Item 2. Management’s Discussion and Analysis
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.
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, 2022 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, 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, 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 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 (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;
● the ability to gain regulatory approval of products in a timely manner;
● delays in receiving components from third-party suppliers;
● the bankruptcy or insolvency of one or more key customers;
● protection of intellectual property rights;
● the ability to respond to technological change;
● failure to retain/recruit key personnel;
● risks related to succession planning;
● a cyber security incident;
● risks related to our self-insurance program;
● 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”).
Except as expressly required by the federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise after the date of this report. Results of
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operations in any past period should not be considered indicative of the results to be expected for future periods. Fluctuations in operating results may result in fluctuations in the price of the Company’s common stock.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report, or to reflect the occurrence of unanticipated events. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act of 1933, as amended (the “Securities Act”), and 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Investors should also be aware that while the Company, from time to time, communicates with securities analysts, it is against its policy to disclose any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.
Company Overview
Innovative Solutions and Support, Inc. (the “Company,” “IS&S,” “we” or “us”) was incorporated in Pennsylvania on February 12, 1988. The Company operates in one business segment as a systems integrator that designs, develops, manufactures, sells and services air data equipment, engine display systems, standby equipment, primary flight guidance, autothrottles and cockpit display systems for retrofit applications and original equipment manufacturers (“OEMs”). The Company supplies integrated Flight Management Systems (“FMS”), Flat Panel Display Systems (“FPDS”), FPDS with Autothrottle, air data equipment, Integrated Standby Units (“ISU”), ISU with Autothrottle and advanced GPS receivers that enable reduced carbon footprint navigation.
The Company has continued to position itself as a system integrator, which capability provides the Company with the potential to generate more substantive orders over a broader product base. This strategy, as both a manufacturer and integrator, is designed to leverage the latest technologies developed for the computer and telecommunications industries into advanced and cost-effective solutions for the general aviation, commercial air transport, United States Department of Defense (“DoD”)/governmental and foreign military markets. This approach, combined with the Company’s industry experience, is designed to enable IS&S to develop 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. The Company has incorporated Electronic Flight Bag (“EFB”) functionality, such as charting and mapping systems, into its FPDS product line.
The Company has developed an FMS that combines the savings long associated with in-flight fuel optimization in enroute flight management combined with the precision of satellite-based navigation required to comply with the regulatory environments of both domestic and international markets. The Company believes that the FMS, alongside its FPDS and CIP product lines, is well suited to address market demand driven by certain regulatory mandates, new technologies, and the high cost of maintaining aging and obsolete equipment on aircraft that will be in service for up to fifty years. The shift in the regulatory and technological environment is illustrated by the dramatic increase in the number of Space Based Augmentation System (“SBAS”) or Wide Area Augmentation System (“WAAS”) approach qualified airports, particularly as realized through Localizer Performance with Vertical guidance (“LPV”) navigation procedures. Aircraft equipped with the Company’s FMS, FPDS and SBAS/WAAS/LPV enabled navigator, will be qualified to land at such airports and will comply with Federal Aviation Administration (“FAA”) mandates for Required Navigation Performance, and Automatic Dependent Surveillance-Broadcast navigation. IS&S believes this will further increase the demand for the Company’s products. The Company’s FMS/FPDS product line is designed for new production and retrofit applications into general aviation, commercial air transport and military transport aircraft. In addition, the Company offers what we believe to be a state-of-the-art ISU, integrating the full functionality of the primary and navigation displays into a small backup-powered unit. This ISU builds on the Company’s legacy air data computer to form a complete next-generation cockpit display and navigation upgrade offering to the commercial and military markets.
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The Company has developed and received certification from the FAA on its NextGen Flight Deck featuring its ThrustSense® Integrated PT6 Autothrottle (“ThrustSense® Autothrottle”) for retrofit in the Pilatus PC-12. The NextGen Flight Deck features Primary Flight and Multi-Function Displays and ISUs, as well as an Integrated FMS and EFB System. The innovative avionics suite includes dual flight management systems, autothrottles, synthetic vision and enhanced vision. The NextGen enhanced avionics suite is available for integration into other business aircraft with Non-FADEC and FADEC engines.
The Company has developed, its 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. 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 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. The autothrottle computes and controls appropriate power levels thereby reducing overall pilot workload. The system computes thrust, holds selected speed/torque, and implements appropriate speed and engine limit protection. When engaged by the pilot, the autothrottle system adjusts the throttles automatically to achieve and hold the selected airspeed guarded by a torque/temperature limit mode. The autothrottle system takes full advantage of the integrated cockpit 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. 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).
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.
Cost of sales related to product sales comprises material, components and third-party avionics purchased from suppliers, direct labor, and overhead costs. Many of the components are standard, although certain parts are manufactured to meet IS&S specifications. The overhead portion of cost of sales 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 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.
Critical Accounting Policies and Estimates
The discussion and analysis of financial condition and consolidated results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The
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preparation of these 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 estimates are those related to revenue recognition, valuation of tangible and intangible assets acquired, long term contracts, the useful lives of long-lived assets for depreciation and amortization, the recoverability of long-lived assets, evaluation of goodwill impairment and contingencies. On an ongoing basis, IS&S management evaluates its estimates based upon historical experience and various other assumptions that it believes to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The Company believes that its critical accounting policies affect its more significant estimates and judgments used in the preparation of its consolidated financial statements. The Annual Report on Form 10-K for the fiscal year ended September 30, 2022 contains a discussion of these critical accounting policies. There have been no significant changes in the Company’s critical accounting policies since September 30, 2022, except new critical accounting policies in acquisition, intangible assets and goodwill. See also Note 1 to the unaudited consolidated financial statements for the three-and nine-month periods ended June 30, 2023 as set forth herein.
