FLYHT Aerospace Solutions Ltd. (OTCQX:FLYLF) Q4 2021 Earnings Conference Call April 7, 2022 9:30 AM ET
Company Participants
Bill Tempany – CEO
Alana Forbes – CFO
Conference Call Participants
Jaeson Schmidt – Lake Street Capital Markets
Bruce Krugel – Private Investor
Marc Berger – MKB Associates
George Melas – MKH Management
Operator
Thank you for standing by. This is the conference operator. Welcome to the FLYHT Aerospace Solutions Fourth Quarter and Year End 2021 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] If there are any outstanding questions at the end of the call, the company will be happy to take them by e-mail to investors at flyht.com.
I would now like to turn the conference over to Bill Tempany, Chief Executive Officer for FLYHT. Please go ahead, Mr. Tempany.
Bill Tempany
Thank you very much. And thanks everybody for joining us for the Q4 and year-end 2021 update. I’d like to start out by listing some of the accomplishments that we had last year. It was obviously a very difficult year in our industry and pretty well every industry with COVID round four and now the all-in [ph] year and everything going on. But the things that we focussed on we’re making sure that we were building a platform for success for 2022 and 2023 that involved making sure that we had the right people, the right number of people and the right skills and I’m very pleased to say that the company today has a very strong keen to deliver results in the months and quarters and years coming. And the large part because of the dedication that we put in these systems and new methodologies in place, thanks for government support through 18 months of the last 24 months, it was very difficult for people to be effective with the work from home rules and so on. But I believe we’ve really managed to come up with an approach and a team and an ability to deliver for our customers that’s unique in the industry. We’ve just completed an employee satisfaction survey and got really high marks on the loyalty, the commitment to the brand, the commitment to the customers, and I’m very pleased and excited with how the people have fought their way through this last two years to come out on top with a great spirit and great product and great customers.
Our customers have been loyal through this. We did lose a couple to receivership during the pandemic. One of them is back, the second one told us they will be back when they get through the bankruptcy procedures. And even though it dropped our SaaS revenue by over the year, about a million and a half dollars because they weren’t flying their aircraft, the beauty of it is that those aircraft and those customers still exist and they’re going to come back as the travel numbers come back and the industry recovers.
The part of what we did last year was strengthen our weather business. As everybody knows we bought the Panasonic business three or four years ago, the TAMDAR sensors deployed in about 200 aircraft and the weather collection data was reduced because they only collect weather data when they’re flying. But those aircraft are still equipped and continue to fly. Mid-term last year, we bought a product from another company in California, called WVSS there’s it’s called the Water Vapor Sensing System. It’s a very high technology sensor, works extremely well on jets and larger aircraft been deployed a lot of places like Southwest Airlines and FedEx to collect data for the U.S. NOAA system. And we’re in the process right now of setting up that equipment. There are press releases both from U.K. Matt, where they’ve committed to buy 30 units of WVSS to fleet to Europe to get better weather data collection there. That was written up in a recent research report from Bruce Krugel [Ph] and it’s public information even though we haven’t done a press release on him. And that program is underway. And we’re working hard with U.K. Matt to get that done in 2022.
The other thing that we promised last year when we raised the money was that we would pay off our debt. So our current balance sheet, the only debt on the balance sheet is long term, low coupon, government debt. All of the private data has been paid off. So our balance sheet is in good shape at the end of the year. And we’ve lined up an acquisition which actually closed March 21. All of the approvals came through its effective January first, but we bought CrossConsense a company in Europe. And one of the things that we talked about last year was meeting to expand both our geographic footprint by getting an office and people in place in Europe and our technology capabilities. We didn’t have maintenance capabilities in house. And the CrossConsense team brings very strong 20 years of experience in supporting maintenance systems for the airlines.
There are a lot of synergies in the CrossConsense acquisition, and our ability to capture and transmit error codes and information off the aircraft which goes into a maintenance system. The maintenance system then generates a work order and we can get that work order to wherever it needs to be on the planet. A lot of the CrossConsense technology is building devices and software to help people on the ground improve the maintenance performance for their airline customers. And it’s a great team of people, a lot of experience and the synergies and the integration of our teams has been very rapid and very effective. We’re working on half a dozen different opportunities together to sell both products into some pretty significant airlines. So a really good deal, as far as I’m concerned for the company and to meet the requirements.
