Frequency Electronics, Inc. (FEIM) CEO Stan Sloane on Q1 2020 Results – Earnings Call Transcript No ratings yet.

Frequency Electronics, Inc. (NASDAQ:FEIM) Q1 2020 Earnings Conference Call September 16, 2019 4:30 PM ET

Company Participants

Martin Bloch – Chairman of the Board

Stan Sloane – Chief Executive Officer

Steve Bernstein – Chief Financial Officer

Conference Call Participants

Brett Reiss – Janney Montgomery Scott

Sam Rebotsky – SER Asset Management

Richard Jones – Private Investor

Michael Eisner – Private Investor

David Starkey – Morgan Stanley

Michael Cooper – Private Investor

Operator

Greetings and welcome to the Frequency Electronics’ Fourth (sic) [First] Quarter Fiscal Year 2020 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] 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 reports filed 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, Martin Bloch, Executive Chairman of the Board of Frequency Electronics. Sir, the floor is yours.

Martin Bloch

Thank you. As usual, I will turn the first part of this presentation to Steve Bernstein. Steve will give you the detailed update and then Stan Sloane will give you the update from his view and I will summarize some other thoughts for everybody and then open the discussion part to everyone of you. So Steve, go ahead.

Steve Bernstein

Thank you, Martin, and good afternoon. For the three months ended July 31, 2019, consolidated revenue was $12.6 million, up 14% from $11 million for the prior fiscal year. The components of revenue are as follows: revenue from commercial and U.S. government satellite programs was $3.9 million compared to $5.5 million for the same period of the prior fiscal year and accounted for approximately 31% of consolidated revenue compared to approximately 50% in fiscal 2019.

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 rose to $6.7 million compared to $4.8 million in the prior fiscal year.

Other commercial and industrial revenues was $1.9 million compared to $700,000 in the prior fiscal year. Intersegment revenues are eliminated in consolidation. For the three months period ended July 31, 2019, the gross margin and gross margin rate both decreased over the same period in fiscal 2019. The decrease is primarily due to higher engineering costs on several current programs which relates to products that are pushing state of the art technology.

For the three months ended July 31, 2019 and 2018, selling and administrative costs were approximately 20% and 23% respectively of consolidated revenue. There were no accounts or type of expense that represented a significant portion of the change in expense.

R&D expense for the three months ended July 31, 2019 and 2018 increased to $2.3 million from $1.6 million, an increase of $700,000 and were approximately 18% and 15% of consolidated revenue. The company expects to maintain a high-level of internally funded activity relating to R&D through the balance of the current year and beyond to address new large opportunities in secured communication, command and control applications, next generation satellite payload products and additional DoD and commercial applications.

For the three months ended July 31, 2019, the company recorded an operating loss of $780,000 compared to an operating profit of $85,000 in the prior-year. The operating loss reflects improvements in revenue offset by both lower gross margin and increased research and development costs compared to the same period of fiscal 2019. Other income consisted primarily of investment income derived from the company’s holdings of marketable securities.

For the three-month period ending July 31, 2019, investment income included a $125,000 dividend from Morion. Other income included the sale of a fixed asset for gain of $50,000. This yields a pre-tax loss of approximately $570,000 compared to a pre-tax income of approximately $38,000 for the prior year. For the three months ended July 31, 2019, the company recorded a tax provision of $20,000 compared to $7,000 for the same period of fiscal 2019.

Consolidated net loss for the three months ended July 31, 2019 was $591,000 or $0.07 per share compared to income of $31,000 or a fraction of a cent per diluted share compared to previous year. For the period just ended, the company generated positive cash flow from operations of $153,000. Our fully funded backlog at the end of July 2019 was $35 million.

The company’s balance sheet continues to reflect the strong working capital position of approximately $45 million as of July 31, 2019 and a current ratio of over 8.5 to 1. The company believes that its liquidity is adequate to meet its operating and investing needs for the next 12 months and foreseeable future.

I will turn the call back to Martin, and we look forward to your questions later.

Martin Bloch

I will turn over at this moment to Stan Sloane for his remarks. Stan, please.

