPresent value of future lease payments \n 7,650 \n\nLess current obligations under leases \n (2,002)\n\nLong-term lease obligations \n$5,648 \n\n \n\nAs\nof April 30, 2026 and 2025, the weighted-average remaining lease term for all operating leases was 3.9 years and 4.5 years, respectively.\nThe Company does not generally have access to the rate implicit in the leases, therefore, we use a discount rate based on our incremental\nborrowing rate, which is determined using our credit rating and information available as of the commencement date. The weighted average\ndiscount rate for operating leases as of April 30, 2026 and 2025, was 7.09% and 6.85%, respectively.\n\n \n\n7.\nDebt Obligations\n\n \n\nAs of April 30, 2026 and 2025,\nthe Company had no debt obligations nor any borrowing capacity pursuant to a credit facility.\n\n \n\nOn\nJune 12, 2026, the Company entered into a senior, secured revolving credit facility with JPMorgan Chase Bank, N.A., as the lender (the\n“Credit Agreement”). The Credit Agreement provides for a three-year revolving credit facility of $10,000,000, of which up\nto $5,000,000 is available for the issuance of letters of credit. The Credit Agreement provides that the Company may, at its option,\nincrease the aggregate amount of the revolving credit facility in an amount up to $10,000,000, subject to certain customary conditions\nand on the terms set forth in the Credit Agreement. There can be no assurance that additional funding will become available. Commitments\nunder the revolving credit facility are subject to a commitment fee of 0.35% per annum on the daily amount of the undrawn portion of\nthe revolving credit facility. The Company’s obligations under the Credit Agreement are guaranteed by FEI-Zyfer (the “Subsidiary\nGuarantor”). The revolving credit facility matures on June 12, 2029.\n\n \n\nThe\nCompany and the Subsidiary Guarantor also entered into a separate pledge and security agreement (the “Security Agreement”)\nwith JPMorgan Chase Bank, N.A., as lender, pursuant to which the Company and the Subsidiary Guarantor each pledged all or substantially\nall of its assets, including equity in its domestic subsidiaries, in favor of the lender as collateral for the obligations under the\nCredit Agreement and the other loan documents.\n\n \n\n35\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n \n\nLoans\ndesignated by the Company at the time of borrowing as “CBFR Borrowings” that are outstanding under the Credit Agreement bear\ninterest at a rate per annum equal to (i) the greater of (a) the Prime Rate (as defined in the Credit Agreement) in effect on such day\nor (b) 2.50%; plus (ii) 2.50%. Loans designated by the Company at the time of borrowing as “SOFR Borrowings” that are outstanding\nunder the Credit Agreement bear interest at a rate per annum equal to the Adjusted Term SOFR Rate (as defined in the Credit Agreement)\nfor the interest period in effect for such borrowing plus 2.50%. Under the terms of the Credit Agreement, accrued interest on each loan\nis payable in arrears on the applicable interest payment date for each loan. The loans under the Credit Agreement may be prepaid at any\ntime without premium or penalty (other than any accrued interest or breakage costs, if applicable). The Company expects that the proceeds\nfrom the Credit Agreement will be used for general corporate purposes and to provide general working capital.\n\n \n\nThe\nCredit Agreement contains customary affirmative and negative covenants, including limitations on mergers, consolidations and sales of\nassets, limitations on indebtedness, liens and sales and leasebacks, limitations on transactions with affiliates, limitations on investments,\nlimitations on dividends and distributions and limitations on swap agreements, as well as other customary terms and provisions. In addition,\nthe Credit Agreement contains financial covenants specifying that, as of the end of each fiscal quarter commencing with the fiscal quarter\nended July 31, 2026, (i) the total leverage ratio will not exceed 2.25 to 1.00 and (ii) the fixed charge coverage ratio will not be less\nthan 1.25 to 1.00. The Credit Agreement also contains events of default customary for such financings, the occurrence of which would\npermit the lenders to accelerate the amount due thereunder. Such events of default include failure to pay principal, failure to pay interest\nand other amounts within three days of the due date, failure to comply with a covenant beyond any applicable grace period, material misrepresentations,\ndefault beyond the applicable grace period on other material indebtedness, certain events of bankruptcy or insolvency of the Company\nand its subsidiaries, guarantor defaults, judgment defaults and change of control, among others.\n\n \n\n8.