What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-11 compared with 2021-08-13 · 68 added, 89 removed, 165 unchanged (49% of the section changed)

9 unchanged sentences

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, 2021 and the following factors:

● market acceptance of the Company’s ThrustSense® Integrated PT6 Autothrottle, PC-12 Autothrottle, Vmc a Mitigation and Hot Start Protection capabilities, FPDS, NextGen Flight Deck and COCKPIT/IP® or other planned products or product enhancements;

● market acceptance of the Company’s ThrustSense® full-regime Autothrottle, Vmc a 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 and producing the Company’s ThrustSense® Integrated PT6 Autothrottle, PC-12 Autothrottle, Vmc a Mitigation and Hot Start Protection capabilities, NextGen Flight Deck, COCKPIT/IP® Flat Panel Display System or other planned products or product enhancements;

● 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;

1 unchanged sentence

● the availability of government funding;

● the availability and efficacy of vaccines and their global deployment in response to the COVID-19 pandemic (including as a result of the impact of any newer variants or strains of SARS-CoV-2);

● the availability and efficacy of vaccines (including vaccine boosters) and their global deployment in response to the COVID-19 pandemic (including as a result of the impact of any newer variants or strains of SARS-CoV-2);

● the impact of general economic trends on the Company’s business, including as a result of the COVID-19 pandemic;

30 unchanged sentences

This strategy, as both a manufacturer and integrator, is designed to leverage the latest technologies developed for the computer and telecommunications industries into advanced and cost-effective solutions for the general aviation, commercial air transport, United States Department of Defense (“DoD”)/governmental and foreign military markets.

This approach, combined with the Company’s industry experience, is designed to enable IS&S to develop highquality products and systems, to reduce product time to market, and to achieve cost advantages over products offered by its competitors.

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.

For several years the Company has been working with advances in technology to provide pilots with more information to enhance both the safety and efficiency of flying, and has developed its COCKPIT/IP® Cockpit Information Portal (“CIP”) product line, that incorporates proprietary technology, low cost, reduced power consumption, decreased weight, and increased functionality.

4 unchanged sentences

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.

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 into general aviation, commercial air transport and military transport aircraft.

9 unchanged sentences

The Company has signed a multi-year agreement with Textron Aviation, Inc.

to supply ThrustSense® on the King Air 360 and King Air 260.

(“Textron”) to supply ThrustSense® on the King Air 360 and King Air 260.

ThrustSense® is also available for retrofit on King Airs through Textron service centers and third-party service centers.

23 unchanged sentences

Many of the components are standard, although certain parts are manufactured to meet IS&S specifications.

The overhead portion of cost of sales comprises primarily salaries and benefits, building occupancy costs, supplies, and outside service costs related to production, purchasing, material control, and quality control.

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 includes warranty costs.

Cost of sales related to Engineering Development Contracts (“EDC”) sales comprises engineering labor, consulting services, and other costs associated with specific design and development projects.

These costs are incurred pursuant to contractual arrangements and are accounted for typically as contract costs within cost of sales with the reimbursement accounted for as a sale in accordance with the percentage-of-completion method of accounting.

Company funded research and development (“R&D”) expenditures relate to internally-funded efforts towards the development of new products and the improvement of existing products.

These costs are 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, bad debt expense and other general corporate expenses.

Critical Accounting Policies and Estimates

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There have been no significant changes in the Company’s critical accounting policies since September 30, 2021.

See also Note 1 to the unaudited condensed consolidated financial statements for the three- and nine-month periods ending June 30, 2021 as set forth herein.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED

JUNE 30, 2021 AND 2020

See also Note 1 to the unaudited condensed consolidated financial statements for the three months ended December 31, 2021 as set forth herein.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED

DECEMBER 31, 2021 AND 2020

The following table sets forth the statements of operations data expressed as a percentage of total net sales for the periods indicated (some items may not add due to rounding):

Three Months Ended June 30,

Nine Months Ended June 30,

Three Months Ended December 31,

Engineering development contracts

10 unchanged sentences

Income before income taxes

Income tax (benefit) expense

Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020

Net sales were $6,180,183 for the three months ended June 30, 2021 compared to $5,953,689 for the three months ended June 30, 2020, an increase of 3.8%.

Product sales increased $535,714 in the three months ended June 30, 2021 compared to the three months ended June 30, 2020, and EDC sales decreased $309,220 from the same period in the prior year.

