Geoff Hedrick - Chairman, CEO Shahram Askarpour - President Rell Winand - CFO.

David Campbell - Thompson, Davis.

Good morning and welcome to the Innovative Solutions and Support Second Quarter Fiscal 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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 CEO. Please go ahead sir..

Good morning. This is Geoff Hedrick, Chairman and CEO of Innovative Solutions and Support. I would like to welcome you this morning to our conference call to discuss second quarter 2015 results, current business conditions and our outlook for the remainder of the fiscal 2015.

Joining me today are Shahram Askarpour, our President and Rell Winand, our CFO. Before I begin, I would like to let Rell read our 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 operational and financial results for future periods are forward-looking statements that are subject to the risks and uncertainties that could cause actual results to differ materially either better or worse than those discussed including other risks and uncertainties reflected in our company's 10-K which is on file with the SEC.

I'll now turn the call back to Geoff..

Thank you, Rell. Revenues for the second quarter were $5.3 million compared to $12.5 million for the same quarter a year ago and we reported a second quarter loss of $364,000 approximately $0.02 a share. During that period, however, we generated $1.4 million in cash and our cash balance is now 15.6.

We are beginning to see our marketing efforts result in a pick-up of proposal activity which in turn we expect and are optimistic will lead to increased new orders. On the other hand revenues and profits continue to exhibit quarterly variability and we anticipate on the termination of the Delta contract.

The current status of the Delta contract is that the company is engaged – has engaged in non-binding meditation with Delta Airlines on February 25. The mediation session did not resolve our dispute with Delta.

On February 25, the company filed a complaint against Delta for breach of contract in the East Pennsylvania, Federal District Court, company has alleged that Delta's termination of the contract was wrongful and in breach of the terms of the contract. On March 20, Delta answered the company's complaint and filed a current claim.

The parties are entering into discovery and the outcome of the litigation is not determinable at this time. As the current engineering programs wind down, we are taking the resources that had previously been applied to engineering programs and are using them to capitalize on a broad range of new opportunities which have significant market potential.

These efforts are evident and a sustained higher level of internal R&D investment in the second quarter where spending was essentially the same as a year ago although revenues are only half of those of a year ago. We remain committed in new product development even though in the second quarter, it weighed on our results.

Despite the quarterly variability we were profitable over the first half of the year. In addition, our disciplined expense control, our ability to effectively manage our resources is a cornerstone on which IS&S has been built.

So with a near-term gap to fill between the current backlog at the start of production phase of these engineering programs some of them represent significant opportunity, but none of which are captured in our backlog.

To this end, we will continue to execute on the current development contracts, so as to better assure the onset of subsequent production contracts. We are also pursuing new opportunities for existing products as well as programs that get us into attractive growing markets.

As our product portfolio continues to expand and the macro economic forces continue to influence the dynamics. Innovative Solutions & Support has the qualifications capability and flexibility to adapt and to capitalize on the growth opportunities across a range of new and retrofit markets.

Now, let me turn this over to Rell for a detailed description of our financial report..

Thank you, Geoff, and thank you all for joining us this morning. For the three months ended March 31, 2015, the company reported sales of $5.3 million down from $12.5 million, the same quarter a year ago. Performance is consistent with the variability and quarterly performance we anticipate this year, primarily due to loss of the Delta contract.

Company reported a 2015 second quarter net loss of $364,000 or $0.02 per share compared to net income of $784,000 or $0.05 a share in the same quarter a year ago. In the second quarter, product sales were $3.5 million; our revenues from engineering programs were $1.8 million.

Total gross margins for the second quarter were down sequentially from the first quarter as a result of an unfavorable mix of revenues generated from products with a higher than normal purchase material content that can reflect in how product mix and revenue levels have affected this year's quarterly variability.

Total operating expenses in the quarter were $2.2 million down $500,000 from $2.7 million a year ago. Expenses included $647,000 of internally funded research and development investment, which has little changed from $661,000 spend on R&D a year ago, when revenues were more than doubled those of this quarter.

We remain committed to investing in new product research and development. Selling, general and administrative expense in the quarter was $1.6 million down from $2 million in the second quarter of 2014. The significant reduction of SG&A reflects the actions taken earlier in the year to better align our cost structure with current business conditions.

