Tom Schmutz - CEO Nola Heale - CFO

Fadi Benjamin - Euro Pacific Canada Marc Berger - MKB Associates

Thank you for standing by. This is the chorus call conference operator. Welcome to the FLYHT Aerospace Solutions’ Third Quarter 2015 Earnings Conference Call. As a remainder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. Due to the volume of questions expected on today’s call, we ask that you please limit your questions to three to allow others to ask. If there are any outstanding questions at the end of the call, the company will be happy to take them over email at investors@flyht.com. [Operator Instructions] At this time, I’d like to turn the conference over to Tom Schmutz, Chief Executive Officer of FLYHT. Please go ahead.

Thank you very much, Brock and good morning to all. I’m very excited to have been selected as the CEO for FLYHT Aerospace Solutions and have enjoyed my first two weeks on the job, especially this past week, which I have spent in Calgary. My initial impressions of the team, is that we’re engage, talented and committed to success. And I very much appreciate the welcome that I received here. I will be moving to Calgary and I’ve come to Calgary ahead of my family who I expect to join me after we conclude some personal matters in Florida. I want to take this time to thank my wife and my children for their role in our decision to come to Calgary. We’re pretty comfortable in Florida and we could have remained there indefinitely. Sarasota is a very nice place to live, but Calgary has its beauty and charm. And the opportunity to lead FLYHT is one that’s very much aligned with my professional goals and my instincts. And what my instincts tell me is that FLYHT is the right place at the right time now, and I am thoroughly energized to move this company to the next level, building upon the excellent base created by the entire team, led by Bill Tempany and Matt Bradley. So, I’ve been observing FLYHT for the past several years from my position at L-3, working closely with them in our dealings with Airbus and taking notice of changes in the industry. Why I observed was a very innovative offering that the market did not initially seem to be ready for. However, good ideas normally find their way into use. And I believe this is true for the technology created by FLYHT. So despite the pace of the aviation reform which is slow and it’s difficult for those who are outside of the industry sometimes to come to grasp with the speed at which it moves. But the time for real time data, screening, alerting, tracking and the backend processing functions that FLYHT does, turning this information into -- this data into operational information, which improves our efficiencies, saves time and money, improves safety, it seems to me the time is now. We’re seeing a steady acceptance in our sales figures, in the size of our deals, our churned [ph] investments and our license fee collection from OEM sales. So, all of these indicators provide me with confidence in our base strategy and make me feel very fortunate to be a part of what I think is going to be very exciting ride here. So, at this point, I’ll ask Nola Heale, our CFO, to bring the third quarter financial results and then, I’ll follow with the summary before get to your questions.

Good morning, everyone. And thank you, Tom. When we review the quarterly trend, the third quarter results certainly do demonstrate the bumpiness that that Bill Tempany spoke off in the last few quarters. The FLYHT revenue rebounded to almost identical to the first quarter of 2015. In fact, the $2.5 million third quarter revenue was only $50,000 behind that first quarter’s to record revenue, which means that we have seen our two best quarters in history within the same 2015 financial year. The revenue in the current quarter was in fact $920,000 more than Q2. So, as we indicated in Q2, the revenue did rebound. So, it’s a bit of a rollercoaster ride. But we’re very pleased to report that we are enjoying the upslope again. The gross margin also rebounded nicely to 73.3% that does include $682,000 in parts revenue, which of course has a lower cost of sales versus the gross margin. But our voice and data revenue is still 43.7% of that revenue. And this recurring revenue is our highest revenue on record at $1.1 million, so yet another record in the quarter. Recurring revenue is increasing nicely and we’re also very pleased to report that in October, we have now reached $2 million flying hours for our own AFIRS units, which drive that recurring revenue. During September, we marked our 60th installation in China. And the business in this region is slowly beginning to flow through at an increasing pace, as we had been anticipating would happen. The sales are both through SKYBLUE and direct sale customers. In the quarter, there definitely was a trend to supply orders with installation dates that all more reliable. So, loss from operating activities and this quarter was $541,000, which brings the full year loss to a loss of $2.3 million, $81,000 more than the prior year-to-date. That of course shareholders will remain remember that in our 2014 year, we had written back a provision for the SNC legal claim and this distorted our results. Our current year results are actually a full $1.9 million improved over the first nine months of 2014. Similarly, the net loss is $970,000 less than in the same quarter of 2014, or an incredible $2.3 million less on the year than in 2014, if that SNC abnormal reversal was excluded. Overall, expense levels this quarter were very similar to the second quarter of 2015 and in fact to the third quarter of 2014, if in the third quarter of 2014, the separation payment that was provided for our retiring CFO is excluded. Both the payments received from customers and the AFIRS units shipped and does not get [ph] affected by customers have shown a significant increase in this quarter, demonstrating an increase in AFIRS installation revenue that will be available to be recognized during the fourth quarter. And inventory as reported on the balance sheet has consequently increased by $296,000 as these are the AFIRS units that have been shipped to customers, but not yet installed. So that revenue cannot yet have been recognized. Our cash balance has decreed $513,000 during Q3, but as just mentioned, $296,000 of that decrease is actually sitting in inventory on the balance sheet, so the cash is not significantly decreased in this quarter. If we review our modified working capital, which of course excludes the unearned revenue and customer deposits as those items are not refundable to customers and thus they are not true liabilities in the sense of needing to be paid, if we exclude these items, our modified working capital balance is $1.1 million which has only decreased from the second quarter by $4,261. So, the financial position of the company has not really changed in the quarter for words. We are definitely looking at the up for a [ph] change. With that brief summary, I’d like to hand the phone back to Tom.