The thing that we see coming in the aviation industry is that North America and Europe will recover faster than the rest of the world. Our customers in Southeast Asia and China are feeling the effects of the next wave of COVID. They’re not seeing the recovery that we’re seeing in North America and Europe. So having very strong basis in both locations is going to be extremely good for our growth. I’m very, very excited about 2022 and 2023. The Edge product is in house, it’s being tested, we’re working on the STCs for both the A 320 and the 737 right now. First delivery of commercial product will happen late second quarter, early third quarter this year. And I think the uptake on that and the ability for us to deliver SaaS revenue from that platform is going to be exceptional.
So if you look at the results from the last year, it’s the loss is significant. But I think that if you look at the loss of opportunities that we’ve capitalized on during that, that don’t get on the balance sheet that went into the income statement, the $4 million of research and development that we spent, brought a brand new hardware platform. It brought new software that’s being deployed today. There was a press release around Sloop and Alberta government supporting our deployment of our APU management system. We’ve got ground handling systems that a lot of our operators are looking at to reduce turn times. So a lot of that expense in the R&D sector was getting prepared for 2022 and 2023 with products that meet the needs of what the airline industry is looking for.
In the last year, our SaaS was down about one $1.3 million. As I say that, that reduction is because our customers just weren’t flying their aircraft. And it also reflects in the license revenue, because every airline on the planet parked large parts of their fleet anywhere from 20% to 80% of their fleet to a part. And if they’re not using your aircraft, they’re not going in to see each or they’re not doing implementation of papers. And also orders weren’t coming through Airbus for new aircraft. So our license revenue is off about $2 million from the year before, because of reduction in the delivery schedules out of Airbus.
So the way that I look at the performance last year was that we did what we needed to do to be ready for 2022 and 2023 to be very exciting years. And I’m going to get kicked by Atlanta here. But all indications are Q1 revenues are going to be a company record high. And that is because we manage our way through supply chain issues. We got shipments out to the customers when they needed them. And our team has dug [ph] exceptionally hard to make sure that we’re not affected by the global events, whether it’s supply chain, the war in Europe, the Southeast Asia COVID outbreak, and we’re looking forward to an exceptionally good year this year, with a very strong team, a very strong group of people and products that we’ve put together over the last two years, and looking forward to great things to come for our shareholders from those efforts.
So without I will turn it over to Alana.
Alana Forbes
Thanks Bill. So I’m going to start out by looking at our balance sheet and then head into the income statement, and just a commentary on items of note. Starting at the top of the balance sheet, our cash balances were down slightly from December of 2020. But we remained with a healthy cash balance at the end of 2021. And we continue to be very careful with our cash expenditures. Our inventory has increased year-over-year. We’ve really that’s been an area of focus for us over the past year, particularly as supply chain issues are at the forefront of our minds. Our production and supply chain team has done an exceptional job of making sure that we are able to deliver on our hardware, contractual obligations. And part of that is investing in some inventory.
Our convertible debenture, you can see the impact on our current liabilities, loans and borrowings of paying that down and retiring it in July. And that’s kind of the area of significant changes in the balance sheet. So looking at the income statement, our revenue is slightly down. Hardware increased from 2020, but decreased Q4 over Q4. We had a really strong Q4 in 2020 in the hardware sector. Our South revenues as Bill mentioned were down by about $1.3 million and those continue to vary with the pandemic. The impact on our revenue that you see is we had a full quarter in 2020, of pre pandemic revenues, which was really strong. And so in 2020, you see, three quarters of pandemic impact where 2021 shows a full year of the impact of flight. As Bill also mentioned, licensing was about half of 2020 levels. Licensing has historically been a really lumpy category. It varies with the needs of the Airbus line. And we continue to see variances in orders, quarter-to-quarter in that area.
Looking at our operating costs, we were able to save about a million. And you’ll notice that there’s a change in categories, and that if there was a reduction from distribution, expenses and administration expenses, and you can see that there’s an increase in our R&D expenses. And that really reflects the efforts that we’ve been, and the company focused on developing the Edge product and actionable intelligence that of products.
