Innovative Aerosystems, Inc. (ISSC) Q3 2020 Earnings Report, Transcript and Summary

Welcome to the Innovative Solutions and Support Third 2020 Earnings Conference Call and Webcast. All participants Will be in listen only mode. [Operator Instructions]. I would now like to turn the conference over to Mr. Geoffrey Hedrick, Chairman and Chief Executive Officer. Please go ahead.

Good morning. This is Geoff Hedrick. Welcome to our conference call to discuss our performance for the third quarter of fiscal 2020, current business conditions, and our outlook for the coming year. Joining me is Shahram Askarpour, our President and Relland Winand, our CFO. Before I begin, I would like Rell to read the Safe Harbor message. Thank you.

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 than 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. Three years ago, I announced that we would change our approach to the market by focusing only on products in which we had both the performance and technologically driven price advantage. The resulting trending of our operating performance seems to vindicate our change in direction. The third quarter, we experienced a historical strong growth quarter with revenues up 28% quarter-over-quarter and 30% from a year ago. Generating sequential revenue growth in 7 of the last 8 quarters. In addition, revenues at this quarter including production deliveries to our newest OEM customer Textron. We are pleased to be supplying Textron, our ThrustSense autothrottle with lifeguard protection. On the new King Air 360 twin turboprop production aircraft. We intend to build on this relationship in our joint pursuit of retrofit and upgrade of the very large fleet of King Air's expanding the number of production aircrafts to include a ThrustSense autothrottle as standard equipment and upgrade existing fleets. The company has the industry's first FAA Supplemental Type Certificate for its groundbreaking and patented ThrustSense autothrottle system with lifeguard protection on 10 years 200s and 300s with Rockwell's ProLine 21 avionics. The full regime autothrottle ThrustSense system with lifeguard VMCa protection is available for immediate retrofit and promoted at Textron service centers, as well as all King Air maintenance facilities. This slide card feature can offer protection against catastrophic upsets with the loss of an engine if the pilot fails to maintain adequate air speed. Excuse me for a second. In the process, we have overcome and continued to overcome many challenges, most notably the Corona virus pandemic. We remain focused in protecting our employees, partners and customers and remain ever vigilant as to its potential effect on our end markets, supply chain and other aspects of our business. To this state, the impact has been immaterial. I am extremely proud of our team and their ability to execute in these difficult circumstances. Let me turn it over to Rell for financial details.

Thank you Geoff, and thank you all for joining us this morning. Revenues for the third quarter of fiscal 2020 were $6 million, up 30% from a year ago and also up on a sequential basis from $4.8 million in the second quarter of 2020. Growth this quarter was primarily in product revenue. We also had some engineering development revenue associated with final engineering on the F5 development contract, while customer service revenue was down from a year ago, mainly due to our prioritization of resource allocation. Gross margin for the quarter were 57% up from both 55% in the third quarter in 2019 as well from 47.5 in the second quarter of 2020. We indicated that the drop on last quarter's margins was going to be a temporary as a result of product mix, an increase in warranty costs, and higher labor expense as we staffed up ahead of future product, production demands. As anticipated, margins bounced back and we are in line with margins achieved the past few quarters. Total operating expenses for the third quarter of fiscal 2020 were $2.2 million flat with the second quarter and up incrementally from the third quarter a year ago. I would like to once again mention that all the revenues have been increasing this year, most recently growing 30% in the third quarter, operating expenses have not increased. Research and development expense was up approximately 150,000 from a year ago, reflecting an increase in amount of Internally funded R&D primarily related to obtaining FAA Certification for the King Air Autothrottle systems. Despite our 30% growth this quarter, selling, general and administrative expenses were down from a year ago, mainly due to lower travel expense, professional fees and trade show expenses. Most of these reductions are result of restrictions arising from Corona virus. For the quarter, we generated operating income of 1.2 million or slightly over 20% of revenue. Due to the continued availability of lost carry backs, we recognized minimal tax expense in the quarter. We reported quarter net income of 1.3 million or $0.07 per share. This with the most profitable quarter in 13 quarters. With the first five months of the year, both net income and earnings per share increased 137% and 140% respectively as compared to the first nine months of fiscal 2019. The company remains in a strong financial position and generated positive operating cash flow of 340,000 in the quarter and 567 year to date, such as the news recently to fund accounts receivable, which are correspondingly higher due to the significant growth in revenues. On June 30, 2020, we had $23 million of cash on hand and no debt. We believe that the company has sufficient cash to fund operations for the foreseeable future. I'd like to turn the call over to Shahram.

