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Edited Transcript of FLY.V earnings conference call or presentation 8-Aug-19 1:00pm GMT

Q2 2019 FLYHT Aerospace Solutions Ltd Earnings Call

CALGARY Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of FLYHT Aerospace Solutions Ltd earnings conference call or presentation Thursday, August 8, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alana Forbes

FLYHT Aerospace Solutions Ltd. - CFO

* Thomas R. Schmutz

FLYHT Aerospace Solutions Ltd. - CEO

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Conference Call Participants

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* Marc Berger

MKB Associates Inc - Financial Advisor

* Bruce Krugel

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the FLYHT Aerospace Solutions Second Quarter 2019 Results Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Tom Schmutz, Chief Executive Officer for FLYHT. Please go ahead, Mr. Schmutz.

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Thomas R. Schmutz, FLYHT Aerospace Solutions Ltd. - CEO [2]

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Thank you, Ariel. For this call, I'll provide some high points of our second quarter 2019 results. Alana Forbes, our CFO, will then provide a more detailed review of the financial results of the quarter as well and for the first half. I'll discuss some additional details about the quarter and then expand on some of the more recent press releases. Finally, we'll answer any questions that may be dialed in.

I want to start by thanking our shareholders and those who have dialed in or accessed the online recording on our website to learn more about FLYHT. The second quarter was financially outstanding setting records for both traditional record -- traditional revenue and overall top line, which was $7.9 million, top line being revenue plus other income. This second quarter marked our third consecutive positive quarter going back to Q4 of 2018 and generated an impressive positive $1.5 million in EBITDA.

Hardware shipments remained robust demonstrated by the 31 AFIRS hardware kits we shipped in the quarter. We continued with strong near-record SaaS revenues in the quarter, second only to Q4 2018, where we had unique year-end revenues and more favorable exchange rates. We posted the highest technical service revenues in more than 5 years with significant paid engineering development on several OEM development programs.

We developed many of the one FLYHT activities necessary to begin shipments from our facility in Littleton, Colorado, to its channels acquired through the PWS acquisition. And shipments in July have begun on time and on target.

For the first half of 2019, we generated more than $5 million in SaaS revenues and a positive $2.2 million in EBITDA. We shipped 79 hardware kits for the year compared with 99 all of last year, and we continue to maintain a strong sales order backlog.

We have an exciting number of sales opportunities that we are pursuing, and we are encouraged by our consistent progress to this point in the year.

I'll now ask Alana Forbes, Chief Financial Officer, to provide a detailed review of the second quarter financials.

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Alana Forbes, FLYHT Aerospace Solutions Ltd. - CFO [3]

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Good morning, shareholders, and thank you for joining us on this call. We are really excited to have posted a record revenue quarter, and our third sequential quarter with positive income on the bottom line. I'll take you through the key areas of interest on the income statement for the quarter and for the year, and then move into highlighting the significant changes in the balance sheet.

Looking at the second quarter, revenue from our traditional revenue streams was $6.4 million and was the highest in FLYHT's history. We doubled Q2 2018's total. SaaS revenues for the quarter were $2.5 million and continue to increase as we deliver voice and data services from our backlog, including increases over last year resulting from the addition of PWS customers last fall.

Hardware revenues were $1.8 million and doubled from Q2 2018 as we shipped 31 installation kits this past quarter compared to Q2 2018's 17 kits. Year-to-date, licensing revenue was $1.9 million after 6 months, which is over 80% of 2018's 12-month total.

Gross margins at 66% were also higher-than-average in Q2 reflecting the greater portion of high-margin licensing revenue in the mix, similar to levels last seen in Q2 2018 where a similar revenue mix was produced.

Operating expenses have increased both quarter and year-to-date as we expected with the increased PWS head count and the expenses associated with an additional building lease and increased scale of operations. These increases in operating expenses continue to be offset by the subsidy provided by Panasonic Avionics Corporation resulting from the asset acquisition in October 2018, which is shown in the other income category. The subsidy was designed to give us time to integrate the 2 businesses into a combined profitable organization. Payments are made quarterly on the baseline subsidy of USD 3 million and an additional $1 million may also be accessed depending on whether FLYHT's income related to these PWS assets exceeds or falls short of certain agreed upon threshold. These potential adjustments are also evaluated on a quarterly basis.

