Thank you for standing by. This is the conference operator. Welcome to the FLYHT Aerospace Solutions Second Quarter 2021 Results Conference Call. I would now like to turn the conference over to Bill Tempany, Chief Executive Officer for FLYHT. Please go ahead, Mr. Tempany.

Thank you very much and thanks everybody for joining us again. I think that the hot summer and the smoke in Western Canada and I hear it’s going all the way across North America, has been kind of an unusual year all the way around and with COVID combined has made all kinds of challenges for everybody this summer, but we are very buoyed by the results of the second quarter. I know the revenue – there was no revenue growth, but I think if you look back through the last 3 or 4 years, the license revenue for our products that we sell to OEMs has been – well, it was virtually none in the second quarter, and that seems to be the main problem across the revenue line. What we would like to do is have Alana go through briefly the information on the financials and then I’ll come back and talk to you about what I am really excited about, and that’s the future of this company and the things that we’ve worked on and have delivered and have ready to go. So Alana, over to you.

Thanks, Bill. As Bill mentioned, COVID does remain an issue globally, and it continues to impact our financial performance. But we are beginning to see some signs of recovery, particularly in our Q2 hardware revenues and in the recent OEM purchase order we received for Q3 deliveries of licensing revenue. I think one of the most interesting parts of our financial report is actually the subsequent event note, the private placement that we closed 2 weeks ago really allows us to head into our expected recovery with a much tighter capital structure. After paying off our maturing debenture, the remaining amount added to our Q2 ending cash reserves is really paving the way and allows us to pursue several growth avenues. The increase in this quarter’s SaaS revenues over last Q2 was driven by increases in our customers’ flights and flight hours. We’re starting to see a recovery, and slowly, we’ll start to see that reflect in our SaaS revenues. Our customers’ flights increased by 30% over Q2 last year and the hours showed an increase of 40%. Looking at the difference between last year’s Q2 and this year’s Q2, the mix in revenues, it’s impacted our gross margin, in that last year, a significant portion of the revenues were in our highest-margin licensing revenue category, whereas this year, it was in the lowest margin category of hardware revenue. And while hardware revenues carry lower gross margins, it is encouraging to see our customers starting to invest in hardware again, ramping up for their recoveries. Our operating expenses continued to track lower than pre-pandemic levels, reflecting permanent changes to our cost structure. You will notice that we’ve been investing in our development efforts. As we’ve been talking about actionable intelligence, we’ve been investing in that area of the business, which you will see in the shift to a higher R&D portion of our operating expenses. We have also been feeling the impact of changes in governmental support. In 2020, we were able to access higher levels of support from both the Canadian and the U.S. governments. Funding through the U.S. government has not been available to us this year. And while the Canadian government has extended their programs to November 2021, the level of support has decreased from last year’s levels, not entirely unexpected. Encouragingly, our customers continued to make it through the pandemic. To-date, we’ve seen two of them lost in the pandemic struggle, of which one has already returned and reengaged – engaged us for services. And the other has indicated they will be doing the same shortly. We are seeing an upward trend in a return to normal payment terms also, which we’re pretty happy about and which is reflected in our revised estimates of improved collections from year end. And now back to Bill for a discussion of the business.