Thank you, Rell. Good morning everyone. Reported of Q3, the revenues are up profitability [indiscernible] general aviation industry's most prestigious manufactures astronauts contracted with us to install our proprietary ThrustSense autothrottle as standard equipment on the production of King Air aircraft. We have achieved this progress in spite of the COVID-19 pandemic by implementing new safety policies and procedures that have kept all of our employees safe and productive as well as protect our partners and customers. During the month of April, in order to safeguard the health of our employees, we provided our production workers with two paid time off and [indiscernible] to minimize congestion in our plant. We have installed automated personnel temperature monitoring at our main facility entrance with facial recognition software in conjunction with daily and in-between break sanitization and weekly antiviral fogging of the entire facility to minimize risk of an outbreak. The organization has digested these changes and in the third quarter, as Rell reviewed, margins were up significantly from the second quarter as As our operating conditions have normalized from these actions. In fact, we are continuing with hiring to meet the growing demand in areas of production, sales, product support and engineering. The contract for the Beechcraft King Air to an engine aircraft represents our third OEM production contract joining the Boeing KC-46A and the Pilatus PC-24. These contracts provide an underlying ongoing stream of revenue consistent with their respective delivery schedules. The aggregate that represent the potential for future revenues are multiple of our stated backlog, so we consider them fundamental to our business. Textron clearly recognizes the important risk mitigation nature of our autothrottle virtually on twin-engine aircraft and for that reason, they are making it standard equipment on their King Air. They believed the extra safety offered by ThurstSense provides Beechcraft with an advantage in the highly competitive general aviation market. Annual King Air production rates are higher than those of the PC-24, but in the case of King Air, also there are already over 5,000 airplanes in service. Textron is also beginning to actively market our autothrottle at the service centers so it can be offered to owners as a retrofit option. Parallel, we are also aggressively marketing our retrofit package autothrottle to government entities and our portfolio of FBOs. We have already delivered production oil, it's all for Textron which are included in the third quarter revenues. Simulators for the production of King Air aircraft are currently being upgraded, they are autothrottle and they will be training King Air pilots within a couple of months. First, we continue to market our autothrottle to Textron and other OEMs beyond twin turboprop aircraft as we see applicability of some of its safety enhancements to twin jets. We are in discussion with OEMs to include our ThurstSense autothrottle in several other production aircrafts. We believe Textron's recent public announcement will attractive attention of other generalization aircraft manufacturers and as Geoff mentioned, transform Pilatus from [indiscernible] Potentially lifesaving standard equipment on their fleet. Now quickly reviewing our ongoing program, the PC -24 program, remains on track to deliver approximately 50 Pilatus aircrafts this year. As with all, our long-term production contracts, we are specified for installation of on all of the PC-24s Pilatus manufacturers, which is already over 100. These are generally only a quarter or two of deliveries carried in our backlog and therefore only a fraction of OEM delivery potentials is visible through that channel. We believe the PC-24 program represents a long-term opportunity, and now the similar contract with Textron was significantly after that potential. In the commercial transport market, air cargo delivery services keep buying 0.757 and 767 planes and converting them. As part of their conversion, we are seeing steady demand for Flat Panel Displays. As noted, we finished up development work for the F5 air data computer this past quarter, and we will start production deliveries for the US Navy Fleet retrofit this quarter. With this contract successfully completed, we are now turning our attention to foreign military, which also fly the F5 and could be a large new market for this versatile drama. Our KC-46 program is also production contract, it continues to make a steady contribution to our top and bottom lines. New orders in the third quarter were 2.7 million and backlog was 6.5 million at quarter end. Rell mentioned that our travel and trade show expense was down this year, so we have had fewer opportunities to personally meet with our new prospects. The FAA is on the work from home orders, which is added complexity we are managing. By these conditions, the FAA personnel have been very supporting of our efforts by diligently reviewing our submittals and timely issuance of certifications, such as the most recent certification for production in King Air. The aggregate, we don't believe the pandemic will have a material impact on our business and are excited about the prospects of our portfolio of products. Let me turn the call back to Geoff for some closing remarks.

Thank you, Shahram. As pleased as I am with the performance for this quarter and the past couple of quarters, we must be very diligent that we keep the pursuit up and our nose to the grindstone as I say, to make sure that we realize the opportunities that have been presented to us. This will require a vigilant--a vigilance in our growing--our growth requirements of personnel and investments in technology. You know, we're pleased--we're pleased that we performed as well as we did in the middle of the COVID-19 pandemic. Our people in our plant and the things that we did to the plant created a work environment which essentially had zero impact of the--from the pandemic. I'm very proud of the people in this company that made it happen and I'm pleased that our work change in the environment that they are working, so, and focus remains strengthening our organization, opening those new relationships that have been provided to us with some of this technology and further growth in our portfolio, our price for Performance Products. Thank you for your attention today. Please operator, open us up for discussions.

[Operator Instructions]. The first question is from the line of David Campbell with Thompson Davis & Company. Please go ahead.

Hey guys, congratulations on a good quarter. You actually got to my forecast revenues and your profits were, were better than my forecast. Thanks to G&A being less than expected. Over the long-term, it seems to me that the biggest contribution will come from aircraft production that compete with the King Air. I mean the King Air has been around for about 30 years I think, I don't know how much--how many new King Airs will be You will be producing, so it seems like the biggest protection will be for competing aircraft that don't have that capability. And for retrofit of existing gears, can you give us any thoughts about how the company views the marketplace?