\nAccrued Liabilities\n\n \n\nAccrued\nliabilities at April 30, 2026 and 2025, respectively, consisted of the following (in thousands):\n\n \n\n  \n2026  \n2025 \n\nVacation and other compensation \n$1,822  \n$1,575 \n\nIncentive compensation \n 191  \n 1,347 \n\nPayroll taxes \n 665  \n 712 \n\nWarranty reserve \n 517  \n 567 \n\nCommissions \n 19  \n 24 \n\nDeferred compensation payable \n 634  \n 634 \n\nOther \n 2,634  \n 1,040 \n\n  \n$6,482  \n$5,899 \n\n \n\n9.\nInvestment in Morion, Inc.\n\n \n\nThe\nCompany has an investment in Morion, a privately-held Russian company, which manufactures high precision quartz resonators and crystal\noscillators. The Company has also licensed certain technology to Morion.\n\n \n\nThe\nCompany’s investment consists of 4.6% of Morion’s outstanding shares. However, due to the Russia-Ukraine conflict and resulting\nsanctions the future status of FEI’s investment in Morion became uncertain and accordingly, such investment was written off in\nfiscal year 2022. The carrying value of this investment is $0 as of April 30, 2026 and 2025.\n\n \n\nDuring\nthe fiscal years ended April 30, 2026 and 2025, the Company did not acquire any product from Morion. During the fiscal years ended April\n30, 2026 and 2025, the Company sold no product and no training devices to Morion, and the Company received no dividends from Morion.\n\n  \n\nPrior purchases of materials from Morion consisted mainly of quartz\ncrystal blanks, which were used in the fabrication of quartz resonators. However, on October 30, 2024, the U.S. Department of Treasury’s\nOffice of Foreign Assets Control designated Morion as a Specially Designated National, resulting in the blocking of all Morion property\nand property interests. As a result, the Company terminated all commercial relationships with Morion, including the licensing of technology\nto Morion and the purchase of any products from Morion. The Company has established alternate sources of supply with respect to items\npreviously acquired from Morion. The Company is also capable of fabricating the crystal blanks in-house.\n\n \n\n36\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n \n\n10.\nRestricted Cash\n\n \n\nAs\nof April 30, 2026 and 2025, restricted cash consisted of approximately $1.3 million and $1.4 million, respectively, related to a letter\nof credit required for contractual restrictions during the period of performance for one of the Company’s contracts. Restricted\ncash is classified as current or non-current based on the remaining performance period of the contract.\n\n \n\nA\nreconciliation of cash and cash equivalents and restricted cash from the consolidated balance sheets to the consolidated statements of\ncash flows is shown below (in thousands):\n\n \n\n  \nApril 30,\n\n2026  \nApril 30,\n\n2025 \n\nCash and cash equivalents \n$1,603  \n$4,720 \n\nRestricted cash \n 1,331  \n 1,365 \n\nTotal cash and cash equivalents and restricted cash \n$2,934  \n$6,085 \n\n \n\n11.\nEmployee Benefit Plans\n\n \n\n**Profit\nSharing Plan:**\n\n \n\nThe\nCompany provides its U.S.-based employees with a profit-sharing plan and trust under § 401(k) of the Internal Revenue Code. This\nplan allows all eligible employees to defer a portion of their income through voluntary contributions to the plan. In accordance with\nthe provisions of the plan, the Company can make discretionary matching contributions in the form of cash or common stock. For the fiscal\nyears ended April 30, 2026 and 2025, the Company contributed 36,067 and 70,100 shares of common stock, respectively. The approximate\nvalue of these shares at the date of contribution was $1.3 million and $0.9 million in fiscal years 2026 and 2025, respectively. Contributed\nshares are drawn from the Company’s common stock and during fiscal years 2026 and 2025, such transactions increased additional\npaid in capital by $1.3 million and $0.8 million, respectively. As of April 30, 2026, the plan held a total of 440,546 shares, which\nwere allocated to the accounts of the individual participants. As of April 30, 2025, the plan held a total of 504,734 shares, which were\nallocated to the accounts of the individual participants.\n\n \n\n**Income\nIncentive Pool:**\n\n \n\nThe\nCompany maintains incentive bonus programs for certain employees that are based on operating profits of the individual subsidiaries to\nwhich the employees are assigned. The Company also adopted a plan for the President and Chief Executive Officer of the Company for which\nthe formula is based on consolidated pre-tax profits, bookings, and revenue. The incentive bonus recorded for the fiscal year ended April\n30, 2026 and April 30, 2025 was $0.2 million and $1.8 million, respectively.