Thanks Nola. So, the important accolade is that our modified working capital position changed by only $4,000 in all of Q3. There is some strength of our sales and our continued controlling of expenses. So that leads us to forego the fundraising that was announced in the summer. We are no longer pursuing this raise. We will continue to monitor closely our cash position and reengage the market in the future if we need capital for the several programs that we’re pursuing and when the market provides FLYHT a better value for an equity raise. I’m impressed with the quantity and specially the quality of opportunities that we are currently pursuing at FLYHT. And I’m quite confident that any of these pursuits could change playing field for us. David Perez discussed last call his efforts to standardize our sales process, our message, and our methods of pricing. He’s made progress in these areas and I’ll be revealing the changes in the next couple of weeks, prior to the roll-out with the team in early December. Meanwhile David and the team are targeting the type of airline companies that we feel are best candidates for adoption, while at the same time pursuing a major and continuing to work China opportunities with a focus toward services. A great example of that target company is the Avmax win in the third quarter. Avmax is an airline leasing company. So, it’s our first leasing company and it provides us with good insight into that business and how we can expand into that market. We are also very focused on new OEM opportunities that are very much within our performance capabilities. We hope to have direction from one of these opportunities in the next few months, but as you know this will be completely dependent upon the OEM and we cannot provide any clear guidance on what we’ll receive this feedback. In general, the sales message is that we continue to evaluate opportunities to improve the sales team and to grow global sales staff and improve the processes. So speaking of processes, I’ve begun a systematic review of the internal company processes here, our organizational structure, our talent and priorities. I’ll be leading the company in the establishment and flow down of goal for 2016 along with a validation of the budget. I’m not prepared to share any of the results from this evaluation, it’s really too early to do that. But I will likely to share major results during the annual call. I do want to emphasize that my impression of the team so far is that they are open and eager and they are being very frank with me here, that what’s working and what needs tuning. Bill and Matt made a real progress with the team and a new set of eyes continue this process as continuous improvement requires. I’m confident in our ability to identify areas that require streamlining, to lean them out and to improve across the board. So, I’d like to finish by wishing Matt success in his future endeavors. I worked extremely well with Matt through the years and I’ll miss working closely with him here. However, I respect his desire to move on and I completely support that decision and hope for future cooperation. He has been a wonderful employee here at FLYHT. I also have a fantastic relationship with Bill and I look forward to interactions with him as our Chairman of the Board. And I also want to thank him for providing me with a couple of months of transition, as I assume both his and Matt’s duties in the near-term. I believe FLYHT’s future is bright. This is why I’m here. I want to take a more active role in defining the future of aviation operations. And I believe that FLYHT is ground zero for this transformation. So with that, we’ve received some questions in email. We’ll go through those quickly and then we’ll turn it over to questions from callers. So, the first question is please comment on the situation in China. Has the government resolved, changed at all in general terms, how many airlines have you signed and how our things going? So, we don’t know of any changes that have -- Chinese have made to their requirements. We’ve signed up 10 carriers; we’re installed on 13, so there is three trials underway. So we continue to make good progress there. There is another question that asks about progress on sales initiatives with L-3, SNC and how the Dragon’s doing along with some other programs. So, as we stated before, L-3 and SNC, the relationship is excellent. We simply can’t comment on any details of those relationships or contracts with those partners. From the Dragon standpoint, the sales funnel is pouring. We sold a few of the Dragon’s, but we really need to evaluate that further. The next question is any further progress with the tier 1 airline, anything further with Air Canada. So, we’re still pursuing these opportunities, we’re making good progress, and we can’t say anything further on this. As Avmax begun taking delivery of the 146 AFIRS units, they ordered it, so how many units have been taken to-date? We haven’t delivered yet. Our planned start delivery date is in early December. So, has the service depot and service partnership in China