Good morning and welcome to the Innovative Solutions and Support Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Geoffrey Hedrick. Please go ahead.

Good morning, this is Geoff Hedrick. I'm Chairman of the Board. Joining me today are Rell Winand, our CFO; and Shahram Askarpour, our President. We will discuss the fourth quarter performance for fiscal 2021 and the 2021 completion. I would like to turn it over to Rell for the Safe Harbor message. Rell?

Thank you, Geoff and good morning, everyone. I would remind our listeners that certain matters discussed in the conference call today, including new products and operational and financial results for future periods are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially, either better or worse from those discussed, including other risks and uncertainties reflected in our company's 10-K which is on file with the SEC and other public filings. Now, I'll turn the call back to Geoff.

Thank you, Rell. We finished the 2021 fiscal year, positioning us for strong top and bottom line growth going forward. The strength of our growing OEM demand provides us an excellent foundation for the growing demand in the retrofit section in this segment. The autothrottle is now developing in our military sector on King Air and larger multi-engine aircraft and our Turbofan autothrottle program doubles the market opportunities. We are expanding our sales force and planning an expansion of our strategic marketing. Our growth has been affected by the lack of sales people and exacerbated by the pandemic. Our recent emphasis has produced a new strongly experienced GA's sales director and we are in a process of finding individuals for the other two market segments, military and air transport. I will now turn it over to Rell for the financial analysis. Go ahead, Rell.

Thank you, Geoff and thank you all for joining us this morning. Let me mark that the fourth quarter revenues were $6.9 million, up 9% from $6.3 million a year ago. As a result, we saw sequential revenue growth in every quarter this year. Revenues were generated in each of our general aviation, commercial air and military markets with ongoing recurring revenue from our PC-24 and King Air autothrottle production programs. Gross margins for the quarter were 57.6%, up from 54.3% in the year-ago quarter, with the increase attributable to product mix as well as the favorable leverage achieved by the growth in revenues. Margins remain in line with historical averages. Total operating expenses for the fourth quarter of fiscal 2021 were $2.1 million, down both sequentially compared to the third quarter of this year as well as from $2.3 million in the fourth quarter of last year. Compared to a year ago, research and development expense was marginally lower, at 10% of quarterly revenues, R&D was in line with our historical averages and continues to reflect our strong commitment to innovative and new product development. Selling, general and administrative expenses were down from the year-ago quarter. The decrease reflects lower professional fees and benefits expense in the quarter. We believe quarterly operating expense levels will increase as the company expands it's sales and marketing efforts this fiscal year. For the quarter, we generated operating income of $1.9 million or 27% of revenue. We recorded taxes of approximately $356,000 in the quarter. The company recognized a tax benefit in the fiscal third quarter of fiscal 2021 due to the reductions of the deferred tax assets valuation allowance. Therefore, income tax expense will be recognized on a go-forward basis. The company anticipates the tax rate should be in the 21% range. Bottom line, net income was $1.5 million or $0.09 per share for the quarter, up from $1.2 million or $0.07 per share in the year-ago quarter. Quickly looking at results for the year, total revenues were $23 million, our third consecutive year of revenue growth. For the year, net income was $5.1 million or $0.29 per share which includes $1.1 million or $0.06 per share in tax benefits, reflecting the release of a deferred tax valuation allowance. As a result, this was our most profitable year in over a decade. The company remains in strong financial position. We generated $4.6 million of operating cash in fiscal 2021, with $800,000 of operating cash flow in the fourth quarter. At fiscal year-end September 3, we had $8.3 million of cash on hand and that is after dispersing approximately $20 million of cash dividends in fiscal 2021. The company is debt-free. I would make one additional note on the balance sheet. That's due to the ongoing global supply chain challenges, as a result, among other things, the ongoing COVID-19 pandemic, we are maintaining a slightly higher than normal levels of inventory, simply as an added measure of precaution. However, to date, we have managed to largely avoid production disruption as a result of the supply chain challenges even amongst an increase in production volume. We believe that the company has sufficient cash and to fund opportunities for the foreseeable future. Now, I'd like to turn the call over to Shahram. Shahram?