Looking forward, as Bill mentioned, we remain really excited about CrossConsense. What you’ll notice, what you’ll see on our Q1 results, is twofold. One, the closing date of March 17, you’ll see about two weeks of revenue in our main set of statements in Q1. We’ll also have a financial statement note that will give an indication of what it would have looked like what the combined entity would have looked like had we been able to consolidate from January 1 onwards and had a full quarter of both entities contributing.
So with that, we should, we can go to questions. We have a few.
Question-and-Answer Session
A – Alana Forbes
The first one acquired was CrossConsense profitable entity. CrossConsense has historically been consistently a profitable entity. We budget and that continues to forecast their concepts and keep contribution to be positive, accretive from day one. On what dates will the financial costs consensus begin to be blended without a flight itself.
In our main statements, as I mentioned, you’ll see that happened from the closing date of March 17. Forward. What was the expected revenue across CrossConsense for 2022? CrossConsense, it was a private company. They did not have audited financials, and so we’re unable to disclose that.
Okay, so that was one set of questions, the second set — to close the gap between revenue and expenses in which category does management see gains and reduction this calendar year?
Bill Tempany
I think that if the pandemic continues to recede, we will see a good increase back to kind of normal levels in SaaS revenue. There will be additional SaaS revenue from both the actionable intelligence products that have been developed as well as a few Edge products that will get installed this year. As everybody knows, we’ve got to get STCs for these products on the aircraft before they can be put on and then and turn those things on. Our plan is to have an STC done by the end of second quarter on the 320 and the third quarter on the 737. We do have customers lined up to take those products and get them installed and start getting some revenue this year. But next year will be the big revenue for SaaS from the Edge products.
Edge Products from all indications are going to be have a lot of sales of hardware over the next foreseeable future. There’s approximately 4000 devices out there that perform one of the functions that the Edge does that are relying on 2G and 3G cellular technology. The Edge product provides that service on 3G, 4G and 5G. So we see a great uptick in the number of units being sold although the Edge units are much less expensive than the AFIRS 228. So we’re going to sell a lot more units but not the revenue isn’t as high as it is on the 228 unit.
So I think future you’ll see a good growth in SaaS in 22 with a platform that is great growth with SaaS in 23, then the hardware revenues will grow even though the product price is going to be lower on the Edge.
Alana Forbes
In particular, what are the IRS R&D expenses expected to be in comparison to 2021? Or STCs included in R&D?
Bill Tempany
Yes, yes, it will be approximately the same because of the effort on STCs as well as the certification work that has to be done for an aviation product.
Alana Forbes
In a principally, SaaS revenue model its flight looking at free installation of the TAMDAR and WVSS sensors to get at their revenue potential.
Bill Tempany
There’s various means that we can pay for WVSS and TAMDAR. The programs that we’re working on right now, like I just mentioned, U.K. map, the governments have money for that hardware. So the airline wouldn’t have to pay for the hardware, the government pays for the hardware, and then they pay us to get the data to the weather bureaus. There are models that we’ve looked at, and are currently looking at in some other jurisdictions where we would bundle a cost of the hardware into the services revenue, and the airline wouldn’t have to pay for the hardware installation. We do have a lease facility set up with a company to do that providing the airline is healthy enough to be able to support it, where we would provide lease financing for that hardware and bundle it into a single monthly charge.
Alana Forbes
Okay, and so that brings us to the end of the email questions. Over to you, Shirley [ph] to take questions from the phone line.
Operator
Thank you. [Operator Instructions] The first question comes from Jaeson Schmidt with Lake Street Capital Markets. Please go ahead.
Jaeson Schmidt
Hey guys, thanks for taking my questions. Just curious if any revenue in Q4 was pushed out here into 2022 because of the supply chain. And I guess relatedly could you just provide some color on what you’re seeing from the supply chain environment.