been realized? And so, we’re continuing in that process, we’re in negotiations with the partner there and we expect to be completed and through that negotiation and under contract and before the end of the year. Can you elaborate on the reported status of the private placement being handled by Dougherty; were any shares sold? And so, as I mentioned earlier and as outlined inside of our financials, we cancelled that deal and there is no deal done there. It seems that the smaller contracts somewhat regularly announced in the past by FLYHT, it’s 4 to 10 plans are quite down. [Ph] Has FLYHT changed its sales approach with small airlines? And so nothing is really changed. And we have lots of small and mid-tier opportunities inside of our sales pipeline and we’re continuing to work with it. So the next question says, please comment on the STC process. Are there installs waiting full approvals or pending STCs, are there orders, the product waiting for the commencement of new STC applications? And so from this, I will just generally say that we have a full of certification activities underway and this is a normal course of business. There was -- I mentioned on a question, it said congratulations on passing the 2 million flights with the AFIRS milestone. I’d like to say thank you very much. And for those of you who are not aware, on our website on the maintain page in the bottom, there is running ticker that shows the number of flight hours for AFIRS. Other question says. Can you give an explanation of the new software you’re developing and is it being used on current customers? Can you comment on what the airlines are looking forward to bear more fruit, as Matt Bradley announced in Q2? So, I believe this question deals with Matt’s statement that we were not going to pursue mobile applications and that we are going to use those resources to focus more on our backend processing uptime. And so we are continuing to make improvements to up time. We’re creating a great deal of customer customization options, which will make it easier to use and less work for flight. We’re are implementing a much more detail troubleshooting and analysis tools inside of the product. And ultimately, when we roll these new features out, it will be more capable and it will provide a basis for better for decision making for our users. So, who’s the new sales guy and the sales team that Dave Perez mentioned in Q2? So, we’ve added a new sales resource to support China, which we view as a huge opportunity for us. And this is demonstrated in our Q3 results. Can explain the recent 146 aircraft deal from leasing company as recurring revenue, dollar amount from that data been left out; can shed more light on in terms of the detail. So, we show that the recurring revenue including the install will be about $4.3 million over five years and it didn’t include options, which could bring that total up to $8.3 million. So I think that that’s really explained in the press release that we made on that. So, it’s just reinforcing that. Our new CEO comes from L-3, we do assume more visits business from them? I’ve got great relationships with L-3 along with other partners in the industry. So, we will continue to look to create value wherever we can. When will a replacement for President of the company be made? So, right now I’m making an assessment of the organization and the company and make the decisions on when and if we’ll have a President role decided as we go. Can you comment on Ascend Aero’s activities, when we will be getting contractors from their work? So, they have already brought us three qualified deals. We call it as qualified deal when the airline has a budget, and they have a problem that FLYHT can solve. So the process that Ascend uses and that we use are standard processes that are used in aviation. And a question said it seems like it takes a very time for a deal one to three years or contract to sign in. That’s unfortunately the takes that the aviation industry moves at. This AESC competition for AFIRS? Some airlines are adopting it to track and stream data, is the statement correct? I would say sort of. I mean AESC is a contract that is used to provide position location for aircraft but in terms of tracking and screening data, not really so much the capabilities. That we provide in our AFIRS product are significantly -- provides significantly more value than AESC. So in Q1, next question, I believe that there was a mention that the iridium license was not properly recognized in China and not being accepted by larger airlines. Has this issue been resolved, are contracts waiting in the pipeline for the China depot to be set up, into this depot step up? So, we covered the depot question earlier. FLYHT is the only valid iridium license for aviation in China. That remains unchanged to our knowledge. And Iridium Corporation is cooperating with Chinese authorities to recertify iridium for continued use there. So that really is not new information. And I think that our position remains solid in China. Those are the questions that we have forwarded to us. So, Brock?