Our financial statements to date show a total accrued as of the end of Q2 2019 of USD 3.1 million. An advanced working capital payment for Q1 2020 was also received upon closing that deal, which will be recognized in other income in Q1 2020.

Finance costs show an increase over the same period in 2018 in part due to the implementation of a new standard for the treatment of leases, IFRS 16, in combination with accretion on the debenture issued last July. Also having impact in this category is the movement of the U.S. dollar against the Canadian as we are sustaining FX losses in 2019 compared to 2018's FX gains.

Now turning back a page to the balance sheet. The most obvious change is the impact seen from the January 1, 2019, adoption of IFRS 16 as discussed at our AGM. The adoption of that new standard added all leases to the balance sheet for which FLYHT meant the remaining value on our 2 building leases and 2 photocopiers were added as leased assets in the noncurrent asset section with a corresponding liability split into the current being the amount due within the next year and the noncurrent liability category. The June 30 balances show the depreciated net value of those assets offset by the lease payments remaining in the respective agreement.

The second area of change you'll notice is an increase in the current loans and borrowings category as the repayment period for our first WINN loan will start in early 2020. There is a corresponding reduction in the noncurrent loan balance as those amounts move into the current section, but another contributing factor to that reduction is also the movement in the debentures issued last summer. By the end of Q2, 13% of the convertible debenture had been converted. The accounting impact of these conversions is to move the amounts, formerly characterized as debt, into the equity section of the balance sheet.

We've had several questions recently regarding the calculation of backlog and how it relates to revenue and/or sales made in each quarter. So to describe it in a bit more detail. The value of our backlog is increased as we sign customer contracts and receive POs. It is decreased as we ship product and licenses and as we deliver SaaS and other technical services. We consistently evaluate orders in backlog to scrub for any contracts that may be unlikely to manifest. And then the final component in the calculation is that our backlog number is calculated and published in Canadian dollars, while we contract and typically invoice our revenue in USD. So changing foreign exchange rates will also impact the outstanding backlog total.

We have chosen to report backlog in Canadian dollars as -- despite the effect changing FX rates can have on the number over time, it is more easily correlated in that currency into future revenue. Given FLYHT's reporting currency is Canadian dollars, when this backlog hits our income as revenue, it will be in Canadian dollars.

We also disclosed in yesterday's press release an issue we identified with the system used to calculate FLYHT's backlog number, which resulted in an error in the backlog numbers previously reported at the end of Q1 and Q2 2019. Those numbers have been updated to CAD 59.0 million and CAD 54.8 million from the CAD 61.9 million and CAD 58.0 million, respectively.

I will now pass the mic back to Tom.

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Thomas R. Schmutz, FLYHT Aerospace Solutions Ltd. - CEO [4]

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Thank you, Alana. Last week, FLYHT announced a new OEM position in concert with L3Harris that did not seem to receive as much attention as we had anticipated. The announcement was an extension of FLYHT's partnership with L3Harris to extend the line of satellite communication products FLYHT provides to L3Harris to include the Airbus A220 family, formerly known as the A220 Airbus Canada Limited Partnership. The L3Harris version of the FLYHT AFIRS 228S is now the satellite communications option providing global communication between pilot -- between pilots and air traffic control, aeronautical operational control and airline administration control through the Iridium high-fidelity satellite network used in the cockpit of the Airbus A220. The unit was selected to replace a previously certified product for that family from another provider. The A220 is the aircraft previously known as the Bombardier C series before Airbus purchased a controlling partnership last year and pledged to apply its fantastic logistical and production efficiencies to the aircraft family. The A220 family serves the 100- to 150-seat market and is expected to get the lion's share of this market. This market is estimated to be 7,000 aircraft over 20 years. Airbus is executing plans to ramp the production of the A220. They are expanding the facility in Mirabel with 2 large dome buildings for year-round production and introducing an additional line in Mobile, Alabama.