Bill Tempany
Sure. There was one small order less than $300,000 that got delayed not because of our supply chain, but because the customer supply chain. They rolled over some deliveries into actually February because they couldn’t get the parts that they needed for the other part of the installation they were doing, so that was less than $500,000 that got moved and it was not our supply chain that caused it. That doesn’t mean that we haven’t had lots of challenges with the supply chain. We’ve been very prudent. As Alana mentioned, our inventory numbers are up because we’ve been buying parts that might be in jeopardy of supply chain collapse and making sure that we’ve got supplies for all of our products so that we don’t have those issues. However, when we were shipping the kits this last quarter there’s a lot of small parts connectors and wires and gaskets and so on. That we have orders in for we have agreed to delivery dates for those things. And we had three parts that right toward shipping date all of a sudden became unavailable and we had to find substitutes for two of them.
The final part that was going to hold up 18 kits being shipped was the gasket that goes on the top of the aircraft between the antenna and the aircraft. And we’ve been told that they were fine and then all of a sudden they were in short supply and in aviation you can’t just go to Canadian Tire and buy a gasket and stick it on there. It’s got to be a certified aviation part. So our team did an exceptional job of going out and scouring and finding certified traceable parts and making all of the deliveries in the first quarter. And we’ve gone to our customers and said look, you got to give us a longer lead time on order so we can make sure we do this and our customers have been obliging in that. I think we’ve, we’ve placed orders today for 2023 because we want to make sure that we don’t run into these issues. But they’re there, but we’ve been managing so far to not be impacted by them.
Jaeson Schmidt
Okay, no, I appreciate that color. And then just looking at the CrossConsense acquisition obviously seems like a great fit for you guys. I know you don’t want to disclose financials. But can you help us think about sort of what the growth rate that they were seeing. And if you believe that growth rate can be accelerated now under the broader flight umbrella?
Bill Tempany
Well, like everybody in aviation, the last two years, the growth rate was not there. They were impacted by COVID, just like everybody else, but they did maintain their profitability, and they did maintain their staff and customers. They’re just now starting to get back in stride with as the customers come back online with additional work. It’s the history that we went through on the deal. It’s a very solidly run company with great people, and great customers, and they adapted like everybody else through COVID to be here, and be strong and be ready to go as the industry recovers.
Jaeson Schmidt
Okay, and then just the last one for me, and I’ll jump back into queue. Sticking with the acquisition, I mean, I assume just given the nature of that business margin should be kind of similar to your overall SaaS margins?
Bill Tempany
Yes. Yes, exactly.
Jaeson Schmidt
Okay, perfect. Thanks a lot, guys.
Bill Tempany
Thank you.
Operator
And next question comes from Bruce Krugel, a Private Investor. Please go ahead.
Bruce Krugel
Hi, there. Good morning.
Bill Tempany
Morning, Bruce.
Bruce Krugel
I’m just looking at the weather business. I mean, we know about this potential city unit order on hardware side. But on the SaaS side, are you seeing any recovery on rates [Ph] on that front?
Bill Tempany
Not a lot. One of the big sources of weather data revenue per us was AirAsia. AirAsia, had, I think, 135 aircraft flying at the end of 2019. The last couple of years, they’ve been between 13 and 18 aircraft. Their forecast to the end of this year that we’ve been talking to them about is they’ll have between 25 and 30 aircraft in service by the end of this year, depending on which borders open. So that’s the big piece of the business.
The other business, that the big chunk of our weather business was the Dash eight fleet on the west coast of North America. And obviously, it dropped off substantially. And that recovery has started and it’s starting to come back. We had a lot of revenue coming from weather data in China. And that actually has been curtailed because the Chinese government has said no data leaves China because of the diplomatic situation. So we believe it’s going to come back. We’re in discussions today with CMA, the Chinese Meteorological Association. And I think there’s great opportunities for us to get increased data as well as increased hardware in China, because they want to get better data for their own weather forecasts.
Bruce Krugel
Okay. Just getting on to the CrossConsense, you mentioned that Q1 is going to be a company record for Revs, and you’re only including two weeks of CrossConsense Revs, so I’m stating the obvious head CrossConsense being included for the full quarter, you would have obviously reported a significantly higher quarterly rev. So with that in mind, are we at least being set up for a decent Q2 as well?
Bill Tempany
Yes, Q2 is looking good. We shipped a lot of hardware in Q1. That won’t be repeated in Q2, but there’s another order for Q3 and we’re looking at a strong year from a hardware perspective. And I think a good year from a SaaS perspective, again, as long as we don’t have another COVID or another war or whatever.
