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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(Address of Principal Executive Offices) | (Zip Code) |
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As of August 9, 2024, there were
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
FORM 10-Q JUNE 30, 2024
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 22 - 31 | |
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PART I—FINANCIAL INFORMATION
Item 1- Financial Statements
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| June 30, |
| September 30, | |||
2024 | 2023 | |||||
ASSETS | ||||||
Current assets | ||||||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivable |
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Contract assets |
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Inventories | |
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Prepaid inventory | | | ||||
Prepaid expenses and other current assets |
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Assets held for sale |
| — |
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Total current assets | | | ||||
Goodwill | | | ||||
Intangible assets, net | | | ||||
Property and equipment, net |
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Deferred income taxes | | | ||||
Other assets |
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Total assets | $ | | $ | | ||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||
Current liabilities | ||||||
Current portion of long-term debt | $ | | $ | | ||
Accounts payable | | | ||||
Accrued expenses |
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Contract liability | | | ||||
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Total current liabilities | | | ||||
Long-term debt | — | | ||||
Other liabilities | | | ||||
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Total liabilities | | | ||||
Commitments and contingencies (See Note 6) | ||||||
Shareholders’ equity | ||||||
Preferred stock, |
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Common stock, $ | | | ||||
Additional paid-in capital |
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Retained earnings |
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Treasury stock, at cost, |
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Total shareholders’ equity | | | ||||
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, | ||||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 |
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Net Sales: | |||||||||||||
Product | $ | | $ | | $ | | $ | | |||||
Customer service | | | | | |||||||||
Engineering development contracts |
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Total net sales |
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Cost of sales: | |||||||||||||
Product |
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Customer service | | | | | |||||||||
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 expense |
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| — |
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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 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)
Additional | Total | ||||||||||||||
Common | Paid-In | Retained | Treasury | shareholders’ | |||||||||||
| Stock |
| Capital |
| Earnings |
| Stock |
| equity | ||||||
Balance, September 30, 2023 | $ | | $ | | $ | | $ | ( | $ | | |||||
Share-based compensation | | | — | — | | ||||||||||
Net income | — | — | | — | | ||||||||||
Balance, December 31, 2023 | $ | | $ | | $ | | $ | ( | $ | | |||||
Share-based compensation | | | — | — | | ||||||||||
Net income | — | — | | — | | ||||||||||
Balance, March 31, 2024 | $ | | $ | | $ | | $ | ( | $ | | |||||
Share-based compensation | | | — | — | | ||||||||||
Net income | — | — | | — | | ||||||||||
Balance, June 30, 2024 | $ | | $ | | $ | | $ | ( | $ | | |||||
The accompanying notes are an integral part of these statements.
3
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)
(Accumulated | |||||||||||||||
Additional | Deficit) | Total | |||||||||||||
Common | Paid-In | Retained | Treasury | shareholders’ | |||||||||||
| Stock |
| Capital |
| Earnings |
| Stock |
| equity | ||||||
Balance, September 30, 2022 | $ | | $ | | ( | $ | ( | $ | | ||||||
Share-based compensation | — | | — | — | | ||||||||||
Exercise of stock options | | | — | — | | ||||||||||
Net income | — | — | | — | | ||||||||||
Balance, December 31, 2022 | $ | | $ | | $ | | $ | ( | $ | | |||||
Share-based compensation | | | — | — | | ||||||||||
Net income | — | — | | — | | ||||||||||
Balance, March 31, 2023 | $ | | $ | | $ | | $ | ( | $ | | |||||
Share-based compensation | | | — | — | | ||||||||||
Net income | — | — | | — | | ||||||||||
Balance, June 30, 2023 | $ | | $ | | $ | | $ | ( | $ | | |||||
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, | |||||||
| 2024 |
| 2023 |
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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 | |||||||
Stock options |
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Stock awards |
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Impairment of long-lived assets | — | | |||||
Gain on disposal of property and equipment |
| ( |
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Deferred income taxes |
| ( |
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(Increase) decrease in: | |||||||
Accounts receivable |
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Contract assets |
| ( |
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Inventories |
| ( |
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Prepaid expenses and other current assets |
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Other non-current assets |
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Increase (decrease) in: | |||||||
Accounts payable |
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Accrued expenses |
| ( |
| ( | |||
Income taxes |
| ( |
| ( | |||
Contract liabilities |
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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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Acquisition of a business |
| — |
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Proceeds from the sale of property and equipment | | — | |||||
Net cash provided by (used in) investing activities |
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CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Repayments of term note | ( | — | |||||
Proceeds from line of credit note | | — | |||||
Repayments of line of credit note | ( | — | |||||
Proceeds from term note |
| — |
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Proceeds from exercise of stock options | — |
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Net cash (used in) provided by financing activities |
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Net (decrease) increase in cash and cash equivalents |
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Cash and cash equivalents, beginning of year |
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Cash and cash equivalents, end of year | $ | | $ | | |||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||
Cash paid for income taxes | $ | | $ | | |||
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION | |||||||
Transfer from prepaid inventory to purchases of property and equipment | $ | | $ | — | |||
Transfer from prepaid inventory to inventory | $ | | $ | — | |||
Transfer from prepaid inventory to goodwill | $ | | $ | — | |||
Transfer from prepaid inventory to intangible assets, net | $ | | $ | — | |||
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
Certain of Innovative Solutions and Support, Inc.’s (the “Company,” “IS&S,” “we” or “us”) significant accounting policies are described below. All of the Company’s significant accounting policies are disclosed in the notes to the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
Description of the Company
The Company 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 and, 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 high-quality products and systems, to reduce product time to market and to achieve cost advantages over products offered by its competitors.
On June 30, 2023 (the “Acquisition Date”), the Company entered into an Asset Purchase and License Agreement with Honeywell International, Inc. (“Honeywell”) whereby Honeywell sold certain assets and granted perpetual license rights to manufacture and sell licensed products related to its inertial, communication and navigation product lines (the “Product Lines”) to the Company (the “Transaction”). The Transaction involved a sale of certain inventory, equipment and customer-related documents; an assignment of certain customer contracts; and a grant of exclusive and non-exclusive licenses to use certain Honeywell intellectual property related to its inertial, communication and navigation product lines to repair, overhaul, manufacture sell, import, export and distribute certain products to the Company. See Acquisition within Note 2, “Supplemental Balance Sheet Disclosures” below for more details.
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, 2023 is derived from the audited financial statements of the Company. Operating results for the three- and nine-month periods ended June 30, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2024 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, 2023.
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
Use of Estimates
The financial statements of the Company have been prepared in accordance with GAAP, 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, valuation of tangible and intangible assets acquired, long term contracts, evaluation of 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, the useful lives of long-lived assets for depreciation and amortization, the recoverability of long-lived assets, evaluation of goodwill impairment and contingencies. Estimates and assumptions are reviewed periodically and the effects of changes, if any, are reflected in the condensed consolidated statements of operations in the period they are determined.
