Good day, and welcome to the Innovative Solutions and Support Second Quarter 2021 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Geoffrey Hedrick, Chairman and Chief Executive Officer. Please go ahead, sir.

Good morning. This is Geoff Hedrick. Welcome to our conference call to discuss our performance for the second quarter of fiscal 2021, current business conditions and the outlook for the coming year. Joining me today is Shahram Askarpour, our President; and Rell Winand, our CFO. Before I begin, I’d like Rell to read the Safe Harbor message. Rell?

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

Thanks, Rell. It was a stronger quarter were revenues up, margins job, cash flow positive and solid bottom line profitability. In addition to new orders – in addition, new orders were strong, and we ended up the quarter with sequentially increase in backlog. Over the past several years, we have been planning a strategy to establish a better balance of OEM and retrofit revenues, a more diversified set of products to reduce volatility and prevent – and provide a broader foundation for our continued growth. These efforts continue to succeed. As the pandemic recede production contracts are now producing steady, predictable revenues from some of our largest names in aviation Pilatus, Textron and Boeing. Sales of our patented autothrottle continue to grow. Most recently, we announced that Textron had our autothrottle standard equipment to another of their new air – King Air aircraft, the King Air 260. Additionally, we’ve been shipping to their global network of service centers to retrofit and for retrofit applications, where pandemic has been slowing adoption. In these recent quarterly report however, Textron indicated they expected the retrofit market to improve and could open a significant market opportunity that is multiple times that of the production market. The cooperation and relationship with Textron has been very strong and very rewarding. We believe that we could develop additional opportunities across their product portfolio. The success of our ThrustSense technology and general aviation is creating opportunities in other markets, such as in the military, air transport and several multiengine aircraft. We currently are seeing interest from far beyond King Air, one reason for this interest is that we have the only autothrottle with life guard that is easily retrofittable. We – this is appealing to owner operators because it means they don’t lose revenue, they can use their aircraft and loss of – and prevent loss of control. Currently, the development is in a – currently in development is an autothrottle that will offer customers a simplified solution at lower costs. This will allow us to penetrate the lower end of the market, which is substantially larger than the turboprop that we sit at now.

Thank you, Geoff, and thank you all for joining us this morning. Looking at the second quarter revenues were $5.1 million up 5.9% from $4.8 million a year ago, primarily due to increased shipments of King Air Autothrottle Systems to our OEM customer. Gross margins for the quarter were 56.7% improving as expected from both 47.5% in the year ago quarter and 52.7% in the previous first quarter. The improvement reflected reduced material costs due to product mix partially offset by higher labor costs. Total operating expenses for the second quarter of fiscal 2021 were $23.4 million up by margin of 2.1% from a year ago and down 1.8% from the preceding first quarter of fiscal 2021. We continue to emphasize tight operating cost control, we believe current quarterly operating expense levels will be maintained for the balance of the year. Research and development expense decreased from the year ago quarter was primarily the result of a higher proportion of efforts focus upon product development programs that were allocated to cost of sales in the quarter. Research and development expense was almost 14% of quarterly revenues, which is a reflection of our strong commitment to innovation and new product development.

Thank you, Rell, and good morning, everyone. The solid financial results that Geoff and Rell described are a testimony to our prioritization, our business model that focuses on both OEM production and retrofit opportunities and the diversity and high quality of our customer base. This quarter is so strong performance in our OEM production contracts, which have generally proven to be less sensitive to the influence of the pandemic. For instance, Textron recently noted that virtually every model of jet and turboprop they have is seeing strong activity. Adding interest in the acquisition of new jets was still largely driven by personal travel, but corporate aviation departments are starting to come alive. This is not only encouraging news for our Textron business, but also for Pilatus PC-24 business as well. We believe these programs as well as our KC-46 contract with Boeing for the US Air Force to run for several years offering a stable foundation of predictable recurring revenues from which to build. Just briefly mentioned our development of a more easily retrofitted autothrottle, we are working on a single button, simple operation autothrottle that will lower – offer lower cost installation. The single button faces a high resolution OLED display that occupies minimal cockpit space. It can be installed in multiple aircraft with different cockpit layouts, and its generic nature will significantly reduce the time and expense of obtaining FAA certification on multiple platforms. Autothrottle remains a top priority of our research and development budget. The retrofit market is experiencing some weakness as the pandemic curtails travel, while also creating some degree of caution among buyers. Nevertheless, we are having retrofit success in the air cargo market with the growth of online shopping continues to drive strong cargo conversion activity. Consequently, shipments of Flat Panel Display Systems for 757 and 767 remains robust. With many of over a 1,000 operational 757 and 767 still available for cargo conversion, expect to see our Flat Panel Display business remain strong.

