Hello and welcome to the Innovative Solutions & Support Second Quarter Fiscal 2024 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to hand the call to Shahram Askarpour, CEO. Please go ahead.

Good morning. This is Shahram Askarpour, Chief Executive Officer of Innovative Solutions & Support. Welcome to our conference call to discuss our performance for the second quarter of fiscal 2024, current business conditions and outlook for the coming year. Joining me is Jeff DiGiovanni, our new CFO. Before we begin, I'd like Jeff to read the safe harbor statement.

Thank you, Shahram, and good morning, everyone. You should all have a copy of the press release we issued earlier today. If anyone does not have a copy, you can find the full press release on our website. Before we begin, as usual, I would like to remind everyone that this conference call contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements that address operating performance events or developments that we expect or anticipate to occur in the future are forward-looking. These forward-looking statements are based on management's beliefs and assumptions and not on information currently available to our management. Our management believes that these forward-looking statements are reasonable. However, you should not place undue reliance on any of these forward-looking statements because such statements speak only as of today's date. We do not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results, events and developments to differ materially, either better or worse from our historical experience, our present expectations or projections. These risks and uncertainties include, but not unlimited to, those described in the reports which we file with the SEC. In addition, I specifically call our listeners' attention to our disclaimer regard forward-looking statements contained in the press release issued today. With that, I'll turn it now the call over to Shahram.

Thank you, Jeff. I will begin today with remarks on our performance in the second quarter followed by comments on our long-term growth plan and strategy, including the ongoing integration of the products acquired and licensed from Honeywell. I will then turn the call back to Jeff, who will take us through the financials. But before I do, I want to welcome Jeff DiGiovanni to IS&S and introduce him to the investment community. Jeff is a seasoned public company CFO, who joined us at the beginning of April with extensive experience in SEC filings, financial reporting and acquisitions as well as capital market interactions, all skills that are highly appropriate for the CFO role at IS&S. We're all looking forward to his contributions in helping us build shareholder value. At the same time, I want to thank, Rell Winand for helping us through this transition. It's been another busy and exciting quarter at IS&S. Revenues were up 46% with net income, excluding the nonrecurring expenses, also up from a year ago. We remain on pace to meet our goal of significantly growing both the top and bottom line this year. We continue to progress with Honeywell integration. Most of the radio business has been transitioned, and we are now handling the new maintenance and repair requests out of Exton. We expect to complete the integration of the Inertial Reference Unit business before the end of the summer. There have been some delays in completion of delivery of inventory and test equipment we purchase. However, we believe that once the integration is fully completed, they will be likely opportunities to improve even more upon financial performance of the acquired products and to leverage inherited relationships to expand our penetration with new customers. We continue to generate stable revenues and margins from…

Thank you, Shahram, and thank you all for joining today. Before reviewing our financial highlights for the second quarter, I would first like to say that I'm glad to be part of the IS&S team at this very exciting time in the company's growth. I am confident that I can contribute to our efforts to build shareholder value based on my over 25 years as both a consultant to as well as the CFO of a publicly traded company. I'll begin with an overview of our second quarter results. As Shahram indicated, our top line finished with double-digit growth versus the prior year, which was consistent with our expectations. Total net revenues for the second fiscal quarter of 2024 were $10.7 million, representing a 46.3% increase when compared with the $7.3 million for the second fiscal quarter of 2023. Total revenues for the 6 months ended March 31, 2024, were $20 million, representing a 44.7% increase when compared with the $13.9 million for the 6 months ended March 31, 2023. Product sales decreased $1 million or 17.7% and customer service increased $3.7 million or 265.4% as compared to the year ago quarter. The decrease in product sales for the 3 months ended March 31, 2024, was primarily a result of reduced shipments of displays for retrofit programs to commercial air transport customers, partially offset by an increase in shipments of displays to the general aviation and military customers. The increase in customer service primarily reflects customer service sales at product lines acquired from Honeywell. EDC sales increased $700,000 compared to the year ago quarter, reflecting increased EDC business. For the first 6 months ended March 31, 2024, product sales decreased $1.7 million or 15.5%. Customer service sales increased $6.9 million or 279.9% as compared to the prior period quarter. The…

[Operator Instructions] First question comes from [ Sergey Ginos ] with Freedom Financial Global.

The first question is for Jeff. Could you provide EBITDA financial expectation for 2024 fiscal year, please. Especially, I'm interested in margins because I look at gross margin that decreased a little bit from the quarter a year ago due to Honeywell products acquisition.

Yes. So I think Shahram laid out expectations of 40% growth from a year ago and that included both inorganic and organic as well as 75% EBITDA growth. Right now, as Shahram mentioned, we experienced some synergy delays with the Honeywell acquisition, which is negatively impacting those margins as the inventory and the test equipment comes in, we would expect those margins to improve once the synergies are in full effect.

