Thank you for standing by. This is the conference operator. Welcome to the FLYHT Aerospace Solutions Fourth quarter and Year-End 2020 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. . Due to the volume of questions expected on today's call, we ask that you please limit your questions to three to allow time for others in the queue. If there are any outstanding questions at the end of the call, the company will be happy to take them by e-mail to investors@flyht.com. I would now like to turn the conference over to Bill Tempany, Chief Executive Officer for FLYHT. Please go ahead, Mr. Tempany.

Thanks very much, Reese. I’d like to welcome everybody to our year-end conference call. I - as I said in my letter, I think there's nobody in the world that isn't happy to see the end of 2020 and anxiously wondering what's going to happen in 2021. While we're going to go through the numbers for fourth quarter and the year-end, I think it's really important that everybody focus on what's coming as opposed to what's happened in the past. We've done a major reorganization of the company and our capabilities, our staff, our direction, and our focus on our existing customers. And we now have a place -- a team in place that's been trained and is excited to add value to the data we've been collecting for 20 years, providing solutions to our customers that are going to help them recover from the pandemic. And everybody is kind of waiting with bated breath to see who ends the vaccine versus the variant war. I think Canada is behind most of the other world as far as that battle goes, but certainly indications are from various other parts of the world that the vaccinations are working and people are looking to get back to life as normal and travel and so on. We're quite pleased that probably 95 or better percentage of our customers survived the pandemic. We had a couple of customers that went into receivership. They've re-emerged as new companies and come back to buy services and products from us. All of our customers have taken a major hit to their fleet size, their staff size, their routes, and therefore a very significant hit to our recurring revenue, but it's a temporary thing. And the government support that we've got both in the U.S and Canada to help maintain our key resources, our people has been a huge help in getting us to a point where we are really excited and poised to have a very, very good bunch of quarters coming up. And we're not sure when that's going to start. There's so much uncertainty around regulations and government rules and regulations. How are you going to travel? When are you going to travel? What are you allowed to do? What are you not allowed to do? That we need clarity and our customers need clarity before we can give you a real solid picture when that is. But I'm really pleased about the position we're in going into the recovery phase. We have about $8 million of cash resources available to us, as you saw on the year-end statement. We ended the year with about $5.1 million in cash. We have a couple of million dollars in undrawn down government funds from programs that were approved prior to the pandemic.

Thanks, Bill, and thank you all for joining us on this call. I hope everyone is well. In the fourth quarter, we continued to manage through the challenges to our business presented by the decline in global passenger traffic activity while also preparing for the eventual recovery by investing in technology and sales and marketing initiatives for our software offerings. We remained vigilant on controlling costs and managing our cost position, and we'll retain this focus as the recovery plays out on an uneven basis across our geographies and our customer categories. A - Alana Forbes: Bill, the first one. Is FLYHT on track to see revenue in Q2 from the new Actionable Intelligence Software-as-a-Service?

We're certainly on track from a technology point of view. We had our Board meeting yesterday to approve our annual statements, and we demonstrated some of the functionality that's ready to go to customers. That rollout will happen during Q2. But one of our launch customers, as you know, is Swoop Airlines here in Calgary, their flights have been basically squashed by the federal government's stop travel policies because most of their flights are outside of Canada. Canadians are discouraged from traveling inside Canada. We're in the process of rolling out to China Express, three of the initiatives. They've got a lot of work to do to get us set up with the data that we need because of regulations in China and we work with Amazon Web Services in China with a Chinese server there. But the Chinese government is very carefully watching anything that's done with a Canadian or U.S. company because of the diplomatic relationships we have going right now. We're confident that we will get this done because we've been set up to work with those things in China for many, many years, and we've got everything in place to do it. But it seems that the pandemic is a huge problem for aviation and government policies tend to give us an extra headache to the other things. So the short answer is yes. Technically, we have software ready for delivery to our customers. Our customers have reviewed it and are ready to do it. Whether that turns into revenue in Q2 or Q3? It will happen in those two quarters, but not necessarily Q2 because of government interference.

Any update to your comments in the March 11 Aviation Week article about client timing?