Airbus has announced that the A220 will be offering increased range starting in the second half of 2020. This is significant because new airlines are reported to be interested in using the craft for transatlantic routes. We expect this increased range will further drive up the SATCOM demand for the aircraft and increase our sales.

The partnership between L3Harris, which was L-3 Communications at the time, and FLYHT was originally announced in a press release on May 22, 2012, that the companies had agreed to sell FLYHT's AFIRS 228S to customers of the L-3 Communications Aviation Recorders division. On July 14 and 15 of 2014, L3 and FLYHT released that L3 had received formal type certification for the AFIRS 228S on the A320 family of aircraft. Later that certification was extended to the A330 wide-body aircraft. And now with this announcement last week, AFIRS has become the SATCOM option on the A220 family.

The Airbus A220 family reportedly has net orders of 551 units and 78 have been delivered. The order volume is increasing, and there is every indication that this will be a very popular airframe for many years.

FLYHT has made additional modifications to the unit to customize its operation for the A220 as well as creating a common part number configuration for all Airbus platforms where it is used. FLYHT was paid for this modification. We announced the order in our Q4 sales update in early January and booked service revenues in Q1 and Q2 -- technical service revenues in Q1 and Q2 of this year.

We have already shipped units designated for the new platform. Overall, FLYHT has shipped over 1,600 units through this channel since the partnership began and has booked over $16 million on units shipped since 2014. Currently, revenues for this channel are booked in the revenue category licensing. Prior to 2018, they were booked in the revenue category called parts. The revenue is very high margin at or above 90% gross margin.

Our customers purchase units from our contract manufacturer after having purchased Iridium modems from FLYHT and sell them to Airbus. FLYHT has paid royalties per unit according to their use. FLYHT has remained the design authority for the product, and our partner takes care of all customer-facing activities.

Airbus offers the equipment as an option for the forward fit, which are new -- all new build airframes and also sells a retrofit service bulletin for aftermarket use.

FLYHT's revenues peaked for this revenue category in 2016 because we expected many upfront sales were for retrofit as customers sought to harmonize their existing fleets with their new aircraft purchases. As a result, FLYHT's revenue -- licensing revenues had decreased each year since 2016 where 2018 licensing sales were on the order of 40% of those of 2016. This caused a flattening of our overall revenues from 2016 on to 2018 because the growth in FLYHT's core business, which is the sale of hardware and Software-as-a-Service to customers was replacing the decreasing licensing revenue over that same period. It's therefore very pleasing that due to this increased demand and the addition of this new platform, 2019 will be the first year since 2016 where we do not expect licensing to decrease from the previous year. Midway through 2019, we have booked 83% of what we did in 2018, and we're confident that more orders and shipments will occur in 2019.

On to other subjects. Prior to this announcement, we announced that Captain Mary McMillan will be joining our Board of Directors bringing the total number of directors to 9. We're very excited to bring the Board -- bring into the board someone with Mary's reputation and experience. Prior to joining our Board, Mary had retired from Inmarsat in 2018 where she served as Vice President, Safety and Operational Services and was leading a new division charged with delivering enhanced SATCOM to the cockpit. Prior to Inmarsat, Mary served as Senior Vice President, Aerospace Safety and Environment with Tetra Tech AMT and Vice President of Safety and Environmental Services Division at CSSI, Inc. Prior to this industry work, she served as a commercial airline pilot and amassed 12,000 plus flight hours largely with United Airlines. In addition to Flight Officer duties, she held several management positions, including Line Check Engineer on the Boeing 747-200, Federal Aviation Administrator Designate Examiner and Standards Captain on the Boeing 737-300, Flight Operations Duty Manager and Director of Flight Safety Acting.

As we strive to better understand how airlines make purchasing decisions and create better connections with the airlines, the addition of Mary and Nina Jonsson before her earlier this year are deliberate attempts to bring the airline executive view into the boardroom.

