Good morning, ladies and gentlemen. Today is Tuesday September 17, 2019 and welcome to the Butler National Corporation First Quarter Fiscal 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question 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, for that and good morning to everyone. Before Mr. Stewart begins, I would like to draw your attention to, except for historical information contained herein, the statements of this conference call are forward-looking and made pursuant to the Safe Harbor provisions 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 competing 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 the 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. So with that statement completed, I am going to turn the call over to Mr. Clark Stewart. Mr. Stewart?

Thank you, Mr. Drewitz. Good morning, ladies and gentlemen. We appreciate you taking the time to dial up the phone and listen about Butler National. We have had an exciting quarter and as you can tell by looking at your 10-Q and the press release that revenue was up basically $3.5 million over quarter one of 2018 and were up $2.3 million from the quarter ended April 30. So, our revenue and our income are following each other and we’ve had a successful quarter in actually two or three year in a row. Get nervous about that sometimes but they are coming along pretty well. Let’s start out by looking at the press release and you can all see that we did $17 million versus $15 million than in the previous quarter and $13 million the year ago. Our operating income was $3.5 million versus 740 – versus 900 a year ago and 746 and you notice our long-term obligations went from $3.765 million in April, $44.207 million in July and I would call your attention I will talk about it in a minute Footnote number 11 in the 10-Q tells you we have to adopt the new accounting provisions for capital leases and all kinds of leases. And so, you got to be aware that most of the numbers in here are distorted because of that adopting that information. So, we will cover those as we go forward. As you can see here, we spent $397,000 on R&D this quarter, compared to a year ago $318,000 and compared to the quarter ending in April $655,000. So we are continuing to invest in the R&D to keep the product line fresh. On Page 2 of the press release you basically see that the Aerospace products increased 63% and Professional Services up 2%. We think that’s pretty good 2% increase in Professional Services basically in an agricultural and oil-based economy out there that is a little bit uncertain under the current policies with China and the agriculture situation. Our net income as we talked is $2.1 million, compared to $509,000 and our operating margin went from 6.7% to 20%. So, basically you are see in the Aerospace once you cover that fixed cost minimum the money goes to the bottom-line real quick. There is considerable material cost, but basically it’s labor and once you cover the overheads you are in good shape. Also, pointing out on the third paragraph on Page 2 of the press release, the $397,000 in project developments. You can look at all those numbers on the Professional Services and like I say, they are distorted by Footnote 11. Although they are very good and like I say, the 2% increase in revenue is not distorted. And the Aerospace down below has got a 63% increase in revenue and that’s distorted by one hangar lease, which is not as nearly significant as the lease in Professional Services. So our operating income from Aerospace increased from $357,000 to $2.3 million from previous year. We were pretty pleased with that. We think that’s good progress. Like our backlog is hanging in there at roughly $16 million, $16.7 million as of July 31 this year, $13.4 million at July 31 a year ago. And we had $16.160 at April 30, that’s up $534,000 from that and the shipments of $17 million. So, that’s sales I should say, it’s not shipments, it’s total revenue. And we see that as positive. We don’t see anything that’s really changing very much at this point. I have Aric here. If you had questions about Aerospace, sales, later on we can talk about those if we need to. I think now we should look at the 10-Q itself and you’ll notice we have some cash on board there and we also have some major capital investment coming up about $7 million trying to be in a position where we can do that. Those investments had to do with a couple million between $2 million and $3 million at Boot Hill to rework the electrical systems. So we don’t have brownouts at – when we had storms or somebody cuts the power lines between us and Garden City or somewhere else. We’ve had all those occurrences that cost about [$100] [ph] to $50,000 an occurrence. So we’ve got to spend some money to fix that. Avcon, we need to increase fab job that’s $1 million plus job and here in Olathe we are doing about $2.5 million of capital investment relative to BAI and we are doing some capital investment in Arizona. So, we are looking at $6.5 million, $7 million to be spent on capital investments in the next year or two. As far as the balance sheet goes, I would – you will see a new item under property plant and equipment called finance, lease, right to use, forty three million six hundred and eighty. That is not the purchase of the land and building. That is the accounting change. [It does] [ph] a present value of theoretically of what we are leasing. So that it’s fairly representative of what it would look like if we actually bought the thing, but it’s a distortion because of the accelerated depreciation, plus the interest cost is greater than the lease cost. That will go on halfway through it and then it will turn around and we’ll get the money to have more income that should have. So, anyway, that you just need to study that if it’s bothering you. It’s not really bothering us. We just want to make sure no one is concerned. Under current liabilities, you notice there is a $1,070,000 of current maturities, finance lease liability, which is a calculation per the SEC requirements. Compute that number. We also have a long-term lease probability down below $42,000,384, both of those are covered in Footnote 11. If we go over to the next page, which is revenue, that’s summary revenue in expense you’ve got cost to Professional Services and – it’s distorted by that big long-term lease and its valuation, so is depreciation and amortization. And of course, there is $1,097,000 of interest expense that is really paid as part of the lease payment. So, there is some distortion there. If you look at Footnote 11 and the Q, you will see that the total distortion is about $510,000 decrease in overall net income. So, I think that’s important. I think we are glad we finally got that thing put into the numbers. We didn’t necessarily agree that is what we ought to be doing, but we don’t set the rules. We just do the accounting. So, that’s where it is and we got it approved by our auditor and everything is wonderful. That’s filed on Footnote 11. It’s ASU 2016-02 Leases Topic 842 if anyone wants to following up on it. And I think that goes as far as financial information, we are really happy that we are moving in the direction we are moving. If there is questions on extension of the lease, and the buyout of the lease and the answer is, or extension of the contract and the buyout of the lease, the answer is, the extension of the contract seems to be moving. It’s moved slow for the last 2.5 years, but maybe we’ll get something to happen in the next month or two. I keep saying that to you and you don’t believe me, but that’s fact we are actually moving a little bit. Financing of the buyout seems to not be a major problem at this point. Thanks callers and we want to know where we stand on it fairly regular basis. So it’s a good thing. I didn’t say that they are going to loan us any money. That is just their interest. So, with that, I think, that’s probably the big question in everyone’s mind and I appreciate your patience. And I think it’s time for us to take calls unless somebody else here in this room has any comments. I don’t see any. Craig is in Arizona going to flight safety. So, if you have any comments you want to make over time here?