Principles of Acquisitions
The Company evaluates each of its acquisitions in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations” (“ASC 805”), to determine whether the transaction is a business combination or an asset acquisition. In determining whether an acquisition should be accounted for as a business combination or an asset acquisition, the Company first performs a screen test to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this is the case, the acquired set is not deemed to be a business and is instead accounted for as an asset acquisition. If this is not the case, the Company then further evaluates whether the acquired set includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. If so, the Company concludes that the acquired set is a business.
The Company accounts for business acquisitions using the acquisition method of accounting. Under this method of accounting, assets acquired and liabilities assumed are recorded at their respective fair values at the date of the acquisition. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions. The Company’s estimates of fair value are based upon assumptions believed to be reasonable, but are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Any excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill.
During the measurement period, which may be up to one year from the acquisition date, the Company adjusts the provisional amounts of assets acquired and liabilities assumed with the corresponding offset to goodwill to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded within the Company’s condensed consolidated statements of operations.
Intangible Assets
The Company’s identifiable intangible assets primarily consist of license agreement and customer relationships. Intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods deemed appropriate for the type of intangible asset acquired and are reported separately from any goodwill recognized.
Intangible assets with a finite life are amortized over their estimated useful life and are reported net of accumulated amortization. They are assessed for impairment in accordance with the Company’s policy on assessing long-lived assets for impairment described in the notes of the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
Indefinite-lived intangible assets are not amortized, but are subject to an annual impairment test, or when events or circumstances dictate, more frequently. The impairment review for indefinite-lived intangible assets can be performed using a qualitative or quantitative impairment assessment. The quantitative assessment consists of a comparison of the fair value of the indefinite-lived intangible asset with its carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If the fair value exceeds its carrying amount, the indefinite-lived intangible asset is not considered impaired.
Goodwill
Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The recorded amounts of goodwill from business combinations are based on management’s best estimates of the fair values of assets acquired and liabilities assumed at the date of acquisition. Goodwill is assigned to the reporting units that are
7
expected to benefit from the synergies of the business combination that generated the goodwill. The Company’s goodwill impairment test is performed at the reporting unit level. Reporting units are determined based on an evaluation of the Company’s operating segments and the components making up those operating segments.
Goodwill is tested for impairment at fiscal year-end September 30 or in an interim period if certain changes in circumstances indicate a possibility that an impairment may exist. Factors to consider that may indicate an impairment may exist are:
| ● | macroeconomic conditions; |
| ● | industry and market considerations, such as a significant adverse change in the business climate; |
| ● | cost factors; |
| ● | overall financial performance, such as current-period operating results or cash flow declines combined with a history of operating results or cash flow declines; |
| ● | a projection or forecast that demonstrates continuing declines in the cash flow or the inability to improve the operations to forecasted levels; and |
| ● | any entity-specific events. |
If the Company determines that it is more likely than not that the fair value of the reporting unit is below the carrying amount as part of its qualitative assessment, a quantitative assessment of goodwill is required. In the quantitative evaluation, the fair value of the reporting unit is determined and compared to the carrying value. If the fair value is greater than the carrying value, then the goodwill is deemed not to be impaired and no further action is required. If the fair value is less than the carrying value, goodwill is considered impaired and a charge is reported as impairment of goodwill in the condensed consolidated statements of operations.
Fair Value of Financial Instruments
The net carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value because of the short-term nature of these instruments. The carrying value of our debt approximates fair value as the interest rate is variable and approximates current market levels. 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.
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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, 2024 and September 30, 2023, according to the valuation techniques the Company used to determine their fair values.
Fair Value Measurement on June 30, 2024 | |||||||||
| 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, 2023 | |||||||||
| 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 | $ | | $ | — | $ | — | |||
The June 30, 2024 money market funds balance differs from the cash and cash equivalents balance on the condensed consolidated balance sheet due to the timing of sweep transactions within the PNC cash investment accounts.
Revenue Recognition
The Company enters into sales arrangements with customers that, in general, provide for the Company to design, develop, manufacture, deliver and service 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 accounts for revenue in accordance with ASC 606, “Revenue from Contracts with Customers” (“ASC 606”). The core principle of ASC 606 is that an entity recognizes revenue 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 in 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.
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
9
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.
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. If the contract contains multiple performance obligation, the Company determines standalone selling price based on the price at which each 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. The Company has also recognized revenue from EDC contracts and is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Contract costs include material, components and third-party avionics purchased from suppliers, direct labor and overhead costs.
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. 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 in which 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, 2024 and 2023. Therefore, no adjustment on any contract was material to our condensed consolidated financial statements for the three- and nine-month periods ended June 30, 2024 and 2023.
10
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. The following table reflects the Company’s contract assets and contract liabilities:
Contract | Contract | |||||
Assets | Liabilities | |||||
September 30, 2023 | $ | | $ | | ||
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, 2024 | $ | | $ | | ||
Concentrations
Major Customers and Products
In the three-month period ended June 30, 2024,
In the three-month period ended June 30, 2023,
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, 2024, the Company had
For the three- and nine-month periods ended June 30, 2023, 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
Change in Accounting Estimate
Effective April 1, 2024, the Company changed its method of computing depreciation from accelerated methods to the straight-line method for the Company’s property and equipment, except for the manufacturing facility which was already depreciating using the straight-line method. Based on ASC 250, “Accounting Changes and Error Corrections”, the Company determined that the change in depreciation method from an accelerated method to a straight-line method is a change in accounting estimate affected by a change in accounting principle. Per the guidance, a change in accounting estimate affected by a change in accounting principle is to be applied prospectively. The change is considered preferable because the straight-line method will more accurately reflect the pattern of usage
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and the expected benefits of such assets and provide greater consistency with the depreciation methods used by other companies in the Company’s industry. The net book value of assets acquired with useful lives remaining will be depreciated using the straight-line method prospectively. As a result of the change to the straight-line method of depreciating the assets, accumulated depreciation and depreciation expense decreased by $
Recently Adopted Accounting Pronouncements
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 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. The adoption of this standard did not have a material impact on our condensed consolidated financial statements or related disclosures.
2. Supplemental Balance Sheet Disclosures
Acquisition
On June 30, 2023, the Company entered into an Asset Purchase and License Agreement with Honeywell whereby Honeywell sold certain assets and granted perpetual license rights to manufacture and sell licensed products related to its inertial, communication and navigation product lines to the Company. The Transaction involves a sale of certain inventory, equipment and customer-related documents; an assignment of certain customer contracts; and a grant of exclusive and non-exclusive licenses to use certain Honeywell intellectual property related to its inertial, communication and navigation product lines to repair, overhaul, manufacture sell, import, export and distribute certain products to the Company. The Transaction allows the Company to diversify its product offerings in the aerospace industry. The Company determined that the Transaction met the definition of a business under ASC 805; therefore, the Company accounted for the Transaction as a business combination and applied the acquisition method of accounting.