\n\n \n\n**Employee\nStock Plans:**\n\n \n\nOn\nAugust 27, 2024, the Board of Directors, subject to stockholder approval, adopted the 2025 Stock Award Plan (“2025 Plan”),\nwhich replaced the 2005 Stock Award Plan. The 2025 Plan incorporates all previous grants under the previous plan, without changes to\nthe original terms of the grants, and adds 700,000 shares for future grants. The 2025 Plan was approved by stockholder vote at the Company’s\nannual meeting of stockholders held on October 8, 2024. The 2025 Plan is for key management employees, including officers and directors\nwho are employees, certain consultants and independent members of the Board of Directors. Under the 2025 Plan equity compensation, such\nas nonqualified stock options, incentive stock options, stock appreciation rights (“SAR”), performance stock units (“PSU”)\nand restricted stock units (“RSU”), are granted at the discretion of the Compensation Committee of the Board of Directors\nat an exercise price not less than the fair market value of the Company’s common stock on the date of grant.\n\n \n\nTypically,\noptions and SARs vest over a four-year period from the date of grant. The options and SARs generally expire five or ten years after the\ndate of grant (the most recent SARs awards, beginning in fiscal year 2017, expire in five years), at the Compensation Committee’s\ndiscretion, and are subject to certain restrictions on transferability of the shares obtained on exercise. Under the 2025 Plan, instruments\ngranted which expire, are canceled, or are tendered in the exercise of such instruments, increase the shares available for future grants\nunder the 2025 Plan.\n\n \n\n37\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n \n\nAs\nof April 30, 2025, eligible employees and directors had been granted total SARs representing approximately 2,385,000 shares of the Company’s\ncommon stock, of which no shares were outstanding and no shares were exercisable. There were no SARs granted during the fiscal year 2025.\nWhen the SARs become exercisable, the Company will settle the SARs by issuing to exercising recipients the number of shares of stock\nfrom common stock or treasury stock, if available, equal to the appreciated value of the Company’s stock between the grant date\nand exercise date. At the time of exercise, the quantity of shares under the SARs grant equal to the exercise value divided by the then\nmarket value of the shares will be returned to the pool of available shares for future grant under the 2025 Plan. During the fiscal year\nended April 30, 2025, employees exercised 20,000 SARs and were granted 4,556 shares of the Company’s common stock. There were 15,444\nshares returned to the pool of available shares. Forfeitures are recorded as they occur. There were no options or SARs granted, exercised,\ncanceled or expired during the fiscal year ended April 30, 2026.\n\n \n\nThe following table summarizes information about stock option and SARs\nactivity for the fiscal years ended April 30, 2026 and 2025:\n\n \n\n   Stock Options and Stock Appreciation Rights \n\n** **** ** ** **** **** ** **Weighted-\nAverage**** **** ** ** **** **** ** **Weighted Average Remaining**** ** **Aggregate**** **\n\n** **** ** ** **** **** ** **Exercise**** **** ** **Grant Date**** **** ** **Contractual**** ** **Intrinsic**** **\n\n** **** ** **Shares**** **** ** **Price**** **** ** **Fair Value**** **** ** **Term**** ** **Value**** **\n\nOutstanding – April 30, 2024   86,000   $13.01   $1,118,640   0.9 years  $- \n\nGranted   -    -    -         \n\nExercised   (20,000)   12.24    (244,800)      (127,200)\n\nExpired or canceled   (66,000)   13.24    (873,840)        \n\nOutstanding – April 30, 2025   -   $-   $-      $- \n\nAvailable for future grants   1,269,186                   \n\n \n\nAs\nof April 30, 2026 and 2025, respectively, there were no unrecognized compensation cost related to non-vested options and SARs under the\nplans.\n\n \n\nDuring\nthe fiscal year ended April 30, 2026 and 2025, there were no shares that vested.\n\n \n\nThere\nwere no stock-based compensation costs, for options and SARs, included in the cost of revenues of programs on which the Company recognizes\nrevenue under the POC method for the fiscal years ended April 30, 2026 and 2025. There was no stock-based compensation expense included\nin selling and administrative expenses related to options and SARs during the fiscal years ended April 30, 2026 and 2025, respectively.\n\n \n\nThe\nCompany classifies cash flows resulting from the tax benefits from tax deductions recognized upon the exercise of stock options or SARs\n(tax benefits) as operating cash flows. The Company did not recognize any tax benefits from the exercise of stock options and SARs for\nthe fiscal years presented.\n\n \n\n38\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n** **\n\n**Restricted\nStock Plan and Other Issuances:**\n\n \n\nThe\nCompany began issuing RSUs to eligible employees in fiscal year 2020. The fair value of these awards is equivalent to the market value\nof the Company’s common stock on the grant date and vests over a period of time. RSUs are not shares of the Company’s common\nstock and do not have any rights or privileges thereof, including voting or dividend rights. On the applicable vesting date, the holder\nof an RSU becomes entitled to share of the Company’s common stock. A portion of the RSUs awarded will vest annually until fiscal\nyear 2029, the remaining represent awards that cliff vest in fiscal year 2029.