Well, a couple of things. First of all, there's not a hell lot of twin-engine airplanes coming out, there are no, the King Air is a proven standard and as we said, the large--the large market is not so much ongoing production, more or less excellent business is 5,000 units out there and we can offer, and these are valuable aircrafts. These are single engine piper cubs. So, they are well maintained and by the way, people fly them around with their families on and people who are interested in protecting their families and protecting the airplane are interested in our autothrottle and that's in part why Textron is promoting it through their retrofit centers. I think the King Air is still a strong airplane and the [indiscernible] is a fast airplane, people are taking them. Many of the airplane, the King Air has important bigger and faster arrangements on them as well. So the market opportunity in our opinion is very large and King Air is an ideal aircraft because it's a high value airplane that we provide real performance advantages and safety to the airplane itself and the flight crew as well. But there is another airplane, single engine airplanes, we do that. We're finding that, we are looking at not just GA, but military aircraft, air transports. I don't like twin-engine but multi-engine airplanes. We can do exactly the same thing in a multi-engine airplane and that traditional approach to autothrottles is prohibitively expensive and basically makes it impossible to retrofit. Our system is capable of doing both of those. So, we think we have a very strong advantage and I'll remind you, our market direction was always a very strong retrofit company because we believe that when business was bad, they stopped buying new airplanes and they fixed the old ones and when business was good, they They couldn't get the new airplanes fast enough, so they had to fix the old ones. That formula worked out extremely well for us in the past, I believe that that formula will continue to work for us. So I'm optimistic and very pleased and honestly, I see a relationship with Textron and their--their enthusiastic support and by the way, very active support by--by Textron and oh, by the way the FAA who acknowledged that, as they said to me, we lose almost 100 people, 100 lives a year and save lives, but that's a good endorsement.

All right. Did you have any, did you have any King Air retrofit revenues in the quarter?

We're just beginning to actively market. Well, we didn't have an STC until three weeks ago, so we're doing it now, but we are, we see it as a, as a strong, but this is a strong market opportunity and in our existing PC-12, we're announcing the new generation autothrottle for the PC-12 that--that offers everything that new airplane does and many more with a whole bunch of patented features that provides the--the operators real safety and system awareness.

But there was King Air revenues in the, in the quarter, right?

Yeah, we've shipped 13 units, 13 ship sets of production equipment and similar things.

And Textron being now more aggressively marketing the retrofit, than they were three or four months ago?

They didn't do it all three of four months ago for two reasons. First of all, they wanted to make sure that they announced their new airplane, which just came out two days ago with the autothrottle and they didn't want to undermine that announcement. Secondly, we haven't finished certification of the units to deliver the production units yet, so they were, they were preparing. This is a big deal, preparing, they have these these service centers, which are huge; each one is huge. I think the one in Tampa has about 8 hangers, enormous operation. They have to get that stamped up and trained and start getting the approval Equipment available before they do an announcement. They will make their announcement next day, oh well, we don't have any units to give you. So, it's [indiscernible] and remember the other thing that's compounded it, it's the COVID-19. They were shut down in the plant and at the service center. Nobody was bringing their airplanes in because of the epidemic, the pandemic. So, all of that had a negative effect, but we're seeing that bit clearing out and we're frankly very optimistic.

Yeah, it sounds like you'll get some good new business in the, in the fourth quarter, in your September quarter, as I'm reading that right, that's what sounds like to me.

Immediate retrofit opportunities, about $300 million worth of opportunities.

All right.

So, we had the teams out, we're hiring a guy in Wichita, opening of office in the center of the United States to promote this, and by the way support Textron. So, we're delighted. Textron has done a hell of a good job and in implementing and putting it on their airplane. They did it with a remarkable speed and support. So, we could be more delighted as we are with the FAA, who has acknowledged that this is a very valuable thing for safety and they want to get it implemented as quickly as possible safely.

And Rell, I have one last question Rell. What about the taxes? When will you begin to accrue taxes for your income?

Alright, well we're right at the tipping point, so, and we have credit, unused credit. So, I would say, this year it will be something small like this year, but probably going into the next year, I will probably realize a lower margin tax expense, so tax credit things like that, you can use 5% again. But so, obviously next year end.

What about the fourth quarter, you expect some tax accruals in the fourth quarter?

I think if it is, it will be small to this. It depends, we're right there to tipping point with our NOLs and such. So, dissipating, if it's, if we do it, it will be small.

Okay. Okay. Well, that's it for me. Thanks again for having, you're doing. So, this is a great job.

Ladies and gentleman, thanks again for your support You've been great. Although I'll tell you, I almost sold all my stuff from your last report and I.

Go to hell.

Take care of yourself. Good to talk to you.

Thank you.

The next question is from the line of George Marema with Pareto Ventures. Please go ahead.

Good morning, thanks for taking my call.

Good morning.

I had a question regarding Textron. Are you doing for the new production part, are you just doing the 360s or you also doing their new production of other platforms like the 200s and C9s?

Their intention is to do all of them. They're doing one at a time, you can understand when they bring this on to correction line, it's a major job and we'll see it bigger than we saw. But they're trying to get this done in a matter of months where it's usually the late time is usually a year-and-half or more. So, they're going to bring up to 360, that was the important one, that's the latest and greatest airplane and by the way if you look at the announcement, the first announcement is IS&S autothrottle for the 360 and then they're turning over another instant because it's a significant improvement. It's worthwhile looking at that youtube as well from the chief test file. I'd tell you that the intention is to put it in all the air crafts, that's what they told us, but it takes time to get that done.

Well, for what it's worth, if you look at the company's website on their brochures, your product is already pictured on the C9s and 200 series.

Well, that's wonderful.

So, they obviously planned to do a pretty quick.

I haven't. I've been in the business longer than I want to admit, but, Textron has showed grip and thrived and it's incredibly refreshing and totally atypically. They've done a hell of a job. It has just given us an order, but they really attacked this in a very incredibly professional and aggressive way when that's not common in many large corporations.

So, when you last quarter [indiscernible] up the opportunity from Textron, were you just talking about the 300 series or there were total platforms of C9s and 200s and everything?

