Frequency Electronics, Inc.

Greetings and welcome to the Frequency Electronics Q1 fiscal 23 earnings release conference call. At this time, all participants are in a listen-only mode. 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 the forward-looking statements. Factors that would cause or contribute to such differences are included in the company's press release 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, Thomas McClellan, President and Chief Executive Officer.

Thank you. The first quarter of fiscal 2023 continued to be really challenging financially, but aggressive steps to correct things are in progress. The leadership change, which resulted in my participation here, was made with one month remaining in the first quarter, so the opportunity to impact the first quarter results was clearly limited. However, since the close of the first quarter, we have implemented changes which will result in a 17% reduction in labor costs for FEI New York. These changes have been carefully planned and designed such that we can still meet or beat program milestones and deliverables which are necessary to hit our revenue targets. Aggressive steps are also being taken to improve efficiency in FEI's manufacturing over the longer term and to accelerate progress wherever possible. Finally, some of the specific delays which have impacted the fiscal year 2022 and also Q1 2023 results are finally ending. For example, a major atomic clock development program is now generating revenue after almost eight months of government delays in getting the program started. Nonetheless, going forward, delays due to geopolitical events, the COVID-19 pandemic, are still a frustrating reality. Everyone's aware of supply chain problems, but for FEI, this now routinely translates into promised deliveries of well over a year for commonly used electronic parts. Similarly, the eight-month delay cited above is not likely to be the last such delay as much of the U.S. government continues to work remotely, a fact which further slows already slow administrative and contractual activities. These challenges are a fact of life which we must be prepared to deal with for the foreseeable future. Accordingly, we're working hard to implement real-time adaptations to our manufacturing processes, which will allow us to be successful in spite of these ongoing challenges. We have a lot of work in front of us, but are optimistic that the changes already made, as well as those anticipated over the next three quarters and on into the future, will result in a dramatic improvement in results. I'd like to now turn things over to Steve Bernstein, our CFO, who will go through some of the financial numbers.

Thank you, Tom, and good afternoon. For the three months ended July 31st, 2022, consolidated revenue was $8.2 million compared to $13 million for the same period of the prior fiscal year. The components of revenue are as follows. Revenue from commercial and U.S. government satellite programs was approximately 3.5 million, or 42%, compared to 6.7 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 reported 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 Zephyr segments, were $4.1 million compared to $5.5 million in the same period of the prior fiscal year and accounted for approximately 50 percent of consolidated revenue compared to 42 percent for the prior fiscal year. Other commercial and industrial revenues were $664,000 compared to $724,000 in the prior fiscal year. Intersegment revenues are eliminated in consolidation. For the three months ended July 31st, 2022, 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 that experienced particularly complex technical challenges as well as cost impacts on several programs resulting from supply chain problems. Gross margin was also affected by underabsorption of costs due to the decrease in sales this quarter. For the three months ended July 31st, 22 and 21, selling and administrative expenses were approximately 24% and 34% respectively of consolidated revenues. The decrease in SG&A expense for the three months ended July 31st, 22 as compared to the prior year period end is largely due to decrease in professional fees as well as reduction in stock option expense and deferred compensation expense. R&D expense for the three months ended July 31st, 22 decreased to 1.1 million from 1.4 million for the three months ended July 31st. A decrease of 300,000 and we're approximately 14% and 10% of consolidated revenue. R&D decreases for the first quarter of fiscal year 23 are related to focus on projects currently in 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 three months ended July 31st, 22, the company recorded an operating loss of 3.1 million compared to an operating loss of 1.7 million in the prior year. Operating losses resulted largely from the decrease in revenue coupled with the additional costs mentioned previously regarding gross margin. Other income consisted primarily of investment income derived from the company's holdings and marketable securities. Earnings on securities may vary based on fluctuating interest rates, dividend payout levels, and the timing of purchases, sales, redemptions, or maturities of securities. This yields a pre-tax loss of approximately 3.1 million compared to 1.6 million pre-tax loss for the prior fiscal year. For the three months ended July 31st, 22 and 21, the company recorded a tax provision of $1,000. Consolidated net loss for the three months ended July 31st, 22 was 3.1 million or 33 cents per share compared to 1.6 million net loss or 17 cents per share in the prior fiscal year. Our fully funded backlog at the end of July 22 was approximately $40 million, similar to the previous fiscal year end, April 30, 2022. The company's balance sheet continues to reflect the strong working capital position of approximately $31 million at July 31, 2022, and a current ratio of approximately 2.3 to 1. Additionally, the company is debt-free. The company believes that its 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 Tom, and we look forward to your questions.