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Edited Transcript of ISSC.OQ earnings conference call or presentation 14-May-20 2:00pm GMT

·34 mins read

Q2 2020 Innovative Solutions and Support Inc Earnings Call EXTON Jun 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Innovative Solutions and Support Inc earnings conference call or presentation Thursday, May 14, 2020 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Geoffrey S. M. Hedrick Innovative Solutions and Support, Inc. - Founder, Chairman & CEO * Relland M. Winand Innovative Solutions and Support, Inc. - Company Secretary & CFO * Shahram Askarpour Innovative Solutions and Support, Inc. - President ================================================================================ Conference Call Participants ================================================================================ * David Pearce Campbell Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner * George Marema;Pareto Ventures;Founding Owner * Steve Rudd;Blackwall;Analyst * Michael Friedrich;Private Investor ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day and welcome to the Innovative Solutions and Support Second Quarter 2020 Earnings Conference Call and Webcast. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to Geoffrey Hedrick, Chairman and Chief Executive Officer. Please go ahead, sir. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [2] -------------------------------------------------------------------------------- Yes, good morning. This is Geoff Hedrick. Welcome this morning to our conference call to discuss our performance for the second quarter of fiscal 2020, current business conditions and our outlook for the coming year. Joining me are Shahram Askarpour, our President; and Relland Winand, our CFO. Before I begin, I would like Rell to read the safe harbor message. Thanks. -------------------------------------------------------------------------------- Relland M. Winand, Innovative Solutions and Support, Inc. - Company Secretary & CFO [3] -------------------------------------------------------------------------------- Thank you, Geoff, and good morning, everyone. I would remind our listeners that certain matters discussed in the conference call today, including new products and operational and financial results for future periods, are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially, either better or worse, from those discussed, including other risks and uncertainties reflected in our company's 10-K, which is on file with the SEC and other public filings. Now I'll turn the call back over to Geoff. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [4] -------------------------------------------------------------------------------- The coronavirus pandemic is reshaping the way we lived and worked, including the lives of our many dedicated employees of IS&S. As a business deemed essential, we have managed to safely keep our operations open to meet our obligations to our customers, which includes markets that are vital to the nation's safety and security, such as the military, as well as cargo air carriers who are playing an increasingly crucial role in getting medical supplies that are needed throughout the country. Having recognized the challenges early on, we took aggressive steps to protect the health and wellbeing of our employees, our families, our customers, and our partners, as well as immediate and remedial actions to minimize the impact to our business. The results of these efforts have been rewarding. All 100% of the IS&S team members have complied with the new safety procedures and have come to work, my personal heroes. These past 3 months resulted in a quarter-over-quarter revenue growth and the sixth quarter in the last seven in which we have generated sequential revenue growth. We generated strong cash flow and had one of the strongest quarters of new business back and our backlog has increased to nearly $10 million, highest in years. The margins were impacted by period cost fluctuations in the quarter. We expect them to rebound to prior levels in subsequent quarters. We will deliver production quantities of our autothrottle to the OEM this quarter, which would represent the second major OEM contract in the general aviation market. The autothrottle has been 6 years in development, culminating with the FAA certification of the OEI upset protection and the add up and adoption into a major OEM production. The general aviation market and autothrottle, we believe provides an excellent opportunity and further inserts us into the market, both in terms of an OEM production and retrofit. In a competitive market, this revolutionary autothrottle is a compelling differentiator that aircraft operators, especially in charter travel, military, and specifically multiengine aircraft where the threat sense autothrottle, is a unique patented source of life saving Vmca upset protection. And currently, I would comment that as a pilot of 30 or 40 years that I was always quizzical about the fact that they used to refer to the multiengine aircrafts having more fatalities than single engine; never made sense as we now understand why. And what we've done here today, we were told by an FAA engineer that although we lose 4 people at a -- well, 1 person every 4 days, that what we're doing -- what IS&S is doing here today will save lives. I'm very proud of that. Interest remains strong in the air cargo industry for our flat panel display technology, which operators have been installing in the aircraft. They are converting to expand capacity to meet the growing shipping needs, especially from the healthcare industry in light of the current pandemic. Certainly our second quarter results suggest that our efforts to safeguard our employees as well as those around us have not significantly impacted our operators today and that our end markets today appear not to have been affected by many others. But we understand investors are interested in the future and how this pandemic might impact future quarters. No one can say with any certainty, but we recognize it's an added risk. For instance, our supply chain. In our supply chain, we have not experienced significant disruption. Though we have seen some minor disruptions such as supply of certain connectors. We are still dependent on the FAA before we can officially start officialling -- starting other auto