Thanks, Shahram. The second quarter was another quarter in which we achieved the objectives, we believe best building shareholder value of your growth, profitability and positive cash flow. The second half improved sequentially from the first half solid start to the fiscal year. Backlog also rose all signs of healthy growing business. In the second half of calendar 2020, we distributed nearly $20 million in dividends showing our commitment to rewarding our loyal shareholders. We remain optimistic about Innovative Solutions and Support’s future and we thank you for the ongoing support, encouragement, and audience today. Operator, please turn this over for questions.

Thank you. We will now begin the question-and-answer session. And the first question will come from George Marema with Pareto Ventures. Please go ahead.

Yes, good morning, Jeff. Thanks for taking the call. A couple things. So, I wanted to ask you on the new orders for Q1 did a lot of this come from the Boeing? Like sort of the cargo retrofits or was a lot of OEM orders?

Let me have Shahram answer that in specifics. But the distribution generally was more uniform than even we anticipated. Shahram, can you comment on those?

Sure. Yes. So, we received new OEM orders from Textron, Telarus, as well as Boeing. As well as on the cargo market we had strong retrofit orders.

Yes, it’s Q2, you said Q1.

Yes, the current quarter, yes, this quarter.

I think you meant Q2 of 2021.

What’s rewarding is the demand at Amazon continues.

Yes, okay. Yeah, I just want to see how heavy it was. Because I know on the OEM business, like the King Air is the only produced seven planes in Q1, but that’s their seasonal low quarter, it just goes up sharply from here into the fourth quarter. I’m talking about my calendar quarters now. But yes, I just want to see the flavor of the of the ordering there on how it came. And then also, I was excited to see in your press release about your new low cost product, which sounds like that is going to address the piston engine market, correct?

Thingo.

I’m sorry. What?

I said thingo. I’m sorry.

,:

What we believe is turns out, the technology was turned out to be ideal. We were able to reduce our costs, probably in half or better. And to produce a simpler, lower cost installation. Shall we see this as a broad application to a lot of the Textron product lines, and also very easy retrofit, it reduces the retrofit time unless it half.

Wow. Okay.

That’s cool. It’s a really good product. And it’s, yes, it’s very nice.

Build a new product can also be applied to like the King Air platforms as well?

Yes, you could put it in a King Air. The question is, look, what it does is, it allows you to operate the auto-throttle far more simply, there’s not a lot of – there’s no setting of numbers or anything else, you push button – push a button on and off basically. So it makes it much simpler to operate. But the real advantage to it is that it, it will provide a very fast retrofit time.

Yes, well, I’m also excited about the piston market, because as you know, that’s a huge market.

About the P58 they made 8,500 of those. And they still have common problems with all twins that we have a solution for. So, we think it’s going to be a very good product for us and for to Textron, and Textron has been remarkably our supportive. We’re delighted.

And about how long do you think until this becomes available on market for retrofits and all that?

I just assume that it will be soon. Like…

They’ll be soon.

Actual day, I can’t. I mean, this is an engineering program at the same time, it’s pretty much done. Actually, we’re in play test now. But like everything, as soon as you give it a day you’re going to slip itself.

But you’re thinking 2021, though, sounds like.

Absolutely.

Okay. In terms of the retrofits, what is sort of the cadence going on right now? And what do you anticipate? Well, I guess this new product will change the inflection on that you predict, what’s the current cadence of the retrofits?

It’s really – it’s a sort of a steady progression. As more and more people install it, they feel more comfortable with it, et cetera, et cetera, et cetera. But most importantly, remember, auto-throttles were always considered, especially when we got started, people say, What the hell do I do that auto-pilot and auto-throttle for I don’t need a cruise control, I want to fly my airplane. Well, our most recent product, which is tied to the one literally means that you can fly the airplane just like you always did except that provides a background safety so that you get the effective FADEC engine and safety controls that have never been seen before. So it’s the ideal situation is for the pilot that says they still want to fly my airplane. But I approved – but I would like all those safety features, just as both.

