Greetings and welcome to the Frequency Electronics Second Quarter Fiscal 2023 Earnings Release Conference Call. 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 obligation to update these statements for revisions or changes after the date of this conference call. It’s now my pleasure to introduce your host, Thomas McClelland, President and Chief Executive Officer.

Hi. Good afternoon, everyone. Although the results for the second quarter are not where we would want them to be, there are significant indicators that we are on the road to recovery. Revenue quarter-over-quarter has increased. Our backlog of approximately $56 million at quarter end is higher than it has been at any time in the last 8 years, as is the book-to-bill ratio of 2.8. In addition, we have booked $4.4 million of new business already in the third quarter. At the annual meeting, we discussed the satellite industry’s move to develop systems, which utilize a large number of low-cost satellites that are designed to be replaced much more regularly every 3 to 5 years rather than the 15-year lifetime required of today’s large satellites. One of our key customers, a large government-like prime contractor, has communicated that they experienced 15% growth in satellite business over the past year and anticipate sustained growth of 10% to 15% annually over the coming years. As a result, they are interested in engaging FEI in the development of advanced technology appropriate for what they refer to as proliferated low earth orbit satellite systems, often referred to as large systems of small satellites. We are experiencing similar overtures from other satellite prime contractors, all of which bodes well for our future business prospects in space. All that being said, we still struggle with supply chain issues and persistent inflation, but in both cases, signs of easing are beginning to appear. Continued effort is required to navigate the changing economic and geopolitical environment, but we are confident that we are progressing in a positive direction and look forward to dramatic improvements in results. The company is committed to moving towards sustained profitability and cash generation in the near future. We remain debt-free, and our strong balance sheet allows us to pay the special dividend discussed in a separate press release today while still maintaining the ability to invest in future growth opportunities. Okay. I’d now like to turn things over to the Chief Financial Officer, Steve Bernstein. Go ahead, Steve.