Thank you, Rell. Good morning, everyone. Fiscal year 2021, Innovative Solutions and Support made good progress in virtually every aspect of it's business. Revenues were up consecutive year. Margins expanded compared to the fiscal 2020, driven by improved productivity and efficiency despite the extraordinary measures undertaken to ensure the safety of our employees, customers and vendors in response to the COVID-19 pandemic. While we recognize the pandemic continues to out supply lines and many industries are reporting labor shortages, we have experienced few disruptions. Nevertheless, we remain vigilant to quickly identify and resolve any issues that may arise. So, let me provide additional information around some of our revenue generative programs that are driving our success. The company has three OEM production contracts that continue to provide a level of stable recurring revenue. General aviation market seems to be improving. And as a result, Textron is reporting increased demand for King Airs, in which we are the supplier of production autothrottle. Consequently, we are somewhat optimistic we may see some increase in revenue from these programs. Our strategy has been to use our King Air autothrottle as a foundation to brand chart on to adjacent airframes as well as expand beyond turboprops into the business jets market, where our products are equally valuable. I'm happy to report that we are expanding our autothrottle market to retrofit any appropriately equipped and Embraer Phenom 100 and 300 business jets. Pilatus PC-24 program is also making steady progress. Like Textron, Pilatus also reported a nice increase in the number of PC-24s delivered over the first nine months of 2021. The Textron and Pilatus OEM production contracts are, therefore, expected to provide a steady level of recurring revenue with some potential for growth in fiscal 2022 as well as thereafter. Our government contract on the KC-46 continues to run at expected production rates. In addition to our OEM business, we continue to grow our retrofit business, primarily flat panel displays for air cargo convergence. We have a competitive advantage in that many air cargo operators are buying used 705 and 767 aircraft for conversion, aircraft on which we believe we have the best cockpit upgrade on the market. For some terms of perspective, the only other competitive cockpit upgrades on the market takes 4x longer to install, costs significantly more and reliability is much lower. In addition to OEM applications, our autothrottle is an ideal retrofit option. We are adopting a much more aggressive approach to the autothrottle retrofit market, having hired a dedicated business development professional and expanding our reach beyond Textron's own service sensors to target independent fixed base operators and our maintenance with an operations center network. I should also briefly mention our two big recent announcements. The European Union and Canada certification of our King Air Autothrottle opens up new geographic markets, while our expansion into the business jet market provides the base to expand into another adjacent market. Finally, Eclipse continues to show interest in technology upgrade of their cockpits, we are in ongoing discussions regarding additional needs. New orders in the fourth quarter of fiscal 2021 were $6.5 million, bringing the new orders for the year to $28.5 million. Backlog as of September 30 was $9.1 million, a 250% increase over the course of the last 12 months. Fiscal 2021 was a good year that has us well positioned for continued success. While end markets have not fully recovered to pre-pandemic levels and various safety and other protocols have been an obstacle, our emphasis on price for performance across various markets has enabled us to deliver strong returns. Before we open for questions, let me once again applaud the ongoing efforts of our employees to integrate new safety protocols into our standard operating procedures, has enabled us to maintain productivity without jeopardizing the health, safety and well-being. I'd like now to turn the call over to questions.

Thank you. At this time, we will open the floor for questions. The question comes from David Campbell with Thompson, Davis & Company. Please go ahead.

Good morning, everybody, Geoff and Rell, Shahram. Excellent presentation and excellent results for the quarter, although, of course, you missed my targets which is because I'm always optimistic. But let me tell you -- let me answer your question, at least one. Your sales and new products are going up and substantially increasing the opportunities for you to get new revenues. Why do you need new salesmen? Why do you need more salesmen? You're doing very well.

I believe that we are massively understaffed. And that the opportunities are multiples of what we are presently realizing. And that's primarily because we don't have active people in the field. So I mean, if you think about the revenue that we want to generate, we're talking about trying to generate $25 million, $30 million this coming year. We are attempting to do that to try to do it with one guy in the field just doesn't make sense. So we're looking for smart, capable people to deal with the three segments. And again, remember, we have three market segments. We have the bizjet which we're -- which is now being covered by our latest GA Marketing Director. And we needed an equivalent of that for military and we needed equivalent for that for air transport. We get a lot of business that are -- that's inherited business but we want to expand our -- both those segments, both the military and the air transport. There's huge opportunities there that have yet to be touched and we need sales guys to do it.