throttles, and the FAA is under a shelter-in-place for which could potentially slow the approval process. Also some new business meetings and demonstrations are being rescheduled due to the pandemic. I mentioned on the onset, the important thing is that we are receiving new orders and we're working hard to satisfy our obligations to meet those orders. In fact, we are actively hiring to meet the growing demand. As a result of the uncertainty created by COVID-19 pandemic, we are -- and to help adequate liquidity during this period, we originally decided to participate in the federal Paycheck Protection Program under the CARES Act. However, since the time of our loan application, additional guidance has been issued by SBA and the Treasury Department that creates further uncertainty regarding the qualification of certain requirements for our PPP loan. Out of the abundance of caution and in light of the new guidance, we have concluded that it is prudent to repay the PPP loan. This will free up that resource for other companies that have a greater need for the funds. The first half of the year has gone well and we are optimistic that we can continue an upward trajectory over the rest of the year as well as into the future. Let me turn it over to Rell for some really boring financial details. -------------------------------------------------------------------------------- Relland M. Winand, Innovative Solutions and Support, Inc. - Company Secretary & CFO [5] -------------------------------------------------------------------------------- Thank you, Geoff, and thank you all for joining us this morning. Revenues for the first quarter -- for the quarter of fiscal 2020 were $4.8 million, a 15% increase over second quarter 2019, reflecting increased product demand as well as increased customer service revenue, which was over $1.2 million in the quarter. There continues to be engineering revenue associated with the F5 development contract. Gross margins for the quarter were 47.5%. That is down from last quarter as well as a year ago due to product mix, an increase in warranty costs and higher labor expense, as we stamp up ahead of future production demands. We fully expect margins to return to levels recently achieved as these expenses normalize. Total operating expenses for the second quarter of fiscal 2020 were $2.2 million, down from the first quarter, a little change from a year ago, so that normalized expenses remain relatively stable despite the revenue growth we are experiencing. Research and development expense was up slightly from a year ago reflecting an increase in the amount of internally-funded R&D, which is expensed as incurred in contrast to funded R&D, which is charged to cost of goods sold. With the winding down of the F5 development contract, funded F&D has been significantly reduced. Selling, general and administrative expenses were essentially unchanged as we work hard to keep costs under control. Interest and other income added $75,000 to the bottom line this quarter, which is a little less than last quarter mostly due to the decrease in interest rates. Due to loss carrybacks, we recognized a $309,000 tax benefit in the quarter, a loss carryback resulted from the Coronavirus Aid, Relief, and Economic Securities Act or CARES Act which has been signed into law. The CARES Act amends a net operating loss provision allowing for the carryback of losses to each of the 2 tax full years preceding the tax full year loss. We reported quarterly net income of $438,000 or $0.03 per share, more than double the same quarter a year ago as well as sequential improvement from $332,000 or $0.02 per share in the first quarter. For the first half of the year, net income is more than twice that for the first half of fiscal 2019. The company remains in a strong financial position and generated positive cash flow of $500,000 from operating activities in the quarter. At March 31, 2020, we had $22.6 million of cash on hand and no debt. We believe that the Company has sufficient cash to fund operations for the foreseeable future. Now I'd like to turn the call over to Shahram. -------------------------------------------------------------------------------- Shahram Askarpour, Innovative Solutions and Support, Inc. - President [6] -------------------------------------------------------------------------------- Thank you, Rell, and good morning, everyone. It certainly has been both an exciting and challenging first 6 months. As Geoff explained and as an essential business, we have remained open over the course of Pennsylvania shelter-in-place directive. Our first priority was with the safety and health of our employees. So we acted swiftly to enact the plan that met and went beyond federal and state guideline, while maximizing the productivity of our workflows. Additionally, production crews during the month of April were split into 2 different shifts with each shift 1 week on, 1 week off but paid for both weeks. Although short-term productivity was reduced as a result of measures taken, we believe the overall results of this quarter will not be significantly impacted. We are currently meeting our delivery deadlines and in fact, we are now hiring to staff up to meet the increasing production requirements. As you heard from Geoff, we expect to start shipping production autothrottle units to an OEM this quarter. This is an encouraging endorsement our autothrottle technology from a leader in the general aviation industry. As we have mentioned in the past, the ability to incorporate Vmca mitigation in our autothrottle provides a tangible competitive advantage to twin-engine aircraft and it seems OEMs want to capitalize on this advantage by in turn incorporating the technology into their new production aircraft. It offers a great selling point to perspective buyers as it offers potentially life-saving rollover protection for twin-engine aircrafts. Our Vmca mitigation technology is a standard part of our autothrottle. We have been anticipating an influx of autothrottle production orders. And while it may not be a year of big autothrottle shipments, it is shaping up to be the beginning of a ramp up we believe has significant potential. Once again, quickly reviewing the programs driving current results. The PC-24 program remains on track to deliver approximately 50 Pilatus aircraft this year. As only a quarter of 2 of deliveries are carried in our