No, I think you covered it.

All right. Thank you. David, we are ready for questions.

All right. Erica, let’s open the floor to questions.

[Operator Instructions] Our first question comes from Tim McMillan. Please state your question.

Good morning, Clark, folks. Clark, it’s always been kind of a concern and we talk about it some on as option program. Is there any proved definition as to how that’s going to be allocated over timeframe and price and what the criteria is? It seems like it’s out there and I think it creates uncertainty on the stock price a little bit as to how that’s going to operate and so forth. Is there a definite plan that you have formulated yet or not?

No, we probably will discuss that at our next Board Meeting which is coming up here in October and try to get that done. Right now, we’ve been trying to figure out how we make money and get all those. You realize that our backlog is increasing faster than our increase in revenue. So, that’s the reason we got to spend a little money here and there to try to get to the point where we can produce more products. But that is – that’s not been on the list until we get to the October Meeting, Tim. So, I can’t…

Okay, well, as I say, I think once you can address that and give real clarity, it’s going to help the price of the stock. It certainly – it raises questions and hopefully you can get that handled. Also, on your – you’ve mentioned this - that about the – you are thinking the extension is looking better. Can you say what makes you say that? Are people – is everyone trying to get extension along with you or are we the only ones?

We really don’t know what the other people are doing on it. We just know that we are trying to get the lottery to talk to us and deal with us on the basis that we really want to move forward and we are five years away from the end of the contract and that kind of doesn’t put a high priority on it except by us. And so we continue to pressure them and try to meet with them and we do meet with them and that’s why I’m saying, we – that’s about what I can tell you it is that we’re – we think we are moving forward. We are not moving backward let’s say that a week ago if you’d asked me I just said we are moving backwards. This week, I think we are moving forward. I couldn’t tell you about next week. So it’s a political situation from the standpoint of what the state really does and how they do it. What policy they are establishing as they do it and I guess my answer to you is it’s still in a pretty good state of flux.