Bruce Krugel
Okay. Just also with CrossConsense. As you mentioned, it’s a profitable organization, but there’s been no discussion on balance sheet. What does CrossConsense balance sheet look like in terms of cash and debt?
Bill Tempany
Well there’s no debt and it was a share purchase. And they had a positive balance sheet, and we’re very happy with the results.
Bruce Krugel
Okay, and then just finally, get talking about STCs for the Edge device, they’re obviously forthcoming. In terms of sales channel, would your main sales channels for the Edge device be Sita and Amazon?
Bill Tempany
They’re definitely big players in what we’re doing from our sales and marketing efforts. We are working on I think, five opportunities with AWS and some really exciting ones. We’ve got a meeting on the 19th of April; let’s see the people from Montreal are coming out here to discuss three opportunities that are I’m really thrilled that we’re moving down the path with them with a bunch of ACARS over IP and so on. The — our sales our sales department is has grown significantly, year-over-year. I don’t think we break out sales separately, it’s covered in distribution expense. But we’ve gone from kind of one inside salesperson and two outside salespeople to a team of 10 people including marketing, a person in Japan, a person in Indonesia. And so people are watching LinkedIn and some of the social media sites are seeing more and more information on flight. We’re getting more conferences, conferences have started opening up again, we’ve got people going middle of May to a conference in Memphis. We’ve got a partnership with another company that’s going to be putting their software potentially on the Edge and demonstrations to some Tier 1 airlines, some unique technologies at that conference. So it’s, we’re back in business from a sales and marketing point of view.
Bruce Krugel
Great. That’s all my questions. Thanks.
Bill Tempany
Thanks, Bruce.
Operator
The next question comes from Marc Berger with MKB Associates. Please go ahead.
Marc Berger
Hi, Bill. With regard to Frontier Airlines, you got a deal there for about $680,000. Can you tell me when that’s expected to start rolling off? Is that going to come in for this year or over a couple of years how does that work?
Bill Tempany
Shipment start Q2
Marc Berger
Start in Q2.
Bill Tempany
Yes. And they should be done within the year. But again, the aircraft whether they come in for C check or not because the fleet has been parked is outside of our control. But their plan was to do it in 12 months, but that probably is stretched out because of lack of use on the aircraft.
Marc Berger
Okay, the other question was who got the Comac got about over 300 planes or what is there? When do you think Comac will actually start to deliver planes? And at what rate will they be delivering the [Indiscernible]?
Bill Tempany
The first C919 is actually supposed to go live this month. Their 300 orders are probably over five years. I don’t think they’re going to be able to build up a supply chain much faster than that. The ARJ we’ve got one installed on and five kits on order to the AMG at China Express and they’re just finishing certification at China Express we expect that in Q2.
Marc Berger
So China will be a good force this year.
Bill Tempany
As long as our diplomats stay out of the diplomatic circles for a while and let us do business. I’m always bullish about China. You know, I like yeah…
Marc Berger
Yes, I understand. What do you think revenues would be per plane on those orders? Is that mostly going to be SaaS…?
Bill Tempany
I did say about 70,000 per kit that that we’re selling the mat and we’re in the $700, $800 per aircraft range with the ones that are with China Express and then again, it depends on which airline they go to.
Marc Berger
Right. Okay, thank you very much.
Bill Tempany
No problem, Marc.
Operator
[Operator Instructions] The next question comes from George Melas with MKH Management. Please go ahead.
George Melas
Thank you. Hi Bill, hi Alana.
Bill Tempany
Hi, George.
George Melas
I’d like to ask two sort of very sort of general questions. There’s a lot of moving pieces in the business. You provide comm services now you sort of moving towards a broader solution. So the question is, sort of in three years, where would you like to be? And what kind of services you see flight providing to the airline industry? And are we touching any Tier 1 airlines? Are we still sort of focusing mostly on Tier 2 and Tier 3? What does the future look like from your — and give us sort of, I don’t know, an optimistic view of what do you think can happen?