\n\n \n\n During\nthe fiscal year ended April 30, 2026, there were no shares of common stock issued to employees for milestone years of service to the\nCompany. During the fiscal year ended April 30, 2025, the Company issued 1,550 shares of common stock to select employees for milestone\nyears of service to the Company. These shares were issued under the 2025 Stock Award Plan, are shares of the Company’s common stock,\nand are fully vested at time of issuance.\n\n \n\nIn fiscal year 2021 the Company\nelected to issue PSUs. The fair value of these awards is equivalent to the market value of the Company’s common stock on the grant\ndate and requires an assessment of the probability that the specified performance conditions will be achieved, which is updated at each\nreporting date. PSUs are not shares of the Company’s common stock and do not have any rights or privileges thereof, including voting\nor dividend rights. On the applicable vesting date, subject to the attainment of the specified performance conditions, the holder of a\nPSU becomes entitled to a share of the Company’s common stock. PSUs are subject to certain restrictions and forfeiture provisions,\nin addition to the specified performance conditions. The PSUs awarded will vest, subject to achieving these performance conditions, annually\nuntil fiscal year 2029.\n\n \n\nStock-based compensation costs,\nrelated to RSUs and PSUs, included in the cost of revenues of programs on which the Company recognizes revenue under the POC method were\napproximately $699,000 and $357,000 for the fiscal years ended April 30, 2026 and 2025, respectively. Stock-based compensation expense,\nfor RSUs and PSUs, included in selling and administrative expenses was approximately $1.2 million and $776,000 for the fiscal years ended\nApril 30, 2026 and 2025, respectively. Unrecognized stock compensation was $7.7 million and $4.2 million for the fiscal years ended April\n30, 2026 and 2025, respectively. The grant date fair value of vested RSUs and PSUs was approximately $1.5 million and $918,000 for the\nfiscal years ended April 30, 2026 and 2025, respectively.\n\n \n\nThe\nfollowing table summarizes activity for the RSUs and PSUs awards that reduce available capacity under the 2025 Plan for the fiscal years\nended April 30, 2026 and 2025:\n\n \n\n  \n   \nWeighted-\n\nAverage \n\n  \nShares  \nGrant Date\n\nFair Value \n\nBalance – April 30, 2024 \n 474,569  \n$6.94 \n\nGranted \n 187,250  \n 13.13 \n\nVested \n (131,970) \n 6.95 \n\nForfeited \n -  \n - \n\nBalance – April 30, 2025 \n 529,849  \n$9.12 \n\nGranted \n 112,048  \n 52.65 \n\nVested \n (171,629) \n 8.84 \n\nForfeited \n (34,120) \n 14.28 \n\nBalance – April 30, 2026 \n 436,148  \n$20.01 \n\n \n\nAs\nof April 30, 2026, performance conditions related to the majority of outstanding PSUs are anticipated to be achieved. The PSUs will continue\nto vest, the same as RSUs, annually over a four year period.\n\n \n\n**Deferred\nCompensation Agreements:**\n\n \n\nThe Company has a series of\nagreements with key employees providing for the payment of benefits upon retirement or death. Annual amounts relating to these plans are\nrecorded based on actuarial projections, which include various actuarial assumptions, including discount rates, mortality rates, assumed\nrates of return, and turnover rates. The actuarial assumptions used to determine deferred compensation liabilities and expense are reviewed\nannually and modified based on current economic conditions and trends. The discount rate used to measure obligations is based on the Company’s\nbond rate yield curve.\n\n \n\n39\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n \n\nUnder\nthese agreements, each key employee receives specified retirement payments for the remainder of the employee’s life with a minimum\npayment of ten years’ benefits to either the employee or his or her beneficiaries. The agreements also provide for lump sum payments\nupon termination of employment without cause and reduced benefits upon early retirement. The Company pays the benefits out of its working\ncapital but has also purchased whole life or term life insurance policies on the lives of certain of the participants to cover the optional\nlump sum obligations of the agreements upon the death of the participant. Deferred compensation expense charged to selling and administrative\nexpenses during the fiscal year ended April 30, 2026 was approximately $374,000. Deferred compensation expense charged to selling and\nadministrative expenses during the fiscal year ended April 30, 2025 was approximately $504,000.