FLYHT Aerospace Solutions Ltd. (FLY) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for joining us for the annual and special meeting of the shareholders of FLYHT Aerospace. We -- I want to thank everybody for taking the time to listen in today. What we'll be doing is going through the formal part of the meeting. And then we'll have an update from Alana on the first quarter and I think from me on where the business is and where we're going. We'll have questions and answers, and then we will have a farewell speech from Barry Eccleston. As everyone knows, Barry has decided retirement. He's been working all the time, and he's going to take some well-deserved time off. So we welcome any questions. We've got some written ones that have come in through the Investors site, but we're willing to take any questions that you've got after the call as well. So I'm going to go through the formal script right now. Good afternoon, ladies and gentlemen, and welcome to the Annual and Special Meeting of FLYHT Shareholders. My name is Bill Tempany, and I'm the Interim CEO of FLYHT, and I will be acting as chairman for the meeting today. Before we begin the formal business of the meeting, I would like to thank you all for joining us. In order to cover the required business in an efficient manner, we've prearranged with certain shareholders to move in second motions of business. And this is no way intended to discourage comments from the floor. And on the contrary, should any registered shareholder wish to speak on any matter, please do so at any time by typing your question in the Q&A section on your screen in Zoom. If shareholders present have no objection, I welcome all guests and ask any non-security holders to refrain from asking questions or voting during the formal part of the meeting. There will be a presentation of the company's business affairs after the formal meeting, and you can continue to ask questions throughout that presentation using the Q&A function on your screen. This meeting will now come to order. With your approval, I shall ask Alana Forbes to act as secretary for the purposes of recording the minutes of this meeting. The first item of business will be to appoint scrutineers. With the consent of the meeting, I shall ask Jennifer Oliver of Computershare to act as scrutineer. Computershare has indicated that shareholders of record at close of business on March 26, 2021, were mailed the notice calling this meeting together with the accompanying meeting documents on April 14, 2021. Accordingly, with the consent of the meeting, I would propose to dispense with the reading of the notice, and I direct a copy of the notice and proof of service to be kept by the secretary with the records of this meeting. I note that a quorum of the shareholders is present at the meeting irrespective of the number of persons actually present if 2 shareholders or duly appointed proxy holders are present. I've received the preliminary scrutineers' report indicating that a quorum is present. It shows that 46 shareholders present are represented by proxy, representing 8,884,558 common shares, being 32.57% of the total issued capital. I ask that when vote is requested, shareholders do so by choosing the response available on the polling questionnaire that will appear on the screen as each motion is put forward. The notice and quorum requirements have been met, and I now declare the meeting is regularly called and properly constituted for the transaction of business. The first item of business is to receive and consider the financial statements for the year ending December 31, 2020, together with the auditors' report thereon. With the consent of the meeting, the reading of such financial statements and auditors' reports will be dispensed with. Copies of the financial statements and the auditors' report thereon have been made accessible to each registered shareholder who have had an opportunity to review them, and no action is requested. I would be pleased to answer any questions after this meeting. The next item of business is to fix the number of directors of the corporation to be elected at this meeting and to hold office until the close of the next annual meeting of the FLYHT shareholders.

My name is Derek Graham, and I move that the number of directors to be elected at the meeting to hold office until the close of the next annual meeting of FLYHT shareholders be fixed at 8 directors.

My name is Kent Jacobs, and I second the motion.

The motion is now open for discussion. You've heard the motion. And if there are no further discussion, I ask for all the shareholders present to indicate their vote using the on-screen poll. [Voting]

Assuming that the resolution is carried, based on the preliminary scrutineer's report and the votes conducted at this meeting, I declare the motion carried. The next item of business is the election of directors to hold office until the close of the next annual meeting of the FLYHT shareholders.

My name is Kent Jacobs, and in accordance with the bylaws of the corporation and as detailed in the information circular, I nominate Brent Rosenthal, Douglas G. Marlin, Jack Olcott, Mary McMillan, Michael Brown, Nina Jonsson, Paul Takalo and William T. Tempany be elected as directors of the corporation to hold office until the close of the next annual meeting of the FLYHT shareholders or until their successors are duly elected or appointed.

My name is Douglas Marlin, and I second that motion.

I ask for someone to second -- move and second the resolution to elect nominated directors of the corporation to hold office until the next Annual General Meeting of the FLYHT shareholders.

My name is Paul Takalo, and I so move to elect those nominated as directors of the corporation to hold office until the close of the next Annual General Meeting of the FLYHT shareholders.