In connection with the Transaction, the Company entered into a term loan with PNC Bank, National Association for $
In the third quarter of 2024 and within one year from the Acquisition Date, the Company finalized its accounting of the Transaction. The following purchase price allocation table presents the Company's estimates of the fair value of assets acquired and liabilities assumed as of the Acquisition Date, and subsequent measurement period adjustments recorded during the one-year period ended June 30, 2024:
Amounts Recognized as of | |||||||||
| Acquisition Date |
| Measurement |
| Purchase Price | ||||
(as previously reported) | Period Adjustments | Allocation | |||||||
Cash consideration | $ | | $ | — | $ | | |||
Total consideration | $ | | $ | — | $ | | |||
— | |||||||||
Prepaid inventory (a) | $ | | $ | ( | (d) | $ | | ||
Equipment | | | (d) | | |||||
Construction in progress | | — | | ||||||
Intangible assets (b) | | ( | (d) | | |||||
Goodwill (c) | | ( | (d)(e) | | |||||
Assets acquired | | ( | | ||||||
Accrued expenses | ( | | (e) | — | |||||
Liabilities assumed | ( | | — | ||||||
Net assets acquired | $ | | $ | — | $ | | |||
| (a) | Prepaid inventory consists of raw materials and finished goods acquired by the Company but not in the Company’s physical possession as of the Acquisition Date. The fair value of raw materials was estimated to equal the replacement cost. The fair |
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| value of finished goods was determined based on the estimated selling price, net of selling costs and a margin on the selling activities, which resulted in a change in the value of the finished goods. |
| (b) | Intangible assets consist of license agreement related to the license rights to use certain Honeywell intellectual property and customer relationships and are recorded at estimated fair values. The estimated fair value of the license agreement is based on a variation of the income valuation approach and is determined using the relief from royalty method. The estimated fair value of the customer relationships is based on a variation of the income valuation approach known as the multi-period excess earnings method. Refer to Intangible assets within Note 2, “Supplemental Balance Sheet Disclosures” for further details. |
| (c) | Goodwill represents the excess of the purchase consideration over the estimated fair value of the assets acquired and liabilities assumed. The goodwill recognized is primarily attributable to the expected synergies from the Transaction. Goodwill resulting from the Transaction has been assigned to the Company’s |
(d) | In the third quarter of 2024 and within one year from the Acquisition Date, the Company identified measurement period adjustments related to fair value estimates. The measurement period adjustments were due to the refinement of inputs used to calculate the fair value of the prepaid inventory, equipment, license agreement and customer relationships based on facts and circumstances that existed as of the Acquisition Date. One of the refinements of inputs used was a change in classification of prepaid inventory to of $ |
(e) | During the fourth quarter of 2023, the Company identified measurement period adjustments related to the fair value estimates for accrued expenses. While the Asset Purchase and License Agreement indicated an amount of liabilities related to open supplier purchase orders to be assumed by the Company as of the Acquisition Date, it was determined that there were no actual liabilities outstanding related to these open supplier purchase orders as of the Acquisition Date; therefore, the $ |
Transition services agreement
Concurrent with the Transaction, the Company entered into a transition services agreement (the “TSA”) with Honeywell, at no additional costs, to receive certain transitional services and technical support during the transition service period. The Company accounted for the TSA separate from business combination and have recognized $
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Acquisition and related costs
In connection with the Transaction, the Company incurred
Unaudited pro forma information
The following unaudited pro forma summary presents consolidated information of the Company, including the Product Lines, as if the Transaction had occurred on October 1, 2021:
Three Months Ended | Nine Months Ended | |||||
| June 30, 2023 | |||||
Net sales | $ | | $ | | ||
Net income | $ | | $ | | ||
These pro forma results are for illustrative purposes and are not indicative of the actual results of operations that would have been achieved nor are they indicative of future results of operations. The unaudited pro forma information for all periods presented was adjusted to give effect to pro forma events that are directly attributable to the Transaction and are factually supportable. The unaudited pro forma results do not include any incremental cost savings that may result from the integration.
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, | |||
2024 | 2023 | |||||
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, | |||
2024 | 2023 | |||||
Prepaid insurance | $ | | $ | | ||
Other |
| |
| | ||
$ | | $ | | |||
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Intangible assets
The Company’s intangible assets other than goodwill are as follows:
| As of June 30, 2024 | |||||||||||
| Gross Carrying |
| Accumulated |
| Accumulated |
| Net Carrying | |||||
Value |
| Impairment |
| Amortization |
| Value | ||||||
License agreement acquired from the Transaction (a) | $ | | $ | — | $ | — | $ | | ||||
Customer relationships acquired from the Transaction (a) |
| |
| — |
| ( |
| | ||||
Licensing and certification rights (b) |
| |
| ( |
| ( |
| | ||||
Total | $ | | $ | ( | $ | ( | $ | | ||||
As of September 30, 2023 | ||||||||||||
| Gross Carrying |
| Accumulated |
| Accumulated |
| Net Carrying | |||||
| Value |
| Impairment |
| Amortization |
| Value | |||||
License agreement acquired from the Transaction (a) | $ | | $ | — | $ | — | $ | | ||||
Customer relationships acquired from the Transaction (a) |
| |
| — |
| ( |
| | ||||
Licensing and certification rights (b) |
| |
| ( |
| ( |
| | ||||
Total | $ | | $ | ( | $ | ( | $ | | ||||
(a) | As part of the Transaction, the Company acquired intangible assets related to the license agreement for the license rights to use certain Honeywell intellectual property and customer relationships. The license agreement has an indefinite life and is not subject to amortization; the customer relationships have an estimated weighted average life of nine years. The Company determined that the intangible assets were not impaired as of June 30, 2024 and September 30, 2023; |
(b) | The licensing and certification rights are amortized over a defined number of units. |
Intangible asset amortization expense was $
Intangible asset amortization expense was $
The timing of future amortization expense is not determinable for the licensing and certification rights because they are amortized over a defined number of units. The expected future amortization expense related to the customer relationships as of June 30, 2024 is as follows:
2024 (three months remaining) |
| $ | |
2025 | | ||
2026 | | ||
2027 |
| | |
2028 |
| | |
Thereafter |
| | |
Total | $ | |
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Assets Held for Sale
As of September 30, 2023, the Company classified $
Property and equipment
Property and equipment, net consists of the following:
| June 30, |
| September 30, | |||
2024 | 2023 | |||||
Computer equipment | $ | | $ | | ||
Furniture and office equipment |
| |
| | ||
Manufacturing facility |
| |
| | ||
Equipment |
| |
| | ||
Land |
| |
| | ||
| |
| | |||
Less accumulated depreciation and amortization |
| ( |
| ( | ||
$ | | $ | | |||
Depreciation and amortization related to property and equipment was $
Depreciation and amortization related to property and equipment was approximately $
Other assets
Other assets consist of the following:
| June 30, |
| September 30, | |||
2024 | 2023 | |||||
Operating lease right-of-use assets | $ | | $ | | ||
Other non-current assets |
| |
| | ||
$ | | $ | | |||
Other non-current assets as of June 30, 2024 includes deferred ERP implementation costs, a supplier credit from one of our suppliers and a deposit for medical claims required under the Company’s medical plan. Other non-current assets as of September 30, 2023 includes a supplier credit from one of our suppliers, a deposit for medical claims required under the Company’s medical plan and an airplane hanger deposit. In addition, other non-current assets as of June 30, 2024 and September 30, 2023 includes $
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Accrued expenses
Accrued expenses consist of the following:
| June 30, |
| September 30, | |||
2024 | 2023 | |||||
Warranty | $ | | $ | | ||
Salary, benefits and payroll taxes |
| |
| | ||
Professional fees |
| |
| | ||
Operating lease | | | ||||
Income tax payable | — | | ||||
Other |
| |
| | ||
$ | | $ | | |||
Warranty cost and accrual information for the three- and nine-month periods ended June 30, 2024 is highlighted below:
| Three Months Ending | Nine Months Ended |
| ||||
June 30, 2024 |
| June 30, 2024 | |||||
Warranty accrual, beginning of period | $ | | $ | | |||
Accrued expense |
| |
| | |||
Warranty cost |
| ( |
| ( | |||
Warranty accrual, end of period | $ | | $ | | |||
3. Income Taxes
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.