Stan Sloane

Thanks, Martin. As stated in our press release, I’m very encouraged by the amount of new business activity we’re seeing. I believe on our last call we mentioned that we have over $450 million of bids outstanding. As of today, that number is around $490 million. We are seeing some delays in the awarded new space programs, but our win rates are solid and overall the new business picture is very promising.

Revenue was also up from Q1 of last fiscal year. We have several development programs, which we feel will have substantial production tales and in which we’ve made a decision to invest. I feel the short-term effect on gross margin are well working in investment, particularly since we’ve already received initial development contracts for several of these that could potentially result in $200 million plus of revenue.

Overall, I believe we are making progress on improving operations with an eye to long-term growth of the business both top and bottom line. We also continue to generate positive cash flow. Martin?

Martin Bloch

Okay. I think the future we should examine a little bit the past and what happened. Over the past three years, all our customers have suffered to be a decrease in satellite business, which was our main area and to give you example an average of 33 geosynchronous satellites were both on average year-over. The past three years, the average was less than ten. So when our customers lost a lot of business that affected our — a big portion of our backlog.

Second thing that happened is new technology was introduced and this is instead of getting 15 year to 20 years commercial satellite, the cheaper launch cost that are now happy to use automotive parts and expect the five-year of life in orbit. All of this has an effect on our satellite business. However, during this time we were on our intuition waiting for a miracle. We invested a lot in research and development and products which Stan has mentioned has bought our backlog for — proposal backlog the first time in numbers which we’ve never expected to do and what Stan has mentioned is some of this programs although they are — have a slow start, our customers have given us initial R&D fund in order to protect schedule.

I want to relate another effect that happened which — that promises a great opportunity to Frequency Electronics. In July the second most significant navigational system to GPS called Galileo, which is the European GPS, failed because of ground station problems and was out the air for eight days. We’ve got forbid, what have happened to GPS we wouldn’t have police, ambulances, homeland security, all of the critical factors that the DoD and in many cases effect maybe of a commercial operation as well.

What this has created is a necessity for having local time available. So in case it happens you can operate for a certain amount of time before it can be repaired and you’re back on the air. This offers Frequency enormous amount of opportunity for especially the DoD market where technology of low G and good hold of our clocks is unique and we’re probably one of maybe three companies in the world that have the technology to meet that demand. I’m very encouraged that the reality is going to set in that we need to have local time and give us a great opportunity for the investment that we’ve made. So I’m — with Stan, I’m very encouraged with the business that we are getting and with what we see forward, we can see a very profitable future. I would like at this time to turn over to question-and-answer. Please be kind enough to address the question to Steve, Stan or Martin, so we know how to answer you properly. Go ahead.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will take our first question from Brett Reiss with Janney Montgomery Scott. Mr. Reiss, please press “*” “1” again, sir.

Brett Reiss

Does that work?

Operator

Yes. Your line is now open, sir.

Brett Reiss

Okay. Good afternoon, gentlemen.

Martin Bloch

Good afternoon.

Stan Sloane

Good afternoon.

Brett Reiss

Hi. In the press release, you talk about bookings. Could you just explain that versus when you say bids, which have gone from 450 to 490?

Martin Bloch

Just — okay. Either me or Stan, both of us have the same answer, what happened. This is an open proposal to our customers on our type of equipment in many cases that we’re sole source and the only ones that can supply.

Brett Reiss

Okay.

Martin Bloch

So the way we get future business is the customer has a requirement they come to us and we write them a technical proposals and come up with a price to do it.

Brett Reiss

Okay. Can you give us some sense that the $490 million in bids outstanding, does it range all over the map, is it to one or two customers where you’re looking for an elephant order of 50 million to 100 million or is it 30 potential customers with smaller orders, 1 million to 5 million, how many entities or customers are you — how many fishhooks do you have in the pond?

Martin Bloch

Okay. That’s a good question. I would say that probably the majority come from above half a dozen customers. [Indiscernible] say, Stan.

Steve Bernstein

Yes. It’s a whole range from very small orders for small oscillators to big satellite programs. In terms of the total numbers, it’s probably the 30-ish number of fishhooks that was the question.

