What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-08 compared with 2023-02-14 · 69 added, 51 removed, 165 unchanged (42% 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, 2022 and the following factors:

● 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;

● 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;

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● 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,

● the impact of general economic trends (such as rising interest rates and recent bank failures in the United States) on the Company’s business and operations;

● disruptions in the Company’s supply chain, customer base and workforce, including as a result of the COVID-19 pandemic;

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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.

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”).

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

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

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

Investors should also be aware that while the Company, from time to time, communicates with securities analysts, it is against its policy to disclose any material non-public information or other confidential commercial information.

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

ThrustSense® also ensures aircraft envelope protection and engine protection during all phases of flight reducing pilot workload and increasing safety.

ThrustSense® 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® 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.

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.

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

The Company has also developed an FAA-certified safety mode feature for its King Airs aircraft ThrustSense® Autothrottle, LifeGuard™, which provides critical Vmca 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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When engaged by the pilot, the autothrottle system adjusts the throttles automatically to achieve and hold the selected airspeed guarded by a torque/temperature limit mode.

The autothrottle system takes full advantage of the integrated cockpit utilizing weight and balance information for optimal control settings and enabling safety functions like a turbulence control mode.

The autothrottle system takes full advantage of the integrated cockpit and utilizes weight and balance information to determine optimal control settings and enable safety functions like a turbulence control mode.

The Company sells to both the OEM and the retrofit markets.

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The Company’s retrofit projects are generally pursuant to either a direct contract with a customer or a subcontract with a general contractor to a customer (including government agencies).

Customers have been and may continue to be affected by changes in economic conditions both in the United States and abroad.

Such changes may cause customers to curtail or delay their spending on both new and existing aircraft.

Factors that can impact general economic conditions and the level of spending by customers include, but are not limited to, the war between Russia and Ukraine and the global response to this war, the impact of the ongoing COVID-19 pandemic, general levels of consumer spending, increases in fuel and energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, rising interest rates, access to credit, consumer confidence, and other macroeconomic factors that affect spending behavior.

Furthermore, spending by government agencies may be reduced in the future if tax revenues decline.

If customers curtail or delay their spending or are forced to declare bankruptcy or liquidate their operations because of adverse economic conditions, the Company’s revenues and results of operations would be affected adversely.

On the other hand, the Company believes that in adverse economic conditions, customers that may have otherwise elected to purchase newly manufactured aircraft may be interested instead in retrofitting existing aircraft as a cost-effective alternative, thereby creating a market opportunity for IS&S.

The ongoing COVID-19 pandemic is nevertheless a significant event, driver of market trends, and source of uncertainty that may ultimately have a direct or indirect material impact on the Company’s business, financial position, liquidity, or ability to service customers or maintain critical operations.

In direct response to the COVID-19 pandemic, the Company has taken specific actions to seek to ensure the safety of its employees, including temperature monitoring, frequent sanitization of workspaces, observance of social distancing protocols, and other increased safety measures.

Cost of sales related to product sales comprises material, components and third-party avionics purchased from suppliers, direct labor, and overhead costs.

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There have been no significant changes in the Company’s critical accounting policies since September 30, 2022.

See also Note 1 to the unaudited consolidated financial statements for the three months ended December 31, 2022 as set forth herein.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED

DECEMBER 31, 2022 AND 2021

See also Note 1 to the unaudited consolidated financial statements for the three and six months ended March 31, 2023 as set forth herein.

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED

MARCH 31, 2023 AND 2022

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 December 31,

Three Months Ended March 31,

Six Months Ended March 31,

Engineering development contracts

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Income tax expense

Three Months Ended December 31, 2022 Compared to the Three Months Ended December 30, 2021

Net sales were $6,516,256 for the three months ended December 31, 2022 compared to $6,695,778 for the three months ended December 31, 2021, a slight decrease of 2.7% .

Product sales decreased by $522,126, EDC sales increased $366,899, Customer Repair revenue saw a modest decrease of $24,295 for the three months ended December 31, 2022.

The increase in EDC sales was driven by two new Research & Development projects.

The decrease in product sales was a function of lower aftermarket sales orders to commercial air transport customers .

The sales decrease was partially offset by an increase in the OEM business, in which demand remained strong during Q1.

Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

Net sales were $7.34 million for the three months ended March 31, 2023 compared to $6.85 million for the three months ended March 31, 2022, an increase of $0.49 million, or 7.2%.

Product sales increased $0.66 million, or 12.4% in the three months ended March 31, 2023 compared to the year ago quarter.

This increase in product sales for the three months ended March 31, 2023 compared to the year ago quarter primarily resulted from increased shipments of displays for retrofit programs to commercial air transport customers under our 757/767 platform.

Cost of sales.