We do have a bunch of clients that are reviewing contracts and reviewing functionality right now. There are a lot of companies that are looking for these kinds of solutions, both existing customers and new customers. We don't preannounce sales. And once the contracts are in, we will be putting them out. One of the things that I've done is rather than do quarterly updates, if there's a significant contract signed regardless of dollar value, we do press releases and we're going to continue that policy to make sure that our investors know what we're doing. As I said in my opening remarks, 2020 is behind us. And looking forward, I think that you will see a lot of new names and all new opportunities come our way that are driven by our ability to add value to the data that we collect. And I think that is -- that you'll see this quarter, a quarter like Q2 and Q3 and beyond. There is definitely a feeling in the industry that things are going to pick up. And people are seriously looking now at how they're going to manage that with reduced staff and reduced capabilities. I'm sure you've all seen the news that both Delta and United have had to cancel flights because they don't have enough pilots that are certified to take the flights that they've got booked and they're doing things to rush that. The same thing happens to them with their operations group, the ground handling groups, all of those departments have been decimated by the pandemic and to recover as quickly as they need to, a lot of the tools that we've got built and ready to roll out are going to help them do that. So I'm very excited about where we're going in the next few quarters here.

Great. And the final one, what are you hearing from the airlines about COVID-19 vaccine passport?

Well, everybody has got a different view on it. I think personally, if I have to carry a passport that I've been vaccinated to travel, I will be lined up to get my passport the same as I have been for my vaccines. I've traveled for business for 50 years, and had to carry a vaccination passport years ago to go to Brazil to show that I had yellow fever and vaccinations and malaria and all those things. I don't see it as a problem, and I don't think any of the airlines do. What the airlines are looking for is clarity on what does it take for somebody to go on a trip and come home and not have to go through the rigmarole that we have to go through today to get back home or to arrive in a country. And I was really encouraged to hear that the U.S. has opened it up that if you've had your two vaccinations and you wear a mask on the airplane, you're free to fly and you don't have to quarantine when you come home. I hope the Canadian government comes to some realistic resolution to the silliness they've got going right now with the hotel situation if you fly in from another country. We're watching very closely what's happening in Europe. Southeast Asia, I don't think has a plan yet. But Europe, they are looking at ways to open the border and get things moving there. We need to get the Canadian government to catch up in a lot of different areas to allow business to get back to business. We've taken a huge step backwards in Canada in the last week, going back to locking down restaurants and other selected facilities that the government doesn't like with no data coming from the government about why. And it's very frustrating for all businesses to try and operate in a regulatory environment where there's no logic and no reason to anything that they're doing. But airlines are really -- in Canada, particularly, where there has been no government support, are really looking at tell us what we need to do, and we're willing to do it, but let us get back to business. So there's definitely a pent-up demand for travel and there's people wanting to get out and get back to normal. We just got to know what the rules are.

Okay. That was the end of the questions that we received in advance. So we'll go back to you, , for any questions from callers.

Thank you. We will now begin the question-and-answer session. . The first question comes from Jaeson Schmidt with Lake Street Capital Markets. Please go ahead.

Hey, guys, thanks for taking my questions and congrats on a nice finish to a challenging 2020. Just curious if you could comment on what you're seeing from an order momentum standpoint here in Q1? And I guess more importantly, if you've seen any meaningful cancellations?

We haven't had any meaningful cancellations. Delays are another thing, though. Everybody has delayed their c-checks because they aren't flying their aircraft, so they don't need to do them. They've delayed orders of new aircraft because they haven't been putting the hours on that they expected. But we haven't had any cancellation of orders to date, but we haven't had any confirmed shipments. We expect probably by the end of Q3 that everybody will have their fleet decisions made and have their route structures reorganized, so they know what they're flying where. I think as an industry trend, there's going to be more smaller aircraft than large aircraft while the demand picks up. And that change in fleet structure is going to be really good for us because there's a bunch of companies, a bunch of our customers and new customers, they're going to be looking at ways to find smaller, more fuel-efficient aircraft to service their customers. And that's the sweet spot that FLYHT has been part of for many, many, many years.