Frankly, we looked the largest opportunity I think even Textron acknowledges it, it will be well. It's a huge install base of aircraft and the retrofit opportunities for those air crafts. I remind, I may remind you that the company was built on retrofits. We did, we did $150 million on the KC-135 program. We did, we did RVSM for over 60% of the world market. Those are all retrofit. What is the wonderful thing about retrofit, it's the volume terms and--and you don't have the slow staging. So anyway, we looked at it now and as a joint effort with Textron and Textron is aggressively marketing it as a, as an install in their existing fleets.

Right. On the OEM new production though, were you sort of factoring in their other platforms yet when you started talking about it last quarter or were you just talking about 360s?

No, we didn't factor them at all.

And then on the retrofit market for the next year with Textron, do you have any feeling on the cadence of that or?

Well, our opening is going to be an abrupt supply, but it's always, it's always a surprise in the retrofit market, but we see it in the strong way. We're talking to the military on a variety of multi-engine airplane and they see some acute safety issues that they have that can only be addressed with our autothrottle. We're delighted we found that. I mean, we're talking about safety issues that destroy the airplane and kill the crews.

Are you in more advanced stages of talks with other OEMs and military at this point or is it sort of first inning or level?

I prefer not to comment as they say, but you can presume if that's realistic. The markets there and we're, we have a number of demonstrations that have been very successful.

That's great to hear. And then I noticed on your website, you're doing some pretty aggressive hiring it looks like, and your new orders have been a little bit lumpy, I'm assuming this previous quarter was lumpy due to Corona virus, but have the orders picked up with all this hiring or?

We haven't done a lot of hiring, we've done a lot of advertising for people and we always do that, because you usually pick 1/20 or 30 people, so you got to bring a lot of them in. So we, we start, we start an ad campaign for hiring often 6 to 12 months in advance of the -- of the specific date. They got to do it It takes time to go through the process and to get people that are good fit for the company.

Okay. Okay.

And we don't hire people that we don't need because I find it personally and suddenly seeing them reading their screenings and not working. So, we'll take a real interest in and focus on and they're doing a great job, the team is doing a really good job especially some of our young new engineers. They've got [indiscernible] and they're good people.

So it sounds like you believe that after it ramps up, the Textron retrofit kind of annual business could be more than the OEM business or for new production?

Oh yeah and I think Textron is [ph].

Yeah.

Our production is, you know double loop production in a hurry, you're going to run with new production at roughly the rates, the historical rates. Some variations, up 20% or 30% but not 200% or 300%. When you have a market potential market of 5,000 of just one kind of aircraft and by the way they're all, they operating, their aircrafts are operating and there are significant investments. So it's not like the lower end of the market where the retrofit cost is a measurable comparable portion of the cost of the airplane itself. These are, these are traditionally far more expensive airplanes.

And then my last question, then I'll sweep the floor here. In terms of production numbers, the King Air 360 versus 200s and C9s, are there C9s and 200s vastly lower production numbers or somewhat similarly demand to you?

Well, the 360 just got released so we'll see how.

Well, they are all 350s or 300 series.

That's the 350s and the 200s, the 350s and 200s, we think are going up. What we're finding is that military is using them a lot.

Okay, thank you.

They use them both for reconnaissance and they them for transport.

Okay. I imagined for military, since you have a very unique product, would be a sole source contract or to be bid.

What was that?

I imagine on a military contract because your products unique could be a sole source contract?

No, we are a sole source, but its unique enough that it's going to be covered by about 6 patents. So, and we tend to enforce it and our Our bidding average would've been forcing our patents is, we bid a 1,000.

Yeah, okay. Very exciting Geoff. Thank you.

Thank you.

The next question is from the line of Joseph Lisa with Retail. Please go ahead.

Good morning. Congratulations on great quarter and you sound very, very excited and I am very excited for you for the, for the future. I would like to know if you can help me out a little bit quantitatively on what kind of sales ramp you would expect for this quarter and for next fiscal year and what the, what your internal projections might be for quarterly sales going forward? Thank you.

We obviously make a habit of not predicting that because every time we do it, we either end up with a Corona virus or as in, probably about 200 airplanes are sitting on the ground. So, we're because, good portion of our business is retrofit on both military and commercial and general aviation. We don't ever predict the next quarter, other than I can tell you that internal estimates, we don't, we don't want it to go down as we get it all. So we try to keep going up and then you can only, that's the only way we keep our shareholders happy. So we're mindful of that. Our long-term estimates are in that end. Can you take a look at the fact that we have not sold one retrofit system yet and the market opportunity is $250 to $300 million. I would say we have, there is, in between those to 0 and 300 is a big number and I'm sure that if we do our job, we will realize our fair share of it.

Well, you did mention that you expect the future to be -- sales to be multiples of your current backlog and perhaps you could give me some color on what that means?

Well, we know what our current backlog is, yes we can tell you that. Our market opportunity, I can only tell you what we believe our market opportunity is and you have to rely on our judgment or somebody else's judgment on whether it is valid. The fact is that, we think we have a unique product that does not exist as there is no competitor around Out there now, and we're very pleased with it and we want to exploit opportunities in other areas. As it has gotten acceptance by one of the largest OEMs in the world from general aviation, we expect that retrofit market is going to be achievable. I'll tell you what; if you get a better perspective probably in one to two quarter sometime early next year, we should have an idea of how we're doing penetrating the retrofit market.

Okay, great.