Bill Tempany
George, I never have an optimistic view, come on. First of all, we’re not getting rid of our SATCOM business. AFIRS 228 is a great product. We had a board meeting yesterday, and our chairman of the board was here and it was their first time to visit our new office. We were walking around the office and I was showing her our test and support, basis and so on. When we look after our product, we have an AFIRS 220 on the shelf that we set up to help if a customer has a problem debug what the problem is and get fixed. We have roughly 300 AFIRS 220. And the first one was installed 17 years ago, that one is still out there running and still generating probably $800 or $900 a month revenue for that one box, the AFIRS 220.
So the SATCOM business, the data communication business, the AFIRS 228 will continue to generate revenues and opportunities for us. So what we’ve done now is said okay, there’s new technology, the change from when we built our back to 22 years ago, satellite communication was brand new, there was no cellular technology off aircraft, there was no way to get data off. So what we did in the last 12 months, is built a device that took advantage of all of the new technology as far as communication goes, but took all of the intelligence and IP and development work that we’ve done over the years on the AFIRS 220 and 228 and moved it onto a platform that can do WiFi or Bluetooth, 3G, 4G 5G, look up the satellite entertainment systems, hook up to any satellite system. And but the guts of it are doing the same stuff that the AFIRS has done for the last 20 years. And we’ve reused all that technology. So for a couple of million bucks, half of which the government sponsored, we got a new platform that’s way ahead of anybody else out there as far as data communication goes.
And data communication is a good business. But it’s kind of a, it’s the bottom, bottom end of the revenue run, the more value you add to the data that you’re transmitting, the more value you can get to our company into your customers. So what we’re doing is adding value to that data that we’ve been collecting for 20 years. And what I would like to see two to five years from now is that we’ve got, 75% to 80% of our revenue coming from our recurring SaaS, that’s there for 20 years, all aircrafts in service, and 20% or 25% of it coming from hardware, not because we’re selling less numbers of units, but because we’re selling a less expensive unit to do what we were doing with the SATCOM systems. Did that answer your question?
George Melas
Yes, interesting. So there’s clearly a pivot towards solutions. And clearly from a customer’s perspective, a much lower cost hardware that should make entry faster or make a decision easier, and hopefully also more software and solutions to provide sort of more information and more value to the customer.
Bill Tempany
Exactly.
George Melas
And how far are you in terms of developing those solutions to really, to go well beyond communications, but to provide solutions that that the airline or the maintenance facility can actually use.
Bill Tempany
We’ve got four or five applications that are ready for customer use. One of the very attractive parts of CrossConsense to us is the software that they’ve built to help maintenance people look after the aircraft when it gets to the ground and to be able to integrate real time data with their maintenance system to improve the ability for them to know what needs to be done. So on a scale of 1 to 10, how far are we down the road as far as data collection, data transmission, all those things, I think we’re 8 out of 10. As far as solutions that airlines use, most of the stuff that we’re feeding today are things that our airlines have been using for 10 years. So it’s done. The opportunity to Greenfield [Ph] though the ability to help airlines manage their aircraft, when it’s on the ground, is absolutely huge. And I think one of the unique things that we’re doing is helping the airlines use real time aircraft data to manage the operations while the aircraft is on the ground. Because for the airlines, when an aircraft is on the ground, it’s costing them money. If it’s in the air, it’s making them money. So they want to reduce in every way possible, how long that aircraft stays on the ground.
George Melas
Yes. Okay. Thank you very much.
Bill Tempany
Thanks, George.
Operator
This concludes the question-answer-session. I would like to turn the conference back over to Bill Tempany for any closing remarks.
Bill Tempany
Okay, thanks very much, everybody for attending. As I said, I’m, I’m very satisfied pleased would be a bit too strong with the results from last year. I think we accomplished what we promised the shareholders we would do, from an acquisitions point of view, a stewardship of the money point of view, and getting products and infrastructure and people in place to deliver superior value to our customers and to our shareholders in the years coming. As I’m looking forward to the conference call on May 5 and the results from Q1. And, God willing, we’re past the worst parts of COVID. And hopefully the war will soon be over and things will come back to normal in Europe and we can get on with enjoying life and being a productive part of the aviation world. So thanks for everybody’s time, and we’ll talk to you on May 5th.
Operator
This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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