As a result of the 2017 Tax Cuts and Jobs Act, the Company must amortize amounts paid or incurred for specified research and development expenditures, including software development expenses, ratably over 60 months, beginning at the mid-point of the tax year in which the expenditures are paid or incurred.
The effective tax rate for the three-month periods ended June 30, 2024 and 2023 were
The effective tax rate for the nine-month periods ended June 30, 2024 and 2023 were
4. Shareholders’ Equity and Share-Based Payments
At June 30, 2024, 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, “Compensation – Stock Compensation”, by using the fair value method for expensing stock options and stock awards.
Amended and Restated 2019 Stock-Based Incentive Compensation Plan
The Company’s Amended and Restated 2019 Stock-Based Incentive Compensation Plan was approved by the Company’s shareholders at the Company’s Annual Meeting of Shareholders held on April 18, 2024, which amended and restated the 2019 Stock-Based Incentive Compensation Plan approved by the Company’s shareholders on April 2, 2019 (as Amended, the “Amended and Restated 2019 Plan”). The Amended and Restated 2019 Plan authorizes the grant of stock appreciation rights, restricted stock, options
17
and other equity-based awards. Options granted under the Amended and Restated 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 Amended and Restated 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 Amended and Restated 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 Amended and Restated 2019 Plan, the aggregate number and kind of shares of common stock available under the Amended and Restated 2019 Plan, any applicable individual limits on the number of shares of common stock available for awards under the Amended and Restated 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 stock options and awards issued to employees under the Amended and Restated 2019 Plan was $
The compensation expense under the Amended and Restated 2019 Plan related to stock awards issued to non-employee members of the Board was $
Total compensation expense associated with the Amended and Restated 2019 Plan was $
At June 30, 2024, unrecognized compensation expense of approximately $
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5. Earnings Per Share
Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 |
| |||||
Numerator: | |||||||||||||
Net income | $ | | $ | | $ | | $ | | |||||
Denominator: | |||||||||||||
Basic weighted average shares |
| |
| |
| |
| | |||||
Dilutive effect of share-based awards |
| |
| |
| |
| | |||||
Diluted weighted average shares |
| |
| |
| |
| | |||||
Net income per common share: | |||||||||||||
Basic | $ | | $ | | $ | | $ | | |||||
Diluted | $ | | $ | | $ | | $ | | |||||
Net income per share is calculated pursuant to ASC Topic 260, “Earnings per Share”. 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, 2024 and 2023, there were
For the three-month periods ended June 30, 2024 and 2023, respectively,
For the nine-month periods ended June 30, 2024 and 2023, respectively,
6. Commitments and 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 aggregate, have a material effect on the results of operations or financial position.
7. Related Party Transactions
In recent years, the Company has had sales to AML Global Eclipse, LLC (“Eclipse”), whose principal shareholder is also a principal shareholder in the Company. Prior balances are disclosed below for comparability.
Sales to Eclipse amounted to approximately $
A company in which Parizad Olver (Parchi), a former member of the Board of Directors, is the managing partner and has an ownership interest, received a consulting fee of $
8. Leases
The Company accounts for leases in accordance with ASU 2016-02, “Leases” (“ASU 2016-02”), and records right-of-use assets and corresponding lease liabilities on the balance sheet for most leases with an initial term of greater than one year. Consistent with
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previous accounting guidance, we will recognize payments for leases with a term of less than one year 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, 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 a 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 Condensed Consolidated Balance Sheet as of June 30, 2024:
Classification on the Consolidated Balance Sheet on June 30, 2024 | |||||
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, 2024:
| Twelve Months |
| |||
Ending | Operating | ||||
| June 30, |
| Leases | ||
2025 | | ||||
Total minimum lease payments |
|
| $ | | |
Amount representing interest |
|
|
| ( | |
Present value of minimum lease payments |
|
| $ | | |
Current portion |
|
|
| | |
|
| $ | — | ||
20
9. Loan Agreement
On June 28, 2023, the Company and one of its subsidiaries entered into an Amendment to Loan Documents (the “Loan Amendment”) with PNC Bank, National Association (“PNC”), which amends certain terms of that certain Loan Agreement entered into by the parties on May 11, 2023 (the “Loan Agreement” and, as amended, the “Amended Loan Agreement”) and (ii) a corresponding Term Note in favor of PNC (the “Term Note”), which together provide for a senior secured term loan in an aggregate principal amount of $
The interest rate applicable to loans outstanding under the Term Loan is a floating interest rate equal to the sum of (A) the Term SOFR Rate (as defined in the Term Note) plus (B) an unadjusted spread of the Applicable SOFR Margin plus (C) a SOFR adjustment of
In addition to providing for the Term Loan, the Loan Agreement, together with a corresponding Revolving Line of Credit Note in favor of PNC, executed May 11, 2023 (“Line of Credit Note”), provides for a senior secured revolving line of credit in an aggregate principal amount of $
The interest rate applicable to loans outstanding under the Revolving Line of Credit was a rate per annum equal to the sum of (A) Daily SOFR (as defined in the Line of Credit Note) plus (B) an unadjusted spread of Applicable SOFR Margin plus (C) a SOFR adjustment of
On December 19, 2023, the Company and PNC entered into an Amendment to the Loan (the “Restated Loan Amendment”) and a corresponding Amended and Restated Revolving Line of Credit Note (“Restated Line of Credit Note”) and Amended and Restated Line of Credit and Investment Sweep Rider (the “Restated Rider”), to increase the aggregate principal amount available under the Company’s senior secured revolving line of credit from $
The Interest rate applicable to loans outstanding under the Restated Line of Credit is a rate per annum equal to the sum of (A) Daily SOFR (as defined in the Restated Line of Credit Note) plus (B) an unadjusted spread of Applicable SOFR Margin (as defined in the Restated Line of Credit Note) plus (C) a SOFR adjustment of
The foregoing descriptions of the Restated Loan Amendment, Restated Line of Credit Note and Restated Rider do not purport to be complete and are qualified in their entirety by reference to the full text of the Restated Loan Amendment, Restated Line of Credit Note and Restated Rider, which are filed as Exhibit 10.1, Exhibit 10.2 and Exhibit 10.3, respectively, to the Current Report on Form 8-K filed December 22, 2023 and are incorporated herein by reference.