Okay. All right. Very good. Well, thank you, Clark.

Thank you, Tim, for the questions.

Our next question comes from Sam Rebotsky. Please state your question.

Yes. Good morning, Clark and Craig. The backlog is $17 million. Last year, we did $32 million in sales and we are increasing. Can we keep increasing the backlog and is this backlog is profitable as the current quarter’s portion?

Okay. That’s a good question, Sam. I would answer that, but I think the backlog is about the same mix as the last quarter. I don’t see a difference in the backlog there. I think it’s a matter of how the cycle of getting this. We got airplanes that range from $0.5 million to $3 million or $4 million modifications when they show up, that’s a timing issue. We are shipping gun control units at Arizona and that’s a pretty steady flow. That backlog runs for couple years out there. So, the answer to your question is, yes, we are working the backlog on a regular basis and we see that it’s – profitability seems to be pretty stable in that group, if you agree with that Aric. I am looking at Aric Peters here and he is saying, yes, that’s a good statement. So, the answer to it Sam is, yes.

Now the fact that we did $17 million in sales and the backlog is $17 million, when do we expect to complete the backlog? Is it three months? Is it six months?

I’d say, the backlog as it sits right now, of course, it has new additions coming all the time. We will ship that $17 million over the next 18 months. What we don’t know the answer to is how much more orders keep coming in as we ship out the $17 million. So that’s in – yes, the answer is we are covered for at least 18 months, I’d say.

And as far as the number of bids we have out there, is that, could you quantify the dollar amount of bids that we have on the new work that we are bidding on?

I couldn’t – I don’t have a good list of it. My guess is it’s in excess of $17 million. Probably close to $20 million. What we used to say is we have a book laying here with all these quotes in it. It’s worth five years of business. Now which one of these quotes is going to come in next week, we don’t have any idea. So that’s a tough question to answer because we do a lot of this stuff is quoted couple of years ahead of time.

Okay. And the…

$50 million in quotes out there.

$60 million in quotes?

50.

Six zero?

No, five zero.

Five zero. $50 million, five zero? Okay.

That is correct.

Okay. Yes, we purchased the aircraft, is it – it’s on the books, the new aircraft that we purchased? Is that’s on the books now?

Yes, that’s correct. It’s on the books.

Okay. And so, were you surprised that the profitability [in the current] [ph] quarter?

A little bit. We forget about the fact that once we cover all those fixed costs, it all comes to bottom-line. We really don’t think about it that way is as we price this stuff, we build in that, the overhead associated with it and so we kind of lose track of the fact that contribution comes in. So, the answer is, yes, quite honestly we are little surprised.

And I know you’ve been trying to buy stock and the window has been closed, when does it open up?

Craig, that’s your question.

That window is open right now until the end of second quarter which is October 31. So we can buy stock anytime now – between now and October 31.

And I mean, it’s nice that the price has moved up and it moved up on the earnings on your announcements and the activity increased, whether or not these are short-term or long-term buyers. Do you expect to tell the story a little more to get more people involved or what are we doing there?

I think we’ve still got the big story that everybody wants to hear is the story about it getting the extension and casino and aerospace split apart into two separate entities. I think we need to get closer to that happen before we go put a push on we found and we’ve done it based on earnings that it’s all temporary and we need something that will be more long-term.

Right. Well, hope you keep doing what you are doing if you could sort of replicate the profit of this quarter, I think you are just getting more attention. Good luck guys.

Thank you.

Thanks. Sam.

We appreciate the questions.

Our next question comes from Tony [Indiscernible]. Please state your question.

Good morning guys. I guess, just a question for Craig. I’ve noticed that since the inception of the stock buyback program, we’ve picked up, we, the company have picked up about two and a quarter million shares and I’ve also noticed that’s because of some footnotes, it says that, every single one of those transactions has been a private transaction. In other words, we the company have get to go into the open market to purchase any shares. Can you give us a little bit of color as far as where these two and a quarter million shares came from? Are they coming out of in a state? Or are they coming out of just an inactive shareholder? We certainly don’t need names, telephone numbers and so forth and so on, but just some sort of guidance as to who out there has two million or three million shares that they are anxious to sell?