\n\n \n\n**Life\nInsurance Policies and Assets Held in Trust:**\n\n \n\nThe\nwhole-life insurance policies on the lives of certain participants covered by deferred compensation agreements have been placed in a\ntrust. Upon the death of any insured participant, cash received from life insurance policies in excess of the Company’s deferred\ncompensation obligations to the estate or beneficiaries of the deceased, are also placed in the trust. These assets belong to the Company\nuntil a change of control event, as defined in the trust agreement, should occur. At that time, the Company is required to add sufficient\ncash to the trust so as to match the deferred compensation liability described above. Such funds will be used to continue the deferred\ncompensation arrangements following a change of control. The Life Insurance Policies amounted to $7.3 million and $7.0 million at April\n30, 2026 and 2025, respectively. The business account and U.S. securities within the trust are valued on a Level 1 basis and amounted\nto $4.0 million and $3.5 million at April 30, 2026 and 2025, respectively. The fixed income corporate debt securities within the trust\nare valued on a Level 2 basis and amounted to $0.4 million at April 30, 2026 and 2025. Level 2 securities are valued at the closing prices\nand are consistent with quoted prices of similar assets reported in active markets.\n\n \n\n12.\nIncome Taxes\n\n \n\nOn\nJuly 4, 2025, President Trump signed H.R.1, the One Big Beautiful Bill Act (“OBBBA”) into law. In accordance with U.S. GAAP,\nthe Company accounted for the tax effects of changes in tax law in the period of enactment during the first quarter of fiscal year 2026.\nThe OBBBA made changes to the U.S. tax code, including, but not limited to: (1) allowing taxpayers to fully deduct domestic research\nexpenditures for tax years beginning after December 31, 2024, (2) provides a catch-up relief provision for taxpayers to accelerate deductions\nfor unamortized domestic research expenditures, (3) provides a permanent provision for 100% bonus depreciation deductions for most tangible\npersonal property with a recovery period of 20 years or less, acquired and placed in service after January 19, 2025, and (4) for tax\nyears beginning after December 31, 2024, restores Adjusted Taxable Income by adding back amortization and depreciation to calculate the\nlimitation on interest deductions (effectively returning to EBITDA). The enactment of the OBBBA did not have a material impact on our\nprovision or effective tax rate as of April 30, 2026. We continue to evaluate the OBBBA and its requirements, as well as its application\nto our business and its impact on cash taxes and our effective tax rate.\n\n \n\nFor\nfinancial reporting purposes, (Loss) income before benefit for income taxes, includes the following components (in thousands):\n\n \n\n  \nFiscal Year Ended\n\nApril 30, \n\n  \n2026  \n2025 \n\nDomestic operations \n$(2,908) \n$12,144 \n\n(Loss) income before income taxes \n$(2,908) \n$12,144 \n\n \n\nThe\nbenefit from income taxes consisted of the following (in thousands):\n\n \n\n  \nFiscal Year Ended\nApril 30, \n\n  \n2026  \n2025 \n\nCurrent: \n   \n  \n\nFederal \n$18  \n$137 \n\nState \n 16  \n 374 \n\nCurrent provision \n 34  \n 511 \n\nDeferred: \n    \n   \n\nFederal \n (1,501) \n (9,634)\n\nState \n (538) \n (2,419)\n\nDeferred tax benefit \n (2,039) \n (12,053)\n\n  \n    \n   \n\nTotal benefit \n$(2,005) \n$(11,542)\n\n \n\n40\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n \n\nThe\ndifference between the federal statutory rate of 21% and the Company’s effective tax rate after the adoption of ASU 2023-09 is\nsummarized as follows (in thousands):\n\n \n\n  \nFiscal Year Ended\nApril 30, 2026 \n\n  \nAmount  \n% \n\nIncome tax at statutory federal tax rate \n$(611) \n 21.0%\n\nState and local income tax, net of federal income tax effect \n (417) \n 14.4%\n\nChanges in valuation allowances \n (19) \n 0.6%\n\nNontaxable or nondeductible items: \n    \n   \n\nStock Based Compensation \n (1,205) \n 41.5%\n\nNon-deductible officer’s compensation \n 246  \n (8.5)%\n\nGoodwill Write-off \n 84  \n (2.9)%\n\nOther nontaxable or nondeductible items \n (1) \n 0.1%\n\nResearch and Development Tax credits \n (176) \n 6.0%\n\nChanges in unrecognized tax benefits \n 5  \n (0.2)%\n\nOther \n 89  \n (3.0)%\n\nTotal benefit \n$(2,005) \n 69.0%\n\n  \n\nIn\nthe fiscal year ended April 30, 2026, state and local income taxes in California comprise the majority of the state and local income\ntaxes, net of the federal income tax effect category.