Product sales for the three months ended June 30, 2021 increased from the same period in the prior year primarily because of increased shipments of King Air autothrottle systems to our OEM customer.

The decrease in EDC sales in the current year period was primarily the result of the completion in prior fiscal year of a modification contract with the U.S.

Cost of sales.

Cost of sales increased $266,665, or 10.4%, to $2,825,681, or 45.7% of net sales, in the three months ended June 30, 2021, compared to $2,559,016 or 43.0% of net sales, in the three months ended June 30, 2020.

The increase in cost of sales was primarily the result of an increase in labor and related benefit costs attributable to an increase in headcount to meet customer backlog requirements offset by a decrease in material costs as a percentage of sales for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

The Company’s overall gross margin was 54.3% and 57.0% for the quarters ended June 30, 2021 and 2020, respectively.

Research and development.

R&D expense decreased $224,010, or 25.7%, to $646,795, or 10.5% of net sales, in the three months ended June 30, 2021 from $870,805, or 14.6% of net sales, in the three months ended June 30, 2020.

The decrease in R&D expense in the quarter was primarily the result of a decrease in third party costs related to STC certifications as compared to the year ago quarter.

Selling, general and administrative.

Selling, general and administrative expense increased by $232,716 to $1,512,138 in the three months ended June 30, 2021 from $1,279,422 in the three months ended June 30, 2020.

As a percentage of net sales, selling, general and administrative expenses increased to 24.5% of net sales in the three months ended June 30, 2021 from 21.5% of net sales in the three months ended June 30, 2020.

The increase in selling, general and administrative expense in the quarter was primarily the result of an increase in professional fees, employee stock compensation, payroll and payroll related benefits.

Interest income.

Interest income decreased by $7,660 to $107 in the three months ended June 30, 2021 from $7,767 in the three months ended June 30, 2020, mainly a result of decreased cash balance and lower interest rates in the current year period compared to the same period in the prior year.

Other income.

Other income is mainly composed of royalties earned and increased by $970 to $17,231 in the three months ended June 30, 2021 compared to the same period in the prior year.

Income tax expense

The income tax benefit for the three months ended June 30, 2021 was $1,473,014 as compared to an income tax expense of $8,616 for the three months ended June 30, 2020.

The effective tax benefit rate for the three-month period ended June 30, 2021 was 121.4% and differs from the statutory tax rate primarily due to the release of the valuation allowance for all federal and some state deferred tax assets.

This release both increased the deferred tax asset and removed the valuation allowance.

The effective tax rate for the three months ended June 30, 2020 was 0.7% and differs from the statutory tax rate primarily due to an increase in the NOL usage due to an increase in pretax book income and the release of the valuation allowance.

This loss utilization both decreased the deferred tax asset and the valuation allowance.

For the three months ended June 30, 2020, the valuation allowance decreased by approximately $243,300 to $3,485,000 and is recorded against all its federal and state deferred tax assets.

The Company reported net income for the three months ended June 30, 2021 of $2,685,921 compared to net income of $1,259,858 for the three months ended June 30, 2020.

On a diluted basis, the net income per share was $0.16 for the three months ended June 30, 2021 compared to net income per share of $0.07 for the three months ended June 30, 2020.

Nine Months Ended June 30, 2021 Compared to the Nine Months Ended June 30, 2020

Net sales were $16,171,680 for the nine months ended June 30, 2021 compared to $15,300,182 for the nine months ended June 30, 2020, an increase of 5.7%.

Product sales increased $1,336,843 in the nine months ended June 30, 2021 compared to the nine months ended June 30, 2020, and EDC sales decreased $456,345 from the same period in the prior year.

Product sales for the nine months ended June 30, 2021 increased from the same period in the prior year primarily because of increased shipments of King Air autothrottle systems to our OEM customer.

The decrease in EDC sales in the current year period was primarily the result of the completion in prior fiscal year of a modification contract with the U.S.

Three Months Ended December 31, 2021 Compared to the Three Months Ended December 30, 2020

Net sales were $6,695,778 for the three months ended December 31, 2021 compared to $4,869,652 for the three months ended December 31, 2020, an increase of 37.5%.

Product sales increased $1,892,943 and EDC sales decreased $66,817 in the three months ended December 31, 2021 compared to the year ago quarter.