Thank you, Tom, and good afternoon. Before I give you the financial report for the second quarter of fiscal '23, I just wanted to provide a brief explanation relating to the delay in filing the 10-Q as well as the restated fiscal '22 10-K. During the preparation of the current 10-Q for the period ending October 31, '22, we realized there was a formula error in the calculation that split contract assets and contract liabilities from a net presentation to a gross presentation. The net number is correct; however, our formula didn’t split the assets and liabilities of related contracts, calculated as one project for revenue purposes. For example, if there were three related contracts that made up one complete project, two with a contract asset of $1.5 million each and one with a contract liability of $1 million, our formula would have recorded a contract asset of $2 million instead of a contract asset of $3 million and a contract liability of $1 million. As we put together footnote C in the 10-Q to show the effect of the formula change going back in time, it was determined that it was an immaterial error and would only be footnoted to show the effect going back. It was also determined that when the fiscal year Form 10-K for the period ended April 30, '22 was filed, the fiscal year '21 contract assets and contract liabilities were shown gross as opposed to net as was shown in the fiscal year '21 annual report on Form 10-K. The footnote was deficient in that it did not disclose to the reader that the fiscal year '21 contract assets and liabilities would change from net to gross. As a result, we had to amend the fiscal year '22 annual report on Form 10-K to advise the public not to rely upon the financial statements and the controls on financial reporting. It is a GAAP requirement to disclose the changes made regarding the fiscal year '21 presentation changes in the annual report on Form 10-K for the period ending April 30, '22. However, management wanted to clarify the situation, despite the omission to disclose to the reader of the financial statements that the contract assets and contract liabilities were changed from net to gross presentation. Management feels that the financial statements were accurate and could be relied upon. Other than the formula mentioned above, all of the information a reader of the financial statements needed was in the financials and was completely accurate. The only thing causing this restatement and delay in filing was the correction of a footnote to make the reader aware that the contract assets and contract liabilities changed on the face of the FY '21 balance sheet from net to gross. However, it was shown gross in the supporting footnotes. I should also mention that this change does not affect the P&L, working capital, or any other calculation that would have helped in evaluating the financial statements as presented. Because of these reasons, management of the company feels that the financials were accurate and could be relied upon. I believe I have said enough about this subject. However, if you want more details, feel free to contact me after the call. And now, I will go into the financials for the second quarter of fiscal '23. For the six months ending October 31, '22, consolidated revenue was $17.2 million compared to $25.9 million for the same period of the prior fiscal year. The components of revenue were as follows. Revenue from commercial and U.S. government satellite programs was approximately $7.8 million or 46% compared to $13.3 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 $8 million compared to $10.6 million in the same period of the prior fiscal year and accounted for approximately 47% of consolidated revenue compared to 41% for the prior fiscal year. Other commercial and industrial revenues were $1.4 million compared to $2 million in the prior fiscal year. Consolidated revenues increased quarter-over-quarter by approximately $750,000 or 9.1%. Intersegment revenues are eliminated in consolidation. For the six months ending October 31, '22, gross margin and gross margin rate decreased as compared to the same period in fiscal year '22. The decrease in gross margin and gross margin rate was due to increased engineering costs on development phase programs and particularly complex technical challenges that have since been resolved. Minor technical challenges that have been or will be resolved reasonably quickly and the negative cost impacts of some programs due to supply chain delays affected gross margin as well. Gross margin was also impacted by under-absorption of costs due to the decrease in sales during the six-month period ending October 31, '22. For the six months ending October 31, ’22, and ’21, SG&A expenses were approximately 23% and 26% respectively of consolidated revenue. The decrease in SG&A expense for the six months ending October 31, '22, compared to the prior year, was largely due to a decrease in professional fees as well as one-time reductions to stock option expense related to forfeitures and deferred compensation expense. The company continues to monitor expenses looking for additional cost-effective reductions going forward. R&D expenses for the six months ending October 31, '22, decreased to $1.7 million from $2.7 million for the same period last year, a decrease of $1 million and was approximately 10% and 11% respectively of consolidated revenue. The R&D decreases for the first half of fiscal year '23 are related to a focus on projects currently in the production phase. The company plans to continue to invest in R&D in the future to keep its products at the state-of-the-art. For the six months ending October 31, '22, the company recorded an operating loss of $5.4 million compared to an operating loss of $1.4 million in the prior year. Operating losses resulted largely from a decrease in revenue, coupled with additional costs mentioned previously regarding gross margin. Operating loss improved quarter-over-quarter by approximately $120,000 or 26.5%. Other income consisted primarily of investment income derived from the company’s holdings of marketable securities. Earnings on these securities are based on fluctuating interest rates, dividend payout levels, and the timing of purchase sales, redemptions, or maturities of securities, resulting in a pre-tax loss of approximately $5.4 million compared to a $1.1 million pre-tax loss for the prior fiscal year. For the six months ending October 31, '22, the company recorded a tax provision of $2,200 compared to $2,300 for the same period in the prior fiscal year. Consolidated net loss for the six months ending October 31, '22, was $5.4 million or $0.58 per share compared to a $1.1 million net loss or $0.12 per share in the prior fiscal year. Our fully funded backlog at the end of October '22 was approximately $56 million compared to approximately $40 million for the previous fiscal year end, April 30, '22. The company’s balance sheet continues to reflect a strong working capital position of approximately $28 million at October 31, '22, and a current ratio of approximately 3.9:1. Additionally, the company is debt-free. The company believes that its liquidity is adequate to meet the operating and investing needs for the next 12 months and the foreseeable future. I will turn the call back to Tom and we look forward to your questions soon.

We can now take questions.

Thank you. Okay. And the first question is coming from Brett Reiss from Janney Montgomery. Your line is live.

Hi, gentlemen. Tom, Steven, can you hear me?

Yes.

Yes.

Great, great. First question is on the dollar-a-share special dividend. Could you just give me a sense of how the Board decided to do that versus maybe looking on bolt-on accretive acquisitions or retaining the money for organic growth initiatives and, I suppose, our share buyback since the stock is already pretty illiquid—that’s why that was ruled out. Could you give us some color on that?

Well, I think you kind of hit the nail on the head with respect to share buyback. I think the general conclusion of the Board was that this was an appropriate way to essentially provide the same benefit as a share buyback for shareholders, but in a more effective fashion.