Yes. The salespeople, they're likely to come from the existing competing companies? Or will they likely be people that have no experience in the business?

No, no, no, they don't come -- they come from existing companies. Or in the case of the military, we may get a retired -- get a retired Air Force or Navy Officer, colonel or commander that -- who was a pilot and had extensive flight test experience, et cetera and do the opportunities at Patch River et cetera. So that's -- that would be the military for sure, the commercial air transport would come from one of the people. As an example, there's been a lot of acquisitions and the combining of multiple companies ends up having a number of people looking for something to do. And that's what we're going to look and try to exploit. How we've done it in the past, it's worked out well.

Okay. Last question for now. Your backlog was down from the previous quarter which I think was $9.5 million. now you're down to $9.1 million. That's strange that the backlog is going down when the revenue opportunities are going up. So can you try to explain that?

The shipments go up, the backlog goes down. So when we have bad shipping quarters, our backlog easily goes up. It's a relatively small amount, David. Obviously, it's something that you keep an eye on. And if it was consistent in subsequent quarters, we had an equivalent, we would be concerned but I'm not concerned in this case. It's gone up massively over the past year. So I'm delighted for that.

All right. Thanks for the help. I appreciate it.

Thank you, David. You sound good, by the way.

I'm still in here. I'm working away.

I'm reminded people talk -- remind me that I'm working because I said the reports of my death are pretty sure.

No, Jeff, don't forget here. You're coming up to see me.

Yes, I will, I will do it.

Okay.

Take care.

Our next question comes from Roger Nedrow , private investor. Please go ahead.

Yes, good morning. Thanks for the good call today. You paid out a nice dividend at the end of last year, is with an 8-point some million dollar balance on the cash on the balance sheet, are they anticipated to pay out a dividend again this year?

Not really. We have not anticipated, put it that way. But it was -- bluntly, I want to make sure that whatever dividend we had -- we paid out in this year where we had some conference in the tax situation et cetera, for our stockholders. That's all. So right now, we anticipate making investments and we want to keep some reasonable amount on hand. So in the near future, we don't see an opportunity but that may change. I remain -- the company has a habit of generating pretty consistently cash. And as we generate cash, we're all happy to distribute. We've distributed over $100 million in cash, I think, over the years. So it's -- we consistently do that. But nothing in -- there's nothing planned right now to answer your question.

Okay, thank you. Keep up the good work.

Thank you.

Our next question comes from Michael Friedrich , private investor. Please go ahead.

Good morning, everyone. I didn't hear a whole lot in the call about what was happening with the large air cargo company, online retailer that was retrofitting and building a large fleet. Is all of that still on target and still continuing to go well?

Yes. We have -- in rough terms, of just under 100 aircraft done. So I mean, some of those aircraft will be airplanes that they bought from somebody and they had already done the upgrade to it. But the important issue is that we're applying with -- it's exhibiting our outstanding reliability and acceptance in the field. So that's going well and we want to take very good care of that customer.

Okay. And remind me again how large their fleet could be when they're done?

Well, I mean, a speculation on. If you want to know my speculation, I think it could be bigger than what is now the biggest fleet which would be FedEx. It's about 700. I remember, I built equipment for FedEx when they had seven airplanes. So their growth has been spectacular. I suspect this has to come to about the same or more simply because it has huge resources behind it. And importantly, the profile for business, as you know, has changed. I mean I personally buy an enormous amount online now. I mean it's safely driving to the store, honestly. So they're going to move those packages around and there's a limit to how many trucks you can put on the road. So I think the growth is inevitable. And I think we're on a hall of in the race.

Okay, great. Thanks for that.

Our next question comes from Glenn Remington , private investor. Please go ahead.

Good morning. Thank you for taking my call. I really like just stack beginning my journey with this company but I've read quite a bit. I think I understand the notion of what you're building there. I'm wondering if you could speak a little bit to the notion of future-proofing with all this conversation about alternative fuels, electrification, whether it's R&D or whether it's software baked in for future adaptation. I'd be curious what your feedback would be on the 5, 10 going forward with all these alternatives that everybody seems to want to talk about.