On July 17, FLYHT also issued a press release about a new enhanced aircraft reliability application. Our partner in this announcement, ATP CaseBank, has fielded a troubleshooting and data analysis system for several different aircraft types. FLYHT, as you are aware, provides real-time data capture from aircraft systems. Together, we feel these systems will provide an efficient and effective airborne data capture, selective download capability with automatic bidirectional query and an analysis for rapid identification of immediate and upcoming maintenance needs. The FLYHT CaseBank Aircraft Health Monitoring System, or AHMS, will provide graphical displays of participating aircraft with their current location, health status and other information such as consumable levels needed to assess the fleet at a glance. This information is updated periodically at defined intervals and again instantly whenever AFIRS detects adverse health conditions. Drilling into the display notifications provides additional details and depending upon the situation, launches a diagnostic path allowing for advanced preparation for ground assets to resolve any situation that may arise in a timely and cost reducing manner.

The FLYHT CaseBank AHMS represents an advance over current AHMS offerings. This solution offers a complete end-to-end suite of hardware, software and service for superior real-time monitoring, diagnostics and prognostics of aircraft. With this system, any aircraft fleet can have real-time monitoring with call-centric dynamic data capture, integrated with smart offboard diagnostics and prognostics systems that learns from the global fleet. CaseBank's stand-alone technology is available to FLYHT customers today and the jointly integrated product is bid to specific customers and is being developed now for delivery in the future.

That concludes the initial component of our discussion. We'll now turn to some questions that came in from the e-mail.

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Questions and Answers

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Thomas R. Schmutz, FLYHT Aerospace Solutions Ltd. - CEO [1]

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And the first set of questions is from [C]. It says, what is the time delivery for the delivery of the 100 or so TAMDAR/FlightLink units for AirAsia in the PWS backlog?

We continue to work with AirAsia on the delivery schedule. We have received purchase orders from -- for the -- from the amendment and have been shipping units in 3Q to this and other PWS customers. We have a contractual understanding of delivery timeframes, but the deliveries are ultimately determined by our customers' installation schedules.

The second question is regarding the recent announcement of the extended partnership with Harris. How many licenses for the A220 might be sold in a given year?

The number of units that we will ship will be determined by the optional take rate of the purchasers of the A220 aircraft and potentially by the retrofit service bulletins filled by Airbus. We have not traditionally been able to predict the number of licenses that have been ordered in a particular year. Again, we saw a very strong take rate in the initial portions of the program. It fell off in the second half of 2017 and early 2018. And now it's ramping back up again on the 320, 330. As I indicated, we've already received and delivered 220 orders. So I would love to be able to answer this one in detail, but I can't.

The next question is, are the licenses for the A220 valued at the same royalty rate as the licenses for the A320 series?

And the answer is, yes. The deal was struck at the same rates.

The next question is, licensing through L3Harris for other aircraft in the works.

FLYHT continues to work with L3Harris and other partners on OEM opportunities, and we do have active pursuits underway.

The next question says, regarding the recent announcements on the new partnership with ATP CaseBank and the application jointly created, is the product deliverable at this time?

I indicated on the call that through our partnership, we could deliver the base product offering from ATP CaseBank to our customers and the joint product is one that's in development.

Does the application have a trade name?

Right now, we're referring to the system as the AHMS, and that could change as we move forward.

The hardware platform will -- what hardware platform will sales of this software require?

The system will operate via AFIRS and on variants of AFIRS that we will discuss more fully in the future.

There's another question that says, we indicated that we both shipped 31 kits and recognized revenue on 31 kits. Usually these numbers are different. Can you explain why they're the same?

So in the past, we had revenue recognition rules that precluded us from recognizing all of the units that we shipped. In 2018, when we moved to IFRS 15, the rules changed on revenue recognition. And provided we wrote the contracts in a way that was favorable to FLYHT, we can pretty much recognize revenue on the hardware as we ship it, which is a huge improvement from the rules that we dealt with in the past.

So that concludes the questions that we received via e-mail. Ariel, if there's other questions in the queue, we're ready to take those now.

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Operator [2]

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(Operator Instructions) Our first question comes from Bruce Krugel, a private investor.