This increase in product sales for the three months ended December 31, 2021 primarily resulted from increased shipments of displays for retrofit programs to commercial air transport customers as well as increased shipments to Pilatus under the Company’s PC-24 contract.

Cost of sales.

Cost of sales increased $339,673, or 4.8%, to $7,348,364, or 45.4% of net sales, in the nine months ended June 30, 2021, compared to $7,008,691 or 45.8% of net sales, in the nine months ended June 30, 2020.

The increase in cost of sales was primarily the result of an increase in labor and related benefit costs attributable to an increase in headcount to meet customer backlog requirements offset by lower material costs reflecting product mix for the nine months ended June 30, 2021 compared to the nine months ended June 30, 2020.

The Company’s overall gross margin was 54.6% and 54.2% for the nine months ended June 30, 2021 and 2020, respectively.

Cost of sales increased $424,228, or 18.4%, to $2,728,057, or 40.7% of net sales, in the three months ended December 31, 2021, compared to $2,303,829 or 47.3% of net sales, in the three months ended December 31, 2020.

The increase in cost of sales was primarily the result of an increase in product sales volume for the three months ended December 31, 2021 compared to the three months ended December 31, 2020.

The Company’s overall gross margin was 59.3% and 52.7% for the three months ended December 31, 2021 and 2020, respectively.

The increase in gross margin percentage for the three months ended December 31, 2021 reflects manufacturing efficiencies gained due to increased sales volume and a favorable product mix.

Research and development.

R&D expense decreased $312,692, or 13.9%, to $1,936,747, or 12.0% of net sales, in the nine months ended June 30, 2021 from $2,249,439, or 14.7% of net sales, in the nine months ended June 30, 2020.

The decrease in R&D expense

in the quarter was primarily the result of a decrease in third party costs related to STC certifications as compared to the year ago quarter offset by an increase in payroll and payroll related benefits.

R&D expense increased $136,227, or 22.7%, to $736,525 in the three months ended December 31, 2021 from $600,298 in the three months ended December 31, 2020.

As a percentage of net sales, R&D expense decreased to 11.0% of net sales in the three months ended December 31, 2021 from 12.3% of net sales in the three months ended December 31, 2020 reflecting increased net sales in the current quarter.

The increase in R&D expense in the quarter was primarily the result of a higher proportion of efforts focused upon internal projects rather than product development programs that would be allocated to cost of sales.

Selling, general and administrative.

Selling, general and administrative expense increased by $333,325, or 7.4%, to $4,847,410 in the nine months ended June 30, 2021 from $4,514,085 in the nine months ended June 30, 2020.

The increase in selling, general, and administrative expense in the nine months period was primarily the result of an increase in professional fees, employee stock compensation, payroll and payroll related benefits.

As a percentage of net sales, selling, general and administrative expenses increased to 30.0% of net sales in the nine months ended June 30, 2021 from 29.5% of net sales in the nine months ended June 30, 2020.

Selling, general and administrative expense increased by $73,828 to $1,806,982 in the three months ended December 31, 2021 from $1,733,154 in the three months ended December 31, 2020.

As a percentage of net sales, selling, general and administrative expenses decreased to 27.0% of net sales in the three months ended December 31, 2021 from 35.6% of net sales in the three months ended December 31, 2020.

The increase in selling, general and administrative expense in the quarter was primarily the result of an increase in professional fees, trade show expenses, payroll and payroll related benefits.

Interest income.

Interest income decreased by $151,220 to $1,138 in the nine months ended June 30, 2021 from $152,358 in the nine months ended June 30, 2020, mainly a result of decreased cash balance and lower interest rates in the current year period compared to the same period in the prior year.

Interest income decreased by $783 to $96 in the three months ended December 31, 2021 from $879 in the three months ended December 31, 2020, mainly a result of decreased cash balance in the current year period compared to the same period in the prior year.

Other income.

Other income is mainly composed of royalties earned and increased marginally by $6,234 to $50,994 in the nine months ended June 30, 2021 compared to the same period in the prior year.

Other income is mainly composed of royalties earned and decreased by $154 to $16,238 in the three months ended December 31, 2021 compared to the same period in the prior year.

Income tax expense.

The income tax benefit for the nine months ended June 30, 2021 was $1,443,352 as compared to an income tax benefit of $300,786 for the nine months ended June 30, 2020.