Brett Reiss

Okay. So on the last call in response to kind of a similar question, you answered that you provided the technology to about a dozen programs and in many cases we delivered the engineering models to the customers. So three months have a lapse since you’ve done that. Have you heard back from any of these customers negatively? I assume if we heard positively, we would have had a press release on firm order. But have some of these customers come back and said no or are they still thinking about it?

Martin Bloch

Well, I can tell you that there is only one customer that said no and the majority of them said yes. As a matter of fact, [indiscernible] to new business [indiscernible] $10 million in the past month — 10.6 as Stan corrected.

Stan Sloane

That’s not the last month, that’s the quarter.

Martin Bloch

Yes, but the majority came at the very end.

Stan Sloane

Yes, we’ve also announced additional orders …

Martin Bloch

Subsequent.

Stan Sloane

… subsequent to the quarter end, which is [indiscernible].

Martin Bloch

So to answer you, the majority of our customers think that we’re quite unique and are able to provide the accuracy, the reliability and what’s most important the ability to provide a clock that can operate in both space and terrestrial environment.

Brett Reiss

Okay. The point of all these question, I know the company does not give guidance and fair enough because how do you know when you’re going to get these orders. But you do tease us a little bit or give us information of how many fishhooks are in the pond and a broad estimate of the decision makers taking 12 to 18 months to make the decision? We are just trying to get a sense of playing the probabilities of when order flow is going to start to come in the next one, two or three quarters. I mean, that’s the [indiscernible] of these questions?

Stan Sloane

Well, we — like I say, we announced couple of weeks ago of fairly substantial order was after the quarter end. So it’s not in first quarter, but with your question about when the order flow, that’s a good start.

Brett Reiss

Okay. You reaffirm to the August 29 wide area augmentation system order?

Stan Sloane

No, no to the VCXO contract for $8.7 million I believe was the amount press released.

Steve Bernstein

Yes, some things are between $8 million to $9 million for a very unique product that were extremely suited for and there are couple more orders that we expect in the very near future. So we see it coming in and like I said, the majority of this proposal that we have of outstanding, we’ve a unique capability to supply the technology thus needed.

Brett Reiss

Yes. I don’t doubt it and I’m offended the company. Now the $8.7 million …

Steve Bernstein

[Indiscernible].

Brett Reiss

Yes. Over what period of time will that be executed on?

Steve Bernstein

Well as fast as we can do it. I think we have about a year and half, but we’re trying to do it faster because the faster we do it, the more we’re going to get on the next phase. So we are really focusing on how to get it done as quickly as possible.

Brett Reiss

Great. Thank you for taking my questions. I’m going to drop back in queue. I may come back, but I’m sure others have a lot of questions. Thank you.

Steve Bernstein

You’re welcome.

Operator

We will take our next question from Sam Rebotsky with SER Asset Management.

Sam Rebotsky

Good afternoon, Stan and Martin and Steve.

Steve Bernstein

Hi, Sam.

Sam Rebotsky

The press release that went on on August 29, is there a — just I assume is shift in the August quarter, is there a number in the next quarter which should be October? Is there a dollar number relative to how much that was or is that significant or insignificant?

Stan Sloane

Well, I’m not sure I understand the question.

Martin Bloch

Yes, could you — Sam, could you repeat the question, because …

Sam Rebotsky

Yes, yes. It says Frequency Electronics has now delivered its fourth in a series of wide area augment systems to Northrop Grumman. So if we ship something to Northrop Grumman there is a dollar amount relative to this and is this part of a major contract? What kind of dollar and I assume if this that was announced August 29, so it’s going to be a sale in the October quarter?

Stan Sloane

No, we don’t disclose the details on that. The point of the press release was just to let you and everyone know that we’re delivering very critical hardware that happens to be an FAA program that provides navigation for commercial aircraft. So that was the purpose of the press release.

Sam Rebotsky

Okay. So …

Martin Bloch

Yes, Sam, just to let you know the two reasons why we don’t do it. First of all, most of the cost of this programs are classified and the ones that are not classified, we don’t want to tell possible competition that what our pricing is.