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Bruce Krugel, [3]

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Tom, good set of results. I just was wondering, the way to look at the A220 in terms of what its impact on your licensing revenues maybe, I just want to bounce this off you and see if at least directionally I'm in the ballpark. The A320 is about 60 aircraft demand, the A330 about 50 aircraft per annum. The A220, you should be about 120 units per annum out of Mirabel and 40 to 50 units per annum out of Mobile, Alabama. That gives you, call it, 165 taking the midpoint. That would imply roughly a 20% to 22% increase in licensing revenues if the take rate for the A220 is the same as it is for the A320 and A330. Is that directionally correct?

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Thomas R. Schmutz, FLYHT Aerospace Solutions Ltd. - CEO [4]

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Yes, I believe so. The only caveat that I would say is that the production facilities are ramping, so that won't be immediately true.

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Bruce Krugel, [5]

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Indeed, that facility is at full production.

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Thomas R. Schmutz, FLYHT Aerospace Solutions Ltd. - CEO [6]

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Let me -- I think the projection for the first year is 75 aircraft if I recall. That's off the top of my head. And then it's going to increase as additional facilities in Mirabel and Mobile are brought online.

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Bruce Krugel, [7]

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Okay. The number that really caught my eye was Technical Services. Quite a big jump in Technical Services. And you said in your narrative, you had several OEM development programs. Are there -- are we about to see something with regard to these OEM development programs?

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Thomas R. Schmutz, FLYHT Aerospace Solutions Ltd. - CEO [8]

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We have previously announced the programs, which were driving the increase in the Technical Services revenue. So we were able to discuss one of those because it's publicly announced the A320, so there was some significant revenues gained through the Technical Services component of that program. There are other programs that we have announced and are delivering on with units that required modifications to our product, and we were paid to perform those modifications and now we're entering into the shipment phase of those programs.

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Bruce Krugel, [9]

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Indeed. So I was looking at the Technical Services as potentially a leading indicator of some future revenues and also future announcements you might make. Is that a fair characterization?

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Thomas R. Schmutz, FLYHT Aerospace Solutions Ltd. - CEO [10]

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It is. Also I will characterize that I believe it was in the third or the fourth conference call or maybe both, we indicated that we are looking for strategic opportunities to grow that Technical Services component. So we're actively looking for partners and opportunities where we can diversify our revenues within that category.

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Bruce Krugel, [11]

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Right. Also in your prepared remarks, you said there's an exciting number of sales opportunities coming up. Any color, any perspective on timing with regards to these opportunities?

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Thomas R. Schmutz, FLYHT Aerospace Solutions Ltd. - CEO [12]

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I prefer to just indicate when those come through.

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Operator [13]

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(Operator Instructions) Our next question comes from Marc Berger of MKB Associates.

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Marc Berger, MKB Associates Inc - Financial Advisor [14]

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Congratulations on the quarter.

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Thomas R. Schmutz, FLYHT Aerospace Solutions Ltd. - CEO [15]

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Thank you, Marc.

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Marc Berger, MKB Associates Inc - Financial Advisor [16]

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Any military business opportunities or leasing operators or even business jet market, these areas you're looking to get into or are we in any of them now, or can you give any color on that?

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Thomas R. Schmutz, FLYHT Aerospace Solutions Ltd. - CEO [17]

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We do have a military business. We do it through a third party, which is kind of a contractual relationship. So that exists currently. The lessor -- we have had quite a few. We have closed quite a few deals that we've announced over the last 2 years with lessors that had become a point of focus for us because we -- there's a certain subset of our real-time data services or SaaS that are attractive to lessors. Understanding how the aircraft is being used and where it's being used are very important for our lessors. And we've had some success in selling our product to them in that way and then jointly marketing their users with them, sharing some of the success with the lessors. So that is certainly a way forward.

We have not had as much success with the business jet community recently. Our best play right now is with fractional owners and fleets just because the thrust of our product and our product development is for collections, managing collections of aircraft rather than individual aircraft.

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Marc Berger, MKB Associates Inc - Financial Advisor [18]

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Can you discuss or any follow-on with regard to the $2.5 million purchase of IP from us about 2 years or so ago? Anything moving in that direction, something we can look forward to?