Okay. It was very encouraging to see the backlog move up so dramatically. Could you—Tom, could you give us some sense on the timing on working through the backlog? Is it a certain percentage each quarter? Is it more back-end loaded? Could you give us some color on that?

Well, yes, it’s not like the backlog is represented by one or two contracts. So I think it’s hard to make a general statement in that regard. I think in general, the backlog is converted to revenue for a period of roughly 2 years. But there are going to be some cases where it’s significantly longer than that or some where it’s a little bit shorter.

Okay. And what is the composition of the backlog? Is it mainly with your expertise with the quartz clocks? Is it the atomic clocks? Or is it another area of your business that gave rise to this increase in the backlog?

Well, I think there are really three things: quartz oscillators, atomic clocks, and microwave systems. I actually don’t have a quantitative breakout available at this time, but those are the primary areas. I think it’s reasonably well balanced between those three.

Okay. And a couple of quarters ago, the company was devoting a lot of R&D to reduce the size, weight, power needs, and cost of your clock offerings. Have you made progress in that area?

Well, I think we’ve made considerable progress, but it’s something that we still work on. In fact, I just noticed we got a little over $4 million of new business in the third quarter, and a significant chunk of that is a contract in which we will utilize some of that R&D to develop smaller devices. So I think that’s pretty encouraging. But it’s very much an ongoing effort. We do see this as the direction of the industry at this point, moving to smaller, lower-cost systems, and we have every intention of being a strong competitor in that environment.

Last question from me, and I’ll drop back in queue. Is your employee headcount where you want it to be based on what you see your level of business over the next few quarters?

Yes, I think we’re pretty close to where we need to be. I certainly don’t anticipate any further reductions at this point in time.

Great. I will drop back. Thank you very much for taking all my questions. I appreciate it.

Okay.

Up next, we have Richard Johns, Private Investor. Richard, please proceed.

Hi, thank you. And first, thank you for the dividend. My first question has to do with your supply chain problems. You’ve had difficulty getting parts, and that continued in the second quarter. My question is, can you see an end to that? Can you see getting back to normal in that regard at some point?

Yes, I think we can. What we continue to see is we place orders, and we get extremely long lead times on electronic parts that ordinarily would have lead times of a couple of weeks, maybe a month. We are now quoted lead times of more than a year. In some cases, we’ve had lead times of 80 weeks. But what we’re starting to see is that we get promised deliveries 80 weeks out in the future, and then we actually receive the parts in 10 weeks or 15 weeks. We’ve seen that in a number of cases. So I think what I start to see is that people are being very conservative in making promises, but things are turning around, and they are able to do much better than those original conservative estimates. And that’s really encouraging. But nonetheless, we have to plan based on the promises made by our suppliers. So we don’t see these kinds of improvements to deliveries in all cases. So it’s kind of a mixed bag, but I think it is indicative of the direction that things are going.

Okay. That’s great. And the additional costs that come as a result of difficulty in getting parts or taking more time to engineer products. Do you ever get compensated for that? That is in your ultimate development or production programs; do your customers give you some wiggle room and help you pay for that?

Well, that’s something that we’re actively pursuing at this point in time with some of our customers. In one particular case, we have received some benefit in that regard. But in general, that hasn’t happened. But I think that is something that we are going to be pursuing over the next year or so because we’ve suffered tremendously in this regard.

Okay. And you said on one of the two calls that you led, Tom, that you were hoping to get back to breakeven by the end of this fiscal year. And I’m wondering if you still think that’s likely.

Well, I wouldn’t say it’s likely that this fiscal year will be breakeven, but I think in the last quarter and going forward after that, we do anticipate being breakeven or perhaps a little bit better.

Okay. Alright, thank you. Good luck.

Thank you.

Okay. Next, we have Robert Smith with the Center for Performance Investing. Robert, please proceed.

Good afternoon. Thanks for taking my questions. Tom, the presentation you made at the annual meeting, is that on the website?

It should be; if not, we will check, but it should be there.

Okay, thank you. Yes, we are really interested in listening to it. So Tom, what kind of time period do you think you’d need to make your own personal imprint on leadership at the company? I mean, you’ve been at the helm for a relatively short while. You have a wealth of experience with the company. I assume you’re attempting to reposition the company into stronger growth markets, so I am wondering how you feel about this?

