What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-12 compared with 2022-05-13 · 71 added, 74 removed, 195 unchanged (43% of the section changed)

36 unchanged sentences

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 Company does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect

events, circumstances or changes in expectations after the date of this report, or to reflect the occurrence of unanticipated events.

The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act of 1933, as amended (the “Securities Act”), and 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

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The NextGen enhanced avionics suite is available for integration into other business aircraft with Non-FADEC and FADEC engines.

The Company has developed, and in April 2019 received certification from the FAA for, its ThrustSense® Autothrottle for retrofit in the King Air, dual turbo prop PT6 powered aircraft.

The Company has developed, it's FAA-certified ThrustSense® Autothrottle for retrofit in the King Air, dual turbo prop PT6 powered aircraft.

The autothrottle is designed to automate the power management for speed and power control including go-around.

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

More recently, on December 9, 2019, the Company received certification from the FAA for a safety mode feature during an engine-out condition for its King Air ThrustSense® Autothrottle.

LifeGuard™ provides critical Vmc a protection that proportionally reduces engine power to maintain directional control.

The Company has also developed an FAA-certified safety mode feature for its King Air ThrustSense® Autothrottle, LifeGuard™, which provides critical Vmc a protection that proportionally reduces engine power to maintain directional control during an engine-out condition.

We believe the ThrustSense® Autothrottle is innovative in that it is the first autothrottle developed for a turbo prop that allows a pilot to automatically control the power setting of the engine.

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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 six months ended March 31, 2022 as set forth herein.

See also Note 1 to the unaudited condensed consolidated financial statements for the three and nine months ended June 30, 2022 as set forth herein.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED

MARCH 31, 2022 AND 2021

JUNE 30, 2022 AND 2021

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 March 31,

Six Months Ended March 31,

Three Months Ended June 30,

Nine Months Ended June 30,

Engineering development contracts

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Income tax expense

Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021

Net sales were $6,845,820 for the three months ended March 31, 2022 compared to $5,121,845 for the three months ended March 31, 2021, an increase of 33.7%.

Product sales increased $1,544,947 and EDC sales increased $179,028 in the three months ended March 31, 2022 compared to the year ago quarter.

This increase in product sales for the three months ended March 31, 2022 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.

Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021

Net sales were $6,935,976 for the three months ended June 30, 2022 compared to $6,180,183 for the three months ended June 30, 2021, an increase of 12.2%.

Product sales increased $596,467 and customer service sales increased $358,048 in the three months ended June 30, 2022 compared to the year ago quarter.

This increase in product sales for the three months ended June 30, 2022 was primarily the result of additional shipments of displays for retrofit programs to commercial air transport customers as well as additional volume sold to Pilatus under the Company’s PC-24 contract.

Cost of sales.

Cost of sales increased $444,356, or 20.0%, to $2,663,210, or 38.9% of net sales, in the three months ended March 31, 2022, compared to $2,218,854 or 43.3% of net sales, in the three months ended March 31, 2021.

The increase in cost of sales was primarily the result of an increase in product sales volume for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

The Company’s overall gross margin was 61.1% and 56.7% for the three months ended March 31, 2022 and 2021, respectively.

The increase in gross margin percentage for the three months ended March 31, 2022 is attributable to favorable leveraging of fixed costs resulting from the increased sales and production volume, and a favorable product mix.

Cost of sales increased $53,781, or 1.9%, to $2,879,462, or 41.5% of net sales, in the three months ended June 30, 2022, compared to $2,825,681 or 45.7% of net sales, in the three months ended June 30, 2021.

The increase in cost of sales was primarily the result of an increase in product sales volume for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

The Company’s overall gross margin was 58.5% and 54.3% for the three months ended June 30, 2022 and 2021, respectively.

The increase in gross margin percentage for the three months ended June 30, 2022 is attributable to favorable leveraging of fixed costs resulting from the increased sales and production volume, lower FTE’s, and a favorable product mix.

Research and development.

R&D expense decreased $39,623, or 5.7%, to $650,031 in the three months ended March 31, 2022 from $689,654 in the three months ended March 31, 2021.

As a percentage of net sales, R&D expense decreased to 9.5% of net sales in the three months ended March 31, 2022 from 13.5% of net sales in the three months ended March 31, 2021 reflecting increased net sales in the current quarter.