Thank you. We will now begin this one portion of the question-and-answer session. [Operator Instructions] The first question today comes from Fadi Benjamin of Euro Pacific Canada. Please go ahead.

Good morning. And congratulations Tom on taking the helm at FLYHT. My question is regarding your cash position. You’ve got about $1.3 million on your balance sheet, you’ve got upto shall we say $6 million worth of debentures coming soon, plus some cash going out also in terms of severance payments, as well as you are in a cash negative position in terms of cash generation. What are your thoughts? Your burn -- your current burn is almost $2.4 million, so what are your thoughts about the sustainability of your cash position?

So, I think our cash position is 1.5. And internally we believe that we have a path towards sustaining operations with the cash on hand and expected revenue.

The next question comes from Marc Berger of MKB Associates. Please go ahead.

Hi Tom. Welcome aboard.

Thank you.

First question is recently Russia has had a plane incident and I believe Putin had publically expressed his desire to make all their planes safer. Do we have any connections or contacts in Russia, so we can take advantage of this potential opportunity? And can you also if we do have some type of size of that opportunity might be?

I was just conferring with some other folks here, I don’t know all of our connections yet. I am told we do have some connections in Russia and that we would be able to use those connections in order to work -- in order to see if there is opportunities for us to bring our solution there.

With regard to recurring revenue, in the past, revenue on a recurring basis have been in the area of approximately 1,500 a month; it’s come down from that number, I expect because we’ve had new people sign on and had not had the opportunity yet to up-sell them. And my question is, can you give us any guideline as to when you might think that up-sell opportunity starts to kick in so that we can increase those recurring revenues as well?

I don’t think I can issue any kind of future guidance on those future recurring revenues would kick in. But we do have installations going on and we do up-sell our services on those installations. So, I think that’s about all I can say there.

Chinese new product launch, they had some big event recently. I think there were about 4,000 government employees that attended or whatever, one of their new planes that they expect to come out with. We had in the past said that we were going to be on that launch, where I think there was about 400 some more planes that we had contracted for. It seems they now are upto about 517. So my question is, are we still part of that initiative where those planes will be something that we’re going to pick up when that launch actually lifts off?

I think those are people singing up for the aircraft, the aircraft is still being created, it’s not in production. So, those would be future sales for us.

But there has been no change with regard to a status to be on those planes?

Not to my knowledge.

Last question similar to the last questionnaire, when do you expect, based on cash flow that you will be on a breakeven path? And do you have any guidelines into the future as to when you might be able to have some future forecasting abilities?

Well, we are not supposed to provide forecast on a venture exchange. And so take that guidance seriously. So, I don’t know that I can provide that. But I will say we’re very optimistic about our position currently. I think that’s highlighted by our decision to forego any kind of raise at this time. And so, that’s kind of where we are right now.

[Operator Instructions] Our next question comes from Eric Nelson, [ph] a private investor. Please go ahead.

Yes, good morning and congratulations on the new position. I’d like to ask what the earlier gentleman asked about cash position. I know you sort of answered but with the debenture coming true, are you confident that you have a solution for that? Thanks.

So, internally worked with the team, and we feel like we have way forward. So, that’s kind of what I think we can say at this point. And thank you for your welcome.

There are no further questions at this time. I’ll hand the call back over to Tom Schmutz for closing comments.

Well, I want to again just indicate how thankful I am for having been selected as Chief Executive Officer for FLYHT. I’m really very excited. Calgary is a beautiful place. I’m getting used to it. I am getting my arms around all the different aspects of the job and I’ll continue to do so. So, hopefully within a quarter, I’ll be able to provide you some indications of what I have observed and how we will change things to move this company forward to become a money making company and to continue to innovative and sell our product in the industry. Thank you very much.

This concludes today’s conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.