Sam Rebotsky

So in the backlog how many more of this thing that we ship to Grumman? Do we have a number or more of these things we’re shipping?

Stan Sloane

Yes.

Sam Rebotsky

Okay. Okay. And we are not going to — quantify the number more, I guess?

Stan Sloane

That’s correct.

Sam Rebotsky

Okay.

Stan Sloane

I will get you the two reasons why it’s not wise. One, we cannot because of the sensitive nature and the second is we don’t want to quantify because I’m sure some of the possible competitors are listening.

Sam Rebotsky

Okay. The $490 million that were bids are presumably based on the R&D that we are spending, there will be more bids. Is there — do we see $600 million, $700 million, I mean — the question of a number in the bids and then we spoke of a 12 to 18 months timeframe before they make decisions, if we are so fortunate to get even 50% of this, this would be astronomical. It’s like extended up in the satellite. I mean, Frequency will explode. Could we handle that? What’s the story there?

Stan Sloane

Yes. We are not going to explode. We can handle it. Obviously, when we bid jobs, we do the planning associated with production and engineering loads. So we know that we can execute it. We would not bid on something that we could not execute.

Martin Bloch

That we cannot deliver.

Sam Rebotsky

Okay.

Martin Bloch

[Indiscernible] understand we do have significant other opportunities. And like I said, Sam, as I mentioned, the big area that will now be addressed is that people will recognize the importance of having their own time so they can survive in case the GPS interruption and that will open a significant, in my opinion, other opportunities to FEI.

Sam Rebotsky

Okay. We had about 200 employees at the end of the last quarter. I know we are trying to hire more people. Do we have more than 200 now or where we’re on the hiring process?

Stan Sloane

Well, we are kind of taking a look on population what we have and what we need and the specialties that we need to add on.

Sam Rebotsky

So do you think we need to subcontract some of this if we get big orders?

Stan Sloane

We are looking at that possibility, very good because it’s — that’s much more cost effective than adding people to the routine jobs. The assembly, anything that we can get on our side that will be our first choice.

Sam Rebotsky

Are we looking at any companies to acquire or merge that would give us …

Stan Sloane

All the time.

Sam Rebotsky

Yes, yes.

Stan Sloane

All the time.

Sam Rebotsky

Yes, yes. Well, I guess you guys are trying, I’m very happy that you’re bidding on the number of dollars on the contracts. It’s really wonderful and hopefully soon that somebody contracts will come to fruition and become backlog and sales, so profits will reward the stock. And — yes, are we ready to make presentations or are we — when we are going to start doing that?

Stan Sloane

We are ready and we will do them.

Sam Rebotsky

Okay. All right. Good luck everybody.

Stan Sloane

Thank you, Sam.

Sam Rebotsky

You’re doing wonderful. Thank you.

Operator

We will take our next question from Richard Jones, Private Investor.

Richard Jones

Hi. I’m wondering in dollar terms what percentage of your business has generally been fixed price versus cost plus?

Stan Sloane

A little higher, 70 — probably, 70-30 fixed price 30% cost at various little bit of period, but that’s roughly what it looks like.

Richard Jones

You expect it to be roughly that mix in the future?

Steve Bernstein

That’s an ideal mix for us. We don’t want too many cost plus jobs that high risk development jobs is those value to cost plus, but the others we are much more efficient on a fixed price basis.

Richard Jones

Okay. Okay. And what roughly has been your win rate over time and what do you expect for that in the future?

Stan Sloane

Win rates recently we ran about 70%, it will vary over time, but there is a delay. Range is pretty good for this kind of business.

Richard Jones

Okay.

Martin Bloch

50% plus is [technical difficulty].

Richard Jones

Okay.

Stan Sloane

If you look over a long period of time. And maybe …

Richard Jones

And I guess …

Stan Sloane

And [indiscernible] that we did not win, ended up to be [indiscernible] programs. Some programs look very hot and all of a sudden the government decided that this is what they want to do. So we’ve a good rate in our technology because we don’t bid from TC to Life. We bid on areas where we’ve great expertise.