The decrease in R&D expense in the quarter was primarily the result of a decrease in payroll and payroll related benefits.

R&D expense decreased $29,586, or 4.6%, to $676,381 in the three months ended June 30, 2022 from $646,795 in the three months ended June 30, 2021.

As a percentage of net sales, R&D expense decreased to 9.8% of net sales in the three months ended June 30, 2022 from 10.5% of net sales in the three months ended June 30, 2021 reflecting increased net sales in the current quarter.

The increase in R&D expense in the quarter was primarily the result of a slight decrease in payroll and payroll related benefits.

Selling, general and administrative.

Selling, general and administrative expense increased by $122,682 to $1,724,800 in the three months ended March 31, 2022 from $1,602,118 in the three months ended March 31, 2021.

As a percentage of net sales, selling, general and administrative expenses decreased to 25.2% of net sales in the three months ended March 31, 2022 from 31.3% of net sales in the three months ended March 31, 2021 reflecting increased net sales in the current quarter.

The increase in selling, general and administrative expense in the quarter was primarily the result of an increase in professional fees.

Selling, general and administrative expense increased by $182,095 or 12.0% to $1,694,233 in the three months ended June 30, 2022 from $1,512,138 in the three months ended June 30, 2021.

As a percentage of net sales, selling, general and administrative expenses remained consistent on a quarterly basis to prior year.

The overall increase in selling, general and administrative expense in the quarter was primarily the result of an increase in professional fees.

Interest income.

Interest income increased by $194 to $346 in the three months ended March 31, 2022 from $152 in the three months ended March 31, 2021, mainly a result of increased cash balance in the current year period compared to the same period in the prior year.

Interest income increased by $10,322 to $10,429 in the three months ended June 30, 2022 from $107 in the three months ended June 30, 2021, mainly a result of increased 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 decreased by $5,816 to $11,555 in the three months ended March 31, 2022 compared to the same period in the prior year.

Other income is mainly composed of royalties earned and increased by $4,377 to $21,608 in the three months ended June 30, 2022 compared to the same period in the prior year.

Income tax expense.

The income tax expense for the three months ended March 31, 2022 was $390,110 as compared to an income tax expense of 20,165 for the three months ended March 31, 2021.

The effective tax rate for the three-month period ended March 31, 2022 was 21.4% and differs from the statutory tax rate primarily due to permanent items and state taxes.

The effective tax expense rate for the three-month period ended March 31, 2021 was 3.2% and differs from the statutory tax rate primarily due to net operating loss utilization related to the increase in pretax book income.

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

A full valuation allowance exists on all deferred tax assets.

For the three months ended March 31, 2021, the valuation allowance decreased by approximately $140,000.

The Company reported net income for the three months ended March 31, 2022 of $1,429,570 compared to net income of $608,577 for the three months ended March 31, 2021.

On a diluted basis, the net income per share was $0.08 for the three months ended March 31, 2022 compared to net income per share of $0.04 for the three months ended March 31, 2021.

Six Months Ended March 31, 2022 Compared to the Six Months Ended March 31, 2021

Net sales were $13,541,598 for the six months ended March 31, 2022 compared to $9,991,497 for the six months ended March 31, 2021, an increase of 35.5%.

Product sales increased $3,437,890 and EDC sales increased $112,211 in the six months ended March 31, 2022 compared to the same period in the prior year.

This increase in product sales for the six months ended March 31, 2022 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.

The income tax expense for the three months ended June 30, 2022 was $358,763 as compared to an income tax benefit of $1,473,014 for the three months ended June 30, 2021.

This difference was the result of the release of valuation allowances against deferred tax assets in the prior year.

The effective tax rate for the three-month period ended June 30, 2022 was 20.9% and differs from the statutory tax rate primarily due to permanent items and state taxes.

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 deferred tax assets.

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

The Company reported net income for the three months ended June 30, 2022 of $1,359,174 compared to net income of $2,685,921 for the three months ended June 30, 2021.

On a diluted basis, the net income per share was $0.08 for the three months ended June 30, 2022 compared to net income per share of $0.16 for the three months ended June 30, 2021.

