Good morning, ladies and gentlemen. Today is Tuesday July 23, 2019 and welcome to the Butler National Corporation Fourth Quarter and Fiscal Year End Sales Conference Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] Your call leaders for today's call are David Drewitz, Creative Options Communications; Clark Stewart, President and CEO; Craig Stewart, President of Aerospace Group. I will now turn the call over to Mr. David Drewitz. Mr. Drewitz, you may begin.

Thank you, and good morning ladies and gentleman. Before Mr. Stewart begins, I would like to draw your attention to except for historical information contained herein, the statements in this conference call are forward-looking and made pursuant to the Safe Harbor's provision as outlined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties which may cause Butler National’s actual results in future periods to differ materially from forecasted results. Those risks include among other things the loss of market share through competition or otherwise, the introduction of competitive technologies by other companies, new governmental safety, health, and environmental regulations, which could require Butler to make significant capital expenditures. The forward-looking statements included in this conference call are only made of the date of this call, and Butler National undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Important factors that could cause actual results to differ materially from expectations reflected in the forward-looking statements include but are not limited to factors described under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. With that statement completed, I would like to turn the call over to Mr. Clark Stewart. Mr. Stewart?

Thank you, Mr. Drewitz. Good morning ladies and gentlemen, thank you for taking the time to join us to talk about Butler National's 10-K. We filed 10-K and you'll notice the proxy information is not in the 10-K since our meeting schedule is on - is closed to on schedule for the bylaws. We apparently do not have to file duplicates of each of that information in a proxy. So, the proxy will be filed within the next one to two weeks, is it Craig or three weeks? Hello?

It will be by the - we'll file approximately probably the third week of August, it's somewhere in that time period.

So, what we're talking about - thank you, Craig. What we're talking about this morning is the financial performance as it's reported in the 10-K and I would call your attention to the risk factors that deal with the risk of renewal. There's two factors in their own Page 12 and 13, I believe, and those are there with the renewal of the gaming contract with the state of Kansas. We're in the process of working that as everyone is known that is listened to the call for the last couple years, actually started that project in 2016. We believe we are making progress with that and we are hopeful that we have something in the next couple months, and that is our biggest challenge I think as far as risk factors. There is also on Page 40 under footnote Q, a description of the new account - a little bit of a description of the new accounting rules relative to leases with right to use essentially the land and building lease that Boot Hill runs for 25 years and that is 10 years - 15 years from now, yes, 15 years from now. So, if we put the value of the lease - the present value of the lease on the asset side of the balance sheet and present value of the payments on the liability side, you’ll understand that the balance sheet will increase by almost twice, and we’re working on how we’re going to comply with that. But I think it’s we’re not the only ones facing that situation, but that is new accounting rules and you need to respond to that, that is a risk where there's everyone will really understand what we’ve done. So, I think those two items are cautioned. Next item is we’ve had a great year as far as we’re concerned where we made almost $4 million after tax, which is a real nice position to be in [indiscernible]. Give me just a minute. We - I can say, we've got numbers on Page 1 of the press release there all that table the numbers I assume you review those. Page 2 items 1 through 4, Page 2 the segment analysis and highlights and the backlog. The exciting information in there is that our revenue is up 9% for the quarter, 14.4 million to $15.7 million, and the revenue for the year is up 22% from $48.3 million to $58.7 million. The quarter from last year we show that $1,000 loss in this year. We show $283,000 profit in the fourth quarter, which is definitely a good move since we all know that we’re in a lumpy situation with the airplanes and the avionics and gaming control units, and the casino are fairly smooth except the gaming control units are rolling rather rapidly. As far as the revenue is coming 57% increase from aerospace and 2% in the professional service side which the casino, 57% is spread of our half gone and Butler Avcon and Butler Avionics. So, all of those segments are doing well. We’ve invested a $1.9 million in R&D this year. Last year, we've invested - you maybe got to get that stop. Excuse me, had interruption of the phone call. With quarter, we’d like to say we’ve invested a $1.9 million, 655,000 in the quarter. So it’s been a good year. We’re moving right along as far as that goes. The backlog is probably the most exciting thing that we have to report. The backlog is currently setting in July at $19.2 million and at April 30 that backlog was setting at $16.2 million which versus 13.2 a year ago. So our backlog continues to build at least as you can tell we've increased the revenue 57% in the segments where that backlog is building up. And we have been able to increase revenue like the shipments and still have the backlog continuing to build. So, we're trying to deal with additional staffing, additional space to address some of that backlog that is building up. Most of that is related to special missions and related to Tempe and related to the regulations of the FAA, requiring the RBS - ADS-B, right, you get the right one the radar identification of airplanes. So, I think that is a good thing and I'm pleased with how this is going. Craig, would you like to make some comments on aerospace or have I covered enough of that?