Okay. And the second question for Shahram. What financial effect [indiscernible] from UMS expand into PC-24 do you expect? What are the existing product lines will enhance organic revenue in foreseeable future?

Yes. So yes, on the UMS right now, I mean, we continue with the production contract that we have with Pilatus for PC-24. So we're delivering those, and that platform is growing since aircraft has been a very successful platform. On top of that, they gave us a development contract to make the second generation of the UMS. Part of what we're doing on the second-generation UMS is adding a lot more powerful microprocessors and improving on the performance of the equipment as well as opening it up for, what we call, space to add another channel of processing that would make it a lot more expandable into adjacent platforms. We plan on utilizing that platform for future development, including autonomous flight. And this contract from Pilatus is allowing us to expand the capabilities of the product line. We're hoping that also in the business aviation side that the new platform because of its additional capabilities be more applicable to other aircraft platforms as well.

[Operator Instructions] The next question comes from Doug Ruth with Lenox Financial Services.

Can you give us a summary what were the onetime costs in the quarter? And what do you think the margins would have been -- what would they have been if you did not have those onetime costs? .

So Doug, this is Jeff. So regarding the onetime costs, they're in SG&A. So those onetime costs are some acquisition-related costs, legal fees associated with the acquisition as well as the CFO transition fees. You'll see that more disclosure in our 10-Q that's going to come out later this week. In terms of the margin impact with the synergies of Honeywell, we can't quantify it at this time because we're still working through some of the transition issues.

What about gross margins...

On the gross margins, there is 2 things contributing to the lower gross margin. Number one is that currently as we acquired a large amount of inventory from Honeywell on both product lines, there was something like $3.5 million of goodwill. That was calculated by our brilliant accountants that it's being amortized over the inventory. So the cost of goods sold today as we bleed off that inventory appears to be higher than the normal. So that's one contributor. The second contributor is that when we acquired these product lines from Honeywell, Honeywell does not build any subassemblies. They outsource all of the subassemblies to third-party vendors. Our plan is during this initial period is to continue down that path. As we move along and the integration completes, we will be building majority of those subassemblies in-house. That would allow us to reach the 60% gross margins that we get today as we get with our own product lines because as you can imagine, your cost of goods sold is much higher when you outsource those subassemblies, we have capabilities here in our factory to build our own subassemblies.

Okay. How long will it take to burn off the Honeywell inventory that you acquired?

So obviously, some of the faster-moving inventory will burn off quicker, some of the slower-burning inventory will remain for a few years in the books. But I think it's going to be a gradual improvement as we bleed that off. But I think the big part of it is going to be as soon as we're in a position that we can start building our own subassemblies here and to do that, we're still waiting for some information, some drawings and design information from Honeywell that's due to arrive sometime soon that would allow us to then use those to build subassemblies in-house.

When you think about the current, the second quarter, the period ending 3/31, is that the low period for the gross margin that it might be reasonable to think that in the third quarter that the gross margin might improve?

The gross margin contributed to the Honeywell products, some of it will improve because efficiencies in our production floor as well. So when we look at the second quarter and the first quarter, these were transition quarters. In some ways, we had a set of technicians here at IS&S performing tasks, while they're being trained as well as Honeywell was also executing partially on our behalf on some of these things. The margins will improve as we move forward due to some of that. The improvement of margin -- the significant improvement of margin that we will see a jump coming in is going to be when we actually start manufacturing the subassemblies in-house and that will gradually happen over the next year.

Now when you look at the third quarter, -- is it -- will you be able to make any of the subassemblies? Or is that too soon of a time period? Would you be looking more towards the fourth quarter to be able to make some of the subassemblies?

I think that's going to be looking towards the fourth quarter as well as main contributions that are going to come in fiscal 2025.

Okay. Now my second question, which is my last question, is the management team or the Board of Directors after the 2-day period would they be -- would the management team and the Board of Directors, would they be eligible to buy some stock at that time period? Or is there continued to be a blackout period?

No, I think -- I believe it's like 2 days after today, that blackout period will be over. So if any of the Board of Directors like to purchase additional shares or the management -- within the management team, they can do that. Obviously, I think a big portion of our management team's income is tied into RSUs and a significant amount of taxes that you would have to pay out of your own pocket because the management team has not been selling RSUs, unlike some other companies to pay the taxes for it. So that kind of ties up all that -- at least on my part, it ties up all my available cash is to pay 40% taxes on the RSUs. But I think our stock right now is a very, very attractive price.

I'm optimistic about the company's future.

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