The effective tax benefit rate for the nine-month period ended June 30, 2021 was 69.0% and differs from the statutory tax rate primarily due to the release of the valuation allowance for all federal and some state deferred tax assets.

This release both increased the deferred tax asset and removed the valuation allowance.

The effective tax benefit rate for the nine months ended June 30, 2020 was 17.4% and differs from the statutory tax rate primarily due to the income tax benefit associated with the NOL carryback provisions under the CARES Act and the release of the valuation allowance.

The income tax expense for the three months ended December 31, 2021 was $307,490 as compared to an income tax expense of $9,497 for the three months ended December 31, 2020.

The effective tax rate for the three months ended December 31, 2021 was 21.3% and differs from the statutory tax rate primarily due to permanent items and state taxes.

The effective tax rate for the three months ended December 31, 2020 was 3.8% and differs from the statutory tax rate primarily due to net operating loss realization due to an increase in pretax book income and the release of the valuation allowance.

This loss utilization both decreased the deferred tax asset and the valuation allowance.

For the nine months ended June 30, 2020, the valuation allowance decreased by approximately $243,000 to $3,485,000 and is recorded against all its federal and state deferred tax assets.

The Company reported net income for the nine months ended June 30, 2021 of $3,534,643 compared to net income of $2,025,871 for the nine months ended June 30, 2020.

On a diluted basis, the net income per share was $0.21 for the nine months ended June 30, 2021 compared to net income per share of $0.12 for the nine months ended June 30, 2020.

For the three months ended December 31, 2020, the valuation allowance decreased by approximately $40,000.

The Company reported net income for the three months ended December 31, 2021 of $1,133,058 compared to net income of $240,145 for the three months ended December 31, 2020.

On a diluted basis, the net income per share was $0.07 for the three months ended December 31, 2021 compared to net income per share of $0.01 for the three months ended December 31, 2020.

Liquidity and Capital Resources

2 unchanged sentences

Cash and cash equivalents

Restricted cash (1)

Accounts receivable

2 unchanged sentences

Contract liability

Total debt and other non-current liabilities (2)

Other non-current liabilities (1)

Quick ratio (2)

Current ratio (3)

Nine Months Ended June 30,

Three Months Ended December 31,

Cash flow activites:

1 unchanged sentence

Net cash used in investing activites

Net cash (used in) provided by financing activites

Restricted cash as of September 30, 2020 represents the payment amount for a special cash dividend paid on October 1, 2020

Net cash used in financing activites

(1) Excludes contract liability

4 unchanged sentences

The Company’s principal source of liquidity has been cash flows from current year operations and cash accumulated from prior years’ operations.

Cash is used principally to finance inventory, accounts receivable, contract assets, and payroll.

Cash is used principally to finance inventory, accounts receivable, contract assets, and payroll, as well as the Company’s known contractual and other commitments (including those described in Note 7, “Leases”).

The Company’s existing cash balances and anticipated cash flows from operations 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 above, management is not aware of any trends, events or uncertainties that have had or are likely to have a material impact on our liquidity, financial condition and capital resources.

On September 4, 2020, the Company’s Board of Directors declared a special cash dividend in the amount of $0.65 per share, payable on October 1, 2020 to shareholders of record as of the close of business on September 15, 2020.

The total dividend payment was approximately $11.2 million and is included in restricted cash on the accompanying consolidated balance sheets.

The total dividend payment was approximately $11.2 million.

On December 10, 2020, the Company’s Board of Directors declared a special cash dividend in the amount of $0.50 per share, payable on December 30, 2020 to shareholders of record as of the close of business on December 21, 2020.

4 unchanged sentences

Operating activities

Cash provided by operating activities for the nine months ended June 30, 2021 resulted primarily from funding from net income of $3,534,643 and an increase in contract liability of $1,215,329, the majority of this increase in contract liability is from one customer offset by an increase in deferred income taxes of $1,461,617, primarily due to the release of the valuation allowance against all of the Company’s federal and some state deferred tax assets.

Cash provided by operating activities for the nine months ended June 30, 2020 resulted primarily from net income of $2,025,871, offset by an increase in accounts receivable of $1,516,119.

Net cash provided by operating activities for the three-month period ended December 31, 2021 resulted primarily from funding from net income of $1,133,058 and a decrease in accounts receivable of $325,121.