Well, I think you have covered it really well. I think we're excited about the growth that we're having in the aerospace. Segments, yes, it is one of the few times where we sit and talk about. All three of them are growing and working almost at a capacity to where we're having to figure out how to grow the capacity.

That is correct. Staffing as usual is a problem that where you seem to be. We see to be able to find the staff to get it done. We've added an additional hanger in Newton and that will help give us more space. And we - the reason I was little late here for the call is we were out looking for staff. So, I think that is a good time to do. So having said all that, I think we are ready for questions. David, do you have any comments?

Thank you very much and let's have some questions.

Ladies and gentlemen, at this time we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from [Timothy McMillan] (Ph). Please state your question.

Good morning gentleman. Clark, you had good revenue in fourth quarter and $283,000 is good, but it seemed like a little low for the number. What other contributions in there caused that not to be as high as you might expect?

Craig, you can answer.

There is some tax effect in the fourth quarter that was probably larger than it had been through the first three quarters.

So, you had to make some tax payment from the first three quarters, is what you are saying?

Correct.

How much that have been do you think?

What is your tax payment?

Well, we had some deferred tax items that went back and forth on us, but…

Where you are looking?

So, we ended up having 1 point almost $1.4 million tax for the year-to-date. I don't know what the number is.

The point is that they - what we've done is we needed to buy an airplane for about $3 million that we are using to prove up hard points on the King Airs, and we did that. We thought that would help us on the taxes. If fact, we're not getting the benefit yet, so what we’re setting here was with over a million bucks in taxes that we thought we didn’t have to pay. So that changed our view a little bit, but eventually that would work out in the next year. So I mean, it’s all the matter trying to manner, it’s on a real short-term that marked very well in the airplane business. But unless we have the airplane we have customers to buy when we’re done with that and that was a good decision to do that. You’ll notice that, that is about a $3 million liability and a $3 million asset we add to the balance sheet.

And your debt is under $4 million now is that what I saw?

Probably, I had to look at that number. That is enough. No, it's definitely, obviously .

Total debt is 4 million.

Yes, it's 4 million.

It's just under 4 million, 3.9 million.

You had the several short-term maturities this year. Are those paid off now part?

Yes.

And so you just mainly have the plane and little bit lift probably on that May 2020 on the BNSC test and so forth.

Yes.

I guess the other thing that maybe can't just my eye a little bit is, as we did 58.7 million I think in total revenue. Now, we had a non-recurring profit on that sales tax refund. Was that around 1.5 million?

Just under 2 million.

Yes, little under 2 million and that is all taken out that is non-recurring?

That is a 100% of that our share is 60% of that.

Great, so we round up about a 1 million - about 1.2 million was is that?

You got to be careful with that number though because remember $1.10 million only surfaces. When we take out the minority interest at the bottom of the income statement, so all the way down through the income statement think the $2 million is there until you get through the end and then you take out minority interest, which renews the 40% of the $2 million, which is roughly $800,000.

Excuse me go ahead.

We got to do a lot of back and out to get back to we believe 60% that own the way we’re doing it is the way that the GAAP accounting regardless to do it. Well, that is how it works.

Well, I run back at 1.2 then you really on continuing earnings made about 2.6 would that be a reasonable assumption around 2.67.

Alright, Tad, Tad is looking at the number, yes

Well, their whole share is $1.8 million.

So I mean but of that, that share 800,000, is their of the 2 million?

Okay. What we're trying to get there what our continuing earnings was on sales, is what I'm trying to get to and…

And, Tad, you got to keep in mind that there is the repaid tax on that 1.2 million or so that we got. So you add some of that back into it and have to pay our tax, if we haven't had that earnings.