My name is Derek Taylor, and I second the motion.

The motion is now open for discussion. You've -- any discussion? You've heard the motion. And if there is no further discussion, I ask for all shareholders present to indicate their vote by using the on-screen poll. [Voting]

Based on the preliminary scrutineer's report and the votes conducted at this meeting, I declare the motion carried. The next item of business is appointment of the auditors for the current year. I will now ask for someone to move and someone to second the motion in this regard.

My name is Alana Forbes, and I move that KPMG LLP, Chartered Accountants, be hereby appointed as auditors of the corporation to hold office until the close of the next annual meeting or until a successor is appointed and that the directors are hereby authorized to fix their remuneration.

My name is Paul Takalo, and I second the motion.

The motion is now open for discussion. You've heard the motion. And if there's no further discussion, I ask for all shareholders present to indicate their vote on the on-screen poll. [Voting]

Based on the preliminary scrutineer's report and the votes conducted at this meeting, I declare the motion carried. The next item of business to be conducted today is to consider and, if thought advisable, to pass an ordinary resolution to adopt and approve the stock option plan of FLYHT. The ordinary resolution approved -- approving the stock option plan can be found on Page 13 of the information circular. With the consent of the meeting, I propose to dispense with the reading of the resolution in its entirety and proceed with approving by way of ordinary resolution of the shareholders the stock option plan, all as provided under the information circular. I will now ask for someone to move and someone to second such ordinary resolution.

I'm Douglas Marlin and I move that the stock option plan as described in the information circular be approved as the stock option plan of the corporation.

My name is Kent Jacobs, and I second the motion.

You have heard the motion. And if there's no discussion, I ask for the shareholders present to indicate their vote using the on-screen poll. I understand that we've got a technical problem with the on-screen poll but the votes have all been tabulated on the mail-in ballot. So we'll go with those. Based on the preliminary scrutineer's report and the votes conducted at this meeting, I declare the motion carried. As there is no further formal business to be brought before the meeting, I would now ask for someone to move and second the termination of this meeting.

My name is Alana Forbes. I move that the formal part of the meeting be terminated.

My name is Mike Brown, and I second the motion.

You've heard the motion. And if there's no further discussion, I ask for all shareholders present to indicate their vote using the on-screen poll, which isn't working right now. I declare the meeting terminated. All right. So that's the formal part of the meeting. If there are any concerns from any shareholders about the voting screen not working, please let us know in the comments section on Zoom or e-mail us at either btempany@flyht.com or investors, and we'll make sure that those are noted and looked after. I apologize for the technical difficulties, but that seems to be the way the whole world is going these days and there's always got to be a glitch. What I'd like to do is have Alana go through our Q1 results and talk to you about what we're doing as a company, and then I'll give you an update on what we're doing on the product and marketing side. So Alana?

