FREQUENCY ELECTRONICS INC (FEIM)

Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

“Safe
Harbor” Statement under the Private Securities Litigation Reform Act of 1995:

The
statements in this Quarterly Report on Form 10-Q (“Form 10-Q”) regarding future earnings and operations and other statements
relating to the future constitute “forward-looking” statements pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that could cause actual results
to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include but are
not limited to, our inability to integrate operations and personnel, actions by significant customers or competitors, general domestic
and international economic conditions, reliance on key customers, including the U.S government, continued acceptance of the Company’s
products in the marketplace, competitive factors, new products and technological changes, product prices and raw material costs, dependence
upon third-party vendors, other supply chain related issues, increasing costs for materials, operating related expenses, competitive
developments, changes in manufacturing and transportation costs, the availability of capital, the outcome of any litigation and arbitration
proceedings, and failure to maintain an effective system of internal controls over financial reporting. The factors listed above are
not exhaustive. Other sections of this Form 10-Q and in Part I, Item 1A (Risk Factors) of the Company’s Annual Report on Form 10-K
for the fiscal year ended April 30, 2025 (the “Form 10-K”) include additional factors that could materially and adversely
impact the Company’s business, financial condition and results of operations. Moreover, the Company operates in a very competitive
and rapidly changing environment. New factors emerge from time to time and it is not possible for management to predict the impact of
all these factors on the Company’s business, financial condition or results of operations or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these
risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results. Any or all of the
forward-looking statements contained in this Form 10-Q and any other public statement made by the Company or its management may turn
out to be incorrect. The Company expressly disclaims any obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise, except as required by law.

Critical
Accounting Policies and Estimates

The
Company believes its most critical accounting policies to be the recognition of revenue and costs on production contracts and the valuation
of inventory. Both of these areas require the Company to make use of reasonable estimates including estimating the cost to complete
a contract, the realizable value of its inventory and the market value of its products. Changes in estimates can have a material
impact on the Company’s financial position and results of operations. The Company’s significant accounting policies did not
change during the three and nine months ended January 31, 2026.

Revenue
Recognition

Revenues
are reported in operating results predominantly over time using the cost-to-cost method. Under this method, revenue is recorded based
upon the ratio that incurred costs bear to total estimated contract costs with related cost of revenues recorded as the costs are incurred.
Each month management reviews estimated contract costs through a process of aggregating actual costs incurred and estimating additional
costs to completion based upon the current available information regarding labor, outside services, materials, overhead costs, and status
of the contract. The effect of any change in the estimated gross margin rate (“GM Rate”) for a contract is reflected in revenues
in the period in which the change is known. Provisions for the full amount of anticipated losses on contracts are made in the period
in which they become determinable.

Significant
judgment is used in evaluating the financial information for certain contracts to determine an appropriate budget and estimated cost.
The Company evaluates this information continuously and bases its judgments on historical experience, design specifications, and expected
costs for material and labor.

Inventories

In
accordance with industry practice, inventoried costs contain amounts relating to contracts and programs with long production cycles,
a portion of which will not be realized within one year.  Inventory write downs are established for slow-moving materials based
on percentage of usage over a ten-year period, obsolete items on a gradual basis over five years with no usage and costs incurred on
programs for which production-level orders cannot be determined as probable.  Such write-downs are based upon management’s
experience and estimates for future business.  Any changes arising from revised estimates are reflected in cost of revenues in the
period the revision is made.

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FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

Income
Taxes

We
are subject to income taxes in the U.S. and significant judgment is required in determining our provision for income taxes, our deferred
tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets that are not more likely than not
to be realized. We monitor the realizability of our deferred tax assets taking into account all relevant factors at each reporting period.
In completing our assessment of realizability of our deferred tax assets, we consider our history of income (loss) measured at pre-tax
income (loss) adjusted for permanent book-tax differences on a jurisdictional basis, volatility in actual earnings, excess tax benefits
related to stock-based compensation in recent prior years and impacts of the timing of reversal of existing temporary differences. We
also rely on our assessment of the Company’s projected future results of business operations, including uncertainty in future operating
results relative to historical results, volatility in the market price of our common stock and its performance over time, variable macroeconomic
conditions impacting our ability to forecast future taxable income, and changes in business that may affect the existence and magnitude
of future taxable income. Our valuation allowance assessment is based on our best estimate of future results considering all available
information.

Our
provision for or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted
for discrete items, if any, that are taken into account in the relevant period. Each quarter, we update our estimate of the annual effective
tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.