Okay, well, it's just - it looks like you are probably on your aerospace, you normally talked about 20% margin. Would you say after-tax your net now is 7% or 8%? Is that a reasonable average to guess or is that outline?

And I don't Craig. I think you tie that now beside you had to look at there.

If you just look at the aerospace, our revenues struggled in aerospace. [Multiple Speakers].

We're here on the second page of the.

The $26.7 million.

The $26.7 million, well, so could you be around 10% after-tax? Go ahead, Craig. I'm sorry.

I think typically and what we have always talked about - excuse me, with the guys with Avcon is that, if we can get 10% of the total revenue to the bottom line, we have done a pretty good job in aerospace segment. And I think that is pretty consistent with where we are right now. So, I think that is, the product mix right now is probably a pretty good product mix to get that 10%. I can see that moving forward we have to keep that same product mix that we are looking at now.

Well, again, I'd back that up. Now, you are non-gaming revenue at the casino, you don't have to share that. Is that all our, like 3.6 or something like that, food and beverage so forth?

Yes, we share all of that.

You have to share that. I thought that was just toward.

No, no, we share its 60:40 for the whole deal.

For the whole deal, okay. Well, I think the gaming site can bring your profit margin stand quite a bit obviously and that is more of a reason and we get that financing. Are you, I guess, you are working through to peak now to try to get that extensions, is that safe assumption?

You bet. We make at least one trip a week to peak hour, sometimes it's two.

And you think you have got the real front in like..

I don't know that. You never know with the politician, Tim. But, yes, it's looking favorable this week. How's that? Next week, it might change.

Now, I'm just trying to think if, let's just assume, you get that done, let's say that roughly the net effect to shareholders would be. You are paying $4.2 million in lease now, is that correct right around that range?

Yes. It's just between $4 million and $5 million.

Okay. And you probably can finance $40 million at 5%, is that unreasonable or not?

I don't know. The rate reported is a little higher, right now. It's about 5.6% something like that. The problem is, we can't get the rate fir until we get the contact extended.

Well, obviously rates have dropped. So, it looks like there is a potential of $2 with a 60:40 split, is that unreasonable to say?

Over 2 million with the 60 - I don't know about that. I don't know if that is true. I think you have got to remember, when you get all done with this lease versus the financing, you have got depreciation going on in there, so that is up. You have got 39.5 here on the building and land and so you have had got some equipment bared in that building and then you have got almost $2 million worth debt investment that we are going have to make, that upgrade to our power distribution system. We have trouble with brownouts from the utilities, and we're going to have to increase that. We got about 11 seconds to get power and if the voltage drops below what is 106 volts like that. So, we’re going to have to change the way the generator system works and there is not much we can do about quality. Cost is about $50,000, now also have lights out on a busy evening. So, we got a whole lot of variables in there gambling when you say we get ready to release and refinance it and you are going to have to add a couple of million bucks of…

Do you think on aviation now Clark, you look pretty solid and through this 2020 mandated project, is that correct?

Yes, Mr. Reddy, would say that is true. Yes, that is fine. When are we scheduling, next spring.

February.

We’re scheduling February. Now, I believe yes. We can't get any more business in that we’re selling some caps, which help and that is good.

So, we can look forward to some pretty strong aviation revenue for the next 12 months that is not unreasonable thing?

That is probably fair, yes.

There seems to be a 26 million a year. Is that number a reasonable number?

I don’t know that. I would say that you need to look at the market bailed up of airplanes out there, new airplanes from the manufacturers of the airplanes in our size. There is no real build up of King Airs, but some of these people like Embraer and some of these others have slowed up production and not let that kind of thing which tell you that, we may be looking at some downturn in airplane business. And we aren’t seeing it yet, but that was the signs that things are not as strong as everybody would like to believe. So I'm not along to commit a number that is off of cap like that there is just too many variables.

Our next question comes from [Dan Bate] (Ph). Please state your question.

Can you talk about CapEx for this year? And I saw you sold another or an aircraft in May. Are there going to be other purchases and sales and retrofitting for customers? And what is the CapEx look like for this year?