The Company was in compliance with all applicable covenants throughout the year and at June 30, 2024. The outstanding balance drawn on the Line of Credit was $
10. Subsequent Events
On July 22, 2024, the Company entered into that certain Amendment No. 3 to Asset Purchase and License Agreement (the “Amendment”) with Honeywell.
Pursuant to the Amendment, Honeywell sold, assigned or licensed to the Company certain additional assets related to its communication and navigation product lines, including a sale of certain inventory and customer-related documents; an assignment of certain contracts; and a grant of exclusive and non-exclusive licenses to use certain Honeywell intellectual property related to its communication and navigation product lines to manufacture, upgrade and repair certain additional products for consideration of $
21
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”, “projected”, “might”, “potential”, “preliminary”, “provisionally” 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.
All forward-looking statements are based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Many of the factors that will determine the Company’s future results are beyond the ability of management to control or predict. 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, 2023 and in Item 1A (Risk Factors) to Part II of this Quarterly Report on Form 10-Q, as well as the following factors:
| ● | market acceptance of the Company’s ThrustSense® full-regime Autothrottle, Vmca Mitigation, 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, producing or improving the Company’s 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 impact of general economic trends on the Company’s business; |
| ● | disruptions in the Company’s supply chain, customer base and workforce; |
| ● | the ability to gain, drive and sustain regulatory approval, including domestic and international certifications, 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; |
| ● | ability to successfully manage and integrate key acquisitions, mergers and other transactions, such as the recent asset acquisition of certain Inertial, Communication and Navigation product lines from Honeywell International, Inc., as well as the failure to realize expected synergies and benefits anticipated when we make an acquisition; |
| ● | potential future acquisitions or dispositions; |
| ● | 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”). |
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
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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. 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, integrated standby units with autothrottle and advanced GPS receivers that enable reduced carbon footprint navigation, communication and navigation products and inertial reference units.
The Company has continued to position itself as a system integrator, which provides the Company with the capability and 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 high-quality products and systems, to reduce product time to market and to achieve cost advantages over products offered by its competitors.
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, which incorporates proprietary technology, lower cost relative to the competition, 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 with the precision of satellite-based navigation required to comply with the regulatory environments of both domestic and international markets. The Company believes that its 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 may 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 demand for the Company’s products. The Company’s FMS/FPDS product line is designed for new production and retrofit applications in general aviation, commercial air transport and military transport aircraft. In addition, the Company offers what we believe to be a state-of-the-art integrated standby unit, integrating the full functionality of the primary and navigation displays into a small backup-powered unit. This integrated standby unit 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 integrated standby units, 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
23
Flight Deck enhanced avionics suite is available for integration into other business aircraft with full-authority digital engine control (“FADEC”) and non-FADEC engines.
The Company has developed its FAA-certified ThrustSense® Autothrottle for retrofit in the King Air, dual turbo prop PT6 powered aircraft. The ThrustSense® Autothrottle is designed to automate power management for speed and power control including go-around. ThrustSense® Autothrottle also ensures aircraft envelope protection and engine protection during all phases of flight, thereby reducing pilot workload and increasing safety. The Company has signed a multi-year agreement with Textron to supply ThrustSense® Autothrottle on the King Air 360 and King Air 260. ThrustSense® Autothrottle is also available for retrofit on King Air aircraft through Textron service centers and third-party service centers. The Company has also developed an FAA-certified safety mode feature for its King Air ThrustSense® Autothrottle, LifeGuard™, which provides critical Vmca protection that proportionally reduces engine power to maintain directional control during an engine-out condition.
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).
In June 2023, the Company entered into an Asset Purchase and License Agreement (as amended, the “Honeywell Agreement”) with Honeywell International, Inc. (“Honeywell”) pursuant to which Honeywell sold, assigned or licensed certain assets related to its inertial, communication and navigation product lines, including a sale of certain inventory, equipment and customer-related documents, an assignment of certain contracts and a grant of exclusive and non-exclusive licenses to use certain Honeywell intellectual property related to its inertial, communication and navigation product lines to repair, overhaul, manufacture sell, import, export and distribute certain products to the Company for cash consideration of $35.9 million. On July 22, 2024, the Company entered into Amendment No. 3 to the Honeywell Agreement (the “Amendment”). Pursuant to the Amendment, Honeywell sold, assigned or licensed to the Company certain additional assets related to its communication and navigation product lines, including a sale of certain inventory and customer-related documents; an assignment of certain contracts; and a grant of exclusive and non-exclusive licenses to use certain Honeywell intellectual property related to its communication and navigation product lines to manufacture, upgrade and repair certain additional products for consideration of $4.2 million in cash.
The exclusive licensing of these product lines from Honeywell enhances the Company’s current offerings in the air transport, military and business aviation markets. In addition, there are potential cost synergies from better utilization of the Company’s skilled engineering team and its existing operational capacity. The Company believes the Honeywell Agreement will help to accelerate the Company’s growth and enhance its global reputation for delivering some of the industry’s best price-for-performance value propositions.
Cost of sales related to product and service sales comprises materials, 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 primarily comprises salaries and benefits, building occupancy costs, supplies and outside service costs related to production, purchasing, material control and quality control. Cost of sales also 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 or completed contract method of accounting. Company funded research and development (“R&D”) expenditures relate to internally-funded efforts for 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 and other general corporate expenses.
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The Company sells its products to agencies of the United States and foreign governments, aircraft operators, aircraft modification centers and OEMs. 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, 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, inflation, public health crises and pandemics, and other macroeconomic factors that affect spending behavior. Furthermore, spending by government agencies may be reduced in the future. 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 similar pandemics will result in other suspensions, delays or order cancellations by the Company’s customers or suppliers.
Environmental, Social and Governance Considerations
In recent years, environmental, social and governance (“ESG”) issues have become an increasing area of focus for some of our shareholders, customers and suppliers. Management and the Company’s Board of Directors are committed to identifying, assessing and understanding the potential impact of ESG issues and related risks on the Company’s business model, as well as potential areas of improvement.