Okay. That's really helpful. And have you seen any big shift in the size of orders or the potential size of implementations, just with customers being a little uncertain given the macro downshifting some of the implementations that they were previously looking at?

Well, as I say, every airline on the planet today is evaluating their route structures, their fleet structures, their crew structures, their infrastructure operations, people, outsourcing, finding ways to get a more flexible cost base in their operations. But we've -- I've been on 3, 4 calls in the last 30 days We did a CEO to CEO reach out to all of our customers to talk about what we're doing and the things we're building and what their business is looking for. And bar none, all of them are looking for efficiencies in their operation and flexibility in their operation to be able to manage how many people they need and when they need them to get back into business without incurring a bunch of costs before the revenue picks up. We've got a very strong sales pipeline that's growing on a daily basis with companies looking at Actionable Intelligence and better use of data, better uses of different data sources to manage that recovery. As far as fleet orders and new aircraft orders, I think if you've been watching the backlog with Airbus and Boeing, they're starting to pick up. They're starting to get back to shipping not as many aircraft as 2019, for sure, but more aircraft on a quarter-over-quarter basis. And we're talking to a lot of customers that are looking at those new aircraft shipments because of the green energy drive and emissions reduction and an opportunity for them to do a fleet upgrade to solve a bunch of problems that are going to be very, very good for us.

Okay. I appreciate that color. And then just last 1 for me, and I'll jump back in the queue. Understand that gross margin can fluctuate quarter-to-quarter. But big picture, how should we think about gross margin for 2021, especially considering the SaaS revenue should continue to trend higher?

Well, providing everybody gets back to flying. And I looked at our results and AirAsia is 1 of the airlines that's been impacted the most in the pandemic because they fly in Malaysia, and 90% of their flights were international through the islands down there. Since they haven't been able to leave their country, the runway in Kuala Lumpur is just about the full length of Malaysia. So there's not a lot of flights going on in Malaysia. Their ability to get back to flying internationally and get that revenue back up to where it was and weather soundings back up to where it was because 1 of the things Alana talked about was a 50% reduction in our weather sounding data, the vast majority of those reductions were because of AirAsia doing 15% of the flights they did a year ago. And that's where a majority of our weather soundings were coming from. But the thing to watch as the company grows is the growth in the SaaS revenue and the growth in the margins on the SaaS revenue as we start rolling out Actionable Intelligence. And again, until we know what the rules are and our airlines know what they can do, I can't forecast that it's going to be Q2 or Q3, but I don't think it's going to be on Q3 that you start seeing the impact of both the recovery of flights and the Actionable Intelligence revenues coming into that -- to increase those margins and increase that revenue. So I'm a 1,000,000% believer in we have the right solution coming for our customers. The growth is going to come from the SaaS revenue, not from the hardware. And we have a large installed client base that's excited about what we're doing with technology. They're going to help drive that SaaS revenue without even having to go find new customers.

The next question comes from , a private investor.

Hi, Bill, Alana. Actually, you answered my question, which was, people are looking at FLYHT as a potential recovery stock for the back half of the year. And I was going to ask how could we expect to see this recovery unfold? And where could we expect to see it, but I think you've answered that quite comprehensively. So I'll move into the next one. Inventory, I've asked this before on the call, and I was expecting perhaps to see some movement on that front, i.e., inventory to the downside given that you sold 23 units. You've got a -- from my perspective, you have a fairly healthy level of current and long-term inventory. So when could we expect to see some decline in the main part on the long-term inventory side?

I'm going to let Alana answer that because that's a numbers question.

Yes. So our inventory, we -- like looking at Q4, we had a heavy demand for hardware, but we also have commitments with our suppliers that we have long lead times on a lot of our parts. And so we have to give them detailed schedules pretty far in advance, which through the pandemic has been reasonably tough. But I would say that as we're doing the best we can to try and forecast into the future, but I would say that I would look forward to reduced levels of inventory maybe around the end of the year, but I wouldn't be surprised if they remain fairly constant throughout the year, given our supplier commitments offset with what we think will happen on the hardware sales side.