Cost of sales increased $64,395, or 2.4%, to $2,792,452, or 42.9% of net sales, in the three months ended December 31, 2022, compared to $2,728,057 or 40.7% of net sales, in the three months ended December 31, 2021.

The increase in cost of sales was primarily the result of slightly higher direct material costs.

The Company’s overall gross margin was 57.1% and 59.3% for the three months ended December 31, 2022 and 2021, respectively.

Cost of sales decreased slightly by $.06 million, or 2.4%, to $2.60 million, or 35.4% of net sales, in the three months ended March 31, 2023, compared to $2.66 million and 38.9% of net sales, in the three months ended March 31, 2022.

The decrease in cost of sales was due to a favorable product mix, cost control and an increase in inventory of $0.6 million.

The Company’s overall gross margin was 64.6% and 61.1% for the three months ended March 31, 2023 and 2022, respectively.

The increase in gross margin percentage for the three months ended March 31, 2023 is attributable to the absorption of direct and indirect manufacturing costs into an increased raw materials and work in process inventory balance, as well as a favorable product mix and cost control.

Research and development.

R&D expense decreased $66,080, or 9.0%, to $670,445 in the three months ended December 31, 2022 from $736,740 in the three months ended December 31, 2021.

As a percentage of net sales, R&D expense decreased to 10.3% of net sales in the three months ended December 31, 20221 from 11.0% of net sales in the three months ended December 31, 2021.

The decrease in R&D expense in the quarter was primarily the result of $57,406 of R&D expense being moved to Cost of Sales related to the EDC sales.

Total R&D with the EDC related labor costs amounted to $727,851, which is 11.2% and comparable to R&D as a percent to sales in prior year.

R&D expense increased $0.22 million, or 33.3%, to $0.87 million in the three months ended March 31, 2023 from $0.65 million in the three months ended March 31, 2022.

As a percentage of net sales, R&D expense increased to 11.8% of net sales in the three months ended March 31, 2023 from 9.5% of net sales in the three months ended March 31, 2022 reflecting the hiring of engineers, related product development and increased R&D projects.

Selling, general and administrative.

Selling, general and administrative expense increased by $454,881 to $2,261,863 in the three months ended December 31, 2022 from $1,806,982 in the three months ended December 31, 2021.

As a percentage of net sales, selling, general and administrative expenses increased to 34.7% of net sales in the three months ended December 31, 2022 from 27.0% of net sales in the three months ended December 31, 2021.

The increase in selling, general and administrative expense in the quarter was primarily the result of an increase in non-cash long-term incentive compensation, professional & legal fees, and employee relocation costs.

Selling, general and administrative expense increased by $0.72 million to $2.45 million in the three months ended March 31, 2023 from $1.72 million in the three months ended March 31, 2022.

As a percentage of net sales, selling, general and administrative expenses increased to 33.3% of net sales in the three months ended March 31, 2023 from 25.2% of net sales in the three months ended March 31, 2022.

The increase in selling, general and administrative expense in the quarter was primarily due to additions to the sales and business development teams, increased marketing and investor relations activities in an effort to grow the business, as well as one-time non-cash executive stock awards.

Interest income.

Interest income increased by $115,796 to $115,892 in the three months ended December 31, 2022 from $96 in the three months ended December 31, 2021, mainly a result of increased cash on the balance sheet, increased interest rates and re-allocating funds into higher yielding investments compared to the same period in the prior year.

Interest income increased by $130k to $131k in the three months ended March 31, 2023 from $346 in the three months ended March 31, 2022, mainly as a result of increased cash balance and higher interest rates earned 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 $1,957 to $18,196 in the three months ended December 31, 2022 compared to the same period in the prior year.

Other income is mainly composed of royalties earned and increased by $11.7k to $23.3k in the three months ended March 31, 2023 compared to the same period in the prior year.

Income tax expense.

The income tax expense for the three months ended December 31, 2022 was $226,933 as compared to an income tax expense of $307,490 for the three months ended December 31, 2021.

The effective tax rate for the three months ended December 31, 2022 was 24.5%, compared to 21.3% for the three months ending December 31, 2021.

The Company reported net income for the three months ended December 31, 2022 of $698,651 compared to net income of $1,133,058 for the three months ended December 31, 2021.

On a diluted basis, the net income per share was $0.04 for the three months ended December 31, 2022 compared to net income per share of $0.07 for the three months ended December 31, 2021.

The income tax expense for the three months ended March 31, 2023 was $0.3 million as compared to an income tax expense of $0.4 million for the three months ended March 31, 2022.

The effective tax rate for the three-month period ended March 31, 2023 was 19.6% and differs from the statutory tax rate primarily due to an increased R&D credit, as well as permanent items and state taxes.

The Company reported net income for the three months ended March 31, 2023 of $1.27 million compared to net income of $1.43 million for the three months ended March 31, 2022.