I told you the CapEx in the casino side of its in excess of 2 million. And on the airplane side, I don’t know that that is high. It’s probably about like, all the R&D step we keep showing most of that is CapEx in the SDC world, so that is a more about a $1 million to $2 million. And that has continued because we have to keep up dating the SDC and changing them to meet the changes in the airplanes and the changes in the needs of the customer. So I mean the ISR business is - intelligence business is changing everyday and that equipment that we’re putting on there is different from last year. So, there is capital expense that goes on and that is represented by our expanded use that you are seeing in the 10-K. So, I would say those are going to be about the same for resulting the big item is the addition lot of expenditures in the casino side of it, and they are significant.

Is that ongoing or is that for this year only?

Oh, the average expenditure in the casino is about a one million to two million, happy year. And that is primarily machine updates, hit the floor fresh. Those we really - we don’t - we report those just as normal operating expenses. And I think and where actually they're not. They are written off over what 22 months, around two years. So, that is what those are. Now this business to the electrical side, which is an extra $2 million, that is going to be over a longer period on the write-off of that. But that is true CapEx, the other is I don’t know the - CapEx because remember the machines are owned by the State of Kansas and we are buying, we are purchasing machines for our partner the Kansas Lottery. Those machines are written off because we have the right to use over 22 months, which we proved up. And that is a non-standard transaction if you will, but that is the way it's been for 10 years. So, I think it will continue.

So, what are we looking at, like $5 million to $6 million total on the CapEx line for this year way up?

That is probably a safe number. Yes.

Okay. And then back down to the $3 million, $4 million range moving forward.

Yes. We probably got a $2 million bmp. Yes.

Okay. That is significant. Alright. So, can you discuss dilution? It looks like in April you granted $2.5 million restricted shares and I say this tiny and cheep, but how much more incentive do you need to work there and has the company thought about putting a cap on this damaging shareholder activity? This is really harmful to the shareholders when shares rise at this rate. So have you have you thought about adjusting that or capping it or stopping the damage?

Well let's see. We repurchased stock of almost $1.3 million and we are trying to buy as much stock as we can get our hands to keep that dilution from being there. As you know, we have the incentive and the 401(k) match all as a package for the 401(k). the contributions to the 401(k) by the employees resources increased to match its figure and you know our total increase in shares outstanding is about 1.5 million shares for the whole year after you net out the buyouts. So, we are trying to buy out as much as we would grant and it's just hard for us to do it with all the regulations we have.

Well it would be much easier if you stopped granting so many shares.

That is true but our outside consultants tell us we are way behind.

Outside consultants, I don't know where - if you should find some new ones maybe, have you looked into that, because I don't believe that is a standard procedure or an appropriate recommendation possibly. And again, you know, you are not able to buy enough stock to offset this extreme dilution, that is really harmful to your shareholders who are working at the company, like us. So you know, I'm just wondering if the company has considered other routes besides buying back shares, which is not offsetting this dilution. In other words, can you cap these grants to yourselves of large amounts of shares? I mean, stock went from - shares outstanding went from 60 million to 68 million over the last few years. And the grants that we have been working on had been approved by the shareholders a couple of three years ago.

So, yes I think that is somewhat a limiting factor and if the shareholder said no you can’t grant anymore than that, so we are sitting here. We are trying to - less concerned at one time we are going to grant all the $12 million, but we didn’t do that. So I think our Board is responsive to the fact that we are not going to do it in a big hurry.

Alright, I think maybe the Boards ask itself it should be not in the big hurry, but not in full.

I don’t know, our purpose here today is discuss the numbers in the 10-K when the proxy call comes and we can deal with that part of it. that is in the proxy stuff.

Are the operating costs going to be rising at the same rate moving forward G&A and things like that?

Probably. Especially as the revenue increases and the capacity is towards the heavy side, we are going to have additional cost I mean that - to do it. We entered into the long-term lease on the hand out here. We are in the position we are going to have to build another $2 million to $3 million hang as soon as later maybe not in this fiscal year, but next one for sure and its about $3 million deal. And we are going to have to do that to take care but we are avionics in the engineering store here net cost is going to go up. And there is no question about it. And that was up in the former ramp which ends up down there in the general expense. So yes.