And just to add to that a little bit, Bruce. The long-term inventory, there's a bunch of end-of-life parts that we had to buy so we can build another I think 2,800 AFIRS units, we've got the long lead time and obsolete parts to build. We'd have to buy more to build 2,800 units. I'm not saying we have all of the parts in stock. But with avionics products, you've got certification based on a certain part number and a certain manufacturer, and you can't swap those out without doing a whole bunch of recertification work. So as the product gets a little bit older, you end up buying more and more of these long lead time or critical components for the box. And each year, we go through and do a technology review on any potential obsolescence of those parts. And if something is going to be obsolete, then we have to go buy those parts ready to build those units. So that long-term inventory is not likely to change a lot because of the obsolescence and the recertification problem.

And a final question. What part of your AI strategy is resonating with clients? Which part of it do they say, that's what I want?

That's really geography-dependent. There's a lot of the U.S. airlines that last year didn't really have an interest in emissions reduction, that all of a sudden are looking at what we might be able to do for them for emissions reduction. The operators in Canada, particularly because of the number of layoffs they've had to do and the types of layoffs they've had to do, have outsourced a lot of the ground handling and aircraft grooming and things that were done with staff before. They've now got a contractor doing that, and they need to monitor differently than they did when it was a staff position to make sure that the right jobs being done and they're being charged to right amount and those kind of things. So that turn management IROPS ground handling piece is very important. There's people that are looking at our capability around preventative maintenance, predictive maintenance, the ability to analyze fault codes from the aircraft and help them make sure that an aircraft doesn't land at an airport where there's no facilities, no mechanics to get it repaired and get it back in the air, that our real-time data gives them an advantage over anybody else to be able to do that. So each 1 of the launch customers have different requirements that they're looking at, which is really good for us because we've structured it so that we have multiple development teams that can work on these things. Again, because we're using existing technology, existing software, existing data, it's a matter of how we use and how we display and how we communicate that information. We're not out building brand-new-from-scratch systems because we've been managing this data for them for 20 years. Now all we're doing is getting it to them in a different format.

. The next question comes from Marc Berger with MKB Associates.

Good morning, Bill, Alana. Hope you guys are doing well. Okay. I had about 8 questions I sent in, but I guess you didn't get them, so I'll try to narrow them down to 3 or 4. First one is, you said you expect to have 3 clients using your AI starting in the second quarter. Is that in addition to the 2 launch customers? Or is that including the 2 launch customers?

That's the 3 launch customers.

Okay. So the 3 on the launch. Alright. Could you give us an update on China since there seems to be the fastest one coming back up to full speed? What do you expect or what can we expect in the coming quarters? Do you think you're going to be adding new customers or add a major in there or a lot of the little guys?

We've got a lot of activity going on in China right now. We've got a bunch of their cargo operators that have started buying equipment and getting those upgraded. We've got -- it's a really interesting time right now with the positions of the Canadian and the U.S. government in China and what's going on with the trade wars. The U.S. government has come up with some regulations around dealing with Chinese companies that are considered to be companies in China, and 1 of them happens to build their commercial airlines that we're working around. So we've got a really solid position in China. We have a very good reputation in China. And I believe that once we get China Express up and running with the full AI suite, we're going to see a very rapid adoption of our technologies in the Chinese airlines. One of the things that I'm -- that we're working on is we've got a small hardware project that we're going to develop and deliver by the end of this year, a small device that allows us to get the key data of the aircraft when it lands instead of using satellite. It can be hooked up to existing aircraft regardless of what technology is on it, and we can drive a lot of the AI data in a very cost-effective manner. And I think that that's going to be a homerun in China. Our sales team in China is working with some launch customers on that. And I think that we've got a really large opportunity in China that continues to grow. I know Marc, you and I have been at this for a lot of years, and we've talked about China 100 times, but we have made incredible progress in China. We have 40-plus airlines in China using our solutions, and we keep expanding every year the amount of services that we provide there. It's a slow, steady progress to get into China, and we're way ahead of any of our competitors in the China market. But I'm concerned about the politics, politics getting in the way of business as a part of our life. And right now, it's pretty scary what's going on between the U.S. government and China, the Canadian government and China, China and the rest of the world. I'm watching it very carefully to make sure that we stay as a preferred supplier over there and are not dragged into the mire that these guys are creating with the policy.