Well, I mean, from my -- this is Geoff Hedrick. From my perspective, the electric airplane has got -- may have application in short runs in urban areas. But it certainly doesn't have a good opportunity for long runs, for a simple reason. The airplane, an electric airplane has the same weight when it lands as when it takes off which means it has to carry that enormous amount of weight through the entire . A fuel-based airplane burns off at least 30% of it's weight, reducing the load it has to carry. So certainly in my practical lifetime, I don't think I'll see a huge change. It -- I didn't think -- honestly, I didn't think the electric car would come as quickly as it did. So I'm not sure but I don't believe the airplane is a very different problem than an electric car. There are all the fuels, it's all on a question of right now, there are airlines that are looking at and running all other fuels. If you can make them economically practical, it's terrific. But fuel is a major cost in the operation of an airplane. So you don't want to raise the per unit cost of that. So the fuel, if it at all possible. So maybe it's just a summary. Honestly, I don't have the wisdom of giving you an accurate answer. I can always speculate that I think that the electric airplane will be limited to reasonably short runs around urban areas. But the longer runs will still be done by these massive airplanes with bigger engines. And they have gotten over the years at much more fuel efficient. There is a huge incentive for the operators to optimize the efficiency of their equipment. And they spend billions and billions of dollars doing it because it's a direct operating cost. So, I anticipate that will continue to be a driving force but I don't see any major changeover.

Really excited about the safety and efficiency aspects. I just want to say thank you for your hard work and I'm very excited with your company.

Well, that's very kind of you to say that. Means a lot to us, trust me.

Our next question comes from Rick Teller , private investor. Please go ahead.

Good morning. I'm not sure I heard Shahram correctly there. My sound was kind of going in and out a bit. But did you say something about working with Embraer possible retrofits or something? And it is -- because that's a whole new, let's call it, brand of aircraft. Did I -- was I hearing that correctly? Maybe I just misheard.

Yes. With -- I think -- I believe what we said was we were working on the Embraer aircraft. Embraer Air makes a wonderful airplane. The Phenom 300 has been a super seller, terrific and is ideal and does not have an autothrottle and we can provide it and provide some distinct probable safety features and reduction of workflow. So what we're focusing on now is we're working directly to get retrofit installations. And that's different than OEM. As an example, where you have a build-in airplane from scratch, you can put parts in wherever you feel is appropriate. We have a retrofit situation more likely have tables and hoses and stuff in places that you don't want. You have to learn to deal with it. And this company has done retrofits for 33 years. So we know what we're doing. There's a huge opportunity and we're working that with people like -- not with people but with airplanes like the Embraer and other airplanes has retrofit potential for our . It has -- we're going to be looking at both the military and expansion in the GA. So both of those are coming and turbofans which is what the Embraer is. Does that answer your question?

Yes, it does. Are you in talks with any other OEMs for -- including autothrottles in their new models?

Well, I mean, we're always in talks but substantive talks, not so much. We're moving -- the reality is that the retrofit market is magnitudes, orders of magnitude larger than the OEM market. And we love the OEM market. We're delighted to be in it. But for certain programs, the retrofit is massively larger and we want to focus on that. As an example, one of the things we're doing, just to give you an example, the retrofit, the installation of our autothrottle into the King Air has taken, in some cases, over 100 hours of labor to put in, we estimated it originally at about 40 to 50. But with recent work and development, a refinement of procedures, et cetera, we reduced the time to install this to under 20 hours. That's significant savings for the operator but more importantly, I owned an airplane for 35 years. People who own airplanes hate to go up their airplane even for an hour. I mean whatever reason it just -- all of a sudden, we feel like we need it. And so we're trying to focus on minimizing the effect or impact of a retrofit installation. And that is a very different test or objective than what you would usually face in an OEM because they have -- you're not interested in moving step around and that kind of thing that you have to do in a retrofit. Is that anything that makes sense?

Yes. Yes. And the fact that you're expanding potential retrofit markets to things like Embraer and presumably other manufacturers, I guess that would be behind the new focus on working with fixed base operators and other things other than the Textron system.