Okay. You mentioned in your comments that you believe something might happen in the next couple of months regarding the beginning license extension. And then in the Q&A you said things changed a lot. Was there any reason to believe that we are moving towards resolution there or in other words an extension that is different than your past opinion?

We are not moving backwards. Before we were moving backwards half the time, at least we seem to be moving forward all the time. So I guess that is a past event.

And we didn’t hear much about the spin-off or anything today, is that still a goal or is that just a dream of in the future?

That was discussed in the past, we need to get the contract extended so we got 20 years to deal with then you got something to spin-off, otherwise you get five years and you get a $54 million debt at the end of the five years.

Has the company considered alternative spin-off routes using private equity or non-traditional bank loans of other kinds in order to get this spun off? It doesn’t seem like these businesses make sense together nor does it seem to be a efficient to wait for political change to come about?

Let’s talk about this in real simple terms. Contract now expires in five years and three months. When that contract expires you owe 54 million bucks, now who is going to come in and spin that off without having a contract?

So you can’t do it without these checking?

That is right.

Okay. Thank you.

Thank you.

Our next question comes from [Stan Bobowsk] (Ph). Please state your question.

Good morning Clark and Craig. You seem to cover a lot with both, Timothy and Dan, but as far as the refinancing. So, we are not as friendly with the people controlling the political nature, controlling the 40%, what do we need to do to sort of - I mean they have 40% and you would think to increase the value of the whole thing if they could do a deal to get a financing done, want to benefit the Government of the Kansas?

It would. The key is, remember, we are talking about five years and three months, and the fact that, if you look at the literature in Kansas, you have got the lottery working on various kinds of sports betting, high lotteries, various things like that, which banks get a lot of nervous looking at that. But anyway, that is out there as potential competition and we have another casino from the Indian side going in Oklahoma in the Panhandle, which will lead into our Texas market for marketing not as strong as we think it's going to be, and we are spending money in that market at this point to combat that situation, that opens up in the fall. And so, those two things are hanging out there, and we need the extension so that people know we are going to be there more than five years and the way it sets right now if you read all the paperwork and didn’t do anything else that is where we are. The other casinos are faced with the same problem except they are seven years away. So, I mean it's a tough situation from that standpoint.

But, it would appear that the government to the extent they help you to get the financing do whatever it makes, I don't know what they need to do, but they need to do something that they could increase the value of this casino that if you spun out it has a greater value, shareholders would have 60%, the government would still have 40%, which they could, depend on the valuation and subsequently, they could be a winner. They could reduce it from 40 to another and have more money. So, I mean, is that an approach you are taking, are you telling them or what are you telling them to sort of get them to make a decision to help you get to the bank? I don't know.

Let's talk about that - we changed that ministrations, last January. They changed to a new Governor. So, we have a new Governor and he is a Democrats, previous one was a Republican and all these agencies are going through a change in management, if you will, if that roles over. And so probably, we should probably expected it to take nine months before got somebody new in charge, got him in the position where they are favorable. The Governor is favorable to the casinos. It's not a negative situation at all. It’s one of the administrative situations where we got to get right person in charge to take the action that we need to have done and that is why I'm saying we are not moving backwards. We are at least holding our ground and making some progress at this point.

So it sounds like it’s an education process with the new administration?

It’s a state administration really. Yes.

Okay now let’s see on the your avionics section, your backlog went up to 19.9 would you say you are bidding for more business similar to the previous quarter or are there less bids out going forward?

What would you say Aric?

More going forward.

There is more going forward. I think that would have been my comment but since Mr. Peters is in here and he is in-charge of that, I thought I would ask him a question, but I think the demand is growing. The only caution like I mentioned earlier is in fact that some of the airplane manufacturers in the small business jet and turbine engine type airplane seem to be having a little slow up manufacturing which tell you the demand might be a little weaker than what we see. So that tells us that if we were just doing just normal business airplanes we might be real cautious.

We are scheduling real actual slots into January right now. For longest that has not been here in 20 years.

Are you working one shift to two shifts or what are you -.