And the main driver in terms of stay profitable and take the business to go, which is what I've tried to do since I start filing the company.

Okay great, thank you very much and good luck.

Thanks for your interest.

The next question comes from line of Rick Teller who is a Private Investor, please go ahead.

Yeah, good morning. I have a couple of, I guess accounting questions that relates to the fact that I think last quarter new orders were listed as I forget, what $7 or $8 million and they are pretty high. This, the third quarter, they were listed as $2.7 million which was quite a drop, but I know you'd say and this is a standard language and I think all your releases that backlog excludes potential future sole-source production orders, and then you name some of them and you've added Textron King Air to that. So, does that mean that some of the new orders in your second fiscal quarter, the March quarter included orders for the King Air 360, and now, and the $2.7 million therefore does no longer be counted in new orders or in backlog, is that correct?

That is correct.

Okay.

We received those orders in the second quarter, and we did not receive in the third quarter any new orders, but it comes and goes. That's the point of, it's intermittent, it's not like you get to a 2-year run rate kind of order, it doesn't work that way you get. As Shahram was talking about, you get two quarters in advance maybe or so, it all depends up to them.

Right okay, and then also, I'm curious how the accounting will be handled on the retrofit business because I could see, if let's say now Textron is training all their service centers, hey we're going to bring in a lot of customers who might want a retrofit for this, so if they get a customer says I Like this retrofitted on my older King Air, will the service centers have already ordered products from us or do they wait until they have a customer who says they want it, and then they order from us?

We haven't delivered to them anything for the retro, but we anticipate that we would do that. As indicated, that's exactly what they have to do and tell us if you're going to, to start it. But there, we've delivered as we say, I mean a number of units for the production. We're going to have to obviously deliver more when they expanded beyond the 360 and and put it in the 200 or 250, so did I understand you have.

I'm sorry, you said what?

Well, you mentioned, you said you said [indiscernible]

No, no, no, I don't have a category [indiscernible]

I understand, I understand. And in anyway, they will start, it's a fair amount of time to get up and going, if you can imagine that. So I would say it's going to be several months before they start stocking the retrofit aligned. People that come in and say I'm bringing my airplane and I would like to put the autothrottle in, they will probably trying to get us to do a quick delivery or take their production hardware and we will support that.

Okay, but what I'm getting at is somewhere, let's just say it's a year from now and they've they've got some level of steady retrofit business. Would these service centers be keeping some inventory on hand at that point?

I'm sure that what, I did sort of a simple estimate and they have 10 service centers in the United States and it takes probably to install one of these about a week or less to install an autothrottle. So, and the service centers probably have, they have several centers have hundreds of people, but at any rate if they did one a month, you would do 120 retrofits a year and that's only at one a month.

Right, okay. So presumably, they would have some inventory and then I just want to, and does it would from an accounting point of view, does that get counted in our sales when we ship it to the service center Center or is it only when they install it?

No, no, when we ship it to them, to the [indiscernible]. If they move it to the service center, that's their issue, but we show the revenues as ship it out the door.

Okay, good. So I'm just trying to figure out how that was going to be handled. And then a question that has nothing to do with accounting. I'm just -- I'm just curious whether there is, where we are, if at all in trying to get the aircraft insurance companies to reflect the safety benefits of the autothrottle in the insurance premiums that they charge King Air owners, because I understand that's a pretty hefty sum and even a fairly small discount on insurance would go a big weight to paying for the autothrottle.

Yeah. Yes. Yeah, and just about in the fire insurance in your house, you put in fire alarms or an alarm system. It may not be an overwhelming setting, but you recognize you want to do it now because over a 10-year period, you paid for the damn thing. So yeah, you're absolutely right, and happily Rell has contacted the insurance company and the underwriters and we're having a meeting with them within a couple of weeks. Well, I have been asking them. My question is, you might, I guess for the last couple of weeks. So I assure you that, that he understands the program.

Great. Great. Terrific. Okay. Well, thank you so much.

Thank you for your interest.

The next question is from the line of Michael Friedrich, who is also a Private Investor. Please go ahead.

Morning, everyone. I had a question on sort of follow-up question to an earlier question in the call. I think, just going back the last quarter's notes, I think, Geoff, you had mentioned you thought that that as early of next year that the the OEM revenue may be as much as I think it was the prior year, prior year sale. So with just like ball parking and that's somewhere in the 15 million to 18 million range. When you were saying that, Geoff, I just want to make sure I understand what you were saying, you were only talking about the existing three OEM deals, not any additional OEM business you might be getting from Textron once the other King Air productions are approved. Is that correct?

Two things. First of all, I'm not sure, I would like to believe that our--that our OEM demand would be 15 million. I think we have, if we look into 2, it could be, be it could be double-digits. It could be 10, 12 kind of million next year for sure. We think this should be the larger business, this is going to be in the retrofit. We look at the production aircraft as good steady business, we would expect it. We do the entire tenure production line and the pandemic sort of light was up and we get people back moving our aircraft, although I among other things, I think I'm optimistic that people will be flying their airplanes more often because it's a lot more comfortable being in your own airplane and not worrying about who's sitting next to you. So there's going to be a desire to fly a private aircraft like that can. Anyway if they do do that, if they, if we get the full level of production, it could be upwards to a 100 ship sets a year and OEM and if you're talking about retrofit, maybe that's double.

Okay. Okay.