Yes, the Textron program is a wonderful program. I actually admire them for showing the responsibility and clarity of implementing this as quickly as they did in their production. They did a great job. And I really commend them for doing that. They recognize that there's a real safety feature. They talk about 100 people a year die. That's a humbling challenge, trust me. At any rate, what we have now is working with FBOs and trying to get them up to speed so that they can turn airplanes and quickly and we're looking at new kinds of airplanes. For instance, the Embraer is not a prop airplane, it's a turbofan airplane with a different kind of engine. And so we have broadened out our applications.

Okay, good. Well, thank you.

You're welcome.

Our next question comes from Roger Goldman , private investor. Please go ahead.

Good morning Geoff and team. Nice to hear about another year of progress. My dad is looking down with a smile. A couple of things, Geoff. The first is, I just want to comment a little bit about electric airplanes. My son Jake, who's also a shareholder, is a senior guy at a company called Beta Technologies which has eVTOL. They're based in Burlington, Vermont and they are operating very differently than the others. The others seem to be more interested in an IPO than in the future of aviation. These guys are very -- that's a personal comment, Geoff -- okay, these guys are really interesting in terms of -- and you might just want to take a look at their website. But they've got airplanes that are flying --

Where are they in Vermont?

Burlington.

I had a house up there for 45 years.

Okay, so you know the area but there are a couple of things. One is the improvements in batteries are happening very, very quickly. And second, they have a pretty unique battery configuration. And they're already -- they believe they've signed up UPS. The government is a customer and a lot of where they are, the planes are flying. They're waiting for FAA approval. And they're focused on package delivery, not customers, because as you well know, package delivery is 3x the size of customer delivery in terms of potential revenue. So I just mentioned it, it's worth having somebody on your team, look at their website and if you want an introduction, I can make it. Certainly not worth spending a lot of time on but keeping an eye on it. The second thing is, I'm delighted to hear that you're ramping up your marketing and sales effort. I've always felt that there was a lot of opportunity to move faster with this suite of products in the marketplace. And it sounds like what you're doing is you're redefining the marketplace to be much bigger than you had been. And I think the ramping up of sales and marketing and it looks like you're also doing a little bit of branding is just terrific. So I compliment you on that. The third, of course, is the question I ask you every year which is you've got a lot of cash, you've got a lot of credit lines. I understand your conservatism about dividends but I would like to lobby again for a short-term dividend to reward the shareholders.

shareholder compliment me and said that his net cost for the stock was zero or less than that.

Yes, I know.

So honestly, I think there's -- look, the company is willing to provide dividends. But right now, the dividend for that we did this year was done for obvious and pragmatic reasons. It's always nice to have a little cash and $8 million is not a hell of a lot of cash. $40 million, $50 million is. But we don't -- we will probably keep some amount on hand, $8 million, $10 million, $12 million. And another if I get -- if we get a big flow, we'll take a look at a dividend. We're not -- we're not obsessed with cash; we fell that we want to use potently, put it that way.

No, I understand. I always look at cash plus available credit, particularly in this interest rate environment. If interest rates were different, I would feel differently.

Yes, I understand that. And I know right about now. I prefer to focus my energies towards developing a market which I think will have a better return to getting cheaper cash from the banks but --

Okay, I get it. Again, the most important point I'm making, Geoff, is well done on raising your ambitions for the company.

Well, thank you, we appreciate that. We appreciate your support. Listen, our shareholders are really important to us. We'll talk about them and think about them a lot. So appreciate your interest, appreciate your support.

Okay. Stay well, Geoff.

Thanks.

Our next question comes from Glenn Remington , private investor. Please go ahead.

Yes. So, thank you. I had one other question. I noticed in the release and following along for a while now. There was a lot of mention about approvals in additional regulatory jurisdictions for your products. And I guess, in simple terms, I'm curious that the bureaucratic overhead costs to achieve those are captured in this year's books but the future sales won't have the burden of those costs spread out against them. So I'm wondering if it's more of a onetime business development investment. And then in the future, the sales just stand on their own.