\n\n \n\nThe\ndifference between the federal statutory rate of 21% and the Company’s effective tax rate before the adoption of ASU 2023-09 is\nsummarized as follows:\n\n \n\n  \nFiscal Year Ended \n\n  \nApril 30,\n\n2025 \n\nStatutory rate \n$2,550 \n\nState and local tax \n 223 \n\nValuation allowance on deferred tax assets \n (13,874)\n\nNondeductible expenses \n 5 \n\nFDII \n (81)\n\nNontaxable life insurance cash value increase \n (65)\n\nStock compensation \n (153)\n\nTax credits \n (319)\n\nChange in tax rate \n 173 \n\nOther items \n (1)\n\nTotal benefit \n$(11,542)\n\n \n\n41\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n \n\nThe\ncomponents of deferred taxes are as follows (in thousands):\n\n \n\n  \nFiscal Year Ended\n\nApril 30, \n\n  \n2026  \n2025 \n\nDeferred tax assets: \n   \n  \n\nEmployee benefits \n$2,901  \n$2,810 \n\nInventory \n 4,081  \n 2,876 \n\nAccounts receivable \n 95  \n 144 \n\nTax credits \n 2,111  \n 1,945 \n\nProperty, plant and equipment \n 87  \n - \n\nDeferred costs \n 1,355  \n 1,511 \n\nLease liability \n 1,898  \n 2,128 \n\nCapital loss carry-forward \n 176  \n 194 \n\nResearch & development \n 1,693  \n 2,247 \n\nNet operating loss carryforwards \n 3,649  \n 2,276 \n\nOther assets \n 305  \n 301 \n\nTotal deferred tax asset \n 18,351  \n 16,432 \n\nDeferred tax liabilities: \n    \n   \n\nProperty, plant and equipment \n -  \n (74)\n\nRight of use asset \n (1,838) \n (2,104)\n\nOther liabilities \n (177) \n (77)\n\nDeferred state income tax \n (897) \n (779)\n\nNet deferred tax asset \n 15,439  \n 13,398 \n\nValuation allowance \n (1,355) \n (1,353)\n\nNet deferred tax asset \n$14,084  \n$12,045 \n\n \n\nIn\nassessing the potential for realization of deferred tax assets, the Company considers whether it is more-likely-than-not that some portion\nor all of the deferred tax assets will be realized. A valuation allowance, if needed, reduces the deferred tax assets to the amounts\nexpected to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in\nthose periods in which temporary differences become deductible and/or net operating loss carryforwards can be utilized. We assess all\npositive and negative evidence when determining the amount of the net deferred tax assets that are more-likely-than-not to be realized.\nThis evidence includes, but is not limited to, prior earnings history, scheduled reversal of taxable temporary differences, tax planning\nstrategies and projected future taxable income. Significant weight is given to positive and negative evidence that is objectively verifiable.\nConcluding that a valuation allowance is not needed is difficult when there is significant negative evidence such as cumulative losses\nin recent years.\n\n \n\nAs\nrequired under ASU 2023-09, the Company has included only the portion of the valuation allowance related to federal deferred tax assets\nin the “Change in valuation allowances” line of the rate reconciliation. The following table presents a reconciliation of\nthe total change in the valuation allowance.\n\n \n\n  \nFiscal Year Ended \n\n  \nApril 30,\n\n2026 \n\nBalance at the beginning of the fiscal year \n$1,353 \n\nChanged charged to income tax expense \n 2 \n\nBalance at the end of the fiscal year \n$1,355 \n\n \n\nThe\nCompany maintains a valuation allowance of approximately $1.4 million against certain deferred tax assets including state tax\ncredits and capital loss carryforwards because the realization of these tax attributes requires sufficient taxable income be sourced\nto the respective state jurisdiction and capital gain income is required to utilize capital losses. The Company will continue to\nevaluate the realizability of its deferred tax assets quarterly. Any further increases or decreases in the valuation allowance could\nhave an unfavorable or favorable impact on the Company’s income tax provision and net income in the period in which such\ndetermination is made. As of April 30, 2026, the deferred tax asset is recorded at its more-likely-than-not realizable\namount.\n\n \n\n42\n\n[Table of Contents](#TableOfContents)\n\n** **\n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n \n\nAs\nof April 30, 2026, the Company has U.S. federal net operating losses of $10.9 million of which $1.7 million begins to expire in fiscal\nyear 2027 through fiscal year 2031. The U.S. federal net operating losses of $10.9 million includes $1.7 million which is subject to\nan annual limitation under Internal Revenue Code Section 382. The remaining U.S. federal net operating losses of $9.2 million have an\nindefinite carry-forward period. The U.S. federal capital loss carry-forward of $0.7 million expires in fiscal year 2028. U.S. federal\nR&D credits of $0.8 million begin to expire in fiscal year 2038 through fiscal year 2046. The Company also has state net operating\nloss carryforwards, and state tax credits that expire in various years and amounts.\n\n \n\nA\nreconciliation of the beginning and ending amounts of unrecognized tax benefits, is as follows (in thousands):\n\n \n\n  \n2026  \n2025 \n\nBalance at the beginning of the fiscal year \n$144  \n$111 \n\nAdditions based on positions taken in the current year \n 41  \n - \n\nAdditions based on positions taken in prior years \n 11  \n 45 \n\nDecreases based on positions taken in prior years \n -  \n (12)\n\nLapse in statute of limitations \n -  \n - \n\nBalance at the end of the fiscal year \n$196  \n$144 \n\n \n\nThe\nentire amount reflected in the above table at April 30, 2026, if recognized, would reduce our effective tax rate. As of April 30, 2026\nand 2025, the Company did not recognize or accrue for the payment of interest or penalties.