Well, I think in some ways, I’m leaving an imprint already that’s not very visible in the financial results at this point. But there are a lot of things going on, a lot of changes that have been made. I think it’s kind of a mixed answer. There are some things that are evident already, and there are some things that are going to take a couple of years. We are pursuing new products, and those are things that aren’t going to develop instantaneously. There are some things we’re working on, and we think we’re going to have some prototype products in the 2025 to 2026 time frame. So I guess the summary answer is there is an imprint happening continuously between the present and a couple of years out.

Yes. I mean the burgeoning small satellite business is really coming to the fore. I assume I’m not saying you’re asleep, but in the past, you’ve certainly not been trying to participate, so I assume that this is a really important shift that you’re trying to take the company in the direction.

Yes, it is in some sense. But I will say we don’t believe that the large satellites are going to completely disappear anytime soon. And so we don’t want to abandon that business. In fact, there are signs of growth in that business also looking to the near future. But yes, we do feel that the small satellite business is where the future will go. But the question is what does small satellite really mean? And there are satellites the size of a basketball and even smaller that have been launched recently, and there are people that call satellites that are 100 times bigger than that, which are also considered small satellites. That’s the challenge for us: to find where the sweet spot is and where things really end up.

Makes sense. So looking at the revenue model, do you have a guesstimate as to what kind of volume we have to generate to reach breakeven considering gross margins?

Well, you want to answer that one, Steve?

We have a model. I don’t want to really forecast the future yet. Based on what we see, what we have in-house and our backlog and everything else, we believe, based on product mix and everything else going as Tom said, in the fourth quarter, we should be heading in that direction now.

You are heading in the direction which you were. Okay, thanks so much, and good luck going forward. Happy holidays.

Alright. Thank you. You too.

Up next, we have Michael Eisner, Private Investor. Michael, please proceed.

Thank you. The $56 million in backlog—was some of that classified because there weren’t many news releases recently about contracts?

We don’t have any classified contracts. None of that’s classified.

Alright. That’s fine. And then right now technically up to $60 million in backlog because that $4.4 million came in after October 31st?

Yes.

Alright. That’s good. How many employees do you have overall?

We have about 180 employees considering all of the…

California and New Jersey also, total 180?

It’s 180 between Long Island, New Jersey, and California.

Let’s see, went down a drop. I think you did. Did you move more people from California to New York?

No, we did not.

Alright. And where are we with GPS IIIF?

We have actually just completed qualification testing of an engineering model. We have also completed a 140-day stability test, and we have successfully completed that as well. We have also delivered an engineering model, which is slated to fly on one of the GPS III satellites. They gave an extra slot on the satellite for an extra atomic clock, and our clock will be flying in that slot. I don’t remember the exact schedule for that satellite at this point, but we have heard that everything is good, and I believe that the satellite is all bundled up and ready to go. It’s just a question of when it will actually launch.

That would be on GPS III, not the GPS IIIF?

That’s correct. Yes, this is a goal for everybody on the program. This is seen as an important step in everyone having confidence in our clock as a primary clock on the satellites. There is an effort to get this inserted as early as possible.

The IIIF is like the longest biggest contract, right? That would take years.

Yes, it will take a few years to—I think there are 22 GPS IIIF satellites. But I don’t believe all of them have been released at this point.

Plus the GPS III that was like 10, right?

Yes.

So, it’s totally like 32.

Yes.

And you are getting on the final of the GPS III?

Yes.

Alright. And one more question. I think you mentioned last quarter that some companies were buying more parts upfront or something to that effect. Are they continuing to do that?

Well, we—I don’t want to speak for other companies, but we are doing that.

That’s what I mean. So, this way, you won’t be short of parts.

Yes. Well, it’s a challenge because we don’t want to just build up a huge inventory of parts. On the other hand, it makes sense given the long lead times to judiciously build up some inventory of commonly used parts. So we are definitely pursuing that.

Yes. I think you commented like if they can give you the right part, it would take like a year to get the new parts or something. I think that’s what you mentioned last time.

Yes.

And are the overruns over with? You are in good shape there?

We are definitely finishing up the development on a couple of programs, and we anticipate that the overruns are over or nearly over.