RESULTS
OF OPERATIONS

The
table below sets forth for the three and nine months ended January 31, 2026 and 2025, respectively, the percentage of consolidated revenues
represented by certain items in the Company’s condensed consolidated statements of operations or notes to the condensed consolidated
financial statements:

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FREQUENCY
ELECTRONICS, INC. and SUBSIDIARIES

(Continued)

Revenues

For
the three months ended January 31, 2026, revenues from commercial and U.S. Government communication satellite programs accounted for
approximately 25% of consolidated revenues compared to approximately 59% of consolidated revenues during this same period in the prior
fiscal year. Revenues are recognized primarily over time under the percentage-of-completion (“POC”) method. Revenues from
the satellite market are recorded in the FEI-NY segment. Revenues from non-space U.S. Government/Department of Defense (“DOD”)
customers, which are recorded in both the FEI-NY and FEI-Zyfer segments, accounted for approximately 74% of consolidated revenues for
the three months ended January 31, 2026 compared to approximately 39% of consolidated revenue during the same period in the prior fiscal
year. Other commercial and industrial revenues for the three months ended January 31, 2026, accounted for approximately 1% of consolidated
revenue compared to 2% in the same period of the prior fiscal year.

The
revenue for the three months ended January 31, 2026 were lower than the revenues in the prior period partly as a result of certain space
programs in the FEI-NY segment during the prior fiscal year that were expedited during that period due to very aggressive schedules.
In addition, several new space bookings anticipated for the three months ended January 31, 2026 have been delayed and are now anticipated
in fourth quarter of fiscal 2026.

For
the nine months ended January 31, 2026, revenues from commercial and U.S. Government communication satellite programs accounted for approximately
32% of consolidated revenues compared to approximately 58% of consolidated revenues during this same period in the prior fiscal year.
Revenues from non-space U.S. Government/DOD customers accounted for approximately 65% of consolidated revenues for the nine months ended
January 31, 2026 compared to approximately 39% of consolidated revenue during the same period in the prior fiscal year. Other commercial
and industrial revenues for the nine months ended January 31, 2026 and 2025 accounted for approximately 3% of consolidated revenue. The
change in revenue for the nine months ended January 31, 2026 compared to the same period in the last fiscal year was driven by the changes
noted above for the three months ended January 31, 2026.

Gross
Mar

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

“Safe
Harbor” Statement under the Private Securities Litigation Reform Act of 1995:

The
statements in this Annual Report on Form 10-K regarding future earnings and operations and other statements relating to the future
constitute “forward-looking” statements pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995.  Forward-looking statements inherently involve risks and uncertainties that could cause actual results to
differ materially from the forward-looking statements.  Factors that would cause or contribute to such differences include, but
are not limited to, the risks associated with reliance on key customers, including the U.S. government, the Company’s use of
estimates when accounting for contracts, actions by significant customers or competitors, competitive factors, new products and
technological changes, continued acceptance of the Company’s products in the marketplace, dependence upon third-party vendors,
product prices and raw material costs, the Company’s ability to attract and retain key employees, general domestic and
international economic conditions, health epidemics and pandemics, external disruptions to the Company’s facilities or supply
chain, the Company’s operations in a highly regulated industry, the outcome of any litigation and arbitration proceedings,
cybersecurity attacks, noncompliance with any of the covenants in the Credit Agreement, volatility in the Company’s stock
price, including due to the relatively low trading volume of its common stock, and failure to maintain an effective system of
internal controls over financial reporting. The factors listed above are not exhaustive. Other sections of this Form 10-K
include additional factors that could materially and adversely impact the Company’s business, financial condition and results
of operations.  Moreover, the Company operates in a very competitive and rapidly changing environment.  New factors emerge
from time to time and it is not possible for management to predict the impact of all these factors on the Company’s business,
financial condition or results of operations or the extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.  Given these risks and uncertainties, investors
should not rely on forward-looking statements as a prediction of actual results.  Any or all of the forward-looking statements
contained in this Form 10-K and any other public statement made by the Company or its management may turn out to be incorrect.
The Company expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by law.

Critical
Accounting Estimates

The
Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. The Company believes
its most critical accounting policies to be the recognition of revenue and costs on production contracts, income taxes and the valuation
of inventories. Each of these areas requires the Company to make use of reasonable estimates, including estimating the cost to complete
a contract, the realizable value of its inventories or the market value of its products. Changes in estimates can have a material impact
on the Company’s financial position and results of operations.

