Greetings and welcome to the Frequency Electronics Third Quarter Fiscal Year 2022 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Any statements made by the company during this conference call regarding the future constitute forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such statements inherently involve uncertainties that could cause actual results to differ materially from the forward-looking statements.

Factors that would cause or contribute to such differences are included in the company's press releases and are further detailed in the company's periodic report filings with the Securities and Exchange Commission.

By making these forward-looking statements, the company undertakes no obligations to update these statements for revisions or changes after the date of this conference call. It is now my pleasure to introduce your host, Stanton Sloane, President and CEO..

Thank you. Welcome everybody. I'm glad that you could join us today. Before I turn this over to Steve to take us through the financial details, let me offer a few thoughts. Third quarter is challenging, particularly in our Zyfer operation due to delays in bookings and the reduced revenue that resulted from that.

We haven't seen any competitive losses there, just delays, so we anticipate these bookings will still come in.

We are taking advantage of the lull in production to transition manufacturing from California to our New York facility, which will have the compound effect of significantly reducing costs at Zyfer and reducing manufacturing overhead costs for the Zyfer products that will be manufactured in New York. This will result in benefits over the long run.

In our New York operation, we were hit with a severe round of COVID related employee absences, which affected the quarter's revenue and operating income. Despite the challenges, we saw an increase in revenue for the quarter compared to the first two quarters, as well as compared to Q3 of fiscal year 2021.

Bookings for the fiscal year are solid, running well ahead of where we thought we’d be for the year and up about 30% from this point last year for the New York operation and up about 21% overall for the company.

Backlog is now up to $41.6 million and the book to bill ratio for the quarter was a healthy 1.27 for the company, but an even better 1.4 in core New York operation.

As usual, we generated cash from operations, $4 million for the year so far and cash and marketable securities currently stand at $22.2 million, up $2.1 million from year end fiscal year 2021. We also remain debt free.

On the technical front, our digital Rubidium Atomic Clock for the GPS III F program is progressing extremely well through its qualification testing.

And we have in production, additional units, one of which will be used for long-term testing on the ground by the government and one which is planned to fly on a GPS III satellite to validate its operation in space. Our Pulsed Optically Pumped Rubidium atomic clock is progressing well in design phase also.

Laboratory testing has indicated its performance will be outstanding, ultimately enabling better hold over times and helping mitigate GPS jamming and spoofing. The mercury ion clock development is also underway.

In addition to these two Office of Naval Research funded projects, we are pursuing a variety of new technology opportunities with various government agencies for not only advanced atomic clocks, but also some new technologies unrelated to clocks as part of our effort to grow top and bottom line.

While I can't go into the details here, these are exciting opportunities, and I look forward to sharing more about these as things progress. With that, let me ask Steve to cover financial details for you. And after that, we will take some questions.

Steve?.

revenue from commercial and U.S. Government satellite programs was approximately $20.9 million or a 62% of consolidated revenue compared to $20.1 million or 52% in the same period of the prior fiscal year.

Revenues on Satellite Payload contracts are recognized primarily under the percentage of completion method and are recorded only in the FEI-New York segment. Revenues from non-space U.S.

Government and DOD customers, which are recorded in both the FEI-New York and FEI-Zyfer segments, were $14.9 million compared to $16.3 million in the same period of the prior fiscal year and accounted for approximately 39% of consolidated revenue compared to 42% for the prior fiscal year.

Other commercial and industrial revenues were $2.4 million compared to $2.2 million in the prior fiscal year. Intersegment revenues are eliminated in consolidation. For the nine months ended January 31, 2022, gross margin and gross margin rate decreased as compared to the same period in fiscal year 2021.

The decrease in gross margin and gross margin rate was due to increased engineering cost on development phase programs that experience particularly complex technical challenges, as well as cost impacts on several programs resulting from supply chain issues.

Lack of availability of parts and material and/or quality problems with traditional vendors result in the need to redesign certain electronic units to replace unavailable parts with different parts that were available in order to maintain contract delivery schedules.

In several cases, re-procurement of circuit boards and other mechanical parts was necessitated by quality issues in the supply chain, further contributing to increased costs. The nine month ended January 31, 2022 and 2021 selling and administrative expenses were approximately 25% of consolidated revenue.