backlog, those for which a PO was in hand, you can understand why we believe our backlog greatly understates our future revenue potential. In the commercial and transport market, we are experiencing steady demand for our Boeing 757 and Boeing 767 portfolio of cockpit technology, primarily from the air cargo market, which is converting traditional aircraft into cargo transport planes. In the military market, we were recently awarded the production contract for the F-5 air data computer that has been under development. This is a U.S. navy fleet retrofit, but with many foreign militaries flying the F-5, we're hoping to expand sales into the global market. Our production KC-46 program also remains on track. New orders in the second quarter were roughly $8.3 million, given that's an almost $10 million backlog at quarter end. One of the areas where we are feeling the effect of the coronavirus pandemic is in prospect meetings and demos are getting pushed out to July and later. In addition to revenues generated from backlog or people, we also continue to experience a steady demand for customer service, inter-quarter booking ship work and a contribution from long-term contracts, where only a pricing of the total contract is recorded in our committed backlog. Let me turn the call back to Geoff for some closing remarks. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [7] -------------------------------------------------------------------------------- Thank you, Shahram. While current conditions make it particularly difficult to forecast future sales to any real degree of certainty, we are confident that the progress we have achieved today has positioned us well to prosper over the longer term. I want to turn it over to the operator for lines for questions and answers now. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And the first question will come from David Campbell with Thompson, Davis & Company. -------------------------------------------------------------------------------- David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [2] -------------------------------------------------------------------------------- Thank you for all the good news. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [3] -------------------------------------------------------------------------------- We're happy to give it to you. It's been a good time. It's an interesting time, especially with the massive downturn in commercial air transport. I guess it's down 95%, it's hard to believe. We just sent somebody out to Wichita, and I think he said there were only about 20 people on the airplane. Although he said, on one of the flights, there was a woman that was completely wrapped in plastic with her wrist and ankles tapped and a ventilator for breather. So anyways… -------------------------------------------------------------------------------- David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [4] -------------------------------------------------------------------------------- She didn't want to take any chances. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [5] -------------------------------------------------------------------------------- But what it speaks to interestingly now is there is a hell lot more interest in flying from in charters and business jets where you could control, number one, the people that are going to be onboarding the airplane with you; and number two, you don't have a 100 people. So, as an example, we had some friends down in Palm Beach. We charted an 8 passenger citation to bring them back up. And when the price was distributed among the 8 passengers, it was about the same as a first class ticket. So it's interesting that we may even actually see a strengthening in that market. We're delighted that we've established our sort of foot in the door. Just by the way, David, I did some looking. If I look at the 3 production programs, what we call the ongoing OEM type production programs, their revenue at the end of next year will be equal -- just those 3 programs will be equal to our revenue last year, total revenue last year. And that will be in just those 3 ongoing program. So it's a -- it looks very promising. The promise we're on spectacularly successful aircraft. I need to ask you a question. -------------------------------------------------------------------------------- David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [6] -------------------------------------------------------------------------------- I just wanted to ask a sort of technical question about the taxes. With the CARES Act provided you some tax benefit in the second fiscal quarter, well, that's the only quarter though. Will the third quarter go back to the normal tax rate? -------------------------------------------------------------------------------- Relland M. Winand, Innovative Solutions and Support, Inc. - Company Secretary & CFO [7] -------------------------------------------------------------------------------- Right. I mean, yes, that's correct. It should be effect of the CARES Act. And going forward, it's -- and in the past quarters, we've -- since we have NOL, we really haven't had any tax expects, so I don't expect tax expense. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [8] -------------------------------------------------------------------------------- The truth is that, David, this quarter -- this past quarter, it tended to mitigate the periodic fluctuations and period costs, so kind of leveled those out. This coming quarter, they will be there, but we expect an outturn in both volume and margin. So it will all balance out. For a change, it worked with us rather than against us. -------------------------------------------------------------------------------- David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [9] -------------------------------------------------------------------------------- So assuming there's pre-tax income in the third and fourth quarters, there shouldn't be any charges or taxes? -------------------------------------------------------------------------------- Relland M. Winand, Innovative Solutions and Support, Inc. - Company Secretary & CFO [10] -------------------------------------------------------------------------------- Yes. That's -- yes. -------------------------------------------------------------------------------- David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [11] -------------------------------------------------------------------------------- Well, what about the rest of the business? The flat panels growth in the cargo conversion market, that's likely to continue because the passenger market will probably stay down for some time and they'll be using these passenger planes for a cargo. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [12] -------------------------------------------------------------------------------- That's a very, very accurate observation, David. The reality, I mean, think of it. You are an airliner or a carrier and you got whole hell of a lot of airplanes, specifically 57s and 67s, which you don't need now because there isn't anybody to carry. And I don't expect to have large markets for several years because people, myself included, might be apprehensive about going to Europe or traveling. So it's going to be down, those areas will be down. So the obvious thing is that you convert them to package carriers. The other thing that we've learned in this last 3 or 4 months is that people rely far more heavily on Amazon and alike, and you can even see deliveries in that area. The online ordering, I understand, has gone up by about 25% to 30% just in the last. And I expect that people will get used it. I certainly am getting used to it. It's very nice. So we can probably expect more and more. And take a look at the aggressive action that Amazon took, which was to essentially build their own fleets of airplanes. I mean, obviously, they're -- a lot of them are non-charter, but they're committed to the Amazon operation. And I think they're over 80 now. And it's very reasonable that they could be up to several 100 of committed cargo aircraft and they all would be converted from 57/67s presently in service. -------------------------------------------------------------------------------- David Pearce Campbell, Thompson, Davis & Company, Inc. - Senior VP, Research Analyst & Institutional Sales Partner [13] -------------------------------------------------------------------------------- It's amazing to me that these 57s and 67s all have old technology that they… -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [14] -------------------------------------------------------------------------------- In defense of 57/67, at the time it was very advanced. That was the good news. Literally, there are other airplanes that were in production at the same time. The 37s and 57s really were analogue airplanes where the 57/67s were substantially sort of a digital airplane. So they were a transitionary airplane, and that's -- and so they've got a lot of life out there. And they are a very efficient way of moving cargo. The 67 has a lot of bulk space to move lots of packages. When you look at deliveries now -- I was looking to something this morning and I could say, we'll deliver it in an hour. I mean, why would you want to start your car and drive to a store wearing a mask? I mean, I don't want to do that, right. So anyway, I'm sorry. Forget, I got carried away. You go ahead. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- (Operator Instructions) Our next question will come from Michael Friedrich, Investor. -------------------------------------------------------------------------------- Michael Friedrich;Private Investor, [16] -------------------------------------------------------------------------------- I have a question, a follow-up question from the last call. You haven't been able to announce the new OEM partner yet. Has that been pushed way back or is that still on schedule for maybe the next quarter? -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [17] -------------------------------------------------------------------------------- The simple answer is I don't know. Up to -- I mean we have obligations under agreements that don't allow us to divulge certain things. And that's all there is. And there's nothing very dramatic about it to be blunt with you. And it doesn't really affect our business in anyway. But you're right, it is a little odd, I would say. -------------------------------------------------------------------------------- Michael Friedrich;Private Investor, [18] -------------------------------------------------------------------------------- Yes, yes. And to be honest with you… -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [19] -------------------------------------------------------------------------------- Hopefully, somebody will understand that it is odd and will come to their senses. We'll see. -------------------------------------------------------------------------------- Michael Friedrich;Private Investor, [20] -------------------------------------------------------------------------------- Yes. And I'll be honest with you, it's not really hard to figure out who it is, but anyway. Yes, I won't say anymore. But anyhow, another question I had for you was you said that you had 3 OEM programs. Is that the PC-24, the tanker and the new OEM? Are we talking about just 2 OEM? -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [21] -------------------------------------------------------------------------------- Yes, yes, that's exactly what it is. No, that's exactly what it is. And they're all solid programs. Obviously, the tanker is solid. The PC-24 has been a spectacular success as an airplane. They keep raising their rates and we're adapting our manufacturing to accommodate as much as double the rates. So we're at strongest. And the third, the OEM that we don't talk about is quite frankly, we couldn't be more pleased with their cooperation and support, and the realization that this is a significant safety feature for their aircraft and will be unique to them to that aircraft in the world, a real lifesaver. So it's nice. We've got good partners and I think the prospect of a lot of business. -------------------------------------------------------------------------------- Michael Friedrich;Private Investor, [22] -------------------------------------------------------------------------------- So just real quick. You had said that you thought that by the end of next year that the 3 OEM programs would exceed, did you say last year's revenues? -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [23] -------------------------------------------------------------------------------- That's