On a diluted basis, the net income per share was $0.07 for the three months ended March 31, 2023 compared to net income per share of $0.08 for the three months ended March 31, 2022.

Six Months Ended March 31, 2023 Compared to the Six Months Ended March 31, 2022

Net sales were $13.86 million for the six months ended March 31, 2023 compared to $13.54 million for the six months ended March 31, 2022, an increase of 2.3%.

Product sales increased $0.14 million and non-recurring engineering increased by $0.17 million in the six months ended March 31, 2023 compared to the same period in the prior year.

This increase in product sales for the six months ended March 31, 2023 primarily resulted from increased sales to our core OEM customers, which include Pilatus, Textron and Boeing.

Sales from new auto-throttle installations also increased.

Cost of sales.

Cost of sales was consistent at $5.39 million, or 38.9% of net sales, in the six months ended March 31, 2023, compared to $5.39 million or 39.8% of net sales, in the six months ended March 31, 2022.

The Company’s overall gross margin was 61.1% and 60.2% for the six months ended March 31, 2023 and 2022, respectively.

The increase in gross margin percentage for the six months ended March 31, 2023 is attributable to leverage obtained through increased sales volume, controlled operational spending, and absorption of overhead costs into raw materials inventory.

Research and development.

R&D expense increased $0.15 million, or 10.8%, to $1.54 million in the six months ended March 31, 2023 from $1.39 million in the six months ended March 31, 2022.

As a percentage of net sales, R&D expense increased to 11.1% of net sales in the six months ended March 31, 2023 from 10.2% of net sales in the six months ended March 31, 2022 reflecting the start of the increased in hiring engineers, working on product development and related programs/internal projects.

Selling, general and administrative.

Selling, general and administrative expense increased by $1.18 million to $4.71 million in the six months ended March 31, 2023 from $3.53 in the six months ended March 31, 2022.

As a percentage of net sales, selling, general and administrative expenses increased to 34.0% of net sales in the six months ended March 31, 2023 from 26.1% of net sales in the six months ended March 31, 2022.

The increase in selling, general and administrative expense in the period was primarily the result of personnel additions in the sales and marketing, business development, investor relations and investor facing activities and non-cash long-term compensation.

Interest income.

Interest income increased by $0.25 million to $0.25 million in the six months ended March 31, 2023 from $442 in the six months ended March 31, 2022, mainly as a result of increased cash on hand and higher interest rates compared to the same period in the prior year.

Other income.

Other income is mainly composed of royalties earned and increased by $13,661 to $41,454 in the six months ended March 31, 2023 compared to the same period in the prior year.

Income tax expense.

The income tax expense for the six months ended March 31, 2023 was $0.54 as compared to an income tax expense of $0.70 for the six months ended March 31, 2022.

The effective tax rate for the six-month period ended March 31, 2023 was 21.4% and differs from the statutory tax rate primarily due to increased R&D tax credits, permanent items and state taxes.

The Company reported net income for the six months ended March 31, 2023 of $1.97 million compared to net income of $2.56 million for the six months ended March 31, 2022.

On a diluted basis, the net income per share was $0.11 for the six months ended March 31, 2023 compared to $0.15 for the six months ended March 31, 2022.

Liquidity and Capital Resources

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Current ratio (3)

Three Months Ended December 31,

Six Months Ended March 31,

Cash flow activities:

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Operating activities

Net cash provided by operating activities for the three-month period ended December 31, 2022 resulted primarily from funding from net income of $698,651, a decrease in accounts receivables of $980,938 and an increase in income taxes payable of $511,622.

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 was $2.2 million for the six-month period ended March 31, 2023 and consisted primarily of funding from net income of $2.0 million.

Net cash provided by operating activities was $3.4 million for the six-month period ended March 31, 2022 and consisted primarily of funding from net income of $2.6 million and a decrease in deferred income taxes of $0.5 million.

Investing activities

Net cash used in investing activities was $32,716 for the three-month period ended December 31, 2022 and consisted primarily of the purchase of manufacturing test equipment and production machinery.

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 $0.1 million for the six-month period ended March 31, 2023 and consisted primarily of the purchase of laboratory test equipment and computer hardware.

Net cash used in investing activities was $0.1 million for the six-month period ended March 31, 2022 and consisted primarily of the purchase of laboratory test equipment.

Financing activities

Net cash provided by financing activities was $408,846 for the three-month period ended December 31, 2022 and consisted of proceeds from the exercise of stock options.

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

Net cash provided by financing activities was $0.4 million for the six-month period ended March 31, 2023 and consisted of proceeds from the exercise of stock options.

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

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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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, 2022:

Backlog activity for the three-and six-month periods ended March 31, 2023:

Three Months Ended

December 31, 2022

Six Months Ended

March 31, 2023

Backlog, beginning of period

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Backlog, end of period

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

At March 31, 2023, 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