However, as a result of the double dedication, we expect to incur additional legal expenses which will increase our general and administrative expenses in future quarters. For the second quarter, we incurred a $638,000 operating loss and after taking account of the $258,000 tax benefit, we reported $364,000 or $0.02 per share loss in the quarter.

Cash management as Geoff indicated was very strong in the second quarter particularly in the area of working capital as a result, we had a $1.4 million of cash to the balance sheet over the past three months and actually we have more cash to-date than we did at the same point a year ago. The company remains debt free.

We believe that the company has sufficient cash to fund operations for the foreseeable future.

Shahram?.

Thank you, Rell. Good morning, everyone. I would like to offer an update on our objectives as well as the progress achieved during the second quarter. Our immediate objective is to two-fold; to effectively and efficiently complete the development programs under contract in order to help expedite their transition to production and to rebuild backlog.

I'm happy to report we are able to make progress on both accounts in the second quarter. Among our engineering programs, we completed the flight testing and customer delivery of our C130 next-gen flight deck that includes our flight management system.

The fresh plane being the C130 has been accepted by our customer and the second aircraft being an L100 is in flight testing. The capabilities facilitate us under our contract are unprecedented in these types of aircraft further demonstrating the robustness and across platform versatility of the IS&S next-gen cockpit upgrade solution.

This successful flight test and customer delivery is another example of the growing use of IS&S products for military application. On other engineering development programs, the Pilatus PC-24 is on schedule for its first flight later this month.

The Boeing KC46A program is also undergoing flight testing with its first successful flight having been completed just this past December. As Geoff mentioned, we have taken some of the resources previously utilized for engineering programs and shifted them to new, more broadly defined opportunities in larger growing market.

Within the broadly defined objectives, our sales and marketing team is particularly focused on surfacing new markets for our existing products such as cockpit displays, flight management system and flight computers.

Today, we enjoy a broad portfolio of products that can serve much larger markets than the platforms on which they are already serving now.

Many advantages over more development depended opportunities such as low engineering required to certify additional platforms, rapid ramp up to production status and margin that should be consistent with those historically and on production orders.

Of course, we are also simultaneously pursing strategic new development opportunities recognizing that these programs typically go through a lengthy gestation period.

In the near-term, we are experiencing a significant increase in proposal activities indicating that owners and operators have grown more interested in extending the life of all the aircraft as a result of lower fuel costs and higher demand for air travel.

That is opening up some interesting opportunities with a number of major airlines as well as owner and operators of smaller fleets both internationally and within the U.S. As well related costs have been reduced and operations have been streamlined to improve productivity and to free resources pursue new business opportunities.

I would now like to turn the call back to Geoff..

Thank you, Shahram. We said that fiscal 2015 will be a year of adjustment and quarterly variability. Financial results over the balance of the year will be affected by both the speed and size of new business capture and anticipated legal costs.

Cash flow projections at 12 and 18 months give us good confidence that we can pursue business and we expect to be almost cash neutral at the end of 12 months with the existing backlog and are only a few contracts yet to come in.

We are looking forward to opportunities of ever changing markets we serve and are optimistic we have financial resources technology and expertise to maintain our legacy of growth and profitability over the long-term. And now, I would like to turn the conference over to the operator for Q&A..

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from David Campbell with Thompson, Davis. Please go ahead..

Good morning, Geoff..

Good morning, David.

How are you?.

Good. It's good to hear from you again. The gross profit margin on your product sales must have been under 40%, it was -- I guess 41%, but that's assuming EMD had no profits.

Is that just because of the lack of volume in [draught of] [ph] profit margin below 40%?.

This is Rell. It's little bit of both. It's the product mix as I said because we had some product free delivery with heavy material content and the volumes. So it's a combination of both, yes..

Could you repeat, I couldn't hear you, is it about the mix?.

The product mix this quarter had heavy material content, so as a result that was one reason the margin was less as well as effective, what you said is due to volume also..

Okay. Okay. Heavy material content.

And you mentioned in the – I think in the press release somewhere that improved margins from last year, I'm not quite sure what that is, whether it didn't look like better than last year?.

We are talking about the six months. We are talking about the six-month margin..

Six months, okay. Okay.

Then a question to Delta contract, so as far as the C130, is there add-on business besides this first two aircraft or is that – it is in the backlog or what's going on there?.

Yes. There is still some in the backlog, but this total six aircraft plus [first] [ph] that we have delivered to and like I said, the first one was C130, second one is L100 and it's the same system, it's the commercial C130. But, the system that we have designed works for both the aircraft types..

To both aircraft, right.

And more as far as getting more business for those kinds of aircraft that's not in the backlog?.

That's not in the backlog. But, we see there is a lot of opportunities and now that we have a certified system, we are going to pursue it..

Okay.

Any change in 737s, any business there?.

We see some opportunities which we will be announcing when they come, if and when we get the order..

Okay..

We don't tend to speculate, or we don't book business until we have the purchase order in our hands. So when that happens we will announce that. We expect some good news in the near future..

Okay, great.

The second quarter includes revenues from FedEx and American or they are not in the second quarter?.

No. We have – but we believe – interest we hope, we expect – I think we right now negotiating a couple of units with them right now. So in the near future we expect to see that business continue..

But, no revenues in the second quarter?.

No..

Is that correct?.

Apparently no. I say apparently, I'm looking at my President and CFO, and they say no, so I will say no..

Okay. Okay.

But there is still contracts – there are still something in the backlogs for those contracts?.

For American –.

Very little for FedEx..

Very little..

But, you wouldn't expect – you wouldn't expect them to be in any long-term contracts. They [had to release them up] [ph] to get new airplanes et cetera. So that's we would see release within very short time, we will probably deliver and it will layout long-term because they are managing their fleet..

So there is nothing in the backlog, but you will be delivering as you get orders for them, that is the way it works?.

That's correct..

Right, right, right.

And what's the status of Eclipse 550, I see it's not in – still not in the backlogs, but I thought they were selling aircraft, what are they putting in the aircraft?.

Putting our system in there..

There is some of our backlog includes Eclipse hardware deliveries..

So it doesn't include hardware from – for Eclipse?.

Yes. There is recent announced merger, [indiscernible] has a great deal of experience and I think he will bring some additional knowledge of the industry and credibility to the program. So we are broadly optimistic on that, we are waiting to see..

Right, right, right..

Go ahead..

So I would think that as far as the revs this year is concerned, its pretty much a toss up now especially given the possibility of legal charges, from a revenue point of view, I think you are expecting revenues to be somewhat around $20 million for the year, is that still a possibility?.

It's a possibility. Again, we are living – as Geoff said, we are living – depends on the receipt and the book and bill right now. So we have any other announcements..

Remember the impact of Delta was that we put our resources to bear to develop the product, when that program was – when we were notified they intended to cancel. We lost $20 million to $25 million a year in revenue and appropriate profit et cetera.

We are reacting to that and we see, I believe opportunities, but they never faced problem because complaint were there we wouldn't have been able to accommodate with the Delta revenues. So what we have is, we kind of hole in our revenue and it essentially cuts up into almost half, we have to make adjustments accordingly and we have done that.

And we expect to exploit the other opportunities that we are seeing develop actually better than certainly the last several years..

My last question is on engineering revenues, $1.8 million in the quarter that didn't decrease very much from the December quarter. That could be an indication that there is more business being developed than planned because as I understood, EMD was going to be close to – almost down to zero by the end of the year – end of the fiscal year.

But, not going down very much so far..

That's a result of a contract we have where we actually got time and material. So was a very fair revenue and it was in support of a program they already had in place. So that engineering effort was probably anticipated and it was paid for in time and material..

It's good.

You still anticipate that – those revenues to decrease significantly by the end of the year?.

We do because we hope that they will be flying the airplane and having and going to the [structure] [ph] phase, which we would be very happy to support as production. So it's in the transition between development and production over the next 18 to 24 months.

In the meantime, they ask us do some additional engineering that was not in the original scope and we executed that on a time and material contract consistent with other D&M contracts that we do in military..

Okay, great. Thank you. I will let someone else take it..

Thanks David. I appreciate it. Good talking to you..

Thank you..

[Operator Instructions] There are no more questions at this time. I would like to turn the conference back over to Mr. Hedrick for any closing remarks..

Yes. Thank you very much for joining us today. It's a test of our business to perform well under some reasonably adverse and unexpected conditions. But, I'm very optimistic, I have seen a lot worse than this in the past and I think we will rebound. We see a lot of good opportunities in the future. So I remain confident.

So thank you, again, for joining us. I will sign-off, Geoffrey Hedrick. Thanks..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..