Okay. Thanks very much, Alana. Alana mentioned the – our organic and inorganic growth. And part of the reason we did the offering that we did is to help fund some of the inorganic growth that we have planned. We have several opportunities that we’ve been pursuing for quite some time that are coming close to fruition. And I hope Q3 we’ve got some good results and tell you some of the things that we’ve been working on that are finally getting done. They all help us shift our revenue base from a hardware to a SaaS base. We understand the issues with hardware. We understand the issues that we have in low-margin sales. And the drive is definitely to get to SaaS as soon as possible. We have a very strong management team that is focused on that. We have product being delivered today and will continue to be delivered. We’ve got increased demand from our existing customers and new customers starting to line up for that. And our large installed customer base is going to be a very important part of the growth story over the next 1 to 2 years as our customers take advantage of the work that we’ve done in the last year. One of the key things that we are going to deliver this year is the new AFIRS Edge box, a very low-cost, easy-to-install data collection and data transmission device. I think it’s really important because there’s a lot of aircraft equipped on the planet, probably 40,000 to 50,000 aircraft, equipped with a device to transmit data through the cellular network instead of the satellite systems or Sneakernet, as we call it, where somebody comes and pulls a flashcard. Those devices are 2G and 3G related. And the mobile market is moving to 4G and 5G very quickly. Our device will hit those markets and have the capability to do 4G and 5G. And next year’s version of the product will be enabled to use all of the Iridium services to get the data that’s required immediately to the people on the ground. We have got the strongest pipeline of sales I’ve ever seen in this company. The interest in the Edge and the services around the Edge is extremely high. And our sales team is growing. You saw that we hired Willy Cecil in the quarter. We’re looking for a couple more salespeople. And we’re going to be growing that part of the business to take advantage of this as the world opens up. I think that our geographic diversity gives us lots of advantages and a few disadvantages. We’ve got some pretty major customers in Southeast Asia, and they are behind in the recovery to what’s happening in the rest of the world. The rest of the world kind of goes in fits and starts. So I’m sure anybody following this has seen that American Airlines canceled about one-third of their flights one day last week. They are having trouble getting crews trained. They’re talking to one of our customers, and a lot of their pilots have expired their certification because they haven’t been flying and they are having trouble finding time and simulators to get them recertified because everybody is trying to get their pilots back online. So it’s not just the pandemic. The recovery has got some things because of the certification requirements in aviation that it’s going to be a bumpy restart. But I don’t think anybody can deny the fact that aviation will come back to full strength and continue to grow. I know the pent-up demand for travel is very high. Personally, I have nothing like better than to get on an airplane and go anywhere today. I’m tired of being locked up at home. So we’re definitely seeing that come. And we have got a lot of really exciting things going on with some of our partnerships with companies like Amazon that we’re going to be announcing in the next two or three quarters, some of the developments that we’ve done and ability to take advantage of some really leading edge technologies. And we have a very healthy balance sheet to attack our global opportunities and the people in place to do it from a sales, product development, client support, and certification point of view. So I am very excited about the future. I’m happy with the results in Q2. Not as strong as we’d like, but it’s a fact of life in the environment today with COVID. So with that, I’d like to open it up for questions. I think we have one on the e-mail so we will answer it first. A - Alana Forbes: We do. We had one investor ask, can we get an update during the conference call on the actionable intelligence rollout, customer acceptance or feedback and revenue forecast?

Okay. Well, we don’t do revenue forecast. But we do have 5 or 6 modules that have been rolled out to customers that are in testing right now. We’re working with a total of 4 customers today with that rollout and agreeing on pricing on it. One of the things that we will be presenting in the investor presentations over the next quarter is the cost of delays. How much does it cost per minute to delay an aircraft on the ground? How much does it cost per minute to have an EPU running instead of ground power or having the aircraft in flight? And those are all things that are coming from the work with the clients that are taking this. I am very confident that the revenue growth in Q3 and Q4 will be good, and it will be exceptional in 2022 as everybody gets back into full service. We have got the same problem in rolling out this product as I was just talking about with the pilots. All of the airlines have scaled back their staff to a point that everybody is running around with their hair on fire trying to get flights on time and schedules going. And it’s a very difficult time for airlines to be taking on new products, but we definitely have the interest of some key customers and demand from new customers. Alana, you got another one?

Yes, we do. Parts from helping migrate the company toward – more towards SaaS. What types of companies are you targeting for your inorganic growth and how will they strengthen your offering?