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Thomas R. Schmutz, FLYHT Aerospace Solutions Ltd. - CEO [19]

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Oh, gosh, you're going way back. The -- we sold basic SATCOM IP to a third-party that was not disclosed. This functionality that we sold did not include any of what we call the secret sauce. None of the real-time safety, cost-saving type capabilities. It was more basic SATCOM and then safety services, voice and data capability. Essentially the capabilities that are fundamental to a basic SATCOM system. We sold that at a time that it was beneficial to raise capital. We raised USD 2.5 million from that. The third-party that received that or that -- we did that contract with -- was an Iridium value-added manufacturer for the Iridium service, which is the next generation. They're embarking on developing a next-generation product. Some of the terms that we disclosed at the time was that FLYHT would be provided the opportunity to white label and resell into our market at favorable terms the resulting product. I don't have any comments on that product. And that's pretty much what we released at that time.

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Marc Berger, MKB Associates Inc - Financial Advisor [20]

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Okay. We have a lot of boxes we've sold to Airbus. And many of those are not providing any SAS (sic) [SaaS] revenues to us. Any possibility of going to those operators and basically saying, how about we give you 3 months of the service free so that you can understand, learn how to use the equipment and realize savings so that after 3 months, you won't want to shut it off and then we'll start to bill you? Or any other possible ways of trying to get them to sign on? Or is it just the timing until, what, 2021 that they're going to be required to go into some type of service and they've already guided, so why not just turn it on?

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Thomas R. Schmutz, FLYHT Aerospace Solutions Ltd. - CEO [21]

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So the units that are sold through the channel that you described are units that are used for basic SATCOM services, so they provide pilot communications. So every aircraft has a phone number. They provide safety services, voice and data, and then there's a very lightweight IP connection to for, say, an electronic flight bag. That configuration that we sell is different from the configuration that we sell directly to airlines. So in order for us to provide our full suite of products, there would have to be a modification to the equipment in order to do that. It's possible to do that. The customer would want to have to do that, but that's kind of the status of that configuration.

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Marc Berger, MKB Associates Inc - Financial Advisor [22]

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And that's still the same type of configuration we're selling them now.

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Thomas R. Schmutz, FLYHT Aerospace Solutions Ltd. - CEO [23]

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Correct. That's through that channel, which is different from the configuration that we sell directly to airlines.

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Operator [24]

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

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Thomas R. Schmutz, FLYHT Aerospace Solutions Ltd. - CEO [25]

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Thank you, Ariel. As I mentioned in the letter to shareholders, in addition to the financial and operational success we achieved in the second quarter of 2019, we received a strong endorsement from one of our users, Craig Abela, who is a Standards and Technical Pilot at Pacific Air Express in Brisbane, Queensland, Australia. Mr. Abela provided us with a case study on the benefits of real-time data acquisition at the Airline & Aerospace MRO & Flight Operations IT Conference in Miami Beach, Florida, in April of this year. The case study provides an overview of the practical benefits of the Pacific Air Express proceeds from flights' Automated Flight Information Reporting System, AFIRS. Generally, the study outlines how the system helps their regulatory requirements and improve their efficiencies in their air cargo and charter business. The case study covers voice communications, automated and accurate block and flight time reporting, automated engine and airframe exceedance reporting, automated engine trending with specific profiles for the Rolls-Royce engines' built-in QAR data collection and flight following. In the study, Mr. Abela summarizes how FLYHT's AFIRS detected the real-time airframe exceedances and how this detection convinced the airlines of the value and the efficacy of our technology. This is a really strong customer review. It serves as an excellent testament to the value of our technology and how it saves airlines money, proactively enhances their safety and provides a means to remain compliant with worldwide aviation, operational and maintenance requirements.

The video of Mr. Abela's case study briefing is on FLYHT's website under Investor Relations, Presentations and Webcasts.

Overall, Q2 2019 was an excellent quarter for FLYHT, and we are excited for the rest of 2019. Thank you for your interest in FLYHT Aerospace Solutions.

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Operator [26]

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