Richard Jones

Okay. Okay. I have a couple of questions for Steve. I wondered what you start really going and get profitable? What sort of combined federal and state income tax rate would you expect?

Steve Bernstein

Well, we think it will go proportionally back up to where we’ve always been in 20%, 30% range, once it will — again, once we start to show profits.

Richard Jones

Yes. Donald Trump lowered the corporate rate and the number in my head is somewhere around 21% …

Steve Bernstein

21% is the corporate rate, but then you’ve other things that play into effect. So, it’s hard to say given the exact number what it will be.

Richard Jones

Yes. So if you add in the state income tax and the other things you’re referring to, it might get up to 30% or higher?

Steve Bernstein

About 30%.

Richard Jones

Okay. Okay. There’s a new line in your assets in the July 30 numbers — 31 numbers, it’s called right of use assets. Can you tell me what those are?

Steve Bernstein

Sure. There’s a new pronouncement for leases, so you look on the balance sheet for the assets and the liabilities. So for all leases were required to calculate the asset side and the liability. It was from more, they believe it’s for clarity. So we’ve a right to use asset and then we also have a liability that corresponds to it both short — current and long-term.

Richard Jones

Okay.

Steve Bernstein

All really is the leases that we have.

Richard Jones

Those the liability on the right side of the balance sheet, should an investor think that as comparable to long-term debt?

Steve Bernstein

No, because it — yes, you could say, yes — no, it’s not long-term debt. It’s the same. Before that this pronouncement we’ve to pay rent per month, right? So now what they’re doing is they’re telling you have an asset to use the building and you’ve a liability to pay the rent. It’s — no different than it was.

Richard Jones

Yes. I understand. Yes. Okay. Thank you.

Steve Bernstein

You’re welcome.

Stan Sloane

You’re welcome.

Operator

We will take our next question from Michael Eisner, Private Investor.

Michael Eisner

Hi. I’ve question. Did you say sold source on the $490 million?

Stan Sloane

We sold source on all of it. The answer is no. We sold source on a good portion of it, yes.

Michael Eisner

All right. Thank you. And then you said something about to bring $200 million in revenue. Was that on top of the $490 million?

Stan Sloane

I don’t know. I don’t understand the question. Can you say again, Michael.

Michael Eisner

Stan said something about $200 million and I couldn’t hear, I’m good.

Stan Sloane

Of the $490 million of outstanding bids, some of those have contracts where we’ve already won the development part and we’re doing the first part. It maybe production options later which add up to the $490 million. But about $200 million of that we’ve the initial contracts and they have production options and other things associated with them that would add up to the $200 million.

Michael Eisner

All right.

Steve Bernstein

Which is a going thing, Mike, because we’ve gotten those early turn on in order to protect schedule. So if our customers have issues in getting their contract finalized with the government, they took the initiative of difficult initial development. So schedules get not too badly impacted.

Michael Eisner

All right. And Martin, you’re doing more the scientific part now.

Martin Bloch

That’s my job.

Michael Eisner

All right. That’s — I think that’s perfect for you.

Martin Bloch

Well, thank you. I did know it was perfect for me much.

Michael Eisner

And that $8.7 million contract that you just received, how big can I get is that, I mean long-term?

Stan Sloane

That’s potentially $25 million to $30 million.

Michael Eisner

Over a couple of years?

Stan Sloane

Over several years.

Michael Eisner

The same thing. several years, couple of years. And how is the GPS IIIF coming along?

Steve Bernstein

Very good.

Stan Sloane

IIIF is progressing.

Michael Eisner

That’s coming — are you allowed to announce that if you get that?

Stan Sloane

If we get orders for that, certainly we would make that announcement.

Steve Bernstein

Well, I don’t know will they allow GPS when they get the order. We will have to get a clearance from our customers, but we will try to announce it.

Michael Eisner

And the $37 million air force contract, any color on that? How is that going?

Steve Bernstein

Its standing still. The air force is deciding which way to go.

Michael Eisner

Or its still in the [multiple speakers].