We are committed to recruiting, motivating and developing a diversity of talent. We are an equal opportunity employer and a Vietnam Era Veterans’ Readjustment Assistance Act federal contractor. All qualified applicants receive consideration for employment without regard to race, color, religion, sex, sexual orientation, gender identity, national origin, disability status, protected veteran status, or any other characteristic protected by law.
The nature of our business also supports long-term sustainability. Historically, a majority of the Company’s sales have come from the retrofit market, in which the Company, by making upgrades to improve the functionality and safety of existing machinery, facilitates the re-use and recycling of aircraft and equipment that might otherwise be scrapped as obsolete. The Company’s GPS receivers also facilitate reduced carbon footprint navigation. The Company also plans to enhance its focus on the environmental impact of its operations.
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 (“U.S. GAAP”). 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. Management has determined that the most critical accounting policies and estimates are those related to revenue recognition, inventory valuation and valuation of tangible and intangible assets acquired. On an ongoing basis, the Company’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 condensed consolidated financial statements. The Annual Report on Form 10-K for the fiscal year ended September 30, 2023 contains a discussion of these critical accounting policies. There have been no material changes in the Company’s critical accounting policies since September 30, 2023. See also Note 1 to the unaudited condensed consolidated financial statements for the three- and nine-month periods ended June 30, 2024 as set forth herein.
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RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 2024 AND 2023
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, |
| |||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 |
|
| |
Net sales: | ||||||||||
Product | 43.6 | % | 82.6 | % | 45.4 | % | 80.7 | % | ||
Customer service | 54.5 | % | 16.6 | % | 49.5 | % | 17.3 | % | ||
Engineering development contracts | 2.0 | % | 0.8 | % | 5.1 | % | 2.0 | % | ||
Total net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||
Cost of sales: |
|
|
|
|
|
| ||||
Product | 17.9 | % | 35.6 | % | 19.6 | % | 34.2 | % | ||
Customer service | 26.4 | % | 4.7 | % | 22.9 | % | 5.0 | % | ||
Engineering development contracts | 2.4 | % | 0.3 | % | 2.8 | % | 0.4 | % | ||
Total cost of sales | 46.6 | % | 40.5 | % | 45.4 | % | 39.5 | % | ||
Gross profit | 53.4 | % | 59.5 | % | 54.6 | % | 60.5 | % | ||
Operating expenses: |
|
|
|
|
|
| ||||
Research and development | 9.3 | % | 10.7 | % | 9.5 | % | 10.9 | % | ||
Selling, general and administrative | 26.7 | % | 30.1 | % | 28.5 | % | 32.6 | % | ||
Total operating expenses | 36.1 | % | 40.8 | % | 38.0 | % | 43.5 | % | ||
Operating income | 17.3 | % | 18.7 | % | 16.6 | % | 17.0 | % | ||
Interest expense | (1.5) | % | — | % | (2.2) | % | — | % | ||
Interest income | 0.0 | % | 2.3 | % | 0.4 | % | 2.0 | % | ||
Other income | 0.1 | % | 1.1 | % | 0.2 | % | 0.6 | % | ||
Income before income taxes | 16.0 | % | 22.2 | % | 15.0 | % | 19.6 | % | ||
Income tax expense | 2.8 | % | 4.3 | % | 3.0 | % | 4.0 | % | ||
Net income | 13.2 | % | 17.9 | % | 12.0 | % | 15.6 | % | ||
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Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023
Net sales. Net sales were $11,765,635 for the three months ended June 30, 2024 compared to $7,959,208 for the three months ended June 30, 2023, an increase of 47.8%. Product sales decreased $1,448,355, or 22.0%, and customer service sales increased $5,090,747, or 386.2% in the three months ended June 30, 2024, as compared to the prior year quarter. The decrease in product sales for the three months ended June 30, 2024 compared to the prior year quarter was primarily the result of reduced shipments of displays for retrofit programs to commercial air transport customers, partially offset by an increase of shipments of displays to general aviation and military customers. The increase in customer service sales primarily reflects customer service sales of the product lines acquired from Honeywell. EDC sales increased $164,035 in the three months ended June 30, 2024 compared to the year-ago quarter, reflecting increased EDC business.
Cost of sales. Cost of sales increased by $2,261,252, or 70.1%, to $5,485,814, or 46.6% of net sales, in the three months ended June 30, 2024, compared to $3,224,562, or 40.5% of net sales, in the three months ended June 30, 2023. The increase in cost of sales was primarily the result of an increase in customer service sales volume for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The Company’s overall gross margin was 53.4% and 59.5% for the three months ended June 30, 2024 and 2023, respectively. This decrease in overall gross margin percentage for the three months ended June 30, 2024 is primarily the result of changes in product mix and higher unit manufacturing costs, which resulted principally from production inefficiencies and lower manufacturing utilization due to new products in development and the Honeywell integration.
Research and development. R&D expenses were $1,099,367, an increase of $248,071, or 29.1%, in the three months ended June 30, 2024 from $851,296 in the three months ended June 30, 2023. This increase in R&D expenses was the result of higher salaries and benefits due to higher headcount. As a percentage of net sales, R&D expenses decreased to 9.3% of net sales for the three months ended June 30, 2024 from 10.7% of net sales for the three months ended June 30, 2023.
Selling, general and administrative. Selling, general and administrative expenses were $3,143,334, an increase of $747,620, or 31.2%, in the three months ended June 30, 2024 from $2,395,714 in the three months ended June 30, 2023. The overall increase in selling, general and administrative expense in the quarter ended June 30, 2024, was primarily the result of increases in consulting and legal fees of $175,278 primarily due to the Transaction and increased costs of $233,678 as a result of the recruitment of a new CFO. In addition, the Company incurred amortization expense of $611,125 related to the customer relationships intangible asset resulting from the Transaction. As a percentage of net sales, selling, general and administrative expenses were 26.7% in the three months ended June 30, 2024 compared to 30.1% for the prior year period.
Interest expense. Interest expense was $172,784 for the three months ended June 30, 2024 resulting from borrowings under the Company’s debt facility with PNC. There was no interest expense for the three months ended June 30, 2023 as the Company had no debt during the period.
Interest income. Interest income decreased by $179,826 to $5,826 in the three months ended June 30, 2024 from $185,652 in the three months ended June 30, 2023, mainly as a result of decreased cash balances during the current year period compared to the same period in the prior year.
Other income. Other income decreased by $77,180 to $12,869 in the three months ended June 30, 2024 from $90,049 in the three months ended June 30,2023 and is mainly composed of royalties earned.
Income tax expense. The income tax expense for the three months ended June 30, 2024 was $330,511 as compared to an income tax expense of $339,958 for the three months ended June 30, 2023.
The effective tax rate for the three-month period ended June 30, 2024 was 17.6% and differs from the statutory tax rate primarily due to an increased R&D credit, as well as permanent items and state taxes.