Remember, this is very early in the game. We just certainly, we've just got, we've just related it on our first production aircraft and we've got some work to do to get it on the other aircraft, the equipment is ready to go live, but they still have to feed their production line. So it takes up, there is multiple months of delay in there.

Okay, Okay. And just over to the PC-24 production, I know we're up to 50 ship sets a year. I think longer term if you took a look at their total goals for that--for that plane, that number should keep going up. Do you have any--any idea, what the maximum, I think if you did the numbers, it could be as many at some point it is like 100 a year. Is that what you guys are seeing as well or is that number too high?

That's possible, it's a remarkable airplane. It could go up to that level, remember it's--it's a replacement for some turboprops and well it's significantly more expensive, but it's a very high performer. They built that entire huge expenditure to their facility. They virtually doubled the size of their facility, manufacturing facility in [indiscernible] Switzerland. We've been there obviously a number of times and it's--it's a brand new high-volume facility. So their, but they are cautious. The company is sensibly cautious and moving smoothly and slowly, they don't want Hiccups, they don't want to jump too quickly and they are, they are doing it deliberately and doing a whole good job. Remember, they get 40 and then now 50 and I would expect them to go, creep up towards the 100, it's a great airplane.

Yeah, it sure is, it sure is. Okay.

By the way, Kind Air is a great airplane too. We got one, we love it. I love it anyway.

Yeah, Geoff, on the, on the multi-prop engines, I know right now you have really no competition on that, but I'm sure you fall, fall with the idea that like Pilatus has developed their own autothrottle for their new production piece as well?

It's obviously clear, it's not an autothrottle. We have an alternative, and by the way it's, they didn't develop it, Pratt & Whitney suppliers had with two settings, that's crews and climb. Our autothrottle is a great deal and what, and oh, by the way we're announcing a series of patents of stuff that never existed before. Our focus towards that and oh, by the way that, that autothrottle as you would referred is not retrofittable into the 700 airplanes.

Beautiful, beautiful. I like how [indiscernible].

You teach to pilot how to do it.

I can say I like I like how your sound sounded there, I like the confidence. So that, let that's.

I mean we kind of a wonderful company. [indiscernible] I bought a Pilatus airplane three weeks before I took the company public. So nobody like you would say you've gotten richer you bought an airplane, but this has been an incredibly good airplane and we are very fortunate to have him as a customer. It's a great deal.

Yeah, yeah. Okay, one more thing and then I'll let you go. So yeah, I think you guys posted an article about how all of the CRT instrumentation is being discontinued on the 737s and 67s. Can you give me an idea of the remaining opportunity and I know this is more of a worldwide question in the Flat Panel Display area and the cockpit renovation area that you guys are in and are you still working with Lufthansa on that?

No, we're not, we're not working with Lufthansa on that stuff.

Okay.

What we are doing is, we are finding a more direct, more direct sales to the, to the carriers. It's become more successful for us. Yeah. There is, there is remaining, about [indiscernible] that still remain that need to be retrofitted. Obviously, there is a huge number of 737s [indiscernible] system is applicable to. And we are seeing, we are seeing, constantly, we are delivering every quarter, we are delivering equipment for those platforms. By the way, any competition we have is significantly more expensive and as the, as the value of the airplane declines which it does with age, people don't want to spend a lot of money on an old airplane and we could do, we offer two huge advantages. Our retrofit system besides having an incredible record of reliability and performance also can be installed in a matter of less than a week, four or five days. The competitor takes a month. It costs somewhere between $50,000 and $75,000 a day to put a transport aircraft on the ground. So it gives you a compelling reason why we should, we actually should improve our competitive position as that fleet ages.

Great. Great. All right, guys. Well, a lot of irons in the fire. Hopefully, I will keep adding more and congratulations.

Thank you very much. We got our work cut out for us.

Thanks, take care.

The next question is from the line of Craig Rose with Axiom. Please go ahead.

Hello guys, thanks for all the color today. Regarding, understanding that the biggest market for you right now is the retrofit of the King Air, Shahram mentioned other opportunities. Could you name the next highest value target for retrofit and he also specifically said twin-engine jets, does that mean Textron has an exclusive on this application for turboprops?

No, they don't have an exclusive for turboprops and we're finding that we can take, we do the Eclipse and generated autothrottle on the Eclipse almost 5 years ago. So, and by the way now selling software upgrades to that equipment for Eclipse. So we know how to do a turboprop, a turbofan engine and we have had people that have contacted us and expressed an interest in putting them both in their production and potentially retrofit, but primarily Primarily production. So, we see a market in that area. We'd rather not identify as you could sort of expect, but we also see it in other multi-engine aircrafts and traditionally turboprops. There are, there are tens of thousands of them in operation right now that would--would benefit enormously from our autothrottle. As an example, we were able to do something and have patents pending on it now for our longer mode where we actually measure the efficiency of the airplanes in real-time and adjust the speed of the airplane to maximize its endurance. So we're the only people that have ever done that and it works. So people that do reconnaissance and surveillance are very interested in this system

Okay. An additional question or two. You mentioned the military. I assume the military is one of the largest fleet operators when you add up all the branches in military of the King Air and so you've gone

I understand you don't know how big it is, but I know it's in hundreds of them. There is various versions of them and everybody has a tenure somewhere, so everybody, we've already talked to people like the DEA and those kinds of people and we're progressing with opportunities there. So they're very interested in. As an example, DEA, flies around a lawyer working for bad guys. Well, we're seeing it takes care of that and keeps crew safe. So it really pays off. So, yes, it's there. I would prefer not to identify their specifics. I would really, but I'm--I'm optimistic that we're going to get a significant amount of military business. I know by the way they pay really quick.