The slight decrease in SG&A expense is mainly due to the decrease in professional fees. We expect this trend to continue as expenses normalize. R&D expense for the nine months ended January 31, 2022 and 2021 increased to $3.9 million from $3.5 million, an increase of 400,000 and were approximately 10% and 9% of consolidated revenue.

R&D increases in the nine months ended January 31, 2022 were due to higher levels of internal R&D associated with investments.

The company is making in new technology developments related to atomic clocks and low-noise oscillators that are intended to produce long-term increases in revenue and position the company to compete in the marketplace with next-generation products. The company plans to continue to invest in R&D to keep its products at the state of the art.

For the nine months ended January 31, 2022, the company recorded an operating loss of $2.1 million compared to an operating loss of $1.1 million in the prior year. The factors cited above in gross margin discussion are applicable to operating income as well.

Operating losses for the nine month period ending January 31, 2022 resulted from lower revenue and lower gross margins during both periods, the company experienced increased supply chain and other costs. The majority of the operating loss were experienced in Q1 as a result of higher professional fees associated with litigation has since been settled.

Other income consisted primarily investment income derived from the company's holdings of marketable securities. Earnings on these securities may vary based on fluctuating interest rates, dividend payout levels and the timing of purchases, sales, redemptions, and maturities of securities.

In the nine-month ended January 31, 2022 investment income included $123,000 dividend from Morion, compared to 105,000 dividend from Morion in the same period at fiscal 2021. This yields a pre-tax loss of approximately $1.8 million, compared to a $700,000 pre-tax loss for the prior fiscal year.

For the nine months ended January 31, 2022, the company recorded a tax provision of $3,000 compared to $37,000 for the prior fiscal year. Consolidated net loss for the nine months ended January 31, 2022 was $1.8 million or $0.20 per share compared to $700,000 net loss or $0.08 per share in the previous fiscal year.

Our fully funded backlog at the end of January 2022 was approximately $42 million, up $2 million from the previous fiscal year ended April 30, 2021. The company’s balance sheet continues to reflect the strong working capital position of approximately $40 million at January 1, 2022 and a current ratio of approximately 4.8 to 1.

Additionally, the company is debt free. Company believes as liquidity is adequate to meet its operating investing needs for the next 12 months and the foreseeable future. I will turn the call back to Stan and we look forward to your questions..

Thank you, Steve. The operator will now explain how you can submit questions.

Operator?.

Ladies and gentlemen. The floor is now open for of questions. Your first question is coming from Brett Reiss. Your line is live..

Thank you. Hi, Stan. Hi, Steve..

Hi Brett..

Hi..

The delays in bookings that you talked about could you go into a little bit more specificity as to what that’s all about?.

Well, I don’t really know in a lot of detail other than the bookings that we’ve been anticipating just haven’t been processed through the in this case largest one is through one of the government prime contractors. But why that is, I can’t tell you.

I don’t believe it’s tied to the CR, but it just seems to be delayed in getting things out of contract..

Do we have like lobbyists or people in Washington that when there are these type of delays, you can make inquiries so that you can find out, how long the delays are going to be. So you can plan our business..

You can’t lobby the government prime contractors. So in the case where they’re the customer, having people in Washington lobby things doesn’t really do anything. We have access, of course, to government budget information, and all the exhibits and all that stuff, which we look at pretty regularly.

Those are of interest when you’re looking at the program level, but you have to remember, we’re not the prime contractor, we’re a second tier provider to the prime contractors..

Okay.

The move of manufacturing from California to New York, can you quantify what the cost savings, what’s the run rate on the cost savings going forward?.

I don’t want to put a number out, but I’ll tell you that, it does two things. It reduces the cost out in California, because of course for a given number of manufacturing people there.

We don’t the same number of manufacturing people here, because we have other, the administrative or the staff or overhead portions of manufacturing don’t need to be replicated here. So if you take the cost out of California, the overall cost to manufacture that same product here is less. And how much less depends on the revenue and some other factors.

So I’m not going to predict a precise amount, but it’s a pretty significant effect..

Right. Right. One last question and I’m going to refer to a transcript, I subscribe to David Rosenberg, he’s an Economist in Canada and he had as a special guest Pippa Malmgren, who’s an expert on cyber security threats and among other things, she lectures at Sandhurst in Great Britain.