This is highly unusual. This wasn't our plan either to be sharing an office for this meeting, but my microphone stopped working 2 minutes before the call. So here I am sharing with Bill. My plan was to go through the balance sheet first and then head into the income statement and just identify several of the reasons behind the numbers and look, particularly on the balance sheet, at the areas of more significant change. The first thing that you'll notice on the balance sheet from year-end is the decrease in our cash. This is purely due to a combination. Mainly, we have a lot of seasonal payments in Q1 every year. Most of them occur in January. So we do typically expect cash to dip over Q1. There is an element of the decrease that is, of course, associated with the pandemic and our reduced revenues, but a large part of that decrease is seasonal. Our -- you'll notice that our receivables have increased, and they've increased by approximately the amount that we've revised our bad debt reserve by. And if you look at the income statement in the distribution section, you'll see that we've revised our bad debt to the positive by about $300,000, and that explains the increase in our receivables expected. And that estimate change is really based on some recent good payment behavior from a couple of our customers that had a hard time meeting their commitments particularly through the end of last year. That -- and those payments came in after our Q4 results were issued and between then and today. So we have made some positive adjustments there. The next area of change that you'll notice on the balance sheet is in inventory. The total inventory has decreased by 5%, but you'll also notice a categorization change. So our noncurrent inventory portion has increased. And that really is -- the majority of that is tied to our TAMDAR and FlightLink hardware since the Malaysian borders closed down and particularly our customer, AirAsia, has been flying just a fraction of their fleet. Their installations have been on hold throughout the end of last year, and they remain on hold for that product. And as we look at apportioning our revenue into current and noncurrent portions, current being what we expect to move within the next 12 months, we moved our TAMDAR and FlightLink into that noncurrent category until we're -- we can be more confident that -- when we can expect AirAsia to ramp back up again. Our customer deposits increased, which was positive. It's kind of interesting. We -- throughout last year, we really saw a hit to our hardware revenues, and we're starting to see some of that come back. And those customer deposits that we collected during Q1, those are relating to Q2 hardware shipments. So we're definitely keeping our eye on that, but it is a positive sign to see those hardware orders come back in. Our noncurrent liability section has decreased somewhat. It's all due to loan payments that we've made in Q1. Our repayment to -- under our low coupon SADI loan is an annual payment, and that comes out every year in Q1. So that was a portion of it. We're also in the repayment phase of our first WINN loan. So a portion of that decrease was due to payments through the WINN program, our zero coupon loan through the government. And now turning to the income statement. Looking at Q1 2020 versus 2021 revenue, Q1 2020 had record SaaS revenues. We had a really large portion of licensing revenues, which has historically been lumpy. And so that was a really high quarter for us, exceptionally high. And so it only serves to highlight the differences pre-COVID and post-COVID. The -- our gross margin, too, you'll notice that there are significant differences in gross margin between those 2 quarters down to 57% from 75% last year. Last year, there was exceptionally high quarter revenues in the SaaS and licensing areas. Those are our 2 highest margin categories. Q1's increase was seen in the hardware -- on the hardware side, and hardware has always been our lowest margin revenue category. We're happy to have the revenue, but it does carry lower margins. And so the difference in the mix is really what contributed to the differences in our net gross margin percentage. Looking at our operating expenses, you can see the decrease. We -- last Q1, we really hadn't seen much impact from the pandemic. Q2 was really when we started to see the financial impact of that throughout our customers and throughout the aviation industry. So I think -- and a comparison of Q1 last year to this year really is the most extreme comparison that you'll -- that we'll see. Q2 versus Q2 will be a bit more comparable as both quarters had pandemic impact. Our decreases in operating expense were mainly in 4 categories, 4 areas: One, no one is traveling. We continue to not travel at all of our conferences. If they are online, they cost less. And there is no travel associated with them. That's one. Two, we continue to receive funding under the Canadian CEWS and service programs to subsidize a portion of our salaries and our rents, which is decreasing our operating expenses, and we're happy to be able to access that to help us out. As I talked about before when we were mentioning receivables, our bad debt had a recovery in Q1 as we had some unexpected payments coming from several customers who had a bit of more difficulty than others last year and have been able to make significant payments over the past 3 weeks. And the area of most change would be our people cost. And those are due to reductions in cost containment and a change in our strategy and our plans throughout 2020. And those are reflected, particularly in Q1, when you look at last Q1. The only other item of note that I plan on covering is within finance income. There was an other gain of just under $0.5 million. Our loan agreement with WINN through the government -- it's a zero coupon loan. We can access up to $2.7 million through that loan. They've allowed for us to start our repayments later. We're not even through the recovery portion of that. We haven't accessed all of that funding quite yet. But we did get an amendment from the government. We signed that, and that amendment allowed for the payments to start much later than they had originally been planned for. And so this is a noncash change, but it's an accounting technical item and an accounting technical requirement as to how we attach value and assign value to the fact that we don't have to start paying that until much later than originally expected. And so that's -- that explains about $0.5 million. We have received several questions today via e-mail, which is great to see. So I can -- we can start the Q&A section with that.

The first question. The Q1 report contains a table showing revenue by region, comparing Q1 2021 to Q1 2020. Can you explain the countertrend year-over-year increases in both Canada and Europe? So this actually is kind of interesting as well because it ties back to what I was saying before with our recovery of our hardware revenues. It's a combination of 2 of our customers who have been taking hardware shipments in Q1, 1 being WestJet in Canada and 1 being Azur in Turkey. Is the significant year-over-year decrease in revenue in the U.S. due in large part to licensing? And that is a yes, that portion of our revenue that is geographically sourced out of the U.S. We had a $2.2 million decrease in revenue in that geographic segment, and $2 million of that was the difference in licensing revenues between the quarters and both years. And has L3Harris offered any guidance as to licensing for 2021? We continue to discuss it with them. We don't issue guidance but it's -- the licensing revenue is going to be largely dependent on Airbus orders throughout 2021 and beyond. I can say that much. I think that's it. Okay. And now over back to Bill.

Well, [ to Matt Chesler ].

Okay.

All right. This is -- [ why don't we go on ]. We do have some additional questions coming in over the -- electronically via the chat system.

Okay. I've got a couple of these as well. I think what we should do probably is run through my update on the business side of it. And then I've got some and we'll take your questions after that if that's okay, Matt.