That's great. So [indiscernible] the insurance industry awareness as I think your previous question Rick mentioned is probably really, really important. The lifeguard name I think is great and so I'd just like to compliment you on that. The new air cargo company that everyone has heard of now, Amazon. What does that mean to you guys and what has it meant with your relationship with FedEx?

Well, just let you know again Amazon is operating a fleet by leasing it from two big operators And we supply the, 40 of those aircrafts, are operated with our equipment. So Amazon is operating it themselves. Where they go with that and there is a lot of rumors on what's going on. But we would expect it to be around for the operation because as I said, the downtime is fractional, is a small downtime. We actually were able to modify an airplane in 24 hours once, that's never been done, ever in the history of the industry. So we have that as an advantage and its actual costs and the performance is proven, we get reliability numbers that are outstanding. There are hundreds of thousands of hours of reliability. So, we expect and hope that we'll get that, we're going to be diligent to try to bring it in. But that would be a strong opportunity just to give you a little background I can remember when I delivered equipment to FedEx when they had seven airplanes. They have 700 now. I remember how it grew.

Great. That's all guys. Thank you.

Thanks Craig. Good talking to you.

The next question is from the line of Marcel Herbst with Herbst Capital. Please go ahead.

Good morning and thanks for taking my question. Congratulations on a strong quarter and all the progress you're making on the autothrottle. I wanted to follow up on the orders which has slowed down a bit for obvious reasons. How were your orders trending throughout the quarter and into July. Do you see a pick up at all?

Well, as you can imagine, it's lumpy. If we had an order or anything, it is a big bump. Right now, it's about what we expected, but we're diligent. Clearly, we are optimistic that we have the right product and there is a right market. We're--and I'm committed to making sure that we continue to make a profit. So whatever that takes, we do. That's what we try to do all the time.

Right. And I'm also trying to kind of get a sense of how many King Airs and 360s might be produced every year. I mean if I predict it at 50 planes a year, would that be too aggressive or to commence an estimate?

Well, the 360 is for upgrading obviously A large part of the fleet, I don't know, but I would guess initially 10 and then 20 and then 30 times. The 300 is about 50% of their production right now. Ultimately, I would expect the 360 to take over what is now the 300 series production.

I see. Do you know how many?

Remember, we're not focused on only to 360. They've already made a commitment to do it on all the other airplanes. That's why they're doing the retrofit. But whether they are doing one airplane at a time, it's a monumental task to get it through the system. So once they got the 360 done, which was a critical one, the other one should be easier and then should follow in line.

Right. If you look at those models that they are committing to eventually to integrating, how many airplanes do they produce here?

Well, if there is, it was. I'm saying that they have already talked about retrofitting the C90, so they are going to put it on the 90 and on the 250 and the 200, so I mean ultimately it's whatever their total production is, their thought is to figure their committed position is, that they are going to put this autothrottle on 100% of the King Air. So how quickly that happens, I don't know.

Right, right. So if you look back at 17,18, or 19 how many King Air's do they produce in a typical year?

They might, it depends on.

Roughly about a 100.

Yeah, it depends on the economy, and so we said it's a retrofit, it is probably going to be a lot more.

Right, right. Okay, perfect. Well, thanks so much for taking my question.

King is a great airplane. We expect military programs, frankly we're teaming with Textron as we speak on a proposal to the military, so I think.

That's good to hear.

So that's a, it's moving along very quickly. We're getting, and this is, and this is visibility of their top very top management and is very responsive, very response.

Alright. Thank you.

Thank you.

The next questioner is Derek Bubble with Abott Downing. Please go ahead.

Hi gentlemen, congratulations on an amazing quarter and just a really exciting market opportunity looking forward, long time listener, first time caller here. So, thanks for taking my questions.

Thanks for hanging in there as long as you did.

My pleasure. So you talked about $300 million worth of immediate retrofit Opportunities for the King Air, have you looked, pardon?

Potential market. Yes.

Got you. So have you looked at the total addressable market because you mentioned a lot of other markets including the military markets, have you looked at the total addressable market is and any numbers around that?

I'm always reluctant to do that and I'll tell you why. I would be delighted if I could get a substantial portion of our King Air market and we almost jumped on. So we are aware that the other market is probably four, five even six times the size, but whether or not we penetrated and go after it and whether the people want to keep the airplanes, all kinds of [indiscernible] so to be prudent in our judgment, we restrict our estimates if you can appreciate that.

Yeah, definitely appreciate that. [indiscernible] promising and over-delivering.

But, to some degree it's opportunistic. If somebody comes on and says [indiscernible] 300 of them out there that need this, and we would need that this setting up, we may look at applying our autothrottle system to it. It's reasonably scalable and point adaptable, it's, we've been very lucky with it, it's been very good.

Yes, absolutely impressive and exciting. What a great spot to be in from a strategic standpoint. I'm curious, have you, given the size and the market opportunity, have you thought about partnering up with a strategic partner to make sure that you can meet this huge potential unmet need?