Yes we are working as many shifts as we can find people to work. So we had a desk meeting with the contract employee people this morning and they are helping and we use them because they can kind of steal them away from the big guys off and on and that is the real challenge of the whole things. Special mission and the state of war in the world I guess is probably increasing instead of decreasing and therefore our business is going up. And we are in the - to control the business, we are in the ISR, the surveillance reconnaissance-type world and we are in the compliance with the FA regulations which is also a safety factor. So we have three things going on here all at the same time. I hate to be pessimistic in the airplane production being kind of slowed up, that is the only negative we see out there to tell you the truth.

Is the profitability of the contracts is the same, improving, decreasing?

We think that is going up, Aric saying thumps up, not decreasing.

Pardon?

I say it is not decreasing.

Okay, okay.

We have got less labor intensive products coming out the door.

Okay and the plane that was sold in the first quarter of the next year with the $0.5 million profit is that the same plane similar use to the same purpose as this $3 million plane that you put into production that you are utilizing now.

Yes. Except it’s a layer jet version and the one we are working on is King Air. Definitely that one is special mission all over the place, one that went to Australia.

Do we have any more unusual transactions like the sale of a plane or I mean the sales tax, which produced almost $2 million before the 40% reduction, are we are going forward with everything the same versus any unusual transactions in the new year?

I would say the only unusual is probably the more CapEx, but that is we just can't do that - some place for people to work.

That is great.

The other thing that is going to be in question is, how do you deal with capital leases as we put them on the balance sheet, they are going to look plenty and they are going to look plenty on everybody else's balance sheets. But, bottom line is that, you are leasing something, you are going to capitalized lease things and you are going to set up the liability. When we get to the end of the lease, we will depreciate the lease, so you got a distortion in the expenses and the profitability of the same. When you are all done at the end, you don't won anything and you don’t owe anybody. But, the lease its period up to financial statements and - we are seeing whatever to tem is. So, that is something we will deal with as we get to the first quarter and have that transaction. But overall, we are profitable. I think the discussion of the ownership and a 40%, 60%, we need to look at the 10-K. Actually, what we have is, we own 60% of the casino and our partner has 40% and what that amounts to is we split the tax 60/40 because those are the distribution of ownership.

Okay. I'm sorry for interrupting Craig. Go ahead.

It's not the State of Kansas that owns 40%, it's our business partner BHC Investment.

I see. I see.

If you look in your 10-K, it will show you. We have had a whole bunch of discussion on that. But, that is the easy answer right there, about 40% partner.

And during this period of time, have you been looking for any acquisitions or I know you because of with the casino, you would like to get this financing done. Has other people come around making any offers to you, any larger casino our operators saying, look, we would like to acquire your casino, or merger it, or whatever and with a certain valuation that would be higher than more appropriate at this point in time?

No, we haven't had any inquiries as to purchase anticipation in the casino and I think that, there is not going to be any in the State of Kansas till we resolve whether they are going to extent a contract or not.

Okay. And as far as looking at acquisitions for the avionics or something that you would fit into would acquire your piece, have you done anything in that area?

No. We haven't had any activity.

Alright.

We are fine there. I think everybody else is busy and they don’t have time to do it either is basically what is happening and answer is we don’t have any.

Okay thank you hopefully your profit improves and with increased backlog and you get resolved this casino thing. Alright thank you.

Thank you very much. We appreciate your questions.

Our next question comes from [Abigail Bannerman] (Ph). Please state your question.

Hi would you consider a - auction tender to buy back a large amount of shares like 20% or more given your depressed valuation?

I don’t know what a - auction does. I haven’t studied that, that is a Board question and we will have to take that up to the Board.

Okay. And who is the best point of contact if we do have follow-up questions, after digesting this we reached out a couple of times, just want to know that person as to reach out to if we have follow-up questions?

The best answer is put something in writing and send it to the corporate secretary Chris – at the headquarters.

Okay. So put it in writing that is right?

Yes send it via mails to the headquarters.

Okay. Alright great well, thank you for the call and taking the question. Congrats on a good year.

Thank you.

[Operator Instructions] At this time we have no further questions.

Thank you for the question. David are you back on?

Sorry I was going to say do you have any closing statements?

No I just thank everybody for spending the 45 minutes talking about the 401(k). We appreciate your interest in Butler National Corporation. Thank you very much. That is all David.

That concludes today’s program. Thank you for attending.