Martin Bloch

As a matter of fact we have a meeting in Washington just a few days ago, and that was one of the discussions on this, which way the air force is going to go. At this moment, its standing still.

Michael Eisner

Well, when you say which way it’s going to go, do you mean [indiscernible] forward or if they’re going to do it or what you mean …

Stan Sloane

Well, yes, that’s it. Are they going to [indiscernible] we still have the order, the question is are they going to fund it or are they going to decide that this equipment is too advanced. Although several questions about my pay grade. But it’s being evaluated in — by some serious people in the department of the trends.

Michael Eisner

I was going to try and figure out what you’re going to do, I guess.

Martin Bloch

We will let you know as soon as they let us know.

Michael Eisner

And what — on low G sensitivity technology, you’re the only — you said, there’s only three companies in the world.

Stan Sloane

Well, we are not firmly on the [indiscernible] I’m talking about the ability to provide precision time in production quantities and there are very few worldwide companies that have set [indiscernible].

Michael Eisner

All right. Are you the only U.S one?

Stan Sloane

No. On this, [indiscernible] we are the best, but those are [indiscernible] that are still operating in the United States. But we consider ourselves considerably advanced in the performance, especially [indiscernible] comes to providing timing on to dynamic environment. We are best in the world.

Michael Eisner

What about the price? Because in last conference call you said that they’re still price sensitive?

Martin Bloch

When they need performance, price goes sideways of this — for this clock set are required from moving platforms like remote pilotless vehicles, airplanes, helicopters, ships, performance is number one and price is number two.

Michael Eisner

And final question. Do you — the new backlog since the end of this quarter. You said two numbers. I know you got the $8.7 million contract. Was there something else in there? Could you — I think $10.6 million was there another backlog or maybe something [indiscernible]?

Martin Bloch

Stan?

Stan Sloane

I didn’t hear the question. The $10.6 million is as of the end of the first quarter.

Michael Eisner

$10.6 million as of the end of — that includes $8.7 million?

Stan Sloane

No.

Steve Bernstein

Yes.

Michael Eisner

One yes, one no.

Steve Bernstein

Well, he was asking the $10.7 million includes the $8.7 million contract plus others.

Michael Eisner

Yes. No, no. Yes, the $10.6 million includes everything. I think you said $10.6 million o $10.7 million includes everything.

Stan Sloane

You’re talking backlog?

Michael Eisner

Yes.

Stan Sloane

So that’s the current backlog.

Michael Eisner

So it’s the end of the quarter?

Stan Sloane

[Multiple speakers] include booking. That would include the bookings that happen in second quarter, which we’re not [multiple speakers].

Michael Eisner

Good. Backlog, all right. So it would be — we have the $35 million plus the $10.6 million so far this year, this quarter in the last couple of months is we have to take out?

Steve Bernstein

Yes. So the numbers we reported the $35 million doesn’t include anything for Q2. Its only — that’s a Q1 number for July.

Michael Eisner

Yes, all right. Thank you.

Steve Bernstein

We will give you an update for Q2 next time.

Michael Eisner

Thank you for putting out the more press releases. I [indiscernible] about three [indiscernible] in the last 6 weeks.

Martin Bloch

Thanks, Stan. Here is the press release expert that in the company.

Michael Eisner

Stan you’re going to be — planning up on that anymore?

Stan Sloane

We will put everyone that is at work.

Michael Eisner

All right. Thank you.

Steve Bernstein

Take care.

Operator

[Operator Instructions] We will go next to David Starkey with Morgan Stanley.

David Starkey

Hi, guys. This is for anybody that can answer it. I think the question I have was on the engineering costs in the quarter that you had kind of alluded to some technical issues with some of these things. Can you get a little more detail on that is permanent extra costs or these working away through something that.

Stan Sloane

This is working through major performance issues as we are pushing the envelope all the way. And you’re sometime, and all of this are future products. So we have to solve the problems as they come up and we sold so far. In the history of Frequency electronics was delivered on every project we have ever undertaken. So we are pushing the envelope that gives us more capability and make us more competitive, especially in the dynamic environment.

David Starkey

So these costs could continue if you more a quarters or is it something that you think you are word through sooner.