Regarding our L3-Airbus partnerships, can you give us any more clarity as to what we might expect going forward? And also is the fact that Boeing's problems become Airbus' advantage, has that been helping us as well? And also with regard to the previous customers already have technology on, do we expect to hope that maybe they'll start taking our streaming services, especially with the new AI that you're working with?

Well, I think Airbus has a big advantage because they've got the 220 from Bombardier. I think the shift that I'm seeing globally in the aviation world is smaller, more fuel-efficient aircraft instead of the typical 737 and A320 competition, the A220 is filling a need in some pretty major markets worldwide. And we also -- our agreement -- our L3 Airbus agreement is for the 220 as well as the 320 and 330s. But I think that Boeing's problems and the things that they're getting through and trying to get cleaned up, I think they're fortunate that the pandemic came along. It gave them a year to do a bunch of stuff that kind of slowed the erosion of their market share because nobody was doing anything. So it's 1 of the few things that anybody could look at and say, okay, it was a good thing that the pandemic happened. Our Airbus-Boeing relationship is solid. It has been for years and years. And I think the uptake on the 320 and the 330s is very high. Eventually, there's going to be a new product required that uses the new Iridium modem, the CERTUS modem. And we're working on a solution for that. It's an option in the hardware that we're going to deliver at the end of this year. And we continue to work with it.

Okay. Last question. There's a new asset class that's being developed. It's called disruptive technology with major players there. Obviously, I would think that your technology would fit that bill right away. Do you see any of these new hedge funds or whatever that are specializing in that, coming to you to ask and get more information? Or are you looking to maybe get your PR people to go out, reach out to them to get them interested, to understand what your technology is about and how that will help them?

We're doing both of those, Marc. We're reaching out to all of those kinds of companies, and we're getting a lot of incoming calls from groups interested in what we're doing and where we're going. The investor market certainly is more interested in a SaaS revenue, recurring revenue company that's providing a critical service to a major industry than they are a niche hardware player that has to compete against a bunch of the big guys. I think that the work we're doing with artificial intelligence, machine learning, Actionable Intelligence is going to catch a lot of people's interest over the next 2 or 3 quarters. And that's why I started the call with saying, 2020 is behind us, you got to be looking forward. You got to be looking at what we're doing and the shift we've made and successfully made to help drive value to our customers and value to our shareholders through implementations of disruptive technology. And we've got that in a lot of different areas. We're working with some very, very top of the -- top-class companies around the IoT, edge computing, taking advantage of our capability to detect and notify with things that could be done differently on the aircraft without major work that can be certified by our people, which is a unique capability of ours to be able to certify. One example of it is 1 of our customers -- everybody that works at an airport has to have a badge and they swipe through every door and they swipe through every piece of equipment they use. One of our customers wants us to put a card swipe in the front galley of the aircraft. And when the cleaner comes on, they swipe in, they swipe out, how long they were on board, how many of them there were, so you can prove that you did the cleaning you need to do for the government regulations. Those kinds of things we can do in a matter of a month or 2 where other companies had spent 3 years coming up with a solution. And it's those kinds of disruptive technologies that we are focused on and going to deliver going forward.

This concludes the question-and-answer session. I would like to turn the conference back over to Bill Tempany for closing remarks.

Okay. Well, I appreciate everybody listening in today. And as I keep saying, it's -- we've, I think, got through the worst of the pandemic. We feel very confident about the position we're in to be able to deliver the solutions that we're putting together. We firmly believe that Q3, Q4, probably even Q2 are going to show some of the recovery and strength. And again, it's -- we got to get governments to make some decisions and give us the rules we got to play by. And we're here with some absolutely wonderful things happening in the company from a product point of view, from a staff point of view and from a market point of view. So I'm very happy with where we're at and where we're going and very confident that we're going to be delivering value to everybody on a go-forward basis. So thanks for tuning in.

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