The effective tax rate for the three-month period ended June 30, 2023 was 19.3% and differs from the statutory tax rate primarily due to an increased R&D credit, as well as permanent items and state taxes.
Net income. The Company reported net income for the three months ended June 30, 2024 of $1,552,520 as compared to net income of $1,423,379 for the three months ended June 30, 2023. On a diluted basis, the net income per share was $0.09 for the three months ended June 30, 2024 compared to net income per share of $0.08 for the three months ended June 30, 2023.
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Nine Months Ended June 30, 2024 Compared to the Nine Months Ended June 30, 2023
Net sales. Net sales were $31,813,214 for the nine months ended June 30, 2024 compared to $21,815,917 for the nine months ended June 30, 2023, an increase of 45.8%. Product sales decreased $3,162,016 or 18.0% and customer service sales increased $11,959,764 or 316.8% for the nine months ended June 30, 2024, as compared to the year ago period. The decrease in product sales for the nine months ended June 30, 2024 was primarily the result of reduced shipments of displays for retrofit programs to commercial air transport customers partially offset by an increase of shipments of displays to general aviation and military customers. The increase in customer service sales for the nine months ended June 30, 2024 primarily reflects customer service sales of the product lines acquired from Honeywell. EDC sales increased $1,199,549, or 277.4% for the nine months ended June 30, 2024, compared to the year-ago period reflecting increased EDC business.
Cost of sales. Cost of sales increased by $5,810,551, or 67.4%, to $14,427,868, or 45.4% of net sales, in the nine months ended June 30, 2024, compared to $8,617,317 or 39.5% of net sales, in the nine months ended June 30, 2023. The increase in cost of sales was primarily the result of an increase in customer service sales volume for the nine months ended June 30, 2024 compared to the nine months ended June 30, 2023. The Company’s overall gross margin was 54.6% and 60.5% for the nine months ended June 30, 2024 and 2023, respectively. This decrease in overall gross margin percentage for the nine months ended June 30, 2024 is primarily the result of changes in product mix and higher unit manufacturing costs, which resulted principally from production inefficiencies and lower manufacturing utilization due to new products in development and the Honeywell integration.
Research and development. R&D expenses were $3,031,630 an increase of $643,691, or 27.0%, in the nine months ended June 30, 2024 from $2,387,939 in the nine months ended June 30, 2023. This increase in R&D expenses were due to higher salaries and benefits due to higher headcount. As a percentage of net sales, R&D expense decreased to 9.5% of net sales for the nine months ended June 30, 2024 compared to 10.9% for the prior year period.
Selling, general and administrative. Selling, general and administrative expenses were $9,058,347, an increase of $1,954,135, or 27.5%, in the nine months ended June 30, 2024 from 7,104,212 in the nine months ended June 30, 2023. The overall increase in selling, general and administrative expense in the quarter ended June 30, 2024 was primarily the result of increases in consulting and legal fees of $517,352 primarily due to the Transaction and increased costs of $612,907 as a result of the recruitment of a new CFO and other corporate initiatives. In addition, the Company incurred amortization expense of $1,437,232 related to the customer relationships intangible asset resulting from the Transaction These increases were partially offset by the $162,000 gain from the sale of the Company’s King Air aircraft. As a percentage of net sales, selling, general and administrative expenses were 28.5% in the nine months ended June 30, 2024 compared to 32.6% for the prior year period.
Interest expense. Interest expense was $704,267 for the nine months ended June 30, 2024 resulting from borrowings under the Company’s debt facility with PNC. There was no interest expense in the nine months ended June 30, 2023 as the Company had no debt during the period.
Interest income. Interest income decreased by $310,990 to $121,505 in the nine months ended June 30, 2024 from $432,495 in the nine months ended June 30, 2023, mainly as a result of decreased cash balances during the current year period compared to the same period in the prior year.
Other income. Other income decreased by $74,464 to $57,040 in the three months ended June 30, 2024 from $131,504 in the three months ended June 30, 2023 and is mainly composed of royalties earned.
Income tax expense. The income tax expense for the nine months ended June 30, 2024 was $951,461 as compared to an income tax expense of $877,315 for the nine months ended June 30, 2023.
The effective tax rate for the nine-month period ended June 30, 2024 was 19.9% and differs from the statutory tax rate primarily due to an increased R&D credit, as well as permanent items and state taxes.
The effective tax rate for the nine-month period ended June 30, 2023 was 20.5% and differs from the statutory tax rate primarily due to increased R&D tax credits, permanent items and state taxes.
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Net income. The Company reported net income for the nine months ended June 30, 2024 of $3,818,186 as compared to net income of $3,393,133 for the nine months ended June 30, 2023. On a diluted basis, the net income per share was $0.22 for the nine months ended June 30, 2024 compared to net income per share of $0.19 for the nine months ended June 30, 2023.
Liquidity and Capital Resources
The following table highlights key financial measurements of the Company:
June 30, | September 30, | |||||
| 2024 |
| 2023 | |||
Cash and cash equivalents | $ | 521,041 | $ | 3,097,193 | ||
Accounts receivable | $ | 7,329,662 | $ | 9,743,714 | ||
Current assets | $ | 26,372,873 | $ | 34,673,703 | ||
Current liabilities | $ | 16,152,889 | $ | 6,398,959 | ||
Contract liability | $ | 131,534 | $ | 143,359 | ||
Other non-current liabilities | $ | 448,931 | $ | 17,921,508 | ||
Quick ratio (1) |
| 0.49 |
| 2.01 | ||
Current ratio (2) |
| 1.63 |
| 5.42 | ||
| Nine Months Ended June 30, |
| |||||
2024 |
| 2023 | |||||
Cash flow activities: |
|
|
|
|
| ||
Net cash provided by operating activities | $ | 5,350,891 | $ | 937,925 | |||
Net cash provided by (used in) investing activities |
| 1,713,883 |
| (36,025,084) | |||
Net cash (used in) provided by financing activities |
| (9,640,926) |
| 20,408,846 | |||
| (1) | Calculated as: the sum of cash and cash equivalents plus accounts receivable, net, divided by current liabilities. |
| (2) | 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, supplemented with borrowings under our term loan and revolving credit facility. Cash is used principally to finance inventory, accounts receivable, contract assets, payroll, debt service and acquisitions, as well as the Company’s known contractual and other commitments (including those described in Note 8, “Leases”). The Company’s existing cash balances and anticipated cash flows from operations, together with borrowings under our term loan and revolving credit facility, are expected to be adequate to satisfy the Company’s liquidity needs for at least the next 12 months. Apart from what has been disclosed in this Management’s Discussion and Analysis, 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.
The declaration and payment of any dividend in the future will be at the discretion of the Company’s Board of Directors.