Revenue
Recognition

Revenues
for most contracts are reported in operating results over time using the cost-to-cost method. Under this method, revenue is recorded
based upon the ratio that incurred costs bear to total estimated contract costs with related cost of revenues recorded as the costs are
incurred. Each month management reviews estimated contract costs through a process of aggregating actual costs incurred and estimating
additional costs to completion based upon the current available information regarding labor, outside services, materials, overhead costs
and status of the contract. The effect of any change in the estimated gross margin rate for a contract is reflected in revenues in the
period in which the change is known. Provisions for the full amount of anticipated losses on contracts are made in the period in which
they become determinable.

Significant
judgment is used in evaluating the financial information for certain contracts to determine an appropriate budget and estimated cost.
The Company evaluates this information continuously and bases its judgments on historical experience, design specifications, and expected
costs for material and labor.

Income
Taxes

On
July 4, 2025, President Trump signed H.R.1, the One Big Beautiful Bill Act (“OBBBA”) into law. In accordance with U.S. GAAP,
the Company accounted for the tax effects of changes in tax law in the period of enactment during the first quarter of fiscal year 2026.
The OBBBA made changes to the U.S. tax code, including, but not limited to: (1) allowing taxpayers to fully deduct domestic research
expenditures for tax years beginning after December 31, 2024, (2) provides a catch-up relief provision for taxpayers to accelerate deductions
for unamortized domestic research expenditures, (3) provides a permanent provision for 100% bonus depreciation deductions for most tangible
personal property with a recovery period of 20 years or less, acquired and placed in service after January 19, 2025, and (4) for tax
years beginning after December 31, 2024, restores Adjusted Taxable Income by adding back amortization and depreciation to calculate the
limitation on interest deductions (effectively returning to EBITDA). The enactment of the OBBBA did not have a material impact on our
provision or effective tax rate as of April 30, 2026. We continue to evaluate the OBBBA and its requirements, as well as its application
to our business and its impact on cash taxes and our effective tax rate.

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

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Deferred
income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the
financial statements, which will result in taxable or deductible amounts in the future. Accounting for income taxes requires that a
valuation allowance be established when it is more likely than not that all or a portion of the deferred tax assets will not be
realized. In evaluating our ability to recover deferred tax assets in the jurisdiction from which they arise, we consider all
positive and negative evidence, including the reversal of deferred tax liabilities, projected future taxable income, tax planning
strategies, and results of recent operations. In circumstances where there is sufficient negative evidence indicating that the
deferred tax assets will not be realizable, we establish a valuation allowance.

The
Company maintains a valuation allowance of approximately $1.4 million against certain deferred tax assets including state tax
credits and capital loss carryforwards because the realization of these tax attributes requires sufficient taxable income be sourced
to the respective state jurisdiction and capital gain income is required to utilize capital losses. The Company will continue to
evaluate the realizability of its deferred tax assets quarterly. Any further increases or decreases in the valuation allowance could
have an unfavorable or favorable impact on the Company’s income tax provision and net income in the period in which such
determination is made. As of April 30, 2026, the deferred tax asset is recorded at its more-likely-than-not realizable
amount.

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

RESULTS
OF OPERATIONS

Consolidated
Results

The
table below sets forth for the fiscal years ended April 30, 2026 and 2025, the percentage of consolidated net sales represented by certain
items in the Company’s consolidated statements of operations:

Revenues

For
the fiscal year ended April 30, 2026 revenue decreased by approximately $6.6 million, or 9%, compared to the prior fiscal year.
Fiscal 2026 was a year of digestion from a revenue standpoint, as the Company pulled forward some revenue into last year’s
Fiscal 2025. As a result of the shutdown of the FEI-Elcom manufacturing business, the Company sacrificed some near-term revenue in
the fourth quarter. By doing so, the Company believes it is the right long-term decision to better align its capital and growth
potential as it focuses on the much larger addressable markets it is starting to sell into: alternative position, navigation and
timing (ALT-PNT) solutions; quantum sensing, including magnetometers; space defense and exploration; and, proliferated satellite
programs.

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Satellite
program revenues for Government end-use were 31% and 53% of total revenues for fiscal years 2026 and 2025, respectively. Satellite program
revenues for commercial end-use were 6% of total revenue for both fiscal years 2026 and 2025.

Revenues
on satellite program contracts are recorded in the FEI-NY segment and are recognized primarily under the percentage-of-completion (“POC”)
method. Revenues from non-space U.S. Government/DOW customers increased by approximately $11.5 million, or 43.2%, in fiscal year 2026
compared to fiscal year 2025. These revenues are recorded in both the FEI-NY and FEI-Zyfer segments and accounted for appro

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