Well, it is a onetime business development effort practically. But every time -- remember, every country has their own certification authority. And it isn't terrible but it's -- you have to submit the paper work, it's the bureaucracy that exists worldwide now. But it is a onetime effort. And once you get it, there's maintenance in some cases but that's minor. So the answer is yes. The good news is, once you get authorization in Canada and Europe, you don't have to do it every year, it gives you an opportunity now to sell worldwide or in that area.

Perfect. Thank you very much.

You're welcome.

Our next question comes from . Please go ahead.

I'm curious to know why pay these dividends, why not keep the cash on the books and maybe buy back some shares because we're the biggest -- let's face it, we're all here because we want to make money. And dividends are nice but when you're one of the largest shareholders and some of these other funds that own the shares, they make a lot of the money on a dollar basis. I'd rather see the stock price up. It hasn't gone anywhere for 14 years. The biggest bull market we've seen in 10 years and the stock is still sitting here. It hasn't been over $8 since 2007. So as a shareholder, I'm not really happy sitting in as back as is sitting here and doing nothing. Can you explain -- I would rather not hold the shares until I like to try to make some money myself. So the quarter was good, the year is good but at the same time, nothing to happen.

Well, something must have happened because our shareholder tells me that their net cost or their investment is zero or minus, something must have happened. And that's what happened to the $100 and some odd million that was distributed. As you know, I'm an interested shareholder myself. And we did -- and we have done a buyback in the past. We did that. We did an aggressive one some years ago. The problem what I have is that I have limited liquidity in the stock. And if I buyback, as I buyback, it reduces that it constricts it even more. So it's not -- I've been advised that, that's not such a good idea. We would like to believe that if we distribute the dividend, you can also consider buying stock. So it's not a simple answer. We -- we took the opportunity to distribute the dividend, if the capital gains goes up by 30%, it may be more attractive to have the cash than a stock that would go up. And then the question is, with a higher capital gains as the stock go up as fast. So I mean, I'm not prepared to make those kind of judgments. I try to just run the business in the most practical way. I appreciate your interest. And do I anticipate a buyback? Not right now. But certainly, I don't have an issue doing, done it before.

Okay. So as far as the additional employees, are you saying that without these employees, you're not going to be able to grow the way you want to or we're going to kind of stay at this change?

But right now, we're anticipating growth of 20% to 30%. Now I don't know, that may not be Apple or NVIDIA but I think it's a good, solid growth that we should focus on. Right now, we've never made an acquisition. But if we -- I would prefer not to go out and borrow money to make an acquisition and have the additional burden. So I would like to have some free cash in the business. And $8 million is not a lot. So I mean, we'll have a different -- you obviously have a different opinion. I'll just tell you what my feelings are. Am I saying it's going to limit the growth one way or the other? No, because we're going to focus on the growth we're going to do whatever we can to optimize the growth.

I don't know if I heard you correctly but earlier in the call, you said that you had maybe worked in about 100 planes for your online retailer for this quarter -- this quarter --

It's short of a 100, I don't know what it is today but it's somewhere between 80 and 100.

And that was reflected in this quarter's earnings report?

And that was what?

That was reflected in this quarter's report?

On airplanes , as I explained that a good portion of those airplanes were already done. As an example, American Airlines had a whole bunch of 767s that were modified with our equipment onboard. So the operator bought those airplanes, in some cases, converted them the passenger ones, some cases got freighters. And so this was some percentage that were already equipped with our flat panel display system on the cockpit. The -- and so -- but we probably did about half of those airplanes were all new and they were all good this quarter. They were done over a period of time because they now own them but they were before leased through other companies but now they own them and then lease them back.

One last question. Your -- since the first quarter, your trend in new orders have been increasing and this quarter saw a decline. Is that a seasonal thing? Or is that something else?

It's pretty much -- it's seasonality is typical because you build up, at least as long as I've been in the business as much as I'd like everything to be uniform growth rate. It always ends up being a little bit of a sawtooth such that the first quarter suffers from getting the last equipment out and year-end sales that occur because we do our price increases on a fiscal basis. So when we go to a new fiscal year, there's a price increase and some of our customers take advantage of ordering and taking delivery at the end of the year. So the end of the year tends to be favored, put it that way.

Okay, thank you.

You're welcome.

This concludes our question-and-answer session as well as our conference call. Thank you for attending today's presentation. You may now disconnect.

Thank you.