These, the shares in general are coming for people that are contacting us. And it’s number, it’s not – most of them not been big chunks of – there hadn’t been anybody selling 0.5 million or 1 million shares. There has been a few that are close to 100,000 shares here and there. But most of them are people that are contacting us and, Sam, they would be interested in selling their shares. We did buy – we had been out in the markets. It’s been a while since we’ve been out in the open market. That was pretty slow and painful of buying 500 or 1000 shares at a time and there were lot of days that what’s the rules that go around that we couldn’t even buy any shares for a number of days somewhere out there that, actually most of the days that we are out there, we didn’t buy any shares.

Right.

So…

That do you think if the reason that people are contacting you to see if the company has an interest, let’s say in buying 50,000 or 100,000 or whatever, it is just because of the relative illiquidity of the stock and the fact that they’ve realized that if they slam in the market for a 100k that they are going to adversely affect the company.

I think that’s pretty accurate. I think rather than try to do it – and I think people realize too that if they try to sell 100,000 shares with the way the stock typically trades…

Right.

To do that they either going to take you quite a while to do it and keep the price up or you are going to depress the price and not get as much of it. So, yes, I think it makes sense for – in those situations for people to contact us.

Okay. All right. All right. Are you in contact with a particular market maker or various market makers such that if they see a piece of stock during an open window situation that they would contact you, in other words, if – I’d just make this up. If night trading is shown a quarter of a million shares, do they know to give you or whomever in the company a call and say, I am being shown a block, do you care?

I know that that there is one market maker that would do that that we view as and been in contact with. I don’t know that a majority of the market makers would do that. I think much part of the market makers will try to transact those on the open market and that may be in fact that may be a real good idea to reach out to the market makers that are showing on the list there and let them know that if they get something that we’ve be interested.

If they shown size, just give you a quick call?

Yes.

Sure.

Now that’s great idea.

Okay. Thank you guys.

Thanks, Tony.

Thank you, Tony.

Our next question comes from Dan [Indiscernible] Please state your question.

Hi, nice quarter. Based on the backlog that you’ve stated and the expected capital spending, what are we looking at from a cash flow position at the end of the day over the next couple years? You’ve made very nice healthy cash flows that at least $2 million or $3 million on average over the last several years. Is that $10 million number going to grow and the debt go down over time here?

The $10 million I would say, will go down as we make these investments and I think that’s true. We also had some people perching us to loan us some money to do some of this building expansion and we haven’t really analyzed that. We are really more concerned about figuring out how to get buildings taking care of on these airports where we have federal restrictions on the land for the military and we got a lot of questions to be answered before we can really move forward. We’ve negotiated lease here and New Century which is the old Naval Air Station in Olathe and it’s taken about two-and-a-half years to get all with everybody to sign that off and get it taken care of. So, that takes a while. The answer is, we are saving that some of that cash, so we don’t have to borrow so much land to do these things. So the answer is, the cash probably won’t grow a great deal more from where it is now and then have to put cash on hand and of course, we are on the casino it takes a couple million bucks all the time to $2 million to $3 million needs to be out there. So, that’s kind of the overall picture of it as I see it. Tad, do you have anything different on that?

I don’t see that – that’s my answer to the question is, probably, it’s going to go down, Dan.

All right. Over the next year or two, but then I would assume that your business plan is that cash grows over five years or is this the long-term cycle to spend?