Honestly, we take a look at teaming with Textron and potentially another OEM as another airplane is probably the best way to do it rather than another manufacturer. The other manufacturers, I mean, I don't, I don't see that other than if they want to sell a cockpit system and need a lot of throttle, they may come to us for the autothrottle. But, I think teaming with Textron is formidable, that's really to be blunt with you, it's just, it's just high as I could've had my expectation. I'm delighted that they are working as hard and as they are, so it's terrific. I'll be happy to just support them for the near future.

Excellent, excellent. And then on the last call, you talked a little bit about How you are seeing a shift from first class and business class commercial over to private aviation. I'm curious, are you still, have you still been seeing that trend through year-to-date and are there any numbers that you could put around that?

Take a look at a company called Wheels UP. They operate cash, they got 100 airplanes now all over the country.

Hundreds. That's a lot.

And [indiscernible] has PC-12 and they're buying them like they are Gangnam style. So, more and more people are looking at them and say, look if I had to spend $7,000 to go round trip to trip in California, I don't need to have to run, I spend two-and-half hours going through airline terminal. If I could get it go over an airplane that will wait for me and I'll get on and relax in the airplane. So there's increasingly, there is there is a reason to believe that it's a reasonable solution. I have some friends that were in Palm Beach three months ago. They had to come up and then they were anxious about getting on a commercial airplane with the forward pandemic and they, they got eight people all from the same condominium complex and also lived in the Philadelphia area to put together a matter of two or three days and they chartered an eight-passenger turbofan jet to take them off and it ended up costing them roughly the same as a first-class ticket, but a hell of a lot more convenient.

That's great color and really appreciate it. Okay. So I work for a large institutional for the purpose of this call on the private investor, because it's just the opportunity is just too small from and what we would have as a minimum investment from an institutional standpoint, but from an institutional standpoint what I would recommend is that you get some sell side coverage, maybe get an Investor Relations campaign going, get your--get your calls out on FactSet, maybe do some additional conference calls, so you can get some more traction in the institutional market and then last but not least, if you can get an active options [indiscernible] Trade on your stock that would drive some more additional volume and then give current investors some additional liquidity and then that would probably, all those three things together would probably drive a significant increase in your share price and be good for shareholders and for yourselves. So Not a lecture, but just wanted to give you some suggestions in a public forum

I appreciate the advice. We are, at least I am reluctant to oversell the company. We've had some wonderful times, we've actually had times where we generated an [indiscernible] sorry, 30% net after-tax profit. So, yeah, that was wonderful, but also is vulnerable if you can't keep supported behind it. So I'm a bit more conservative in my estimates. When I've got a well established retrofit business, then I'll be [indiscernible] street again. We had some pretty good luck as you probably know over the past years, but practically there, you don't want to oversell the business, you don't want to promise things that you can't deliver and I'm trying to be a little circumspect.

Fair enough. Well, you've done a fantastic job running the company, Geoff and fantastic job with this product. I have a friend who is a commercial airline pilot, he's incredibly excited about autothrottle. He thinks it's one of the greatest developments in the history of aviation, so wonderful job, really excited to be on board here and thanks for everything you've done here.

Thanks for your kind words. And I promise, we'll try to build the business, but I actually really want to deliver on my promises and it's, it's a challenge. I had a director who is head of all engineering [indiscernible] and he said his boss told him, integrity was doing what you said you would do, when you said you would do it. I think about that every day.

We need more people like you in our society, Geoff.

Not sure of that. That's not you to say, you have a good day.

Thanks, you too.

We've got, Craig Rose is back.

We have one further question from the line of Craig Rose of Axiom. Please go ahead.

One follow-up question. You mentioned Wheels Up and the size of their fleet. What are the odds that the, that you could get the FAA to mandate this safety feature on all charter aircrafts, similar to what they did in the '70s with terrain awareness on planes and did not do with helicopters and we have recently seen what can happen there. So what are the odds of that?

I think we got approved this and I think it's, I think it's notable. We're very proud. Of Textron's selection of us. Trust me. I was there when we did the first presentation. It was a difficult, it was a difficult implementation. They were very, it was a unique situation where we had developed a product and they're not used to that. They are used to having people develop a product for them. We developed it for ourselves. They were extremely supportive and I'm, that gives me confidence that there is a strong safety market and I think the FAA knows it for sure and if the NTSB warrants to have acknowledge it, I think it could be. Look, it's very straightforward. I assume Textron's guy, if you get an airplane, if you have a pilot, I'll have the airplane take very slow with an engine out, it's catastrophic and sadly it's a terrible situation and I guess that's true with any airplane, but especially this, we mitigate that, we do it with, there is something that's never been done before. And I assume that people [indiscernible] is a whole bunch of other things it does just besides VMCa protection, all kinds of things. So, I'm hoping that the NTSB [indiscernible] and if they do, they can put pressure on the appropriate targets. I've [indiscernible] reluctance to implement this, I can tell you that the FAA has been as supportive in the certification of this equipment, has taken I think almost six years. As I've never heard or seen in my career, I mean, they've done extremely thorough, but did not drag their feet, they did, they did an admirable job and so I think it's a possibility. I think there's a good possibility if that can happen, but we end up, we've got to pay our dues and get it in their plans to show that that it's a good reliable and all you have to save is one person's life and that will make all the difference.

Great, thank you.

Good talking to you. Take care. It appears to be the end of the discussion. We appreciate your interest in joining us today. We're signing off. Have a good day. Good luck, stay well.

The conference has now concluded. Thank you for attending today's presentation. You may now this disconnect.