Debt Facility
On December 19, 2023, the Company and PNC entered into an Amendment to Loan Documents (the “Restated Loan Amendment”) and a corresponding Amended and Restated Revolving Line of Credit Note (“Restated Line of Credit Note”) and Amended and Restated Line of Credit and Investment Sweep Rider (the “Restated Rider”), to increase the aggregate principal amount available under the Company’s senior secured revolving line of credit from $10,000,000 to $30,000,000 and extend the maturity date until December 19, 2028. The proceeds of the Restated Line of Credit Note will be used for working capital and other general corporate purposes, for acquisitions as permitted under the Restated Loan Amendment and to pay off and close the loan evidenced by that certain Term Note executed in favor of PNC, dated June 28, 2023, which provided for a senior secured term loan in an aggregate principal amount of $20,000,000, with a maturity date of June 28, 2028 (the “Term Note”).
The interest rate applicable to loans outstanding under the Restated Line of Credit is a rate per annum equal to the sum of (A) Daily SOFR (as defined in the Restated Line of Credit Note) plus (B) an unadjusted spread of Applicable SOFR Margin (as defined in the Restated Line of Credit Note) plus (C) a SOFR adjustment of ten basis points. The Applicable SOFR Margin ranges from 1.5% to 2.5% depending on the Company’s funded debt to EBITDA ratio, as defined in the Restated Line of Credit Note.
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Stifel Sales Agreement
On September 22, 2023, the Company entered into an at-the-market equity offering Sales Agreement (the “ATM Sales Agreement”) with Stifel, Nicolaus & Company, Incorporated (the “Sales Agent”), pursuant to which the Company may offer and sell from time to time through the Sales Agent up to $40 million of shares of its common stock. The shares will be offered and sold pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-267595), which was declared effective by the SEC on October 14, 2022. The Company filed a prospectus supplement, dated September 22, 2023, with the SEC in connection with the offer and sale of the shares. Subject to the terms and conditions of the ATM Sales Agreement, the Sales Agent will use commercially reasonable efforts to sell shares of the Company’s common stock from time to time, based upon the Company’s instructions. The Company is not obligated to sell any shares under the ATM Sales Agreement and the Company or the Sales Agent may at any time suspend solicitation and offers under the ATM Sales Agreement or terminate the ATM Sales Agreement. The Company has provided the Sales Agent with customary indemnification rights and the Sales Agent will be entitled to compensation for its services of up to 3.0% of the gross sales price per share of the shares of the Company’s common stock sold through the Sales Agent. Sales of the shares of the Company’s common stock, if any, under the ATM Sales Agreement may be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act, including sales made directly on or through Nasdaq or any other existing trading market for the Company’s common stock, in negotiated transactions at market prices prevailing at the time of sale or at prices related to such prevailing market prices and/or any other method permitted by law.
During the year ended September 30, 2023 and the three- and nine-month periods ended June 30, 2024, we did not sell any shares of common stock under the ATM Sales Agreement.
Operating activities
Net cash provided by operating activities was $5.4 million for the nine-month period ended June 30, 2024 and consisted primarily of funding from net income of $3.8 million and changes in working capital.
Net cash provided by operating activities was $0.9 million for the nine-month period ended June 30, 2023 and consisted primarily of funding from net income of $3.4 million, offset by an increase in accounts receivable of $1.6 million and a decrease in accrued expenses of $0.9 million.
Investing activities
Net cash provided by investing activities was $1.7 million for the nine-month period ended June 30, 2024 and consisted primarily of proceeds of $2.2 million from the sale of the Company’s King Air aircraft, offset by purchases of $0.5 million of equipment and computer hardware.
Net cash used in investing activities was $36.0 million for the nine-month period ended June 30, 2023 and consisted primarily of the payment for the Transaction.
Financing activities
Net cash used in financing activities was $9.6 million for the nine-month period ended June 30, 2024 and consisted of payments against the Company’s line of credit.
Net cash provided by financing activities was $20.4 million for the nine-month period ended June 30, 2023 and consisted of proceeds from the Term Note of $20.0 million and the exercise of stock options.
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
30
respond to unanticipated requirements or developments. If insufficient funds are available, the Company may not be able to introduce new products or compete effectively.
Backlog
Backlog represents the value of contracts and purchase orders, less the revenue recognized to date on those contracts and purchase orders. Backlog activity for the nine-month period ended June 30, 2024:
Three Months Ended | Nine Months Ended | ||||||
| June 30, 2024 |
| |||||
Backlog, beginning of period | $ | 10,432,682 | $ | 13,450,881 | |||
Plus: bookings during period, net |
| 10,599,505 |
| 27,628,885 | |||
Less: sales recognized during period |
| (11,765,635) |
| (31,813,214) | |||
Backlog, end of period | $ | 9,266,552 | $ | 9,266,552 | |||
At June 30, 2024, 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.
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 nine-month period ended June 30, 2024 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 $15,618 with a resulting impact on cash flows of approximately $15,618 for the nine-month period ended June 30, 2024.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
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. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these controls and procedures were effective as of June 30, 2024 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 recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of such controls that occurred during the fiscal quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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. There can be no assurance that we will prevail in any such litigation. The Company does not believe any such matters that are currently pending will, individually or in aggregate, have a material effect on the results of operations or financial position.
Item 1A. Risk Factors
For information regarding the Company’s risk factors, refer to the “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended September 30, 2023, filed with the Securities and Exchange Commission on January 12, 2024 (the “Form 10-K”), as amended on January 29, 2024. There have been no material changes in our risk factors as previously disclosed in Part I, Item 1A of the Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
There were no unregistered sales of equity securities during the quarter ended June 30, 2024.
Use of Proceeds
Not applicable.
Purchase of Equity Securities
We did not repurchase shares of our common stock during the quarter ended June 30, 2024.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Rule
During the quarter ended
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Item 6. Exhibits
(a) Exhibits
2.1* | |
2.2 | |
2.3 | |
2.4* | |
3.1 | Amended and Restated Articles of Incorporation of Innovative Solutions and Support, Inc. (2) |
3.2 | |
3.3 | Amended and Restated Bylaws of Innovative Solutions and Support, Inc. (4) |
10.1** | |
10.2** | |
10.3** | |
18 | Preferability Letter from Grant Thornton LLP, filed herewith. |
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a), filed herewith. |
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a), filed herewith. |
32.1 | |
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents. |
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
(1) | Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 7, 2023, SEC File Number 001-41503. |
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(2) | Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 19, 2007, SEC File Number 000-31157. |
(3) | Incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed with the SEC on April 18, 2023, SEC File Number 001-41503. |
(4) | Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 1, 2018, SEC File Number 000-31157. |
(5) | Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 20, 2024, SEC File Number 001-41503. |
(6) | Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 20, 2024, SEC File Number 001-41503. |
*Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request.
**Denotes compensatory plan or arrangement.
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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 14, 2024 | By: | /s/ Jeffrey DiGiovanni |
Jeffrey DiGiovanni | ||
Chief Financial Officer (on behalf of Registrant and as Principal Financial Officer and Principal Accounting Officer) | ||
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