You have to remember, our business plan we are looking at a new casino in Guymon, Oklahoma,125 miles. That city out there in the flat lands of the west where distance is not a real problem. We don’t analyze that that’s a 5% hit or 10% hit or what there is maybe 20%. And so we are pretty sure that’s going to be a challenge to maintain that revenue out of that city and the profitability out of that segment. From the airplane standpoint, as we all know, we are operating in a cycle where we had probably in 2005 and 2006, the airplane market right now, which is there is any problems with like Iran and these other places. We are going to have go back on some of the non-military sales that we have and those are significant. We are selling STC hits which are essentially packaging parts and high dollar paper. So, that will all stop. But I guess, what I would tell you is that, we are trying to maintain the activity we’ve had as we’ve done at the last year or so. But I’ve been telling you there is some possibilities if that won’t be able to take place as we’ve done. So, although we are working to do it that, like I say, we do have lot of orders out there and a lot of things coming about. So, that’s not a very good answer for you. But that’s really the facts.

All right. So we are looking at a 5% to 20% hit possibly on the professional service line over the next few years. Is that accurate?

Yes, it will happen in the next two years.

All right. And on…

When they start up, they are stronger in the first two or three years.

All right. And then, the aerospace, have we created a new baseline with our STCs and our R&D spending and stuff or can that drop by $10 million in a year also? Or are we really making more money over the long-term on that side?

We are making more money over the long-term, clearly.

Okay.

We’d make the product innovation that’s caused that margin to go up substantially.

All right. Would it be fair to say the company would think it’s more urgent now than before to pursue the spin-off and the reverse stock split which also makes the cost of purchasing stock lower and cheaper for us buyers, because you have to buy fewer shares and to facilitate a better, more seamless management of both of the divisions?

I guess, the answer is that, we are proceeding basically as we have done than we think that we are moving forward with a good plan in both areas. I believe that there is no one causing anymore – more pressure on the extension of the contract and the spin out than we are. You can’t see it that we definitely spend lot of time every day on that topic. So, that is high on the list and it will stay there until we get it accomplished.

All right. Is the Board going to be merciful?

Pardon?

All right. Finally, is the Board going to be merciful in its decisions based on the restricted stock issuances to the shareholders you actually have to pay for voting rights and the stock price?

I am not in control with the Board. That’s going to be their decision. And…

Okay. Well, nice job for the quarter. Thank you very much.

The compensation committee will deal with that issue. That’s what overall – like I say, I don’t – I am not the one running the Board, so.

Okay. Thank you.

You bet. Thank you.

[Operator Instructions] Our next question comes from Dennis [Indiscernible] Please state your question.

Yes, my question is, the cost of professional services was $5.3 million from the fourth quarter, but only $3.8 million in the first quarter. So, can you help me understand the reason for the decrease? And whether that decrease will continue into the second quarter?

Just a minute. Our CFO is going to answer that question. That’s a technical question.

Well, I think you mainly have to look back at Clark said on the Footnote 11. Some of that decrease is the rent went away and it’s been reclassified into interest and depreciation.

Okay. The depreciation and amortization increased from $0.6 million in the fourth quarter to $1.2 million in the first quarter. So, that’s like a $600,000 increase versus the decrease in professional services was $1.5 million. So that’s quite a bit of a difference between that.

The depreciation is – when you depreciate the $42 million that was capitalized in as lease, depreciation went up accordingly and the rent expense is no longer classified as rent expense and that’s $1.2 million.

You can see on Page 10 of the 10-Q, Footnote 7, summary down there is this increased depreciation, $693,000 increase in interest expense $1.35 million, decrease in rent $1.218 million and that increase in expenses of $510,000.

So that change in accounting principle is – had an earnings hit of $500,000 this quarter that will continue throughout the year. So you extrapolate that, it’s about a $2 million hit on earnings for the one year?

Okay. I guess, the fact that I didn’t work out was the increased interest expense. So, if I look at that, then I’ll understand why cost of services went down so much.

I believe that doesn’t turnaround till 2024. That will continue to see there.

Okay. All right. That was my question. Thank you.

You bet.

Thank you.

At this time, we have no further questions.

Thank you, David.

Clark, can you close it?

I just appreciate all – everybody’s time they spend here today with us forty some minutes. We appreciate that very much. Thank you for your interest in Butler National and look forward to seeing you at the Annual Meeting. Thank you very much. David I think we are done.

Great. Thank you everyone and have a great day.

This concludes today’s conference call. Thank you for attending.