right. -------------------------------------------------------------------------------- Michael Friedrich;Private Investor, [24] -------------------------------------------------------------------------------- And then one final. Yes, and then one quick -- one more quick question. The backlog, so for something to make in the backlog, we do assume that that's something that's going to be delivered in, what, the next 2 quarters or what sort of a qualification makes it? -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [25] -------------------------------------------------------------------------------- I don't think in terms -- it's just -- remember, the backlog really doesn't reflect all the potential business. As an example, any OEM may agree to put your equipment basic on the airplane, that's a standard. Then they will give you a purchase order for the next 20 years. They only release purchase orders and over a 6 month periods typically. Boeing did it. Douglas did it. They will release a 6 months group of -- so the only thing that we ever see in our backlogs are those, that 6-month period. The total -- if you took the total over there, the next 10 years of the program would be obviously orders of magnitude larger. -------------------------------------------------------------------------------- Michael Friedrich;Private Investor, [26] -------------------------------------------------------------------------------- But to make it to backlog, you're essentially saying you need a purchase order? -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [27] -------------------------------------------------------------------------------- These are orders with a defined schedule. Is that right, Shahram? -------------------------------------------------------------------------------- Shahram Askarpour, Innovative Solutions and Support, Inc. - President [28] -------------------------------------------------------------------------------- Correct, yes. -------------------------------------------------------------------------------- Michael Friedrich;Private Investor, [29] -------------------------------------------------------------------------------- And ballpark which -- I mean, how much time we're talking about there though, to be delivered over how many months? -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [30] -------------------------------------------------------------------------------- I can't answer that. I don't know. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Our next question will come from George Marema with Pareto Venture. -------------------------------------------------------------------------------- George Marema;Pareto Ventures;Founding Owner, [32] -------------------------------------------------------------------------------- That was fantastic new order number today. To follow up on that, approximately out of this new order, how much of this was new OEM autothrottle business versus the retrofit markets? And just in general, how is the retrofit market for the AutoSense autothrottle performing? -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [33] -------------------------------------------------------------------------------- The business for the autothrottle is starting to really blossom now. We're getting a lot of interest. We -- so we've been doing PC-12s. And now we're doing King Airs as well. So the retrofit opportunity is orders of magnitude larger than that OEM business. To give you some idea, there's probably -- in just 1 airplane, there's a total market of over 5,000 opportunities. So that's huge. And we're looking at other airplanes that we're working on now where they build over roughly 9,000 of the airplanes. And this autothrottle has gone from being a cruise control to a lifesaver in a multiengine airplane. The -- as you are aware, the Addison, Texas scenario that we saw on the news where the airplane just gently roll on over on its back and into the warehouse is not, sadly, an uncommon terminal scenario. Our system has been certified to prevent that. -------------------------------------------------------------------------------- George Marema;Pareto Ventures;Founding Owner, [34] -------------------------------------------------------------------------------- Are you guys in discussion with additional OEMs on this AutoSense autothrottle? -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [35] -------------------------------------------------------------------------------- Yes, we are. -------------------------------------------------------------------------------- George Marema;Pareto Ventures;Founding Owner, [36] -------------------------------------------------------------------------------- So on the new orders, I'm assuming that some of this is from the autothrottle business, correct? -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [37] -------------------------------------------------------------------------------- Look, it's all very -- bottom line, this is also happening in the last couple of months. So defining it and trying to understand what these orders means that its relevance, it's I think premature. I think we have to kind of say things are maturing well in light of the pandemic and all the other crap that's been going on. We're pleased. So just think about it. Under pre-adverse conditions, we were able to expand our business and grow it towards the future. If we could just keep our heads down and work hard, hopefully we'll keep that going. -------------------------------------------------------------------------------- George Marema;Pareto Ventures;Founding Owner, [38] -------------------------------------------------------------------------------- As you look out into the back half of this year to the next year, do you expect the gross margins in terms of product mix to sort of stay in this normal zone you've had in the last couple years or do you see any longer product shift… -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [39] -------------------------------------------------------------------------------- It pretty brings a lot. I mean, look, there's a -- there are bunch of fixed costs associated with them that obviously building and things like that that don't need to be expanded and therefore the gross margins will go up. Remember, I do remember because I've been around a while, the year that we did over $60 million returned $18 million in profit and in cash, 30% net after tax. I don't expect to do that again. But that gives you an idea how sensitive the margins are to volume. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- Our next question will come from [Roger Goldman], Investor. -------------------------------------------------------------------------------- Unidentified Analyst, [41] -------------------------------------------------------------------------------- I'm an investor. You guys knew my dad who was a long-term investor and he died a couple of months ago. And now my sister and brother and I are investors. A quick question about your cash. Are you guys getting in the banking business? That's a theoretical question, of course. But you got a lot of cash on the balance sheet and questions are there. So any interesting opportunities out there to do something with it in a low interest rate environment? -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [42] -------------------------------------------------------------------------------- Well, we're looking at that. But I'm reminded about 2 things. It was serendipitous that in a time when the federal government felt they had to loan money to the industry to keep it alive, and so they would have cash flow and wouldn't go out of business, our business didn't need it and had that reserve in place. So I won't make any apologies for it. -------------------------------------------------------------------------------- Unidentified Analyst, [43] -------------------------------------------------------------------------------- No, I wasn't expecting you to. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [44] -------------------------------------------------------------------------------- And one other thing. We're going to look at how we best use that. The company has now transitioned into a position, we believe, that will generate cash ongoing in the future and that will change the equation. So we will look at that. I would like to comment that we -- at least the company and I, always enjoyed your dad. If I remember right, it was around '95, but I still remember him saying to me, I got a third of my net worth on you guys, so get going. -------------------------------------------------------------------------------- Unidentified Analyst, [45] -------------------------------------------------------------------------------- That's right. Well, he died peacefully with all his marbles in January and basically told me -- I'm the executor -- basically told me, "Don't you dare sell that stock." -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [46] -------------------------------------------------------------------------------- He is a good man. How old was he when… -------------------------------------------------------------------------------- Unidentified Analyst, [47] -------------------------------------------------------------------------------- 97 with all his marbles. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [48] -------------------------------------------------------------------------------- He did? 97 with all his marbles and he came in no drawer, you owe me. -------------------------------------------------------------------------------- Relland M. Winand, Innovative Solutions and Support, Inc. - Company Secretary & CFO [49] -------------------------------------------------------------------------------- From Jersey I believe? -------------------------------------------------------------------------------- Unidentified Analyst, [50] -------------------------------------------------------------------------------- That's correct. Well, hopefully runs in the family. Anyway, thank you so much. By the way, I wasn't asking for anything specific in terms of how you use the cash except there's going to be lots of bargains out there. Asset values, a lot of companies are going to be dropping and cash becomes king as you know in this environment, having those 2, a bunch of those reports. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [51] -------------------------------------------------------------------------------- Yes. And we obviously are mindful. Look… -------------------------------------------------------------------------------- Unidentified Analyst, [52] -------------------------------------------------------------------------------- Yes. I'm not asking to disclose anything, but just wanted to comment on it. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [53] -------------------------------------------------------------------------------- No, in general, I think we're okay. Trust me, we've discussed it constantly. And I got it you are… -------------------------------------------------------------------------------- Unidentified Analyst, [54] -------------------------------------------------------------------------------- That's good enough for me. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [55] -------------------------------------------------------------------------------- Say what the -- what are you doing with the money? So anyway. -------------------------------------------------------------------------------- Unidentified Analyst, [56] -------------------------------------------------------------------------------- No, okay. Well… -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [57] -------------------------------------------------------------------------------- (inaudible) on probation. -------------------------------------------------------------------------------- Unidentified Analyst, [58] -------------------------------------------------------------------------------- Yes. Well, I'm looking forward to meeting you. We're in Palm Beach in the winter. And actually, your comment about chartering is spot on. That's how we're getting north. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [59] -------------------------------------------------------------------------------- It's a sensible way to do it. And you've got a PBI and you don't -- and you actually don't even have to land at Philadelphia International, in fact. -------------------------------------------------------------------------------- Unidentified Analyst, [60] -------------------------------------------------------------------------------- Well, we're going to fly right into Westchester. Yes. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [61] -------------------------------------------------------------------------------- If you have the right kind of airplane, you can land in Westchester and places like that with short runs. -------------------------------------------------------------------------------- Unidentified Analyst, [62] -------------------------------------------------------------------------------- That's where we're going, right into Westchester. Yes. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [63] -------------------------------------------------------------------------------- Is that right? Yes. You know our plans here. Westchester, New York HPN or West Chester PA? -------------------------------------------------------------------------------- Unidentified Analyst, [64] -------------------------------------------------------------------------------- Well, I'll come visit you. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [65] -------------------------------------------------------------------------------- Well, you are in New York or Pennsylvania? -------------------------------------------------------------------------------- Unidentified Analyst, [66] -------------------------------------------------------------------------------- So -- no, we are -- we summer in Western Mass and winter in Palm Beach. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [67] -------------------------------------------------------------------------------- Okay. (inaudible) -------------------------------------------------------------------------------- Unidentified Analyst, [68] -------------------------------------------------------------------------------- Pretty good life. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [69] -------------------------------------------------------------------------------- Yes. I used to -- I grew up in Westchester County. Anyway, you have a good day. And we're doing well. We work hard and we enjoyed your family. -------------------------------------------------------------------------------- Operator [70] -------------------------------------------------------------------------------- The next question will come from Steve Rudd with Blackwall. -------------------------------------------------------------------------------- Steve Rudd;Blackwall;Analyst, [71] -------------------------------------------------------------------------------- First, I'm very grateful that you all have been coming into work and organizing things as well as you have and happy to hear everybody's voice on the call. We talked about the delivering production quantities of autothrottle this quarter. And if I remember correctly, the units can run up to $50,000 per unit. So how many units are we talking about for this quarter one way or… -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [72] -------------------------------------------------------------------------------- Couple dozen. -------------------------------------------------------------------------------- Steve Rudd;Blackwall;Analyst, [73] -------------------------------------------------------------------------------- A couple dozen? -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [74] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Steve Rudd;Blackwall;Analyst, [75] -------------------------------------------------------------------------------- So that would be then a significant impact -- -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [76] -------------------------------------------------------------------------------- I hope so. -------------------------------------------------------------------------------- Steve Rudd;Blackwall;Analyst, [77] -------------------------------------------------------------------------------- -- on revenue? Okay. All right. That sounded different than what we had. And my numbers are about… -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [78] -------------------------------------------------------------------------------- To be honest with you, I'm very -- just I'm really pleased that we're -- that our customer is committed themselves in such a terrific way. They have a hell of a good partner. And the program is going along exceedingly well. They're even -- they have -- the simulators for the aircraft are even in being built as we speak. And they'll be training people within a couple of months. So the program is moving along very well. -------------------------------------------------------------------------------- Steve Rudd;Blackwall;Analyst, [79] -------------------------------------------------------------------------------- So the incremental revenue could be as much as a $1 million or more? -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [80] -------------------------------------------------------------------------------- We're not going to estimate that. -------------------------------------------------------------------------------- Steve Rudd;Blackwall;Analyst, [81] -------------------------------------------------------------------------------- It's just math. I was just testing my math. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [82] -------------------------------------------------------------------------------- That was all right. The best thing we can do is -- there's a lot of moving marbles right now. And we're trying to keep them together. We're just focused. We'd like to explain what we think is general opportunities and we'll work hard to try to make the best out of realizing those opportunities. -------------------------------------------------------------------------------- Steve Rudd;Blackwall;Analyst, [83] -------------------------------------------------------------------------------- I did note that our gross margins were 47.5%. I think they run higher on autothrottle. So that incremental -- those incremental sales, I'm assuming, are sales -- if we take a base of $4.8 million for this quarter, we're going to be running up higher than that with a -- given that our margins in autothrottle are a bit higher than that, should be average gross margin of greater than 47.5% for this quarter we're in. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [84] -------------------------------------------------------------------------------- Honestly, when you get gross margins in the 45%, 50% range, you don't want to expect a hell lot more. You can get them and we've had times that were over 65%. But that was some -- if you try to run a business with that as a target, you're probably not going to grow the business very fast. So it's the elasticity of the curve, it sort of disappears when you get into those levels. The only people that you can maintain those kind of margins is Heidi Fleiss. -------------------------------------------------------------------------------- Steve Rudd;Blackwall;Analyst, [85] -------------------------------------------------------------------------------- I won't go for that too much more in a me-too moment. And I'm not among those who are me-tooed in any negative way. So let's talk about the CARES Act -- remarkable comment. Let's talk about the CARES Act. What is the magnitude of the benefit that we're going to get on the tax benefit? Because I -- somehow that blew past me. -------------------------------------------------------------------------------- Relland M. Winand, Innovative Solutions and Support, Inc. - Company Secretary & CFO [86] -------------------------------------------------------------------------------- Yes, the biggest benefit is -- for us was just the carryback. As you remember, what's signed into law a year ago or so, you couldn't carry -- I mean, the change of law was you couldn't carryback losses could only go forward. So this new March, whatever the exact date was late March, what it allowed companies to do is to carryback losses. Now for us, since we're a fiscal 2 years, I mean I assume the point was cash, right. So you're going to file it. The company can get some cash, carry the loss back and as another way of funding some company. So that's the benefit we received from it and now we're just moving. -------------------------------------------------------------------------------- Steve Rudd;Blackwall;Analyst, [87] -------------------------------------------------------------------------------- What's the dollar amount that we should expect to get back because you're talking about refund, right? -------------------------------------------------------------------------------- Relland M. Winand, Innovative Solutions and Support, Inc. - Company Secretary & CFO [88] -------------------------------------------------------------------------------- Yes, it's about $309,000 refund. -------------------------------------------------------------------------------- Steve Rudd;Blackwall;Analyst, [89] -------------------------------------------------------------------------------- And we get to take that -- and from an accounting point of view, do we then take that into income or it gets -- you have to restate the prior years? What happens with that? -------------------------------------------------------------------------------- Relland M. Winand, Innovative Solutions and Support, Inc. - Company Secretary & CFO [90] -------------------------------------------------------------------------------- No, it's a NAL thing. So in our current Q2, you'll see a tax benefit of $309,000 in the P&L. -------------------------------------------------------------------------------- Steve Rudd;Blackwall;Analyst, [91] -------------------------------------------------------------------------------- So that will give us a -- from just a number point of view, it'll give us a nice presentation just for that point. -------------------------------------------------------------------------------- Relland M. Winand, Innovative Solutions and Support, Inc. - Company Secretary & CFO [92] -------------------------------------------------------------------------------- Right, yes. -------------------------------------------------------------------------------- Steve Rudd;Blackwall;Analyst, [93] -------------------------------------------------------------------------------- The new order number that we had for -- that was stated in the press release, is it -- I take it's correct that none of that new order number is autothrottle or does it include that the roughly 2 dozen that we just talked about or what amount? -------------------------------------------------------------------------------- Relland M. Winand, Innovative Solutions and Support, Inc. - Company Secretary & CFO [94] -------------------------------------------------------------------------------- It doesn't include. -------------------------------------------------------------------------------- Shahram Askarpour, Innovative Solutions and Support, Inc. - President [95] -------------------------------------------------------------------------------- It doesn't include it, yes. -------------------------------------------------------------------------------- Relland M. Winand, Innovative Solutions and Support, Inc. - Company Secretary & CFO [96] -------------------------------------------------------------------------------- The 8… -------------------------------------------------------------------------------- Steve Rudd;Blackwall;Analyst, [97] -------------------------------------------------------------------------------- It does include? I'm sorry, say it again? -------------------------------------------------------------------------------- Relland M. Winand, Innovative Solutions and Support, Inc. - Company Secretary & CFO [98] -------------------------------------------------------------------------------- It doesn't include autothrottle. -------------------------------------------------------------------------------- Steve Rudd;Blackwall;Analyst, [99] -------------------------------------------------------------------------------- So it includes the units we just chatted about? -------------------------------------------------------------------------------- Relland M. Winand, Innovative Solutions and Support, Inc. - Company Secretary & CFO [100] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Shahram Askarpour, Innovative Solutions and Support, Inc. - President [101] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Geoffrey S. M. Hedrick, Innovative Solutions and Support, Inc. - Founder, Chairman & CEO [102] -------------------------------------------------------------------------------- I guess that wraps it up. Thank you for your attention today. Thank you for coming and thank you for support of our company. -------------------------------------------------------------------------------- Operator [103] -------------------------------------------------------------------------------- The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.