Frequency Electronics, Inc.

Greetings. Welcome to Frequency Electronics fiscal year 2020 fourth quarter and year end 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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 forward-looking statements. Factors 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 is now my pleasure to introduce your host, Stanton Sloan, President and CEO.

Thank you, Sherry. Welcome, everyone. Thank you for joining us today. I hope everyone's faring well during the pandemic. We have now reported fiscal year 2020 results. I'll just say it was a difficult year, and I'm glad to put it behind us. A combination of issues impacted us last fiscal year, some of which we have previously discussed. Late in the year, we had added impacts related to COVID-19, legal expense, and reserve for a note that was due to us. Backlog for 2020 was down approximately a million dollars. However, we did book a significant contract earlier this month. and others. We also had impacts from vendors in our supply chain, either being unable to deliver critical materials on time or having quality issues which resulted from some of their key personnel being out due to direct or indirect COVID-19 impacts. Unfortunately, when this happens, it results in increased cost to us for either additional processing or for rework of materials. When there are delays, it affects revenue recognition, gross margin, and obviously operating income, which is reflected in these financials. More importantly, however, we have lost no employees to the pandemic. as an essential industry. Most of our employees have been here at work through the duration, and their health and safety is, of course, of paramount importance. In Q4, we continue to work through the programs that have had higher development-related costs, which we have previously discussed. Of those three problem programs, one is completed now, one is nearing completion with initial products delivered and working extremely well, and one is in the acceptance test cycle. In summary, we should have all three of these behind us in about three months. Let me shift gears here and talk about the future a bit. I'm sure you all saw the announcement on July 1st of a significant contract award, which I mentioned earlier. We are now currently negotiating an additional contract for which we've been selected and which is also significant. I'm optimistic we'll be able to successfully conclude these negotiations and announce the award sometime soon. While there is no guarantee that this will happen, I am encouraged by progress. It is important to point out that revenue is key to improving our financial performance, and new business activity, which is robust, is the best leading indicator of revenue growth. This fiscal year is very different from previous years in that most of the new contracts that are needed to generate revenue this year are either awarded or are imminent, versus being planned later in the year and that reduces the risk associated with revenue recognition. In order to meet these new contract demands, we are currently hiring personnel in both engineering and manufacturing. I also wanted to mention that we've had significant progress on key programs which we were previously awarded that relate to the GPS satellite program. Both of these contracts are key to future business growth and both are on track. One of them successfully completed a critical design review last week got very high marks from the customer, and the initial engineering model for the other program is progressing very well through the development process. While the fiscal year 2020 financials are what they are, I am encouraged by progress of late, and I'm convinced that our future is brightening considerable. Let me now turn things over to Steve for a review of financial details. Steve?

Thank you, Stan, and good afternoon. Fiscal 20 consolidated revenue was $41.5 million, down 16% compared to $49.5 million for the prior fiscal year. The components of revenue are as follows. Revenue from commercial and U.S. government satellite programs was $20.4 million compared to $22.8 million for the same period of the prior fiscal year and accounted for approximately 49% of consolidated revenues and David Koehler. are $16.9 million compared to $22.8 million in the prior fiscal year and accounted for approximately 41% of consolidated revenue compared to 46% for the prior fiscal year. Other commercial and industrial revenue was $4.2 million compared to $3.9 million in the prior fiscal year. Intersegment revenues are eliminated in consolidation. For fiscal 20, gross margin was $5.8 million compared to $15.8 million for the prior fiscal year. Gross margin rate decreased to 13.9% as compared to 31.9% for the same period in fiscal 2019. The lower gross profit and gross profit percentage was the result of lower revenues and was impacted by increases in engineering costs incurred on several programs which were in the development phase and which encountered unanticipated technical challenges related to customer driven system packaging and environmental requirements for state of the art performance demand. In fiscal years 20 and 19, selling and administrative expenses were 28% and 24% respectively of consolidated revenue. The actual dollar value of the expense decreased compared to the same period of the prior fiscal year. SG&A increased as a percentage of consolidated revenues due to the decrease in revenue. SG&A expense in fiscal 19 included a one-time charge of approximately $1 million for the loss associated with the sale of FEI Asia. Depreciation and professional fees were up this year. However, we expect that our D&O coverage will cover a percentage of the legal fees. Research and development expenditures represent investments intended to keep the company's products at the leading edge of time and frequency technology and enhance future competitiveness. The R&D rate for fiscal 20 was 12% of sales compared to 13% of sales for the previous fiscal year. The approximately $1.4 million decrease in R&D expense year-over-year reflects a higher level of customer-funded R&D as a portion of the total R&D effort. These R&D efforts address large business opportunities in secure communications, command and control, and satellite systems that require advanced technologies and capabilities going forward. For fiscal 20, the company recorded an operating loss of $10.9 million compared to $2.8 million for the prior fiscal year. The increase in the operating loss in the current fiscal year is a result of decreased revenue as well as increased costs related to technical challenges on certain programs in the development phase. Other income consists primarily of investment-derived income from the company's holdings of marketable securities. Earnings on securities may vary based on fluctuating interest rates, dividend payout levels, and the timing of purchases, sales, redemptions, or maturity of securities. Included in other expenses for fiscal year ended April 30, 2020, is a provision related to a $1 million note receivable from the sale of Jalam, which is due in fiscal 21. This yields a pre-tax loss for fiscal 20 of approximately $11.7 million compared to a pre-tax loss of approximately $2.5 million for the prior year. For the fiscal year ended April 30th, The company recorded a tax benefit of $1.7 million compared to a tax provision of $56,000 for fiscal 19. For fiscal year ended April 30, 2020, consolidated net loss was $10 million or $1.10 per diluted share compared to a net loss of $2.5 million or $0.28 per diluted share. Our fully funded backlog at the end of April 2020 was approximately $36 million down approximately $1 million from the previous year. However, subsequent to year end, we announced a significant contract win and expect to announce additional wins in the near term. The company's balance sheet continues to reflect a strong working capital position of approximately $38 million at April 30, 2020, and a current ratio of approximately 4 to 1. The company believes that its liquidity is adequate to meet its operating and investing needs for the next 12 months and for the foreseeable future. I return the call back to Stan, and we look forward to your questions soon.