Net cash provided by operating activities for the three-month period ended December 31, 2020 resulted primarily from a decrease in accounts receivable of $1,824,582, offset by a decrease in accrued expenses of $228,820.

Investing activities

Cash used in investing activities was $324,025 for the nine months ended June 30, 2021 and consisted primarily of leasehold improvements and laboratory test equipment.

Cash used in investing activities was approximately $67,624 for the nine months ended June 30, 2020 and consisted primarily of the purchase of computer, production and laboratory test equipment.

Net cash used in investing activities was $77,348 for the three-month period ended December 31, 2021 and consisted primarily of the purchase of laboratory test equipment.

Net cash used in investing activities was $72,846 for the three-month period ended December 31, 2020 and consisted primarily of the purchase of computer, production and laboratory test equipment.

Financing activities

Net cash used in financing activities was $19,771,082 for the nine months ended June 30, 2021, compared to $8,822 for the same period in the prior year.

The change to financing activities relates to the increase in the dividend paid in the nine months ended June 30, 2021, compared to no dividend paid in the nine months ended June 30, 2020.

Net cash used in financing activities was $0 for the three-month period ended December 31, 2021.

Net cash used in financing activities was $19,788,092 for the three-month period ended December 31, 2020 and consisted primarily of dividends paid.

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.

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Impact of the COVID-19 Pandemic

Through the third quarter of this fiscal year, the Company has not yet seen a material impact from the COVID-19 pandemic on its business, financial position, liquidity, or ability to service customers or maintain critical operations.

However, the COVID-19 pandemic, as well as the quarantines and other governmental and non-governmental restrictions which have been imposed throughout the world in an effort to contain or mitigate the spread of the coronavirus (including recent developments as a result of newer variants or strains of SARS-CoV-2), has caused and is continuing to cause significant market turbulence and disruption that may continue for some time even after business restrictions are lifted and the threat of the coronavirus diminishes.

As a result, the Company expects that it may face liquidity shortages, weaker product demand from its customers, disruptions in its supply chain, and/or staffing shortages in its workforce for the foreseeable future due to the direct and indirect effects of the COVID-19 pandemic.

Backlog represents the value of contracts and purchase orders received, less sales recognized to date on those contracts and purchase orders.

Backlog activity for the three and nine months ended June 30, 2021:

The ongoing global outbreak of coronavirus, which was declared a pandemic by the World Health Organization on March 11, 2020 and a national emergency by the President of the United States on March 13, 2020, has caused and is continuing to cause business slowdowns and shutdowns and turmoil in the financial markets both in the United States and abroad.

IS&S is monitoring the impact of the COVID-19 pandemic on its business, including how it has impacted and will impact the Company’s employees, customers, suppliers and distribution channels.

The Company has not yet seen a material impact from the COVID-19 pandemic on its business, financial position, liquidity, or ability to service customers or maintain critical operations.

However, with the omicron variant and the possibility of the emergence of other new virus strains and vaccine supply constraints, we are unable to predict the ultimate extent to which the global COVID-19 pandemic may further impact our business operations, financial performance and results of operations.

Furthermore, the significant market turbulence and disruption caused by the COVID-19 pandemic, as well as the quarantines and other governmental and non-governmental restrictions which have been imposed throughout the world in an effort to contain or mitigate the spread of the coronavirus, may continue for some time even after business restrictions are lifted and the threat of the coronavirus diminishes.

As a result, the Company may face liquidity shortages, weaker product demand from its customers, disruptions in its supply chain, and/or staffing shortages in its workforce for the foreseeable future due to the direct and indirect effects of the COVID-19 pandemic.

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.

Among the ESG issues we support within the Company, 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 Global Positioning System (“GPS”) receivers also facilitate reduced carbon footprint navigation.

The Company also plans to enhance its focus on the environmental impact of its operations.

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 three-month period ended December 31, 2021:

Three Months Ended

Nine Months Ended

June 30, 2021

December 31, 2021

Backlog, beginning of period

2 unchanged sentences

Backlog, end of period

At June 30, 2021, the majority of the Company’s backlog is expected to be filled within the next twelve months.

At December 31, 2021, the majority of the Company’s backlog is expected to be filled within the next twelve months.

To the extent new business orders do not continue to equal or exceed sales recognized in the future from the Company’s existing backlog, future operating results may be impacted negatively.

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis