IA 10-Q
Innovative Solutions & Support Inc (IA)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
[For the transition period from to _ ]
Commission File No.
(Exact name of registrant as specified in its charter)
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(State or Other Jurisdiction | (I.R.S. Employer | |
(Address of Principal Executive Offices) | (Zip Code) |
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(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
☐ Large accelerated filer | ☐ Accelerated filer |
☐ | |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of July 30, 2021, there were
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
FORM 10-Q June 30 , 2021
INDEX
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Condensed Consolidated Balance Sheets – June 30, 2021 (unaudited) and September 30, 2020 | 1 | |
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2 | ||
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3 - 4 | ||
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5 | ||
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Notes to Condensed Consolidated Financial Statements (unaudited) | 6 - 22 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 - 31 | |
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32 | ||
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32 | ||
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PART II. | ||
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33 | ||
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33 | ||
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33 | ||
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33 | ||
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33 | ||
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33 | ||
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34 | ||
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35 |
PART I—FINANCIAL INFORMATION
Item 1- Financial Statements
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, | September 30, | |||||
| 2021 |
| 2020 | |||
(Unaudited) | ||||||
ASSETS | ||||||
Current assets | ||||||
Cash and cash equivalents | $ | $ | | |||
Restricted Cash | — | | ||||
Accounts receivable | |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Non-current deferred income taxes | | — | ||||
Other assets |
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Total assets | $ | | $ | | ||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||
Current liabilities | ||||||
Accounts payable | $ | | $ | | ||
Dividends payable | — | | ||||
Accrued expenses |
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Contract liability |
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Total current liabilities |
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Non-current deferred income taxes |
| — |
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Total liabilities |
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Commitments and contingencies (See Note 6) | ||||||
Shareholders' equity | ||||||
Preferred stock, | ||||||
Common stock, $ |
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Additional paid-in capital |
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(Accumulated deficit) |
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Treasury stock, at cost, |
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Total shareholders' equity |
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Total liabilities and shareholders' equity | $ | | $ | | ||
The accompanying notes are an integral part of these statements.
1
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Net Sales: | ||||||||||||
Product | $ | | $ | | $ | | $ | | ||||
Engineering development contracts |
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Total net sales |
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Cost of sales: | ||||||||||||
Product |
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Engineering development contracts |
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Total cost of sales |
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Gross profit |
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Operating expenses: | ||||||||||||
Research and development |
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Selling, general and administrative |
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Total operating expenses |
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Operating income |
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Interest income |
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Other income |
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Income before income taxes |
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Income tax (benefit) expense |
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Net income | $ | | $ | | $ | | $ | | ||||
Net income per common share: | ||||||||||||
Basic | $ | | $ | | $ | | $ | | ||||
Diluted | $ | | $ | | $ | | $ | | ||||
Weighted average shares outstanding: | ||||||||||||
Basic |
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Diluted |
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The accompanying notes are an integral part of these statements.
2
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)
Nine Months Ended June 30, 2021 | |||||||||||||||
Additional | |||||||||||||||
Common | Paid-In | (Accumulated | Treasury | ||||||||||||
| Stock |
| Capital |
| Deficit) |
| Stock |
| Total | ||||||
Balance, September 30, 2020 | $ | | $ | | $ | ( | $ | ( | $ | | |||||
Share-based compensation | — | | — | — | | ||||||||||
Dividends declared | — | — | ( | — | ( | ||||||||||
Net income | — | — | | — | | ||||||||||
Balance, December 31, 2020 | $ | | $ | | $ | ( | $ | ( | $ | | |||||
Issuance of stock to directors | | | — | — | | ||||||||||
Share-based compensation | — | | — | — | | ||||||||||
Net income | — | — | | — | | ||||||||||
Balance, March 31, 2021 | $ | | $ | | $ | ( | $ | ( | $ | | |||||
Share-based compensation | — | | — | — | | ||||||||||
Exercise of stock options | | | — | — | | ||||||||||
Net income | — | — | | — | | ||||||||||
Balance, June 30, 2021 | $ | | $ | | $ | ( | $ | ( | $ | | |||||
The accompanying notes are an integral part of these statements.
3
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)
Nine Months Ended June 30, 2020 | |||||||||||||||
Additional | |||||||||||||||
Common | Paid-In | Retained | Treasury | ||||||||||||
| Stock |
| Capital |
| Earnings |
| Stock |
| Total | ||||||
Balance, September 30, 2019 | $ | | $ | | $ | | $ | ( | $ | | |||||
Net income | — | — | | — | | ||||||||||
Balance, December 31, 2019 | $ | | $ | | $ | | $ | ( | $ | | |||||
Issuance of stock to directors | | | — | — | | ||||||||||
Exercise of stock options | | | — | — | | ||||||||||
Net income | — | — | | — | | ||||||||||
Balance, March 31, 2020 | $ | | $ | | $ | | $ | ( | $ | | |||||
Net income | — | — | | — | | ||||||||||
Balance, June 30, 2020 | $ | | $ | | $ | | $ | ( | $ | | |||||
The accompanying notes are an integral part of these statements.
4
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Nine Months Ended June 30, | ||||||
| 2021 |
| 2020 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Depreciation and amortization |
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Share-based compensation expense |
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Stock options | | — | ||||
Stock awards | | | ||||
Excess and obsolete inventory cost | ( | — | ||||
Deferred income taxes | ( | | ||||
(Increase) decrease in: | ||||||
Accounts receivable |
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Contract asset |
| — |
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Inventories |
| ( |
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Prepaid expenses and other current assets |
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Income taxes receivable | — | ( | ||||
Increase (decrease) in: | ||||||
Accounts payable |
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Accrued expenses |
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Income taxes payable | | - | ||||
Contract liability |
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Net cash provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||
Purchases of property and equipment |
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Net cash (used in) investing activities |
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CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||
Proceeds from exercise of stock options | | | ||||
Dividend paid | ( | — | ||||
Net cash (used in) provided by financing activities |
| ( |
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Net (decrease) increase in cash and cash equivalents and restricted cash | ( | | ||||
Cash and cash equivalents and restricted cash, beginning of year | | | ||||
Cash and cash equivalents and restricted cash, end of year | $ | | $ | | ||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||
Cash paid for income taxes | $ | | $ | | ||
The accompanying notes are an integral part of these statements.
5
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies
Description of the Company
Innovative Solutions and Support, Inc. (the “Company,” “IS&S,” “we” or “us”) was incorporated in Pennsylvania on February 12, 1988. The Company operates in
The Company has continued to position itself as a system integrator, which capability provides the Company with the potential to generate more substantive orders over a broader product base. This strategy, as both a manufacturer and integrator, is designed to leverage the latest technologies developed for the computer and telecommunications industries into advanced and cost-effective solutions for the general aviation, commercial air transport, United States Department of Defense (“DoD”)/governmental and foreign military markets. This approach, combined with the Company’s industry experience, is designed to enable IS&S to develop highquality products and systems, to reduce product time to market, and to achieve cost advantages over products offered by its competitors.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements are presented pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) in accordance with the disclosure requirements for the quarterly report on Form 10-Q and, therefore, do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete annual financial statements. In the opinion of Company management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the results for the interim periods presented. The condensed consolidated balance sheet as of September 30, 2020 is derived from the audited financial statements of the Company. Operating results for the three-and nine-month periods ended June 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2021, including in terms of the impact of the coronavirus pandemic (the “COVID-19 pandemic”), which cannot be determined at this time. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020.
Principles of Consolidation
The Company’s condensed consolidated financial statements include the accounts of its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
6
Impact of the COVID-19 Pandemic
The ongoing global outbreak of coronavirus, which was declared a pandemic by the World Health Organization on March 11, 2020 and a national emergency by the President of the United States on March 13, 2020, has caused and is continuing to cause business slowdowns and shutdowns and turmoil in the financial markets both in the United States and abroad. IS&S is monitoring the impact of the COVID-19 pandemic on its business, including how it has impacted and will impact the Company's employees, customers, suppliers and distribution channels. The Company has not yet seen a material impact from the COVID-19 pandemic on its business, financial position, liquidity, or ability to service customers or maintain critical operations. However, the COVID-19 pandemic, as well as the quarantines and other governmental and non‑governmental restrictions which have been imposed throughout the world in an effort to contain or mitigate the spread of the coronavirus (including recent developments as a result of newer variants or strains of SARS‑CoV‑2), has created significant volatility, uncertainty and disruption which may adversely affect IS&S’ business and has caused and is continuing to cause significant market turbulence and disruption that may continue for some time even after business restrictions are lifted and the threat of the coronavirus diminishes. As a result, the Company may face liquidity shortages, weaker product demand from its customers, disruptions in its supply chain, and/or staffing shortages in its workforce for the foreseeable future due to the direct and indirect effects of the COVID-19 pandemic.
Use of Estimates
The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Estimates are used in accounting for, among other items, long term contracts, allowances for doubtful accounts, inventory obsolescence, product warranty cost liabilities, income taxes, engineering and material costs on Engineering Development Contract (“EDC”) programs, percentage of completion on EDC contracts, recoverability of long-lived assets and contingencies. Estimates and assumptions are reviewed periodically and the effects of changes, if any, are reflected in the consolidated statements of operations in the period they are determined.
Cash and Cash Equivalents
Highly liquid investments, purchased with an original maturity of three months or less, are classified as cash equivalents. Cash equivalents at June 30, 2021 and September 30, 2020 consist of cash on deposit and cash invested in money market funds with financial institutions.
Restricted Cash
On September 4, 2020, the Company’s Board of Directors declared a special cash dividend in the amount of $
On December 10, 2020, the Company's Board of Directors declared a special cash dividend in the amount of $
The Company did not pay dividends in the three- and nine-month periods ended June 30, 2020.
As of June 30, 2021, the Company had $
As of September 30, 2020, the Company had $
7
Inventory Valuation
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value, net of write-downs for excess and obsolete inventory.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using an accelerated method over the estimated useful lives of the assets (the lesser of to
Long-Lived Assets
The Company assesses the impairment of long-lived assets in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360-10, “Property, Plant and Equipment.” This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In addition, long-lived assets to be disposed of should be reported at the lower of the carrying amount or fair value less cost to sell. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to estimated future cash flows expected to result from use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows.
Fair Value of Financial Instruments
The net carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximate their fair value because of the short-term nature of these instruments. For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value as follows:
Level 1 — Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.
Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:
| ● | Quoted prices for similar assets or liabilities in active markets; |
| ● | Quoted prices for identical or similar assets in non-active markets; |
| ● | Inputs other than quoted prices that are observable for the asset or liability; and |
| ● | Inputs that are derived principally from or corroborated by other observable market data. |
Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
8
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2021 and September 30, 2020, according to the valuation techniques the Company used to determine their fair values.
Fair Value Measurement on June 30, 2021 | |||||||||
Quoted Price in | Significant Other | Significant | |||||||
Active Markets for | Observable | Unobservable | |||||||
Identical Assets | Inputs | Inputs | |||||||
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Assets | |||||||||
Cash and cash equivalents: | |||||||||
Money market funds |
| $ | |
| $ | — |
| $ | — |
Fair Value Measurement on September 30, 2020 | |||||||||
Quoted Price in | Significant Other | Significant | |||||||
Active Markets for | Observable | Unobservable | |||||||
Identical Assets | Inputs | Inputs | |||||||
| (Level 1) |
| (Level 2) |
| (Level 3) | ||||
Assets | |||||||||
Cash and cash equivalents: | |||||||||
Money market funds |
| $ | |
| $ | — |
| $ | — |
Revenue Recognition
The Company enters into sales arrangements with customers that, in general, provide for the Company to design, develop, manufacture and deliver large flat-panel display systems, flight information computers, autothrottles and advanced monitoring systems that measure and display critical flight information, including data relative to aircraft separation, airspeed, altitude, and engine and fuel data measurements.
Revenue from Contracts with Customers
The Company adopted ASC 606 on October 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for fiscal years ended September 30, 2021 and 2020 reflect the application of ASC 606 guidance. The adoption of ASC 606 represents a change in accounting principles. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services. To achieve this core principle, the Company applies the following five steps:
1) | Identify the contract with a customer |
The Company’s contract with its customers typically is the form of a purchase order issued to the Company by its customers and, to a lesser degree, in the form of a purchase order issued in connection with a formal contract executed with a customer. For the purpose of accounting for revenue under ASC 606, a contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
9
2) | Identify the performance obligations in the contract |
Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. Most of our revenue is derived from purchases under which we provide a specific product or service and, as a result, there is only performance obligation. In the event that a contract includes multiple promised goods or services, such as an EDC contract which includes both engineering services and a resulting product shipment, the Company must apply judgment to determine whether promised goods or services are capable of being distinct in the context of the contract. In these cases, the Company considers whether the customer could, on its own, or together with other resources that are readily available from third parties, produce the physical product using only the output resulting from the Company’s completion of engineering services. If the customer cannot produce the physical product, then the promised goods or services are accounted for as a combined performance obligation.
3) | Determine the transaction price |
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company's contracts for all periods presented included variable consideration.
4) | Allocate the transaction price to performance obligations in the contract |
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price by taking into account available information such as market conditions as well as the cost of the goods or services and the Company’s normal margins for similar performance obligations.
| 5) | Recognize revenue when or as the Company satisfies a performance obligation |
The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer. Revenue from products transferred to customers at a point in time accounted for
Contract Estimates
Accounting for performance obligations in long-term contracts that are satisfied over time involves the use of various techniques to estimate progress towards satisfaction of the performance obligation. The Company typically measures progress based on costs incurred compared to estimated total contract costs. Contract cost estimates are based on various assumptions to project the outcome of future events that often span more than a single year. These assumptions include the amount of labor and labor costs, the quantity and cost of raw materials used in the completion of the performance obligation, and the complexity of the work to be performed.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method.
10
Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter it is identified.
The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates did not change our revenue and operating earnings (and diluted earnings per share) for the three- and nine-month periods ended June 30, 2021 and 2020, respectively. Therefore, no adjustment on any contract was material to our unaudited consolidated financial statements for the three-and nine-month periods ended June 30, 2021 and 2020, respectively.
Contract Balances
Contract assets consist of the right to consideration in exchange for product offerings that we have transferred to a customer under the contract. Contract liabilities primarily relate to consideration received in advance of performance under the contract. As of June 30, 2021, approximately $
Contract | |||
| Liabilities | ||
September 30, 2020 | $ | | |
Amount transferred to receivables from contract assets | | ||
Contract asset additions | | ||
Performance obligations satisfied during the period that were included in the contract liability balance at the beginning of the period | ( | ||
Increases due to invoicing prior to satisfaction of performance obligations | | ||
June 30, 2021 | $ | | |
Customer Service Revenue
The Company enters into sales arrangements with customers for the repair or upgrade of its various products that are not under warranty. The Company’s customer service revenue and cost of sales are included in product sales and product cost of sales, respectively, on the accompanying consolidated statements of operations. The Company’s customer service revenue and cost of sales for the three-and nine-month periods ended June 30, 2021 and 2020 respectively are as follows:
For the Three Months Ended June 30, |
| For the Nine Months Ended June 30, | ||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Customer Service Sales |
| $ | |
| $ | | $ | | $ | | ||
Customer Service Cost of Sales | | | | | ||||||||
Gross Profit | $ | | $ | | $ | | $ | | ||||
Lease Recognition
On October 1, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02 using the required modified retrospective approach. This pronouncement requires lessees to record “right-of-use” assets and corresponding lease liabilities on the balance sheet for most leases. We adopted this pronouncement utilizing the transition practical expedient which eliminated the requirement that entities apply the new lease standard to the comparative periods presented in the year of adoption. See Note 7, “Leases,” to the unaudited condensed consolidated financial statements for a discussion of the impact resulting from the adoption of this guidance.
11
Income Taxes
Income taxes are recorded in accordance with ASC Topic 740, “Income Taxes” (“ASC Topic 740”), which utilizes a balance sheet approach to provide for income taxes. Under this method, the Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets, liabilities, and expected benefits of utilizing net operating losses (“NOLs”) and tax credit carry-forwards. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled, and are reflected in the consolidated financial statements in the period of enactment. At the end of each interim reporting period, the Company prepares an estimate of the annual effective income tax rate and applies that annual effective income tax rate to ordinary year-to-date pre-tax income for the interim period. Specific tax items discrete to a particular quarter are recorded in income tax expense for that quarter. The estimated annual effective tax rate used in providing for income taxes on a year-to-date basis may change in subsequent periods.
Deferred tax assets are reduced by a valuation allowance if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be verified objectively, and significant management judgment is required in determining any valuation allowance recorded against net deferred tax assets. The Company evaluates deferred income taxes on a quarterly basis to determine if a valuation allowance is required by considering available evidence. Deferred tax assets are recognized when expected future taxable income is sufficient to allow the related tax benefits to reduce taxes that would otherwise be payable. The sources of taxable income that may be available to realize the benefit of deferred tax assets are future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and credit carryforwards, taxable income in carry-back years, and tax planning strategies which are both prudent and feasible.
For the quarter ended June 30, 2021, the valuation allowance was released for all federal and state deferred tax assets with the exception of certain state net operating losses for jurisdictions in which the Company does not believe these net operating losses are more likely than not to be realized. The Company will continue to assess all available evidence during future periods to evaluate any changes to the realization of its deferred tax assets. If the Company were to determine that it would be able to realize additional state deferred tax assets in the future, it would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
The accounting for uncertainty in income taxes requires a more likely than not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company records a liability for the difference between the (i) benefit recognized and measured for financial statement purposes and (ii) the tax position taken or expected to be taken on the Company’s tax return. To the extent that the Company’s assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The Company has elected to record any interest or penalties associated with uncertain tax positions as income tax expense.
The Company files a consolidated U.S. federal income tax return. The Company prepares and files tax returns based on the interpretation of tax laws and regulations, and records estimates based on these judgments and interpretations. In the normal course of business, the tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities, and the Company records a liability when it is probable that there will be an assessment. The Company adjusts the estimates periodically as a result of ongoing examinations by and settlements with the various taxing authorities, and changes in tax laws, regulations and precedent. The consolidated tax provision of any given year includes adjustments to prior years’ income tax accruals that are considered appropriate, and any related estimated interest. Management believes that it has made adequate accruals for income taxes. Differences between estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material effect on the Company’s consolidated financial position but could possibly be material to its consolidated results of operations or cash flow of any one period.
On December 22, 2017, the U.S. government enacted the Tax Act, which made broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from
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The Tax Act reduced the corporate tax rate to
In March 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law to provide emergency assistance to affected individuals, families, and businesses. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of NOLs. The CARES Act amended the NOL provisions of the Tax Act, allowing for the carryback of losses arising in tax years beginning before December 31, 2017, to each of the two taxable years preceding the taxable year of loss. Approximately $
On December 27, 2020, the Consolidations Appropriations Act of 2020 (the “CAA") was enacted as a supplement to the CARES legislation providing additional financial relief to taxpayers adversely impacted by restrictions put into place in response to the COVID-19 pandemic. In addition, the CCA provides funding for public health initiatives in response to the pandemic. This legislation does not have a material impact on the Company's tax position.
On March 11, 2021, the American Rescue Plan Act of 2021 (the “ARPA”), which includes certain business tax provisions, was signed into law. The Company does not expect the ARPA to have a material impact on Company’s effective tax rate or income for fiscal year ending on September 30, 2021.
Engineering Development
The Company invests a significant percentage of its sales on engineering development, both Research & Development (“R&D”) and EDC. At June 30, 2021, approximately
Treasury Stock
We account for treasury stock purchased under the cost method and include treasury stock as a component of shareholders’ equity. Treasury stock purchased with intent to retire (whether or not the retirement is actually accomplished) is charged to common stock.
Comprehensive Income
Pursuant to FASB ASC Topic 220, “Comprehensive Income,” the Company is required to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of its condensed consolidated balance sheets. For the three-and nine-month periods ended June 30, 2021 and 2020, comprehensive income consisted of net income only, and there were no items of other comprehensive income for any of the periods presented.
Share-Based Compensation
The Company accounts for share-based compensation under ASC Topic 718, “Stock Compensation” (“ASC Topic 718”), which requires the Company to measure the cost of employee or non-employee director services received in exchange for an award of equity
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instruments based on the grant-date fair value of the award using an option pricing model. The Company recognizes such cost over the period during which an employee or non-employee director is required to provide service in exchange for the award.
Accordingly, adoption of ASC Topic 718’s fair value method results in recording compensation costs under the Company’s stockbased compensation plans. The Company determined the fair value of its stock option awards at the date of grant using the BlackScholes option pricing model. Option pricing models and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of its awards. These assumptions and judgments include estimating future volatility of the Company’s stock price, expected dividend yield, future employee turnover rates, and future employee stock option exercise behaviors. Changes in these assumptions can materially affect fair value estimates. The Company does not believe that a reasonable likelihood exists that there will be a material change in future estimates or assumptions used to determine share-based compensation expense. However, if actual results are not consistent with the Company’s estimates or assumptions, the Company would adjust its estimates. Such adjustments could have a material impact on the Company’s financial position.
Warranty Reserves
The Company offers warranties on some products of various lengths, however the standard warranty period is
Self-Insurance Reserves
Since January 1, 2014, the Company has self-insured a significant portion of its employee medical insurance. The Company maintains a stop-loss insurance policy that limits its losses both on a per employee basis and an aggregate basis. Liabilities associated with the risks that are retained by the Company are estimated based upon actuarial assumptions such as historical claims experience and demographic factors. The Company estimated the total medical claims incurred but not reported and the Company believes that it has adequate reserves for these claims at June 30, 2021 and September 30, 2020, respectively. However, the actual value of such claims could be significantly affected if future occurrences and claims differ from these assumptions. At June 30, 2021 and September 30, 2020, the estimated liability for medical claims incurred but not reported was approximately $
Concentrations
Major Customers and Products
In the three-month period ended June 30, 2021,
In the three-month period ended June 30, 2020,
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Major Suppliers
The Company buys several of its components from sole source suppliers. Although there are a limited number of suppliers of particular components, management believes other suppliers could provide similar components on comparable terms.
For the three- and nine-month periods ended June 30, 2021, the Company had
For the three- and nine-month periods ended June 30, 2020, the Company had
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash balances and accounts receivable. The Company invests its excess cash where preservation of principal is the major consideration. Cash balances are maintained with
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) as modified, which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. ASU 2016-02 will require lessees to recognize most leases on their balance sheets as liabilities, with corresponding “right-of-use” assets and is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption. For income statement recognition purposes, leases will be classified as either a finance or an operating lease without relying upon the bright-line tests under current GAAP. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that we may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. We adopted ASU 2016-02 effective October 1, 2019 using the required modified retrospective approach. See Note 18, “Lease Recognition,” to the consolidated financial statements for a discussion of the impact resulting from the adoption of this guidance.
In June 2016, FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument (“ASU 2016-13”). ASU 2016-13 replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for SEC small business filers for fiscal years beginning after December 15, 2022. Management is currently assessing the impact ASU 2016-13 will have on the Company.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” (“ASU 2018-13”) which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reason for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income. We adopted this update effective October 1, 2020. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
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In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies the accounting for income taxes, eliminates certain exceptions within Accounting Standards Codification Topic 740, “Income Taxes” (“ASC 740”), and clarifies certain aspects of ASC 740 to promote consistency among reporting entities. ASU 2019-12 is effective for us beginning October 1, 2021, with early adoption permitted. Most amendments within ASU 2019-12 are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
As new accounting pronouncements are issued, we will adopt those that are applicable.
2. Supplemental Balance Sheet Disclosures
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value, net of write-downs for excess and obsolete inventory, and consist of the following:
June 30, | September 30, | |||||
| 2021 |
| 2020 | |||
Raw materials |
| $ | |
| $ | |
Work-in-process |
| |
| | ||
Finished goods |
| |
| | ||
| $ | |
| $ | | |
Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:
June 30, | September 30, | |||||
| 2021 |
| 2020 | |||
Prepaid insurance |
| $ | | $ | | |
Other |
| |
| | ||
| $ | | $ | | ||
Property and equipment
Property and equipment, net consists of the following:
June 30, | September 30, | |||||
| 2021 |
| 2020 | |||
Computer equipment | $ | | $ | | ||
Corporate airplanes |
| |
| | ||
Furniture and office equipment |
| |
| | ||
Manufacturing facility |
| |
| | ||
Equipment |
| |
| | ||
Land | | | ||||
| |
| | |||
Less: accumulated depreciation and amortization |
| ( |
| ( | ||
| $ | |
| $ | | |
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Depreciation and amortization related to property and equipment was approximately $
Depreciation and amortization related to property and equipment was approximately $
Other assets
Other assets consist of the following:
June 30, | September 30, | |||||
| 2021 |
| 2020 | |||
Intangible assets, net of accumulated amortization of $ |
| $ | |
| $ | |
Operating lease right-of-use asset | | | ||||
Other non-current assets | |
| | |||
| $ | |
| $ | | |
Intangible assets consist of licensing and certification rights which are amortized over a defined number of units.
Intangible asset amortization expense was approximately $
Other non-current assets as of June 30, 2021 and September 30, 2020 include the security deposit for an airplane hangar and a deposit for medical claims required under the Company’s medical plan. In addition, other non-current assets as of June 30, 2021 and September 30, 2020 includes $
Accrued expenses
Accrued expenses consist of the following:
June 30, | September 30, | |||||
| 2021 |
| 2020 | |||
Warranty |
| $ | |
| $ | |
Salary, benefits and payroll taxes |
| |
| | ||
Professional fees |
| |
| | ||
Operating lease | | | ||||
Other | | | ||||
| $ | |
| $ | | |
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Warranty cost and accrual information for the three- and nine-month periods ended June 30, 2021 is highlighted below:
Three Months Ending | Nine Months Ending | |||||
| June 30, 2021 |
| June 30, 2021 | |||
Warranty accrual, beginning of period |
| $ | | $ | | |
Accrued expense |
| |
| | ||
Warranty cost |
| ( |
| ( | ||
Warranty accrual, end of period |
| $ | | $ | | |
3. Income Taxes
In March 2020, the CARES Act was signed into law providing numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of NOLs. The CARES Act amended the NOL provisions of the Tax Act, allowing for the carryback of losses arising in tax years beginning before December 31, 2017, to each of the two taxable years preceding the taxable year of loss. Approximately $
On December 27, 2020, the CAA was enacted as a supplement to the CARES legislation providing additional financial relief to taxpayers adversely impacted by restrictions put into place in response to the COVID-19 pandemic. In addition, the CCA provides funding for public health initiatives in response to the pandemic. This legislation does not have a material impact on the Company's tax position.
On March 11, 2021, the ARPA, which includes certain business tax provisions, was signed into law. The Company does not expect the ARPA to have a material impact on Company’s effective tax rate or income for fiscal year ending on September 30, 2021.
For the quarter ended June 30, 2021, the valuation allowance was released for all federal and state deferred tax assets with the exception of certain state net operating losses for jurisdictions in which the Company does not believe these net operating losses are more likely than not to be realized. The Company will continue to assess all available evidence during future periods to evaluate any changes to the realization of its deferred tax assets. If the Company were to determine that it would be able to realize additional state deferred tax assets in the future, it would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
The income tax benefit for the three-month period ended June 30, 2021 was $
The effective tax benefit rate for the three-month period ended June 30, 2021 was
The income tax benefit for the nine-month period ended June 30, 2021 was $
The effective tax benefit rate for the nine-month period ended June 30, 2021 was
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The effective tax benefit rate for the nine-month period ended June 30, 2020 was
4. Shareholders’ Equity and Share-Based Payments
At June 30, 2021, the Company’s Amended and Restated Articles of Incorporation provides the Company authority to issue
Share-Based compensation
The Company accounts for share-based compensation under the provisions of ASC Topic 718 by using the fair value method for expensing stock options and stock awards.
Total share-based compensation expense was $
The Company has
2009 Stock-Based Incentive Compensation Plan
The 2009 Plan authorized the grant of stock appreciation rights, restricted stock, options, RSUs and other equity-based awards. Options granted under the 2009 Plan may be either “incentive stock options” as defined in section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or nonqualified stock options, as determined by the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”).
Subject to an adjustment necessary upon a stock dividend, recapitalization, forward split or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase or share exchange, extraordinary or unusual cash distribution, or other similar corporate transaction or event, the maximum number of shares of common stock available for awards under the 2009 Plan was
If there is any change in the Company’s corporate capitalization, the Compensation Committee must proportionately and equitably adjust the number and type of shares of common stock covered by awards then outstanding under the 2009 Plan, the number and type of shares of common stock available under the 2009 Plan, the exercise or grant price of any award, or if deemed appropriate, make provision for a cash payment with respect to any outstanding award, provided that no adjustment may be made that would adversely affect the status of any award that is intended to be a performance-based award under Section 162(m) of the Code, unless otherwise determined by the Compensation Committee. In addition, the Compensation Committee may make adjustments in the terms and conditions of any awards, including any performance goals, in recognition of unusual or nonrecurring events affecting the Company or any subsidiary, or in response to changes in applicable laws, regulations or accounting principles, provided that no adjustment may be made that would adversely affect the status of any award that is intended to be a performance-based award under Section 162(m) of the Code, unless otherwise determined by the Compensation Committee.
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The compensation expense related to options issued to employees under the 2009 Plan was $
At June 30, 2021,
2019 Stock-Based Incentive Compensation Plan
The 2019 Plan authorizes the grant of stock appreciation rights, restricted stock, options and other equity-based awards. Options granted under the 2019 Plan may be either “incentive stock options” as defined in section 422 of the Code or nonqualified stock options, as determined by the Compensation Committee.
Subject to an adjustment necessary upon a stock dividend, recapitalization, forward split or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase or share exchange, extraordinary or unusual cash distribution, or similar corporate transaction or event, the maximum number of shares of common stock available for awards under the 2019 Plan is
If any award is forfeited, terminates or otherwise is settled for any reason without an actual distribution of shares to the participant, the related shares of common stock subject to such award will again be available for future grant. Any shares tendered by a participant in payment of the exercise price of an option or the tax liability with respect to an award (including, in any case, shares withheld from any such award) will not be available for future grant under the 2019 Plan. If there is any change in the Company’s corporate capitalization, the Compensation Committee must proportionately and equitably adjust the number and kind of shares of common stock which may be issued in connection with future awards, the number and kind of shares of common stock covered by awards then outstanding under the 2019 Plan, the aggregate number and kind of shares of common stock available under the 2019 Plan, any applicable individual limits on the number of shares of common stock available for awards under the 2019 Plan, the exercise or grant price of any award, or if deemed appropriate, make provision for a cash payment with respect to any outstanding award. In addition, the Compensation Committee may make adjustments in the terms and conditions of any awards, including any performance goals, in recognition of unusual or nonrecurring events affecting the Company or any subsidiary, or in response to changes in applicable laws, regulations, or accounting principles.
The compensation expense related to options issued to employees under the 2019 Plan was $
The compensation expense under the 2019 Plan related to shares issued to non-employee members of the Board was $
Total compensation expense associated with the 2019 Plan was $
At June 30, 2021, unrecognized compensation expense of approximately $
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5. Earnings Per Share
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Numerator: | ||||||||||||
Net income |
| $ | |
| $ | | $ | |
| $ | | |
Denominator: | ||||||||||||
Basic weighted average shares |
| |
| |
| |
| | ||||
Dilutive effect of share-based awards |
| |
| |
| |
| | ||||
Diluted weighted average shares |
| |
| |
| |
| | ||||
Earnings per common share: | ||||||||||||
Basic EPS |
| $ | |
| $ | | $ | | $ | | ||
Diluted EPS |
| $ | |
| $ | | $ | | $ | | ||
Net income per share is calculated pursuant to ASC Topic 260, “Earnings per Share” (“ASC Topic 260”). Basic earnings per share (“EPS”) excludes potentially dilutive securities and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed assuming the conversion or exercise of all dilutive securities such as employee stock options and restricted stock units (“RSUs”).
The number of incremental shares from the assumed exercise of stock options and RSUs is calculated by using the treasury stock method. As of June 30, 2021 and 2020, there were
For the three-month period ended June 30, 2021 and 2020, respectively,
For the nine-month period ended June 30, 2021 and 2020, respectively,
6. Contingencies
In the ordinary course of business, the Company is at times subject to various legal proceedings and claims. The Company does not believe any such matters that are currently pending will, individually or in the aggregate, have a material effect on the results of operations or financial position.
7. Leases
On October 1, 2019, we adopted ASU 2016-02. This pronouncement requires lessees to record "right-of-use" assets and corresponding lease liabilities on the balance sheet for most leases. We adopted this pronouncement utilizing the transition practical expedient which eliminated the requirement that entities apply the new lease standard to the comparative periods presented in the year of adoption.
As part of our adoption, we elected to utilize the package of practical expedients permitted under the new standard, which allowed us to not reassess: (a) whether an existing contract is or contains a lease, (b) the classification for existing leases and (c) initial direct costs. Further, as permitted by the standard, we made an accounting policy election not to record right-of-use assets or lease liabilities for leases with an initial term of 12 months or less. Instead, consistent with previous accounting guidance, we will recognize payments for such leases in the statement of operations on a straight-line basis over the lease term.
We lease real estate and equipment under various operating leases. A lease exists when a contract or part of a contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In determining whether a lease exists,
21
we consider whether a contract provides us with both: (a) the right to obtain substantially all of the economic benefits from the use of the identified asset and (b) the right to direct the use of the identified asset.
Some of our leases include base rental periods coupled with options to renew or terminate the lease, generally at our discretion. In evaluating the lease term, we consider whether we are reasonably certain to exercise such options. To the extent a significant economic incentive exists to exercise an option, that option is included within the lease term. However, based on the nature of our lease arrangements, options generally do not provide us with a significant economic incentive and are therefore excluded from the lease term for the majority of our arrangements.
Our leases typically include a combination of fixed and variable payments. Fixed payments are generally included when measuring the right-of-use asset and lease liability. Variable payments, which primarily represent payments based on usage of the underlying asset, are generally excluded from such measurement and expensed as incurred. In addition, certain of our lease arrangements may contain a lease coupled with an arrangement to provide other services, such as maintenance, or may require us to make other payments on behalf of the lessor related to the leased asset, such as payments for taxes or insurance. As permitted by ASU 2016-02, we have elected to account for these non-lease components together with the associated lease component if included in the lease payments. This election has been made for each of our asset classes.
The measurement of "right-of-use" assets and lease liabilities requires us to estimate appropriate discount rates. To the extent the rate implicit in the lease is readily determinable, such rate is utilized. However, based on information available at lease commencement for our leases, the rate implicit in the lease is not known. In these instances, we utilize an incremental borrowing rate, which represents the rate of interest that we would pay to borrow on a collateralized basis over a similar term.
The following table presents the lease-related assets and liabilities reported in the Consolidated Balance Sheet as of June 30, 2021:
Classification on the Consolidated Balance Sheet on June 30, 2021 | |||||
Assets |
|
|
|
| |
Operating leases |
| $ | | ||
Liabilities |
|
|
| ||
Operating leases- current |
| $ | | ||
Operating leases – noncurrent |
| $ | | ||
Total lease liabilities | $ | | |||
Rent expense and cash paid for various operating leases in aggregate are $
Future minimum lease payments under operating leases are as follows at June 30, 2021:
Twelve Months |
| ||||
Ending | Operating | ||||
| June 30, |
| Leases | ||
| 2022 | | |||
Total minimum lease payments | $ | | |||
Amount representing interest | ( | ||||
Present value of minimum lease payments |
|
| | ||
Current portion |
|
| ( | ||
Long-term portion of lease obligations |
| $ | | ||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are based largely on current expectations and projections about future events and trends affecting the business, are not guarantees of future performance, and involve a number of risks, uncertainties and assumptions that are difficult to predict. In this report, the words “anticipates,” “believes,” “may,” “will,” “estimates,” “continues,” “anticipates,” “intends,” “forecasts,” “expects,” “plans,” “could,” “should,” “would,” “is likely” and similar expressions, as they relate to the business or to its management, are intended to identify forward-looking statements, but they are not exclusive means of identifying them. Unless the context otherwise requires, all references herein to “IS&S,” the “Registrant,” the “Company,” “we,” “us” or “our” are to Innovative Solutions and Support, Inc. and its consolidated subsidiaries.
The forward-looking statements in this report are only predictions, and actual events or results may differ materially. In evaluating such statements, a number of risks, uncertainties and other factors could cause actual results, performance, financial condition, cash flows, prospects and opportunities to differ materially from those expressed in, or implied by, the forward-looking statements. These risks, uncertainties and other factors include those set forth in Item 1A (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended September 30, 2020 and the following factors:
| ● | market acceptance of the Company’s ThrustSense® Integrated PT6 Autothrottle, PC-12 Autothrottle, Vmca Mitigation and Hot Start Protection capabilities, FPDS, NextGen Flight Deck and COCKPIT/IP® or other planned products or product enhancements; |
| ● | continued market acceptance of the Company’s air data systems and products; |
| ● | the competitive environment and new product offerings from competitors; |
| ● | difficulties in developing and producing the Company’s ThrustSense® Integrated PT6 Autothrottle, PC-12 Autothrottle, Vmca Mitigation and Hot Start Protection capabilities, NextGen Flight Deck, COCKPIT/IP® Flat Panel Display System or other planned products or product enhancements; |
| ● | the deferral or termination of programs or contracts for convenience by customers; |
| ● | the ability to service the international market; |
| ● | the availability of government funding; |
| ● | the availability and efficacy of vaccines and their global deployment in response to the COVID-19 pandemic (including as a result of the impact of any newer variants or strains of SARS-CoV-2); |
| ● | the impact of general economic trends on the Company’s business, including as a result of the COVID-19 pandemic; |
| ● | disruptions in the Company’s supply chain, customer base and workforce, including as a result of the COVID-19 pandemic; |
| ● | the ability to gain regulatory approval of products in a timely manner; |
| ● | delays in receiving components from third-party suppliers; |
| ● | the bankruptcy or insolvency of one or more key customers; |
| ● | protection of intellectual property rights; |
| ● | the ability to respond to technological change; |
| ● | failure to retain/recruit key personnel; |
| ● | risks related to succession planning; |
| ● | a cyber security incident; |
| ● | risks related to our self-insurance program; |
| ● | potential future acquisitions; |
| ● | the costs of compliance with present and future laws and regulations; |
| ● | changes in law, including changes to corporate tax laws in the United States and the availability of certain tax credits; and |
| ● | other factors disclosed from time to time in the Company’s filings with the United States Securities and Exchange Commission (the “SEC”). |
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Except as expressly required by the federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise after the date of this report. Results of operations in any past period should not be considered indicative of the results to be expected for future periods. Fluctuations in operating results may result in fluctuations in the price of the Company’s common stock.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report, or to reflect the occurrence of unanticipated events. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act of 1933, as amended (the “Securities Act”), and 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Investors should also be aware that while the Company, from time to time, communicates with securities analysts, it is against its policy to disclose any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.
Company Overview
Innovative Solutions and Support, Inc. (the “Company,” “IS&S,” “we” or “us”) was incorporated in Pennsylvania on February 12, 1988. The Company operates in one business segment as a systems integrator that designs, develops, manufactures, sells and services air data equipment, engine display systems, standby equipment, primary flight guidance, autothrottles and cockpit display systems for retrofit applications and original equipment manufacturers (“OEMs”). The Company supplies integrated Flight Management Systems (“FMS”), Flat Panel Display Systems (“FPDS”), FPDS with Autothrottle, air data equipment, Integrated Standby Units (“ISU”), ISU with Autothrottle and advanced Global Positioning System (“GPS”) receivers that enable reduced carbon footprint navigation.
The Company has continued to position itself as a system integrator, which capability provides the Company with the potential to generate more substantive orders over a broader product base. This strategy, as both a manufacturer and integrator, is designed to leverage the latest technologies developed for the computer and telecommunications industries into advanced and cost-effective solutions for the general aviation, commercial air transport, United States Department of Defense (“DoD”)/governmental and foreign military markets. This approach, combined with the Company’s industry experience, is designed to enable IS&S to develop highquality products and systems, to reduce product time to market, and to achieve cost advantages over products offered by its competitors.
For several years the Company has been working with advances in technology to provide pilots with more information to enhance both the safety and efficiency of flying, and has developed its COCKPIT/IP® Cockpit Information Portal (“CIP”) product line, that incorporates proprietary technology, low cost, reduced power consumption, decreased weight, and increased functionality. The Company has incorporated Electronic Flight Bag (“EFB”) functionality, such as charting and mapping systems, into its FPDS product line.
The Company has developed an FMS that combines the savings long associated with in-flight fuel optimization in enroute flight management combined with the precision of satellite-based navigation required to comply with the regulatory environments of both domestic and international markets. The Company believes that the FMS, alongside its FPDS and CIP product lines, is well suited to address market demand driven by certain regulatory mandates, new technologies, and the high cost of maintaining aging and obsolete equipment on aircraft that will be in service for up to fifty years. The shift in the regulatory and technological environment is illustrated by the dramatic increase in the number of Space Based Augmentation System (“SBAS”) or Wide Area Augmentation System (“WAAS”) approach qualified airports, particularly as realized through Localizer Performance with Vertical guidance (“LPV”) navigation procedures. Aircraft equipped with the Company’s FMS, FPDS and SBAS/WAAS/LPV enabled navigator, will be qualified to land at such airports and will comply with Federal Aviation Administration (“FAA”) mandates for Required Navigation Performance, and Automatic Dependent Surveillance-Broadcast navigation. IS&S believes this will further increase the
24
demand for the Company’s products. The Company’s FMS/FPDS product line is designed for new production and retrofit applications into general aviation, commercial air transport and military transport aircraft. In addition, the Company offers what we believe to be a state-of-the-art ISU, integrating the full functionality of the primary and navigation displays into a small backup-powered unit. This ISU builds on the Company’s legacy air data computer to form a complete next-generation cockpit display and navigation upgrade offering to the commercial and military markets.
The Company has developed and received certification from the FAA on its NextGen Flight Deck featuring its ThrustSense® Integrated PT6 Autothrottle (“ThrustSense® Autothrottle”) for retrofit in the Pilatus PC-12. The NextGen Flight Deck features Primary Flight and Multi-Function Displays and ISUs, as well as an Integrated FMS and EFB System. The innovative avionics suite includes dual flight management systems, autothrottles, synthetic vision and enhanced vision. The NextGen enhanced avionics suite is available for integration into other business aircraft with Non-FADEC and FADEC engines.
The Company has developed, and in April 2019 received certification from the FAA for, its ThrustSense® Autothrottle for retrofit in the King Air, dual turbo prop PT6 powered aircraft. The autothrottle is designed to automate the power management for speed and power control including go-around. ThrustSense® also ensures aircraft envelope protection and engine protection during all phases of flight reducing pilot workload and increasing safety. The Company has signed a multi-year agreement with Textron Aviation, Inc. to supply ThrustSense® on the King Air 360 and King Air 260. ThrustSense® is also available for retrofit on King Airs through Textron service centers and third party service centers.
More recently, on December 9, 2019 the Company received certification from the FAA for a safety mode feature during an engine-out condition for its King Air ThrustSense® Autothrottle. LifeGuard™ provides critical Vmca protection that proportionally reduces engine power to maintain directional control.
We believe the ThrustSense® Autothrottle is innovative in that it is the first autothrottle developed for a turbo prop that allows a pilot to automatically control the power setting of the engine. The autothrottle computes and controls appropriate power levels thereby reducing overall pilot workload. The system computes thrust, holds selected speed/torque, and implements appropriate speed and engine limit protection. When engaged by the pilot, the autothrottle system adjusts the throttles automatically to achieve and hold the selected airspeed guarded by a torque/temperature limit mode. The autothrottle system takes full advantage of the integrated cockpit utilizing weight and balance information for optimal control settings and enabling safety functions like a turbulence control mode.
The Company sells to both the OEM and the retrofit markets. Customers include various OEMs, commercial air transport carriers and corporate/general aviation companies, DoD and its commercial contractors, aircraft operators, aircraft modification centers, government agencies, and foreign militaries. Occasionally, IS&S sells its products directly to DoD; however, the Company sells its products primarily to commercial customers for end use in DoD programs. Sales to defense contractors are generally made on commercial terms, although some of the termination and other provisions of government contracts are applicable to these contracts. The Company’s retrofit projects are generally pursuant to either a direct contract with a customer or a subcontract with a general contractor to a customer (including government agencies).
Customers have been and may continue to be affected by changes in economic conditions both in the United States and abroad. Such changes may cause customers to curtail or delay their spending on both new and existing aircraft. Factors that can impact general economic conditions and the level of spending by customers include, but are not limited to, the impact of the ongoing COVID-19 pandemic, general levels of consumer spending, increases in fuel and energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence, and other macroeconomic factors that affect spending behavior. Furthermore, spending by government agencies may be reduced in the future if tax revenues decline. If customers curtail or delay their spending or are forced to declare bankruptcy or liquidate their operations because of adverse economic conditions, the Company’s revenues and results of operations would be affected adversely. For example, in the 2020 fiscal year, certain of the Company’s customers temporarily suspended product deliveries as a result of the COVID-19 pandemic, and while these deliveries subsequently resumed, there is a possibility that the COVID-19 pandemic (including as a result of the impact of any newer variants or strains of SARS-CoV-2) will result in other suspensions, delays or order cancellations by the Company’s customers or suppliers.
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On the other hand, the Company believes that in adverse economic conditions, customers that may have otherwise elected to purchase newly manufactured aircraft may be interested instead in retrofitting existing aircraft as a cost-effective alternative, thereby creating a market opportunity for IS&S.
The ongoing COVID-19 pandemic is nevertheless a significant event, driver of market trends, and source of uncertainty that may ultimately have a direct or indirect material impact on the Company’s business, financial position, liquidity, or ability to service customers or maintain critical operations. In direct response to the COVID-19 pandemic, the Company has taken specific actions to seek to ensure the safety of its employees, including temperature monitoring, frequent sanitization of workspaces, observance of social distancing protocols, and other increased safety measures.
Cost of sales related to product sales comprises material components and third-party avionics purchased from suppliers, direct labor, and overhead costs. Many of the components are standard, although certain parts are manufactured to meet IS&S specifications. The overhead portion of cost of sales comprises primarily salaries and benefits, building occupancy costs, supplies, and outside service costs related to production, purchasing, material control, and quality control. Cost of sales includes warranty costs.
Cost of sales related to engineering development contracts (“EDC”) sales comprises engineering labor, consulting services, and other costs associated with specific design and development projects. These costs are incurred pursuant to contractual arrangements and are accounted for typically as contract costs within cost of sales with the reimbursement accounted for as a sale in accordance with the percentage-of-completion method of accounting. Company funded research and development (“R&D”) expenditures relate to internally-funded efforts towards the development of new products and the improvement of existing products. These costs are expensed as incurred and reported as R&D expenses. The Company intends to continue investing in the development of new products that complement current product offerings and to expense associated R&D costs as they are incurred.
Selling, general and administrative expenses consist of sales, marketing, business development, professional services, salaries and benefits for executive and administrative personnel, facility costs, recruiting, legal, accounting, bad debt expense and other general corporate expenses.
Critical Accounting Policies and Estimates
The discussion and analysis of financial condition and consolidated results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these condensed consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, IS&S management evaluates its estimates based upon historical experience and various other assumptions that it believes to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The Company believes that its critical accounting policies affect its more significant estimates and judgments used in the preparation of its consolidated financial statements. The Annual Report on Form 10-K for the fiscal year ended September 30, 2020 contains a discussion of these critical accounting policies. There have been no significant changes in the Company’s critical accounting policies since September 30, 2020. See also Note 1 to the unaudited condensed consolidated financial statements for the three- and nine-month periods ending June 30, 2021 as set forth herein.
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RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 2021 AND 2020
The following table sets forth the statements of operations data expressed as a percentage of total net sales for the periods indicated (some items may not add due to rounding):
Three Months Ended June 30, |
| Nine Months Ended June 30, |
| ||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |
Net sales: |
|
|
|
|
|
|
| ||
Product |
| 96.8 | % | 91.5 | % | 98.2 | % | 95.1 | % |
Engineering development contracts |
| 3.2 | % | 8.5 | % | 1.8 | % | 4.9 | % |
Total net sales |
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Cost of sales: |
|
|
|
|
|
|
| ||
Product |
| 44.7 | % | 41.8 | % | 45.0 | % | 44.4 | % |
Engineering development contracts |
| 1.0 | % | 1.2 | % | 0.5 | % | 1.4 | % |
Total cost of sales |
| 45.7 | % | 43.0 | % | 45.4 | % | 45.8 | % |
Gross profit |
| 54.3 | % | 57.0 | % | 54.6 | % | 54.2 | % |
Operating expenses: |
|
|
|
|
|
|
| ||
Research and development |
| 10.5 | % | 14.6 | % | 12.0 | % | 14.7 | % |
Selling, general and administrative |
| 24.5 | % | 21.5 | % | 30.0 | % | 29.5 | % |
Total operating expenses |
| 34.9 | % | 36.1 | % | 42.0 | % | 44.2 | % |
Operating income |
| 19.3 | % | 20.9 | % | 12.6 | % | 10.0 | % |
Interest income |
| 0.0 | % | 0.1 | % | 0.0 | % | 1.0 | % |
Other income |
| 0.3 | % | 0.3 | % | 0.3 | % | 0.3 | % |
Income before income taxes |
| 19.6 | % | 21.3 | % | 12.9 | % | 11.3 | % |
Income tax (benefit) expense |
| (23.8) | % | 0.1 | % | (8.9) | % | (2.0) | % |
Net income |
| 43.5 | % | 21.2 | % | 21.9 | % | 13.3 | % |
Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020
Net sales. Net sales were $6,180,183 for the three months ended June 30, 2021 compared to $5,953,689 for the three months ended June 30, 2020, an increase of 3.8%. Product sales increased $535,714 in the three months ended June 30, 2021 compared to the three months ended June 30, 2020, and EDC sales decreased $309,220 from the same period in the prior year. Product sales for the three months ended June 30, 2021 increased from the same period in the prior year primarily because of increased shipments of King Air autothrottle systems to our OEM customer. The decrease in EDC sales in the current year period was primarily the result of the completion in prior fiscal year of a modification contract with the U.S. Navy.
Cost of sales. Cost of sales increased $266,665, or 10.4%, to $2,825,681, or 45.7% of net sales, in the three months ended June 30, 2021, compared to $2,559,016 or 43.0% of net sales, in the three months ended June 30, 2020. The increase in cost of sales was primarily the result of an increase in labor and related benefit costs attributable to an increase in headcount to meet customer backlog requirements offset by a decrease in material costs as a percentage of sales for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The Company’s overall gross margin was 54.3% and 57.0% for the quarters ended June 30, 2021 and 2020, respectively.
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Research and development. R&D expense decreased $224,010, or 25.7%, to $646,795, or 10.5% of net sales, in the three months ended June 30, 2021 from $870,805, or 14.6% of net sales, in the three months ended June 30, 2020. The decrease in R&D expense in the quarter was primarily the result of a decrease in third party costs related to STC certifications as compared to the year ago quarter.
Selling, general and administrative. Selling, general and administrative expense increased by $232,716 to $1,512,138 in the three months ended June 30, 2021 from $1,279,422 in the three months ended June 30, 2020. As a percentage of net sales, selling, general and administrative expenses increased to 24.5% of net sales in the three months ended June 30, 2021 from 21.5% of net sales in the three months ended June 30, 2020. The increase in selling, general and administrative expense in the quarter was primarily the result of an increase in professional fees, employee stock compensation, payroll and payroll related benefits.
Interest income. Interest income decreased by $7,660 to $107 in the three months ended June 30, 2021 from $7,767 in the three months ended June 30, 2020, mainly a result of decreased cash balance and lower interest rates in the current year period compared to the same period in the prior year.
Other income. Other income is mainly composed of royalties earned and increased by $970 to $17,231 in the three months ended June 30, 2021 compared to the same period in the prior year.
Income tax expense. The income tax benefit for the three months ended June 30, 2021 was $1,473,014 as compared to an income tax expense of $8,616 for the three months ended June 30, 2020.
The effective tax benefit rate for the three-month period ended June 30, 2021 was 121.4% and differs from the statutory tax rate primarily due to the release of the valuation allowance for all federal and some state deferred tax assets. This release both increased the deferred tax asset and removed the valuation allowance.
The effective tax rate for the three months ended June 30, 2020 was 0.7% and differs from the statutory tax rate primarily due to an increase in the NOL usage due to an increase in pretax book income and the release of the valuation allowance. This loss utilization both decreased the deferred tax asset and the valuation allowance. For the three months ended June 30, 2020, the valuation allowance decreased by approximately $243,300 to $3,485,000 and is recorded against all its federal and state deferred tax assets.
Net income. The Company reported net income for the three months ended June 30, 2021 of $2,685,921 compared to net income of $1,259,858 for the three months ended June 30, 2020. On a diluted basis, the net income per share was $0.16 for the three months ended June 30, 2021 compared to net income per share of $0.07 for the three months ended June 30, 2020.
Nine Months Ended June 30, 2021 Compared to the Nine Months Ended June 30, 2020
Net sales. Net sales were $16,171,680 for the nine months ended June 30, 2021 compared to $15,300,182 for the nine months ended June 30, 2020, an increase of 5.7%. Product sales increased $1,336,843 in the nine months ended June 30, 2021 compared to the nine months ended June 30, 2020, and EDC sales decreased $456,345 from the same period in the prior year. Product sales for the nine months ended June 30, 2021 increased from the same period in the prior year primarily because of increased shipments of King Air autothrottle systems to our OEM customer. The decrease in EDC sales in the current year period was primarily the result of the completion in prior fiscal year of a modification contract with the U.S. Navy.
Cost of sales. Cost of sales increased $339,673, or 4.8%, to $7,348,364, or 45.4% of net sales, in the nine months ended June 30, 2021, compared to $7,008,691 or 45.8% of net sales, in the nine months ended June 30, 2020. The increase in cost of sales was primarily the result of an increase in labor and related benefit costs attributable to an increase in headcount to meet customer backlog requirements offset by lower material costs reflecting product mix for the nine months ended June 30, 2021 compared to the nine months ended June 30, 2020. The Company’s overall gross margin was 54.6% and 54.2% for the nine months ended June 30, 2021 and 2020, respectively.
Research and development. R&D expense decreased $312,692, or 13.9%, to $1,936,747, or 12.0% of net sales, in the nine months ended June 30, 2021 from $2,249,439, or 14.7% of net sales, in the nine months ended June 30, 2020. The decrease in R&D expense
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in the quarter was primarily the result of a decrease in third party costs related to STC certifications as compared to the year ago quarter offset by an increase in payroll and payroll related benefits.
Selling, general and administrative. Selling, general and administrative expense increased by $333,325, or 7.4%, to $4,847,410 in the nine months ended June 30, 2021 from $4,514,085 in the nine months ended June 30, 2020. The increase in selling, general, and administrative expense in the nine months period was primarily the result of an increase in professional fees, employee stock compensation, payroll and payroll related benefits. As a percentage of net sales, selling, general and administrative expenses increased to 30.0% of net sales in the nine months ended June 30, 2021 from 29.5% of net sales in the nine months ended June 30, 2020.
Interest income. Interest income decreased by $151,220 to $1,138 in the nine months ended June 30, 2021 from $152,358 in the nine months ended June 30, 2020, mainly a result of decreased cash balance and lower interest rates in the current year period compared to the same period in the prior year.
Other income. Other income is mainly composed of royalties earned and increased marginally by $6,234 to $50,994 in the nine months ended June 30, 2021 compared to the same period in the prior year.
Income tax expense. The income tax benefit for the nine months ended June 30, 2021 was $1,443,352 as compared to an income tax benefit of $300,786 for the nine months ended June 30, 2020.
The effective tax benefit rate for the nine-month period ended June 30, 2021 was 69.0% and differs from the statutory tax rate primarily due to the release of the valuation allowance for all federal and some state deferred tax assets. This release both increased the deferred tax asset and removed the valuation allowance.
The effective tax benefit rate for the nine months ended June 30, 2020 was 17.4% and differs from the statutory tax rate primarily due to the income tax benefit associated with the NOL carryback provisions under the CARES Act and the release of the valuation allowance. This loss utilization both decreased the deferred tax asset and the valuation allowance. For the nine months ended June 30, 2020, the valuation allowance decreased by approximately $243,000 to $3,485,000 and is recorded against all its federal and state deferred tax assets.
Net income. The Company reported net income for the nine months ended June 30, 2021 of $3,534,643 compared to net income of $2,025,871 for the nine months ended June 30, 2020. On a diluted basis, the net income per share was $0.21 for the nine months ended June 30, 2021 compared to net income per share of $0.12 for the nine months ended June 30, 2020.
Liquidity and Capital Resources
The following table highlights key financial measurements of the Company:
June 30, | September 30, | |||||
| 2021 |
| 2020 | |||
Cash and cash equivalents | $ | 7,482,863 | $ | 12,603,967 | ||
Restricted cash (1) |
| — |
| 11,180,900 | ||
Accounts receivable |
| 4,293,727 |
| 4,369,111 | ||
Current assets |
| 17,312,730 |
| 33,120,422 | ||
Current liabilities |
| 4,008,223 |
| 13,647,117 | ||
Contract liability |
| 1,528,694 |
| 313,365 | ||
Total debt and other non-current liabilities (2) |
| — |
| 129,689 | ||
Quick ratio (3) |
| 2.94 |
| 1.24 | ||
Current ratio (4) |
| 4.32 |
| 2.43 | ||
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Nine Months Ended June 30, | ||||||
| 2021 |
| 2020 | |||
Cash flow activites: |
|
|
|
| ||
Net cash provided by operating activites | $ | 3,793,103 | $ | 626,221 | ||
Net cash used in investing activites |
| (324,025) |
| (67,624) | ||
Net cash (used in) provided by financing activites |
| (19,771,082) |
| 8,822 | ||
(1) | Restricted cash as of September 30, 2020 represents the payment amount for a special cash dividend paid on October 1, 2020 |
(2) | Excludes contract liability |
(3) | Calculated as: the sum of cash and cash equivalents plus accounts receivable, net, divided by current liabilities |
(4) | Calculated as: current assets divided by current liabilities |
The Company’s principal source of liquidity has been cash flows from current year operations and cash accumulated from prior years’ operations. Cash is used principally to finance inventory, accounts receivable, contract assets, and payroll. Apart from what has been disclosed above, management is not aware of any trends, events or uncertainties that have had or are likely to have a material impact on our liquidity, financial condition and capital resources.
On September 4, 2020, the Company’s Board of Directors declared a special cash dividend in the amount of $0.65 per share, payable on October 1, 2020 to shareholders of record as of the close of business on September 15, 2020. The total dividend payment was approximately $11.2 million and is included in restricted cash on the accompanying consolidated balance sheets.
On December 10, 2020, the Company’s Board of Directors declared a special cash dividend in the amount of $0.50 per share, payable on December 30, 2020 to shareholders of record as of the close of business on December 21, 2020. The total dividend payment was approximately $8.6 million. The declaration and payment of any dividend in the future will be at the discretion of the Company’s Board of Directors.
The ongoing COVID-19 pandemic is a significant event, driver of market trends, and source of uncertainty that may have a material impact on the Company’s liquidity, financial condition, capital resources, cash flows or operating results. In direct response to the COVID-19 pandemic, the Company has taken specific actions to seek to ensure the safety of its employees, including temperature monitoring, frequent sanitization of workspaces, observance of social distancing protocols, and other increased safety measures.
Operating activities
Cash provided by operating activities for the nine months ended June 30, 2021 resulted primarily from funding from net income of $3,534,643 and an increase in contract liability of $1,215,329, the majority of this increase in contract liability is from one customer offset by an increase in deferred income taxes of $1,461,617, primarily due to the release of the valuation allowance against all of the Company’s federal and some state deferred tax assets.
Cash provided by operating activities for the nine months ended June 30, 2020 resulted primarily from net income of $2,025,871, offset by an increase in accounts receivable of $1,516,119.
Investing activities
Cash used in investing activities was $324,025 for the nine months ended June 30, 2021 and consisted primarily of leasehold improvements and laboratory test equipment.
Cash used in investing activities was approximately $67,624 for the nine months ended June 30, 2020 and consisted primarily of the purchase of computer, production and laboratory test equipment.
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Financing activities
Net cash used in financing activities was $19,771,082 for the nine months ended June 30, 2021, compared to $8,822 for the same period in the prior year. The change to financing activities relates to the increase in the dividend paid in the nine months ended June 30, 2021, compared to no dividend paid in the nine months ended June 30, 2020.
Summary
Future capital requirements depend upon numerous factors, including market acceptance of the Company’s products, the timing and rate of expansion of business, acquisitions, joint ventures and other factors. IS&S has experienced increases in expenditures since its inception and anticipates that expenditures will continue in the foreseeable future. The Company believes that its cash and cash equivalents will provide sufficient capital to fund operations for at least the next twelve months. However, the Company may need to develop and introduce new or enhanced products, respond to competitive pressures, invest in or acquire businesses or technologies, or respond to unanticipated requirements or developments. If insufficient funds are available, the Company may not be able to introduce new products or compete effectively.
Impact of the COVID-19 Pandemic
Through the third quarter of this fiscal year, the Company has not yet seen a material impact from the COVID-19 pandemic on its business, financial position, liquidity, or ability to service customers or maintain critical operations. However, the COVID-19 pandemic, as well as the quarantines and other governmental and non-governmental restrictions which have been imposed throughout the world in an effort to contain or mitigate the spread of the coronavirus (including recent developments as a result of newer variants or strains of SARS-CoV-2), has caused and is continuing to cause significant market turbulence and disruption that may continue for some time even after business restrictions are lifted and the threat of the coronavirus diminishes. As a result, the Company expects that it may face liquidity shortages, weaker product demand from its customers, disruptions in its supply chain, and/or staffing shortages in its workforce for the foreseeable future due to the direct and indirect effects of the COVID-19 pandemic.
Backlog
Backlog represents the value of contracts and purchase orders received, less sales recognized to date on those contracts and purchase orders. Backlog activity for the three and nine months ended June 30, 2021:
Three Months Ended | Nine Months Ended | |||||
June 30, 2021 | ||||||
Backlog, beginning of period | $ | 6,651,411 | $ | 3,640,637 | ||
Bookings, net |
| 8,982,646 |
| 21,984,917 | ||
Recognized in revenue |
| (6,180,183) |
| (16,171,680) | ||
Backlog, end of period | $ | 9,453,874 | $ | 9,453,874 | ||
At June 30, 2021, the majority of the Company’s backlog is expected to be filled within the next twelve months. To the extent new business orders do not continue to equal or exceed sales recognized in the future from the Company’s existing backlog, future operating results may be impacted negatively.
Off-Balance Sheet Arrangements
The Company has no relationships with unconsolidated entities or financial partnerships, such as Special Purpose Entities or Variable Interest Entities, established for the purpose of facilitating off-balance sheet arrangements or other limited purposes.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s operations are exposed to market risks primarily as a result of changes in interest rates. The Company does not use derivative financial instruments for speculative or trading purposes. The Company’s exposure to market risk for changes in interest rates relates to its cash equivalents. The Company’s cash equivalents consist of funds invested in money market accounts, which bear interest at a variable rate. The Company does not participate in interest rate hedging. Cash balances are maintained with two major banks. Balances on deposit with certain money market accounts and operating accounts may exceed the Federal Deposit Insurance Corporation limits. A change in interest rates earned on the cash equivalents would impact interest income and cash flows but would not impact the fair market value of the related underlying instruments. Assuming that the balances during the three-month period ended June 30, 2021 were to remain constant and the Company did not act to alter the existing interest rate sensitivity, a hypothetical 1% increase in variable interest rates would have affected interest income by approximately $14,000 and $67,000 with a resulting impact on cash flows of approximately $14,000 and $67,000 for the three- and nine-month periods ended June 30, 2021.
Item 4. Controls and Procedures
(a)We carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act as of June 30, 2021. Based on that evaluation, our chief executive officer and chief financial officer concluded that these controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized, and reported, within the time periods specified in the rules and forms of the SEC and (ii) accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b)There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II–OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, the Company is at times subject to various legal proceedings and claims. The Company does not believe any such matters that are currently pending will, individually or in the aggregate, have a material effect on the results of operations or financial position.
Item 1A. Risk Factors
The information set forth in this report should be read in conjunction with the risk factors described under Item 1A of the Company’s Form 10-K for the fiscal year ended September 30, 2020. Such risks are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial could materially and adversely affect the Company’s business, operating results, financial condition, cash flows, prospects, and the value of an investment in IS&S common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None.
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Item 6. Exhibits
(a) Exhibits
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) (1) |
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) (1) |
32.1 | |
101.INS | XBRL Instance Document (1) |
101.SCH | XBRL Taxonomy Extension Scheme Document (1) |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (1) |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document (1) |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document (1) |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (1) |
(1) | Filed herewith |
(2) | Furnished herewith |
34
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INNOVATIVE SOLUTIONS AND SUPPORT, INC. | ||
|
| |
Date: August 13, 2021 | By: | /s/ RELLAND WINAND |
|
| RELLAND WINAND |
|
| CHIEF FINANCIAL OFFICER |
35