I think that Q1 is a very interesting quarter because we had kind of a false start on a recovery. A lot of the airline companies were gearing up to get back to business and seeing that things -- the vaccines were starting to come and had a lot of hope that things were going to turn around not just in Canada but around the world. AirAsia is one of our largest customers. And the Malaysian borders, all of the international borders in that part of the world have been closed for over a year now and no sign in sight of them lifting. The Canadian industry for travel outside of Canada has been severely restricted with all the major airlines agreeing not to fly to some destinations, very few flights in and out of the U.S. So it's kind of watch and see what's going on for a lot of our significant customers. I think that there's a bit of activity stirring in Europe and that there'll be recovery there. Our China customers are back in the 80%, 90% range of 2019 levels in a lot of cases, but ridership is way down. There's still a lot of people avoiding travel in China, and getting information from that part of the world is difficult most of the time. But the customers that we're tracking, their aircraft, we're seeing sort of 80% return to 2019 level on those customers, just probably not on the revenue side. In the last couple of months, we've had some exciting additions to our staff and our sales department. One of the questions that came in was what are we doing in Southeast Asia. And we've hired 2 new salespeople, 1 fellow that is headquartered in Jakarta; and another fellow from the U.S. that's been a salesman internationally in the aviation industry for, I think, 28 years now, very key to what we're doing. There'll be press out in the next few weeks to the -- industry press about that addition. But I'm really excited about the people that are joining us and their background and their ability to help us take advantage of our actionable intelligence work that we're doing. The team is looking to probably hit 40 kits by the end of the first half in shipment. That's also being affected by COVID. One of our key suppliers of our kits for installations has been on -- we found out yesterday is on a 2-week lockdown because they had 3 COVID cases and the businesses shut down for 2 weeks. So far, it's not impacting deliveries. But again, the pandemic is affecting businesses in a lot of different ways. I think the silver lining in the cloud is the pent-up demand for travel that's building as people continue to be locked down. I think the other thing that's really coming through loud and clear is that the airlines are coming out of this leaner and meaner and looking for solutions that will help them recover faster and better and do a better job. There's going to be a lot of competition. You noticed the press release this week that we signed a brand-new carrier that's starting flights in the fall. We've read the industry articles that there's 18 new airlines started around the world, most of them ultra-low-cost carriers. That's the sweet spot for the FLYHT products as those are kind of carriers that need good communications, good data and trying to keep their costs low. So it's -- I think we have a very strong sales pipeline. We've got a strong and strengthened team in our sales department. And we're looking at the second half of the year, providing things continue to improve the way they are, as being very strong. We've got -- all of our staff -- majority of our staff are working from home. There's -- of the 70 people that work for FLYHT, there's maybe, any 1 day, 8 to 10 of us that come into the office, and the rest are all working from home. They're being very productive. One of the good things for our business is the majority of our people are doing engineering work or systems development work and they can do that remotely. We take advantage of all of the technology for communications, and we're being productive and safe working from home. I personally can't wait for everybody to get back in the office because I think the camaraderie and the communications are better in this environment than from home, but we're certainly not concerned about what's going on as we watch the vaccine-versus-variant race unfold. The other major change that's happening in the industry, I think, is the change in fleet configurations. The long-haul international flights are going to be the last ones to recover as we have situations like Brazil and India and have Canada unfolding as far as COVID goes. The narrow-body, short-haul, ultra-low-cost carriers, freight carriers, which are all really in our sweet spot, are going to predominate the industry for the next several years, I believe. The other question that comes up when you talk to people now is, it's been a long time between pandemics. Is this the last one? Is there going to be variants that the vaccine doesn't work for? And how do we plan for that? Because the industry has got to get back to work. We've got to get back -- people back being productive and able to do their job. One of the things that I've been working on quite hard is looking at some acquisitions and companies to join and help strengthen our teams in different areas. We've got some really interesting possibilities that we're working on, but we can't do anything because we want to get together, meet one another, talk to our customers, and it's difficult with the lockdown. So it's been very different running a business through the pandemic than anything I've ever done in my life before. And those things are no doubt going to continue. I'm really happy that last year, we were cash flow positive. We lost a little money this quarter. But again, we've got the cash reserves. We've got facilities with both the government and the bank, and we're confident that our current business plan can be executed with the cash on hand and that the sales pipeline is going to have a good second half coming for us. So with that, I'll go on to some of the questions that we got by e-mail, and then I'll get Matt to give me the ones that have come in since.