\n\n \n\nThe\nCompany is subject to taxation in the U.S. federal, and various state and local, jurisdictions. The Company is no longer subject to examination\nof its U.S. federal income tax returns by the Internal Revenue Service for fiscal years 2021 and prior. Net operating losses and tax\nattributes generated in closed years and utilized in open years are subject to adjustment by the tax authorities.\n\n \n\nCash\ntaxes paid were as follows (in thousands):\n\n \n\n  \nFiscal\n\nYear Ended \n\n  \nApril 30,\n\n2026 \n\nFederal \n$100 \n\nState and local \n 251 \n\nTotal \n$351 \n\n \n\nIncome\ntaxes paid (net of refunds) exceeded 5% of total income taxes paid (net of refunds) in the following jurisdictions:\n\n \n\n  \nFiscal\n\nYear Ended \n\n  \nApril 30,\n\n2026 \n\nFederal \n$100 \n\nState and local \n   \n\nCalifornia \n 223 \n\nTexas \n 20 \n\nOther \n 8 \n\nTotal \n$351 \n\n \n\n43\n\n[Table of Contents](#TableOfContents)\n\n** **\n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n \n\n13.\nSegment Information\n\n \n\nThe\nCompany operates under two reportable segments based on the geographic locations of its subsidiaries:\n\n \n\n(1)\nFEI-NY – operates out of New York and its operations consist principally of precision time and frequency control products used in three principal markets - communication satellites (both commercial and U.S. Government-funded); terrestrial cellular telephone or other ground-based telecommunication stations; and other components and systems for the U.S. military.\n\n \n\nThe FEI-NY segment also includes the operations of the Company’s wholly-owned subsidiary, FEI-Elcom. FEI-Elcom, in addition to its own product line, provides design and technical support for the FEI-NY segment’s satellite business. Effective as of April 30, 2026, FEI-Elcom was converted into a Delaware limited liability company. The ongoing business operations of FEI-Elcom will remain within the FEI-NY reporting segment.\n\n \n\n(2)\nFEI-Zyfer\n– operates out of California and its products incorporate Global Positioning System (GPS) technologies into systems and\nsubsystems for secure communications, both government and commercial, and other locator applications. This segment also provides\nsales and support for the Company’s wireline telecommunications family of products, including US5G, which are sold in the U.S.\nmarket.\n\n \n\nThe\nCompany measures segment performance based on the operating income generated by the geographic location of its subsidiaries rather than\non the specific types of customers or end-users. Consequently, the Company determined that the segments indicated above most appropriately\nreflect the way the Company’s management views the business.\n\n \n\nThe accounting policies of\nthe two segments are the same as those described in Note 1. Our Chief Executive Officer (“CEO”) serves as our CODM who evaluates\nthe segment performance and allocates resources to them based on operating income which is defined as income before investment income,\ninterest expense, other expenses, and income taxes. Operating income by segment is used to monitor segment results compared to prior periods\nto determine areas of business process improvements, profitable market opportunities, forecasted results, and the annual plan. All acquired\nassets, including intangible assets, are included in the assets of both reporting segments.\n\n \n\n44\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n \n\nThe\ntables below present segment revenue, significant segment expenses which consist of segment cost of revenue and segment research and\ndevelopment costs, and segment operating (loss) income for each reportable segment and on a consolidated basis as reported in the consolidated\nstatements of operations for the fiscal years ended April 30, 2026 and 2025 (in thousands):\n\n \n\n  \nFor the Fiscal Years Ended April 30, \n\n  \n2026  \n2025 \n\nRevenues: \n   \n  \n\nFEI-NY \n$45,651  \n$53,269 \n\nFEI-Zyfer \n 21,731  \n 18,660 \n\nLess intersegment revenues \n (4,155) \n (2,118)\n\nConsolidated revenues \n$63,227  \n$69,811 \n\n  \n    \n   \n\nCost of revenues: \n    \n   \n\nFEI-NY \n$35,816  \n$29,331 \n\nFEI-Zyfer \n 12,497  \n 12,598 \n\nLess intersegment cost of revenues \n (3,482) \n (2,215)\n\nConsolidated cost of revenues \n$44,831  \n$39,714 \n\n  \n    \n   \n\nResearch and development expenses: \n    \n   \n\nFEI-NY \n$3,800  \n$3,374 \n\nFEI-Zyfer \n 2,194  \n 2,702 \n\nConsolidated research and development expenses \n$5,994  \n$6,076 \n\n  \n    \n   \n\nOperating (loss) income: \n    \n   \n\nFEI-NY \n$(5,442) \n$11,514 \n\nFEI-Zyfer \n 3,813  \n 743 \n\nLess intersegment \n (673) \n 98 \n\nCorporate \n (699) \n (623)\n\nConsolidated operating (loss) income \n$(3,001) \n$11,732 \n\n \n\nOther\nsegment items included in the determination of operating (loss) income includes SG&A of $11.5 million and $9.1 million for the fiscal\nyears ended April 30, 2026 and 2025, respectively, for the FEI-NY segment, and $3.2 million and $2.6 million for the fiscal years ended\nApril 30, 2026 and 2025, respectively, for the FEI-Zyfer segment.