And I’m kind of quoting from her last talk, which was about a week ago, understanding the strategic importance of space is crucial, because you can see what’s happening on the ground, because you can control everybody else’s access to the main things that we care about these days, which is the digital domain.

Can you cut off in entire nation’s access to GPS, because you knock out their satellites and space? Yes, you can. We’ve seen recently major incidents between the United States, Russia and China in space. And then she went on to name, two examples, which were not in the mainstream media, it was chilling, listening to her describe what’s going on.

Aren’t the various things, the clocks and the ability to prevent spoofing and control satellites? I mean, aren’t we in the catbird seat for order flow with where unfortunately the world is going..

So that’s a very complicated thing to ponder and of course, there’s all sorts of ways you can affect GPS, everything from denial of service type stuff to kinetic attacks. I have to leave that for the government folks in terms of their strategy. But what I would say is that the better clock you have up there, the more hold over you have.

So if you’re going to, for example, jam the GPS signal, then the clock becomes critically important, because you need the satellite to be able to maintain, sync until you get the signal back. So from that point of view, I would argue, yes, we’d produce very high performance clocks. That’s our specialty here.

And a lot of the programs we’re working on, obviously GPS are – that’s the intent to provide better capability..

Stanton you’ve been doing a fantastic job.

But are you frustrated that the order flow has not been more robust to date?.

Well, I think it’s been pretty robust. I mean – I guess, you can you can be the turtle or the hare. In my mind, the continuous improvement is a pretty good strategy. And that’s what I see. So, I think we’re doing pretty good. Every now and then you get these extremely large opportunities that come along and we’ll continue to chase those.

But I think overall our strategy in terms of growing the revenue base is panning out. I would appoint to the two in our contracts as a great example of that. And in my comments, I mentioned we’re chasing some new stuff that’s a little different than our traditional business as another way to go about that.

And as long as I can keep incrementally growing the business, I’m pretty happy..

Okay, great. Thank you for answering my questions. I’ll drop back in queue. Thank you..

You bet..

Your next question is coming from Michael Eisner. Your line is live..

Thank you. Hi.

How’s the COVID situation in New York now?.

Settle down now. We had a bout of it here in the – basically in January and we had quite a number of folks out 30, 32 or 33 folks out with it. And why it, because we didn’t have any significant effects prior to that in terms of our employees and why it hit us in January, I really can’t tell you. But it seems to settle down.

I think we’re at the moment we have one employee who’s out for testing positive and expect him back next week. So, it seems okay now, but it did hit us in January..

Well, I had COVID, the Omicron at beginning of January, it was very high level then.

The supply chain going forward from now, not in the court, how is it looking?.

Well, there’s still issues in the supply chain and there’s two things. One is shortages or delays if you will. A lot of stuff, a lot of the parts that we use, we used to be get in a few weeks, some of them now are, are four, six, 12 months deliveries. That’s one problem. The other problem of court costs are going up.

I think you see in the news, you know things that are sourced from Russia, nickel and titanium, and some of those things are all going up pretty rapidly. So that’s the next challenge. On the component parts side, the issues seem to me to be more in the active components.

So, things that are the more expensive and longer lead things seem to be more problematic. But I’m hoping that will start to down a bit. Of course the Ukrainian situation throws a wrench in a lot of different things, because of raw materials.

But that’s where we are – we’re holding our own so far, but we have, as we said in the comments, we have had some delays and some of those cause other costs, because you got to read stuff to for components source..

Yeah. Every, every company’s had delays, it’s nothing at your fault.

You said GPS III, I think, did you mean GPS IIIF in your comments?.

No. No. I meant GPS III. We’re going to fly one of DRAF units on a GPS III satellite to it’s basically a demo because satellite is designed for not for our clock, but they’re going to put our clock on there, so they can demonstrate its performance in space..

You didn’t think you – I think last call to call before you didn’t think they were going – you’re going to get on GPS III, but you are going to get one..

Yes, we are. Yes..

And if everything goes good one, you start production of GPS IIIF?.

We are in the cycle on GPS IIIF with qual unit, that’s going through the final stages of qualification. We do not yet have orders for the flight units. But I would expect that to be imminent soon as we finish qual here..