Martin Bloch

I think the [indiscernible] I think there will be — they shouldn’t dramatically change. Right, Stan.

Stan Sloane

It will improve over time. But I think we …

Steve Bernstein

I don’t know it’s the next quarter.

Stan Sloane

They’re quite through the development or couple of these key programs.

David Starkey

As your sales pick up, though obviously that gross profit margin will rise again overall. Okay. And you had about $23 million in inventory in the latest numbers here is it looks stable from last time. But is that all 100% usable inventory that they don’t have a [indiscernible] coming or anything?

Martin Bloch

No, that includes the reserve, that’s a number. So we — you guys, that’s the net number we’ve looked at and we believe it’s good.

David Starkey

Okay, great. And one other small window. I noticed about 25,000 more shares in the share count was that an award or something that [indiscernible] in the quarter.

Steve Bernstein

Let the option [indiscernible].

Stan Sloane

Its option its treasury. Little things that added up to, yes.

David Starkey

Okay. All right. Okay, well good luck going forward. I appreciate it. Thank you.

Steve Bernstein

Thank you.

Operator

We will take our next question from Michael Cooper, Private Investor.

Steve Bernstein

Hi, Michael go ahead.

Michael Cooper

Hi, guys. So my first question is around the gross margin and there was notes in the news release. That some of the R&D expenses compress the gross margin. Can you tell me how that works [indiscernible] normally thinking about R&D expenses being in the cost of goods sold [indiscernible].

Steve Bernstein

No, there’s no research and development in the COGS or research and development increase quarter-over-quarter or quarter over the previous year. The margin is affected …

Michael Cooper

I think there was a comment in there that the gross margins were compressed because of new technical developments?

Stan Sloane

Yes, correct. Well that’s like margin set and we said in the press release that we are pushing state of the art technology. So that there is work we are doing [indiscernible] engineering that’s in the COGS line is also R&D, increased almost $700 million, but that’s not COGS, that’s — I think I can give you some color on the demand involved. During the [indiscernible] we were happy to bump at town as goes on, the need was attack a house. Nowadays, we want the accuracy to put it into a window. And that’s the required [indiscernible] amount of precision on our clocks and also to make [indiscernible] comment environmental effect and that’s the development. To improve the accuracy and improve their accuracy on the dynamic environment. That’s the major investment that we’re making.

Michael Cooper

Okay. But, yes, just my confusion is around [indiscernible] as oppose to increasing your R&D line by $700,000, I would have thought you would increase your R&D line by whatever that number is, the compressed, the gross margins. I …

Martin Bloch

Well, let’s make a distinction between R&D costs and developmental costs which are contract related. We have contracts that have non-recurring engineering caused for development is part of the contract. That’s totally separate from [multiple speakers] internal R&D which Steve explain the [indiscernible] on that. But those are two different things. Sometimes we spend money on internal development for products that are perhaps generic, those we get charged to internal R&D. When we are doing work on a specific contract, that’s typically charged to the contract.

Michael Cooper

Okay. Okay. Thank you. My second question is around your news release on the [indiscernible] 6,000 and that new product line. And I was looking into that a little bit and I was reading some stuff on the U.S military is looking for and part of that I think your new product line answers their requirements for open source systems. And I think your system they are — is open source. Can you tell me if I’m right there and is open source a new emerging trend in bidding for government contracts. And [indiscernible] open source is that on the software side.

Martin Bloch

Yes, that — typically have [indiscernible] open sources. So the government is pushing that. We are the VPS of course is a standard. VTX, VXR [indiscernible] formats fiscal format. So the units are comparable with anybody who has sort of [indiscernible] or in fact [indiscernible] electronics.

Michael Cooper

Okay, great.

Stan Sloane

Thank you.

Steve Bernstein

Thank you very much.

Operator

Mr. Bloch, there appears to be no further questions at this time. I will turn the call back over to you for any closing comments.

Martin Bloch

Okay. I want to as usual express the thanks to our stockholders and to all the employees have Frequency Electronics that are [indiscernible] to produce new product and future profitability. Thank you all. Have a good day.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.

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