Alright. I will assume you think everything is going well, especially since you paid the dividend.

Well, we are certainly pretty bullish about the future.

That’s right. I am glad to hear that. And I think you said this is something like for the first time in 8 years that you had this kind of backlog in the release.

Yes.

Alright. Sir, thank you for your time.

You are welcome.

Okay. The next question is coming from Frank Wisneski, Private Investor. Frank, please proceed.

Hi. Thanks. Follow-up on the inventory question. Well, it was pretty clear that the supply chain issues and other issues contributed to that. What do you see as you are—but it’s still a very large number, was $20 million in inventories. So, the trends are pretty poor. On an ongoing basis, without any supply chain uncertainties, what do you think your inventory turn should be? Because you have a lot of cash obviously tied up in that?

Steve?

We look and manage inventory. The problem is sometimes we use it later on as we get repeat programs. So, you have minimum buys and various other things that affect the growth of the inventory. Yes, it stays a little bit higher, but the end result is a lot of it gets reused on the next generation of things.

Okay. So, you wouldn’t see any particular change in the inventory turn ratio?

Because the length of the programs and stuff, probably not or not significant.

Okay. Could you update us a little bit on Zyfer? What’s happening out there as far as their outlook for business?

I think their outlook is quite good at this point. We have recently received a large contract, and we have a couple more in the pipeline that look very promising. I think we have gone through a challenging period with Zyfer, but I think things look really pretty good right now.

Good. In the past, there have been some classified work out there, hadn’t it?

Yes. Well, I think Zyfer manufactures hardware that takes advantage of GPS receivers, and so there are GPS receivers that are able to utilize the encrypted messages, military messages. So there is some classified activity that goes on related to that, but it’s not that Zyfer is working on overall classified programs.

Okay. And one final question. One, I think the moves you have made is to become interim have been very favorable. Could you update us on what the status is of a non-interim—either you or someone else CEO?

Well, I don’t know that that’s really for me to say. My understanding is that the Board is not actively looking for a replacement for me, but I don’t have any intentions of going anywhere or doing anything different at this point in time. I have every intention of being here certainly for the next 3 to 5 years.

And those in the interim designation that you…

Yes. Well, perhaps, we will see.

Alright. Thank you very much. Have a good holiday.

You too. Thank you.

Okay. The next question is coming from Bert Cole, Private Investor. Bert, please proceed.

Yes. Thank you very much. Hey and thanks for taking the call. The question that I have really relates to our Board and the dividend that we are giving. While I certainly appreciate it, I have some questions relating to how our Board is performing and that no one on this call seems to really be concerned. Our backlog is $56 million, up from $40 million. Additionally, we shipped $88 million over the six months. All of the press releases that go through the Board’s approval and so on, I haven’t seen any telling the industry and the public at large that the corporation is, in fact, having increased bookings. We took this $88 million contract and that one and so on and so forth to promote our corporation as it relates to a stock price and the value of our corporation. That’s a Board responsibility, which to me and maybe others, they have certainly failed. The next thing that concerns me, and it only occurred an hour ago, is the release of a $1-a-share dividend. While I certainly appreciate it, the corporation is losing tons of money, and it includes Board members that probably own 20% or 25% or control 20% or 25% of the company’s stock. Look at the rewards they are getting for a corporation that’s lost half its value in the last couple of years. I am really upset with the performance of an overseeing Board that determines a temporary CEO or not a temporary CEO or whatever is going on. No one on this call seems to be concerned that our Board of Directors is rewarding itself in certain instances or the shareholders that they represent, and the corporation is just giving up and losing money, certainly, perhaps for the next balance of this fiscal year and hopefully turning around next year. While I am an extremely small shareholder, I guess you can tell why my anger and my conversations today that are more than upset over the performance of individuals that control and run the management, so to speak, of our business. Gentlemen, I only wish you a healthy New Year, and next year, fiscal and calendar should be better for all of us. Thank you for accepting my call.

Okay. I have no comment at this time.

Okay. We have no further questions in the queue. I would like to turn the floor back to Tom for any closing remarks.

Okay. I would just like to wish everyone a very happy holidays and good health. That’s it. Thank you.

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.