Nine Months Ended June 30, 2022 Compared to the Nine Months Ended June 30, 2021

Net sales were $20,477,574 for the nine months ended June 30, 2022 compared to $16,171,680 for the nine months ended June 30, 2021, an increase of 26.6%.

Product sales increased $3,618,631, customer service increased $773,773 and EDC sales decreased ($86,510) in the nine months ended June 30, 2022 compared to the same period in the prior year.

This increase in product sales for the nine months ended June 30, 2022 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 $868,584, or 19.2%, to $5,391,267, or 39.8% of net sales, in the six months ended March 31, 2022, compared to $4,522,683 or 45.3% of net sales, in the six months ended March 31, 2021.

The increase in cost of sales was primarily the result of an increase in product sales volume for the six months ended March 31, 2022 compared to the six months ended March 31, 2021.

The Company’s overall gross margin was 60.2% and 54.7% for the six months ended March 31, 2022 and 2021, respectively.

The increase in gross margin percentage for the six months ended March 31, 2022 is attributable to favorable leveraging of fixed costs resulting from the increased sales and production volume, and a favorable product mix.

Cost of sales increased $922,365, or 12.6%, to $8,270,729, or 40.4% of net sales, in the nine months ended June 30, 2022, compared to $7,348,364 or 45.4% of net sales, in the nine months ended June 30, 2021.

The increase in cost of sales was primarily the result of an increase in product sales volume for the nine months ended June 30, 2022 compared to the nine months ended June 30, 2021.

The Company’s overall gross margin was 59.6% and 54.6% for the nine months ended June 30, 2022 and 2021, respectively.

The increase in gross margin percentage for the nine months ended June 30, 2022 is attributable to favorable leveraging of fixed costs resulting from the increased sales and production volume, lower FTE’s, and a favorable product mix.

Research and development.

R&D expense increased $96,604, or 7.5%, to $1,386,556 in the six months ended March 31, 2022 from $1,289,952 in the six months ended March 31, 2021.

As a percentage of net sales, R&D expense decreased to 10.2% of net sales in the six months ended March 31, 2022 from 12.9% of net sales in the six months ended March 31, 2021 reflecting increased net sales in the current period compared to the same period in the prior year.

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

R&D expense increased $126,190, or 6.5%, to $2,062,937 in the nine months ended June 30, 2022 from $1,936,747 in the nine months ended June 30, 2021.

As a percentage of net sales, R&D expense decreased to 10.1% of net sales in the nine months ended June 30, 2022 from 12.0% of net sales in the nine months ended June 30, 2021 reflecting increased net sales in the current period compared to the same period in the prior year.

Also driving the expense lower as a percentage of sales as of June 30, 2022 was a lower proportion of efforts focused upon product development programs.

Selling, general and administrative.

Selling, general and administrative expense increased by $196,510 to $3,531,782 in the six months ended March 31, 2022 from $3,335,272 in the six months ended March 31, 2021.

As a percentage of net sales, selling, general and administrative expenses decreased to 26.1% of net sales in the six months ended March 31, 2022 from 33.4% of net sales in the six months ended March 31, 2021 reflecting increased net sales in the period compared to the same period in the prior year.

The increase in selling, general and administrative expense in the period was primarily the result of an increase in professional fees.

Selling, general and administrative expense increased by $378,605 to $5,226,015 in the nine months ended June 30, 2022 from $4,847,410 in the nine months ended June 30, 2021.

As a percentage of net sales, selling, general and administrative expenses decreased to 25.5% of net sales in the nine months ended June 30, 2022 from 30.0% of net sales in the nine months ended June 30, 2021 reflecting increased net sales and leveraging of fixed costs in the period compared to the same period in the prior year.

The overall increase in selling, general and administrative expense in the period was primarily the result of professional fees, adding FTE’s, and the resumption of sales and business development expenses as a result of returning to more normal business conditions post COVID.

Interest income.

Interest income decreased by $589 to $442 in the six months ended March 31, 2022 from $1,031 in the six months ended March 31, 2021, mainly a result of decreased cash balance in the current year period compared to the same period in the prior year.

Interest income increased by $9,733 to $10,871 in the nine months ended June 30, 2022 from $1,138 in the nine months ended June 30, 2021, mainly a result of increased 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 decreased by $5,970 to $27,793 in the six months ended March 31, 2022 compared to the same period in the prior year.

Other income is mainly composed of royalties earned and decreased by $1,593 to $49,401 in the nine months ended June 30, 2022 compared to the same period in the prior year.

Income tax expense.

The income tax expense for the six months ended March 31, 2022 was $697,600 as compared to an income tax expense of $29,662 for the six months ended March 31, 2021.

The effective tax rate for the six-month period ended March 31, 2022 was 21.4% and differs from the statutory tax rate primarily due to permanent items and state taxes.

The effective tax expense rate for the six-month period ended March 31, 2021 was 3.4% and differs from the statutory tax rate primarily due to net operating loss utilization related to the increase in pretax book income.

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

A full valuation allowance exists on all deferred tax assets.

For the six months ended March 31, 2021, the valuation allowance decreased by approximately $180,000.

The Company reported net income for the six months ended March 31, 2022 of $2,562,628 compared to net income of $848,722 for the six months ended March 31, 2021.

On a diluted basis, the net income per share was $0.15 for the six months ended March 31, 2022 compared to net income per share of $0.05 for the six months ended March 31, 2021.

The income tax expense for the nine months ended June 30, 2022 was $1,056,363 as compared to an income tax benefit of $1,443,352 for the nine months ended June 30, 2021.

This difference was the result of the release of valuation allowances against deferred tax assets in the prior year.

The effective tax rate for the nine-month period ended June 30, 2022 was 21.2% and differs from the statutory tax rate primarily due to permanent items and state taxes.

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 deferred tax assets.

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

The Company reported net income for the nine months ended June 30, 2022 of $3,921,802 compared to net income of $3,534,643 for the nine months ended June 30, 2021.

On a diluted basis, the net income per share was $0.23 for the nine months ended June 30, 2022 compared to net income per share of $0.21 for the nine months ended June 30, 2021.

Liquidity and Capital Resources

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Current ratio (3)

Six Months Ended March 31,

Nine Months Ended June 30,

Cash flow activities:

1 unchanged sentence

Net cash used in investing activities

Net cash used in financing activities

Net cash provided by (used in) financing activities

(1) Excludes contract liability

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Operating activities

Net cash provided by operating activities for the six-month period ended March 31, 2022 resulted primarily from funding from net income of $2,562,628 and a decrease in deferred income taxes of $527,141.

Net cash provided by operating activities for the six-month period ended March 31, 2021 resulted primarily from a decrease in accounts receivable of $1,521,544 and funding from net income of $848,722.

Net cash provided by operating activities for the nine-month period ended June 30, 2022 resulted primarily from funding from net income of $3,921,802, a decrease in accounts receivables of $1,042,975 and a decrease in deferred income taxes of $785,737.

Net 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.

Investing activities

Net cash used in investing activities was $84,358 for the six-month period ended March 31, 2022 and consisted primarily of the purchase of laboratory test equipment.

Net cash used in investing activities was $299,028 for the six-month period ended March 31, 2021 and consisted primarily of leasehold improvements and laboratory test equipment.

Net cash used in investing activities was $161,230 for the nine-month period ended June 30, 2022 and consisted primarily of the purchase of laboratory test equipment and computer hardware.

Net 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.

Financing activities

Net cash used in financing activities was $0 for the six-month period ended March 31, 2022.

Net cash used in financing activities was $19,788,092 for the six-month period ended March 31, 2021 and consisted primarily of dividends paid.

Net cash provided by financing activities was $17,154 for the nine-month period ended June 30, 2022 and consisted of proceeds from the exercise of stock options.

Net cash used in financing activities was $19,771,082 for the nine-month period ended June 30, 2021 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

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 possibility of the emergence of 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.

IS&S will continue to monitor 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 could face liquidity shortages, weaker product demand from its customers, disruptions in its supply chain, and/or staffing shortages in its workforce in the future due to the direct and indirect effects of the COVID-19 pandemic.

Environmental, Social and Governance Considerations

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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.

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.

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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 March 31, 2022:

Backlog activity for the three-month period ended June 30, 2022:

Three Months Ended

Six Months Ended

March 31, 2022

Nine Months Ended

June 30, 2022

Backlog, beginning of period

2 unchanged sentences

Backlog, end of period

At March 31, 2022, the majority of the Company’s backlog is expected to be filled within the next twelve months.

At June 30, 2022, 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