Okay, and how are – and my last question is in terms of supply chain of getting product to make your product? Is that that okay right now? Or you have a lot of problems with that?

I mean, trying to get parch.

Yes.

Yes. And look, I’ve been through this over the years. And but I think it’ll work out. We have a couple of choke points that we were monitoring carefully. But I’m not – I’m not overly concerned.

But so far, you’ve been able to make products and ship product sounds like…

Yes. We’re doing that now. But remember, we also have inventory and so it’s not a simple answer, but in general, that’s an accurate one.

Yes. Okay, thank you, Geoff.

Thanks.

The next one will come from Michael Frederick, Investor. Please go ahead.

Good morning, gentlemen, congratulations on the quarter the new products. I have a question for you about the turbos and market. All right, are you guys finding that your auto-throttles are actually displacing existing FADEC-like auto-throttles there on the marketplace?

No, no, you wouldn’t replace FADEC auto-throttle. What ours – auto-throttle does is it puts the FADEC attributes like protection against over temperature, over speed in a turbo fan over torque and a Turboprop, it provides our safety controls and prevents you from these horrendous damage you can do to turbo problems easily get a $0.5 million for the damage and literally a couple of seconds. So this prevents that. That’s why you haven’t. You haven’t even more importantly to prevent loss of control, actually were allowing the airplane to get too slow, you lose control, and it’s catastrophic. And our auto-throttle has got a patented feature that prevents that. So those are the strengths of it. But we’re not going to replace FADEC. But remember, about 80% of all the engines out there are not a FADEC.

Okay. Okay.

Now the bigger engines, we’re obviously not going to go after the big air transport engines, because they’re all FADEC but we can provide similar operation in a non-FADEC engine.

So, you’re saying that most existing turbo fans are not FADEC?

Most existing Turboprops. I don’t know about turbo fans. But I’m going to tell you that it wouldn’t surprise me that there’s a significant number, if not a high percentage of turbo fans that have that are non-FADEC.

Got it. Another question for you, Geoff is on the new product when we’re talking about piston planes like Cessna’s and whatnot. There’s – they’re all different levels of pilot certification. Like some people can like fly during the day, others have to fly, others have instrumentation approvals, and everything would with the implementation of auto-throttle, actually help accelerate a pilots ability to move up that chain?

Actually, we don’t look at it that way. I tell you, what we – how we do look at it. Primarily it’s the system was conceived to take the workload off the pilot, which is important but remember even and you’re taking the workload off of it, he’s still got to be prepared and capable of managing without the thing operating. So you don’t gain a great deal there. Where you do gain, we believe, is a safety feature, which unique to our technology, were the only people in the world that provide proportional mitigation of a lot of slowing airspeed, loss of control. Only have to look at Addison crash, to see what happens to an airplane when it gets too slow. And that’s why people are strongly warned against it. In our case, we have something that actually proportionately controls the power on the engines to keep the flight path stable.

Understood. And Geoff, just ballpark, do you have any idea what percentage of the piston market is actually, dual props as opposed to just single prop planes?

I mean. Well, I can tell you there’s an awful lot of piston twins.

Twins. Right. Okay. And that’s, where you’re more applicable to the twins, correct?

Well, no, we’re applicable to everything. I mean, just the single engine. We started with PC-12. It does a great job there. It manages the airplane in a way that most operators Marvel when they see the airplane takeoff, because it sounds like you’re single, when it takes off whether it’s single or twin. No, it’s twin. The advantage we have with the twin is patented in loss of control accident. And, nobody’s done anything about it partner here. The problem consisted 100 years ago, nobody had a solution. We did, we finally came up with what, actually cost a lot. That’s a good use.

Yes, you guys certainly, you got crack the code. Well, that’s all I have for you, Geoff. Congratulations. Hopefully, all this mania will get behind as soon and you guys will be back to full speed.

Yes, well, I appreciate that. Yes, we’re working on it. We have a good team. The team works well. I’m proud of them.

I know you do. I’ve been with you for a while. Well keep going. Okay, take care.

Thanks.

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