Like a month or two?.

A couple of months..

Oh, still a couple of months..

Well look, they made it elect – the unit I don't want to get too much into detail, but the unit has a qualification program after that qualification program, it has what's called a long term aging test. But once we're with the qual program, we've basically proven the design of the clock.

And my hope is that at that point, they'll start to exercise flight option to not wait all the way through the long-term aging test. But I don't know that yet..

Would that mean – that would mean the continuous stream of revenue if they approve it?.

Well, sure. Yeah. If they exercise the options. Yes..

Well, there's, I don't know.

I figure how many clocks in the GPS 3F was it 21?.

No, there's 22 satellites. But some of the initial satellites are already in production and of course those don't have our clocks on them yet, because we're not through qual..

Yeah. The first 10 or 11, I think it was. You said you got money from Morion.

Is that going to be a problem in the future? They're there in Russia, right?.

Yeah. Yes they are. We get dividends where we have a small equity position in Morion and we get dividends from them. It's not substantial and frankly I don't expect to get them anymore.

So given things are, we're just not – we're not we're not dependent on Morion for anything and I wouldn't expect that we will be able to do much business with them in the future..

And the Ruble is worthless.

Going back to Sam's question on Zyfer are you moving the production and keeping the technology out there? How are you doing this?.

Yes. Manufacturing will move. You could think it's analogous to them deciding to have a contract manufacturer of the unit. The engineering, development and everything else will remain there as it is. We're just going to shift the manufacturing part here..

So that means are you going to a small office?.

Well, no, not smaller office. I mean, it will absorb their manufacturing into the current facility. .

Well, manufacturing not office a manufacturing plant..

Yeah. We'll absorb that here. We don't need any additional space..

No.

Would you? I know you could, no, you have space in New York, but will you reduce space in California?.

Yeah, eventually. Yes. We have a lease and of course we have to either sublet part of the building or when we renew the lease we won't need all that space..

When's the lease up?.

I think it's got another couple of years..

All right. So you cut. All right.

So how long is that going to take to move into New York?.

Probably another month..

All right. So that's going to save some, some good money on people..

Yes..

You're not going to have to hire any new people in New York for this, do you?.

Yes. We will hire additional manufacturing people, but we won't replace the manufacturing workforce out there one-for-one. We won't need the infrastructure part. We already have that here. All we need is the people that do assembly..

How many people do you have in California?.

Now there's roughly 32 or three, I think..

All right. And I know I'm asking a lot of questions. Just get this over with.

The mercury ion atomic clock, how much of that is in the backlog?.

Oh, let's see. In the backlog on mercury ion atomic clock, do you know ? It would be the first piece, so it's rough, these are approximations it's about $2 million.

And the same thing for the space-qualified precision oscillators?.

You're talking about the POPRAFS rowing our contract?.

It was announced October 15th..

October 15th..

I'm sorry, I didn't have, no the pulsed optically pumped bigger in September.

How much of that is Backlog?.

That's roughly the same..

$2 million?.

Roughly, yes..

And the other one, the final one, the October 15th contract, do you – if you don't know it's....

I don't have the press release in front of me. I don't remember which one that is, sorry..

No, it's okay.

What's he bids outstanding at this point?.

Bids outstanding. I don't know offhand. I'm going to guess probably couple $100 million..

And you expect to get most of it?.

Well, we don't win a 100% of things. Our win rates have run in the 30% to 40% range..

Yes. You trade and if you take out the cash, you’re about $6 of share or $6.20 a share..

Yes. I'm not sure a current market conditions are a good calibrator but okay..

No, I'm just saying it's ridiculous because your technology you have in the plant, is worth a lot and yeah. You take out the….

We're underappreciated. This is a national asset..

Yes..

I agree with you..

All right. Sorry, I asked so many questions about….

That's quite alright.

Well I have you. Thank you..

You bet..

There are no further questions from the lines at this time. I would now like to turn the floor back to Stanton Sloane for closing remarks..

Great. Thank you. Well, thank you everybody. I'm glad you're able to join us today. Until we talk to you next quarter, please stay safe and healthy. Have a great day. Thank you very much..

Thank you, ladies and gentlemen. This concludes today's conference call. You may disconnect at this time and have a wonderful day. Thank you for your participation..