\n\n \n\n45\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n \n\nThe\ntables below present the identifiable assets of each reportable segment and on a consolidated basis as reported in the consolidated balance\nsheets as of April 30, 2026 and 2025 and the depreciation and amortization charges related to these identifiable assets for the fiscal\nyears then ended (in thousands):\n\n \n\n  \nApril 30,\n\n2026  \nApril 30,\n\n2025 \n\n  \n   \n  \n\nIdentifiable assets: \n   \n  \n\nFEI-NY \n$40,849  \n$39,125 \n\nFEI-Zyfer \n 23,759  \n 23,865 \n\nless intersegment balances \n (814) \n (140)\n\nCorporate \n 26,912  \n 30,887 \n\nConsolidated identifiable assets \n$90,706  \n$93,737 \n\n \n\n  \nFor the Fiscal Years Ended\n\nApril 30, \n\n  \n2026  \n2025 \n\n  \n   \n  \n\nDepreciation and amortization: \n   \n  \n\nFEI-NY \n$1,799  \n$1,932 \n\nFEI-Zyfer \n 94  \n 123 \n\nCorporate \n -  \n - \n\nConsolidated depreciation and amortization expense \n$1,893  \n$2,055 \n\n \n\n*Major\nCustomers*\n\n \n\nThe\nCompany’s products are sold to both commercial and governmental customers. For the fiscal years ended April 30, 2026 and 2025,\napproximately 91% and 94%, respectively, of the Company’s sales were made under contracts to the U.S. Government or subcontracts\nfor U.S. Government end-use.\n\n \n\nIn\nthe fiscal year ended April 30, 2026, revenues from four customers of the FEI-NY segment, which each accounted for more than 10% of that\nsegment’s revenues, were $7.0 million, $5.5 million, $5.3 million, and $5.1 million. In the fiscal year ended April 30, 2025, revenues\nfrom one customer of the FEI-NY segment, which accounted for more than 10% of that segment’s revenues, was $26.9 million. In the\nFEI-Zyfer segment, revenues from one customer, which accounted for more than 10% of that segment’s revenues, was $8.1 million in\nthe fiscal year ended April 30, 2026. In the FEI-Zyfer segment, revenues from two customers, which each accounted for more than 10% of\nthat segment’s revenues, were $2.9 million and $3.4 million in the fiscal year ended April 30, 2025.\n\n \n\nThe\nloss by the Company of any one of these customers would have a material adverse effect on the Company’s business. The Company believes\nits relationship with these customers is mutually satisfactory. Sales to the major customers referenced above can include commercial\nand governmental end users.\n\n \n\n46\n\n[Table of Contents](#TableOfContents)\n\n \n\n**FREQUENCY\nELECTRONICS, INC. AND SUBSIDIARIES**\n\nNOTES\nTO CONSOLIDATED FINANCIAL STATEMENTS - Continued\n\nApril\n30, 2026 and 2025\n\n \n\n*Foreign\nSales*\n\n \n\nRevenues\nin each of the Company’s segments include sales to foreign governments or to companies located in foreign countries. For the fiscal\nyears ended April 30, 2026 and 2025, revenues, based on the location of the procurement entity, were derived from the following locations\n(in thousands):\n\n \n\n  \nFor the Fiscal Years Ended\n\nApril 30, \n\n  \n2026  \n2025 \n\nDomestic \n$57,745  \n$65,362 \n\nForeign \n 5,482  \n 4,449 \n\n  \n$63,227  \n$69,811 \n\n \n\nDuring\nthe fiscal year ended April 30, 2026, material foreign sales to one Asian country amounted to approximately $3.8 million. During the\nfiscal year ended April 30, 2025, material foreign sales to one Asian country amounted to approximately $3.5 million.\n\n \n\n14.\nProduct Warranties\n\n \n\nThe\nCompany generally provides its customers with a one-year warranty regarding the manufactured quality and functionality of its products.\nThe Company establishes warranty reserves based on its product history, current information on repair costs and annual sales levels.\nAs of April 30, 2026 and 2025, respectively, changes in the carrying amount of accrued product warranty costs, reported in accrued expenses\non the consolidated balance sheets, were as follows (in thousands):\n\n \n\n  \n2026  \n2025 \n\nBalance at beginning of year \n$567  \n$542 \n\nWarranty costs incurred \n (438) \n (253)\n\nProduct warranty accrual \n 388  \n 278 \n\nBalance at end of year \n$517  \n$567 \n\n \n\n15.\nContingencies\n\n \n\nIn\nthe normal course of its business, the Company may be involved in various claims, negotiations and legal actions. As of April 30, 2026,\nthe Company was not a party to any litigation in which an unfavorable outcome or material claim is probable or in which losses associated\nwith the litigation can be reasonably estimated.\n\n \n\n16. Subsequent events\n\n \n\nOn July 1, 2026, the Company acquired a 20% minority\ninterest in an LLC for $0.5 million. Pursuant to the transaction, the Company may be required to purchase up to an additional 25% interest\nsubsequent to the closing of the initial agreement. The Company is currently in the process of evaluating the accounting treatment for\nthis transaction.\n\n \n\n47\n\n[Table of Contents](#TableOfContents)"}