FREQUENCY ELECTRONICS INC

NOTE A – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In the opinion of management of Frequency Electronics, Inc. (the “Company”), the accompanying unaudited condensed consolidated interim financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly, in all material respects, the condensed consolidated financial position of the Company as of January 31, 2025 and the results of its operations, changes in stockholders’ equity for the three and nine months ended January 31, 2025 and 2024, and cash flows for the nine months ended January 31, 2025 and 2024. The April 30, 2024 condensed consolidated balance sheet was derived from audited financial statements. These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated interim financial statements should be read in conjunction with the annual consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2024, filed on August 2, 2024 with the Securities and Exchange Commission (the “Form 10-K”). The results of operations for such interim periods are not necessarily indicative of the operating results for the full fiscal year.

NOTE B – EARNINGS PER SHARE

Reconciliation of the weighted average shares outstanding for basic and diluted earnings per share (“EPS”) for the three and nine months ended January 31, 2025 and 2024, respectively, were as follows:

**For the three months ended January 31, 2025 and 2024, and the nine months ended January 31, 2024, dilutive securities are excluded from the calculation of EPS since the inclusion of such shares would be antidilutive. There wereno shares excluded for the three months ended January 31, 2025. For the nine months ended January 31, 2025,66,000 exercisable shares were excluded. For the three and nine months ended January 31, 2024,86,000 exercisable shares were excluded.

On July 22, 2024, the Company’s Board of Directors declared a special cash dividend of $1.00 per share of common stock. The special dividend was paid on August 29, 2024, to stockholders of record as of the close of business on August 8, 2024. The total amount of the special dividend payment was approximately $9.6 million.

NOTE C – CONTRACT ASSETS AND LIABILITIES

Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date on contracts with customers. Contract assets are transferred to accounts receivable when the rights become unconditional. Contract liabilities primarily relate to contracts where advance payments or deposits have been received, but performance obligations have not yet been satisfied, and therefore, revenue has not been recognized. During the three and nine months ended January 31, 2025, we recognized $10.2 million and $26.2 million, respectively, of our contract liabilities at April 30, 2024 as revenue. During the three and nine months ended January 31, 2024, we recognized $8.6 million and $12.3 million, respectively, of our contract liabilities at April 30, 2023 as revenue. If contract losses are anticipated, a loss provision is recorded for the full amount of such losses when they are determinable. Contract losses for three months ended January 31, 2025 were approximately $0.4 million, and the nine months ended January 31, 2025 were approximately $0.6 million, offset by a loss reduction of approximately $0.3 million, mostly related to additional funding. Total contract losses for three and nine months ended January 31, 2024 were approximately $0.6 million and $2.1 million, respectively. The liability for contract losses is presented as loss provision accrual within the consolidated balance sheets.

NOTE D –EMPLOYEE BENEFIT PLANS

During the three and nine months ended January 31, 2025, the Company made contributions of 7,850 shares and 51,884 shares, respectively, of its common stock to the Company’s profit-sharing plan and trust under Section 401(k) of the Internal Revenue Code. During the three and nine months ended January 31, 2024, the Company made contributions of 5,364 shares and 35,262 shares, respectively, of its common stock to the Company’s profit-sharing plan and trust under Section 401(k) of the Internal Revenue Code. Such contributions are in accordance with the Company’s discretionary match of employee voluntary contributions to this plan.

Deferred compensation expense charged to selling and administrative expenses during the three and nine months ended January 31, 2025, was approximately $142,000 and $425,000, respectively. Payments made related to deferred compensation, inclusive of approximately $26,000 and $79,000, respectively, of interest expense, were approximately $183,000 and $541,000 for the same periods. Deferred compensation expense charged to selling and administrative expenses during the three and nine months ended January 31, 2024, was approximately $109,000 and $325,000, respectively. Payments made related to deferred compensation, inclusive of approximately $28,000 and $88,000, respectively, of interest expense, were approximately $175,000 and $536,000 for the same periods.

NOTE E – INVENTORIES

Inventories, which are reported at the lower of cost and net realizable value, consisted of the following (in thousands):

NOTE F – RIGHT-OF-USE ASSETS AND LEASE LIABILITIES

The Company’s leases primarily represent offices, warehouses, vehicles, manufacturing facilities and Research and Development (“R&D”) facilities which expire at various times through 2029 and are operating leases. Contractual arrangements are evaluated at inception to determine if the agreement contains a lease.

The Company elected the practical expedient for short-term leases which allows leases with terms of 12 months or less to be recorded on a straight-line basis over the lease term without being recognized on the consolidated balance sheets.

The table below presents right-of-use (“ROU”) assets and liabilities recorded on the respective consolidated balance sheets as follows (in thousands):

Total operating lease expense was $0.4 million and $1.4 million for the three and nine months ended January 31, 2025, respectively, the majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses on the unaudited condensed consolidated statements of operations. Total operating lease expense was $0.5 million and $1.4 million for the three and nine months ended January 31, 2024, respectively, the majority of which is included in cost of revenues and the remaining amount in selling and administrative expenses on the unaudited condensed consolidated statements of operations.

The maturities of lease liabilities at January 31, 2025 are as follows:

As of January 31, 2025 and 2024, the weighted-average remaining lease term for all operating leases was 4.54 years and 5.12 years, respectively. The Company does not generally have access to the rate implicit in the leases and therefore selected a rate that is reflective of companies with similar credit ratings for secured debt as the discount rate. The weighted average discount rate for operating leases as of January 31, 2025 and 2024, was 6.40% and 6.31%, respectively.