Well, as everybody has seen in our presentations, we have a geographic distribution that isn’t – doesn’t match the reality of the industry. We’ve got about, I don’t know, 45% of our business in North America and about 45% in China and Southeast Asia and 5% in Europe. So we’re looking for opportunities for relationships with companies that give us geographic strength in Europe. We’re also looking for companies that have applications and software that help fill out voids that we don’t have in what we do today. And there is lots of companies out there in the aviation world today that are looking for a strong partner to work with to help them recover from the pandemic. So we’ve got some really good opportunities, and we’re working them on a daily basis.

Okay. The next one, the next crisis for the aviation industry is going to be climate change. And we’re seeing major airlines and industry associations take this very seriously. How is FLYHT positioning itself to be part of the solution?

One of the biggest development efforts we made in the last year was getting all of the Corsa compliance reporting together, putting together a software that helps company manage their fuel burn. The – one of the biggest things in aviation is how you fly the airplane, how much fuel you burn, how much extra fuel you take because it burns more fuel to take extra fuel. How long you run an APU if you don’t have – if you plug an aircraft into the ground power at the gate and you don’t have to run the auxiliary power unit, you save fuel. We’re also looking at route optimization with some partners, where if there is a better route with better weather or a shorter route where we can help do that, our ability to have real-time data on loads and fuel burns and weather information all tie into how that works. And we are working very closely with the weather providers, NOAA and the World Metrological Association, to help get better weather information, to help route airlines through better weather than burn more fuel. So it’s very high on our priority list, the applications to help the airlines both manage and monitor what they are doing as far as fuel burn goes.

Okay. The next one is for me. Can you give us a snapshot of your pro forma balance sheet? Now that the convertible debentures are paid off, do you have any near-term maturities of debt? Now that we’ve paid off those debentures and done the fund raise, obviously, our cash balance has increased. Our current liabilities, particularly the loans and borrowings, will be reduced from about $2.4 million to about $600,000. And the convertible debenture equity feature in our equity section will have moved off our balance sheet entirely. Our – right now, the debt that we’re left with after having paid off those debentures is all low coupon. And it’s a combination of low coupon and zero coupon governmental loans, and they are long-term loans. So what will – like our repayment structure heading into the future, what it looks like right now, we’re paying off – we’re in the repayment phase of one of those loans – actually, two of those loans. One requires a small monthly payment, the other, an annual payment every January. And our payments are extended over – I think the last one is in 2028. And they are minimal amounts as compared to what we saw with the debenture that you can expect to see in the current section. Okay. That’s it for questions that we have on – from the investor e-mail address. We can go back to the investor line and see if there are any questions from the phone.

The first question comes from Jaeson Schmidt with Lake Street. Please go ahead.

Hi, guys. Thanks for taking my question. Bill, just want to follow-up on some of your prepared remarks. I know you guys don’t provide specific guidance, but just curious what you’re thinking for the second half this year just given some of the dynamics out there, whether it be the supply chain constraints or rising COVID cases related to Delta. Are – do you see in any of your customers get a bit more apprehensive placing orders?

Not really. Number one, the supply chain for us, we did a very thorough evaluation. We do one every 6 months, but we did one in June. And the one shortage we did have in the last 6 months was a type of wire because Boeing put a stop ship order on the part number for that wire because they’d had a problem with it. That has since been remedied, and that wire is back available for the kits that we provide our airlines. We have no problems with our electronics supply. We do – we did a pre-buy on any of the critical components for the boxes. And we have pre-buy inventory for, I think, roughly 2,500 units of the critical components. And we’ve had no issues with the other components as far as our orders go. We have increased our – we haven’t increased our inventory yet, but we’ve increased the orders where we will increase the inventory to make sure we don’t have shipment issues over the next few quarters. As far as the customer’s mood in the recovery, as I said in my comments, all of our customers are running on with their hair on fire, trying to solve all kinds of problems with staff and crews and all those good things. They are continuing to do implementations of the product. We’ve got new orders coming for our products. As Alana said, the hardware revenue in Q2 kind of shows that people are back getting ready for the recovery. How it happens and when it happens, I think people are kind of betting on 3 months to 12 months before they get back to kind of regular flying. And a lot of it’s related to what happens with the variants, but it also relates to having enough people and the right people and the right place to get back to normal schedules, so.

Okay. That’s really helpful. And then just following up on your comment on the partnership with Amazon, just curious if there is any additional color you can provide there?

No. We made a decision a year ago to work with Amazon with their tools for our ground services. And then we expanded it into their tools for machine learning, and now we’ve expanded it into their tools for IoT on the Edge. And as we continue to build the relationship and work with them, we’re doing more and more work with their tools. And they are getting more and more interested in what we’re doing in the industry, so.

Okay. And then the last one for me, and I’ll jump back in the queue. Just curious, any commentary around what you’re seeing in the China market?

Well, there is three or four things going on in the China market. They have been very, very strong in hardware sales force in the last 6 or 9 months. They can – their industry is basically 100% and growing. We’ve got relationships with some of the biggest cargo carriers in China. And they are equipping their aircraft and growing like cargo everywhere around the world. There are some, I wouldn’t call them issues. But there is some concerns with the political situation with both the U.S. and Canada and the relationship with China. And there is – they are very watchful of Canadian or U.S. companies doing business in China. But we have an extremely strong relationship with both the certification agencies in China and the customers in China. And to date, we haven’t seen any impact from that. But it is something that we watch because there is growing tensions between the governments, and that doesn’t help ever anywhere, but – for commerce, but.

Okay, appreciate the color. Thanks a lot guys.

No problem.

The next question comes from Bruce Krugel, a Private Investor. Please go ahead.

Yes. Hi, Bill.

Hi, Bruce.

Just to carry on with a question that was asked previously with regards the outlook for the back half of the year. I was just looking for a bit more color. So your SaaS revs have averaged roughly about $1.4 million over the last couple of quarters. Your big variables as you pointed out, has been licensing. And you mentioned that we should see some licensing revs in Q3. What I was hoping for is just a little bit of focus on what’s happening on the other swing factor in a quarter is the hardware revenues. You sold units 17 units in Q1, 24 units in Q2, which is actually a pretty decent quarter, which brings you to 41 units year-to-date. What do you think your hardware sales looked like for the back half of the year given you’ve still got a fairly decent outstanding order from WestJet?

We’ve got WestJet and some other customers, too. As I said, China is buying quite steadily for both their freight and their low-cost carriers in China. As you know, Bruce, we don’t do forecasts, and we don’t publish when we think. But I’m comfortable that the second half will be strong. I think we will probably exceed first half, but a lot of it is not in our hands. It’s – if aircraft go back into service and they get to a point where they need a C-check and then they install the equipment, we’re in good shape. If they don’t get back into service because of pilots or COVID or a dozen other reasons, they aren’t going to be doing the installations. But we’re confident that the second half of the year will be strong in the hardware side.

And in your prepared comments, you made a few observations about the new Edge device. Have you finalized on a launch customer for the Edge device and when do you think we could see that?

We’re in discussions with three or four customers. And I expect before the end of the third quarter, we will be announcing that. We definitely have a launch date in mind.

Thanks.

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

Alright. Well, as – I appreciate everybody’s time and dialing into this. I’m extremely positive about where we’re going and what we’re doing and that we’re on the right track with our SaaS revenue. I cannot overstate what a strong team we have here that are working on a bunch of different things that all tie together into this strategy. Everybody is focused and everybody is delivering. The response from customers has been strong. And providing the world gets back to some sort of normal, we’re in great shape with where we are in the market from a timing perspective and a product perspective and very excited about what we are doing and where we are going. So thank you for your time. And as always, Alana and I are happy to take questions one-on-one or to investors at flyht.com. Reach out. We’re happy to talk to anybody any time with what we’re doing and where we’re going.

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