The Company has future operating lease payments of approximately $4.0 million related to a lease that has not yet commenced and was entered into as of December 23, 2024. Such lease payments are not included in the table above or the Company’s condensed consolidated financial position as operating lease ROU assets and operating lease liabilities. The operating lease payments are anticipated to commence in the fourth quarter of 2025 and continue for approximately 5 years.

NOTE G – SEGMENT INFORMATION

The Company operates undertwo reportable segments based on the geographic locations of its subsidiaries:

The Company measures segment performance based on total revenues and profits generated by each geographic location rather than on the specific types of customers or end-users. Consequently, the Company determined that the segments indicated above most appropriately reflect the way the Company’s Chief operating decision maker views the business.

The accounting policies of the two segments are the same as those described in “Note 1. Summary of Accounting Policies” to the consolidated financial statements included in the Form 10-K. The Company evaluates the performance of its segments and allocates resources to them based on operating profit (loss). Investment income (expense), interest expense, and other expense, net, as reported in the condensed consolidated statement of operations and comprehensive income, are not allocated to or disclosed for each reportable segment and reconcile segment operating income (loss) to income before provision of income taxes. All acquired assets, including intangible assets, are included in the assets of the applicable reporting segment.

The tables below present information about reported segments with reconciliation of segment amounts to consolidated amounts as reported in the condensed consolidated statements of operations or the consolidated balance sheets for each of the periods (in thousands):

Total revenue recognized over time as Percentage of Completion (“POC”) and Passage of Title (“POT”) was approximately $17.7 million and $1.3 million, respectively, of the $18.9 million reported for the three months ended January 31, 2025. Total revenue recognized over time as POC and POT was approximately $47.3 million and $2.5 million, respectively, of the $49.8 million reported for the nine months ended January 31, 2025. Total revenue recognized over time as POC and POT was approximately $12.9 million and $0.8 million, respectively, of the $13.7 million reported for the three months ended January 31, 2024. Total revenue recognized over time as POC and POT was approximately $37.0 million and $2.7 million, respectively, of the $39.7 million reported for the nine months ended January 31, 2024. The amounts by segment and product line were as follows (in thousands):

NOTE H – INVESTMENT IN MORION, INC.

The Company has an investment in Morion, Inc., a privately-held Russian company, which manufactures high precision quartz resonators and crystal oscillators. The Company has also previously licensed certain technology to Morion.

The Company’s investment consists of 4.6% of Morion’s outstanding shares. However, due to the Russia Ukraine conflict and resulting sanctions the future status of FEI’s investment in Morion became uncertain and accordingly, such investment was entirely written off in fiscal year 2022. Accordingly, the carrying value of this investment was $0 as of January 31, 2025 and April 30, 2024.

During the three and nine months ended January 31, 2025, the Company did not acquire any product from Morion. During the three and nine months ended January 31, 2024, the Company acquired product from Morion in the aggregate amount of approximately $89,000 for both periods. During the three and nine months ended January 31, 2025 and 2024, the Company didnot receive dividends from Morion.

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

NOTE I – RESTRICTED CASH

As of January 31, 2025, restricted cash consisted of approximately $1.4 million primarily related to a letter of credit required for contractual restrictions during the period of performance for one of the Company’s contracts. As of April 30, 2024, restricted cash consisted of approximately $945,000 related to a letter of credit required for contractual restrictions during the period of performance for one of the Company’s contracts. Restricted cash is classified as current or non-current based on the remaining performance period of the contract.

A reconciliation of cash and cash equivalents and restricted cash from the condensed consolidated balance sheets to the condensed consolidated statements of cash flows is shown below (in thousands):

NOTE J – RECENT ACCOUNTING PRONOUNCEMENTS

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

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

NOTE K – DEFERRED INCOME TAXES

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future.

As required by the authoritative guidance on accounting for income taxes, we evaluate the realization of deferred tax assets on a jurisdictional basis at each reporting date. We consider all positive and negative evidence, including the reversal of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of recent operations. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets will not be realizable, we establish a valuation allowance. During the three months ended January 31, 2025, the Company reduced its valuation allowance and recognized a discrete tax benefit of $11.8 million, resulting in an income tax benefit of 330.6% and 132.8% for the three and nine months ended January 31, 2025. A significant component of objective evidence evaluated was the cumulative income or loss incurred over the three-year period ended January 31, 2025. We considered other positive evidence in determining the need for a valuation allowance including utilization of net operating loss carryforwards and a reduction of the net deferred tax asset, our backlog, and sufficient projections of future taxable income that support the more-likely-than-not realization of the existing deferred tax asset and the remaining net operating loss carryforward. The weight of this positive evidence is sufficient to outweigh other negative evidence in evaluating our need for a valuation allowance. As a result of the positive evidence outweighing the negative evidence for the period ended January 31, 2025, we released the valuation allowance on the U.S. federal and state deferred tax items that the Company expects to realize.

As of January 31, 2025, the Company maintains a valuation allowance of $1.3 million against certain deferred tax assets including state tax credits and capital losses because the realization of these tax attributes requires sufficient taxable income be sourced to the respective state jurisdiction and capital gain income is required to utilize capital losses. If these estimates and assumptions change in the future, the Company may be required to adjust its existing valuation allowance resulting in changes to deferred income tax expense.