Acquisitions
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. The Company also uses best estimates and assumptions to determine the useful lives of those acquired intangible assets with a finite life.
Critical estimates in valuing certain of the intangible assets and goodwill acquired include:
● future expected cash flows from customer contracts and license agreements;
● historical and expected customer attrition rates and anticipated growth in revenue from acquired customers;
● estimated replacement costs for equipment acquired;
● obsolescence rate applied to finished goods and raw materials acquired; and
● discount rates.
Intangible Assets
Intangible assets consist of customer relationship, license agreements, and licensing and certification rights, and these assets are carried at cost less accumulated amortization and any impairment charge.
Intangible assets with a finite life are amortized over their estimated useful life and are reported net of accumulated amortization. An impairment assessment for intangible assets with a finite life is only required when an event or change in circumstances indicates that the carrying amount of the asset may not be recoverable. Determining the useful life of an intangible asset with a finite life also requires judgment.
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.
Impairment of Goodwill
The Company evaluates the carrying amount of goodwill annually or more frequently if events or circumstances indicate that the goodwill may be impaired. Factors that could trigger an impairment review include significant underperformance relative to historical or forecasted operating results, a significant decrease in the market value of an asset or significant negative industry or economic trends. Assumptions used in the impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with
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internal projections and operating plans. The Company believes these estimates and assumptions are reasonable and comparable to those that would be used by other marketplace participants.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 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 June 30,
Nine Months Ended June 30,
2023
2022
2023
2022
Net sales:
Product
99.2
%
100.0
%
98.0
%
99.0
%
Engineering development contracts
0.8
%
0.0
%
2.0
%
1.0
%
Total net sales
100.0
%
100.0
%
100.0
%
100.0
%
Cost of sales:
Product
40.2
%
41.5
%
39.1
%
40.3
%
Engineering development contracts
0.3
%
0.0
%
0.4
%
0.1
%
Total cost of sales
40.5
%
41.5
%
39.5
%
40.4
%
Gross profit
59.5
%
58.5
%
60.5
%
59.6
%
Operating expenses:
Research and development
10.7
%
9.8
%
10.9
%
10.1
%
Selling, general and administrative
30.1
%
24.4
%
32.6
%
25.5
%
Total operating expenses
40.8
%
34.2
%
43.5
%
35.6
%
Operating income
18.7
%
24.3
%
17.0
%
24.0
%
Interest income
2.3
%
0.2
%
2.0
%
0.1
%
Other income
1.1
%
0.3
%
0.6
%
0.2
%
Income before income taxes
22.2
%
24.8
%
19.6
%
24.3
%
Income tax expense
4.3
%
5.2
%
4.0
%
5.2
%
Net income
17.9
%
19.6
%
15.6
%
19.2
%
Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022
Net sales. Net sales were $8.0 million for the three months ended June 30, 2023 compared to $6.9 million for the three months ended June 30, 2022, an increase of 14.8%. Product sales increased $1.0 million and customer service sales remained flat compared to the year ago quarter. This increase in product sales for the three months ended June 30, 2023 was primarily the result of additional shipments of displays for retrofit programs to commercial air transport customers. The increase was also due to increase of shipments of OEM sales to Boeing under the KC-46A platform.
Cost of sales. Cost of sales increased by $345,000, or 12.0%, to $3.2 million, or 40.5% of net sales, in the three months ended June 30, 2023, compared to $2.9 million or 41.5% of net sales, in the three months ended June 30, 2022. The increase in cost of sales was primarily the result of an increase in product sales volume for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The Company’s overall gross margin was 59.5% and 58.5% for the three months ended June 30, 2023 and 2022, respectively. The increase in gross margin percentage for the three months ended June 30, 2023 is attributable to favorable leveraging of fixed costs resulting from the increased sales and production volume and a favorable sales mix.
Research and development. R&D expense increased $175,000 or 25.9% in the three months ended June 30, 2023 from $676,000 in the three months ended June 30, 2022. As a percentage of net sales, R&D expense increased to 10.7% of net sales in the three months
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ended June 30, 2023 from 9.8% of net sales in the three months ended June 30, 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 $632,000 or 37.3% to $2.3 million in the three months ended June 30, 2023 from $1.7 million in the three months ended June 30, 2022. As a percentage of net sales, selling, general and administrative expenses was 30.1% in the three months ended June 30, 2023 compared to 24.4% for the prior year period. The overall increase in selling, general and administrative expense in the quarter was primarily the result of increased sales and marketing costs, legal and professional fees incurred as part of the Honeywell asset acquisition, as well as non-cash executive stock awards.
Interest income. Interest income increased by $175,000 to $186,000 in the three months ended June 30, 2023 from $10,000 in the three months ended June 30, 2022, mainly a result of increased cash balance and higher interest rates earned during 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 $68,000 to $90,000 in the three months ended June 30, 2023 compared to the same period in the prior year.
Income tax expense. The income tax expense for the three months ended June 30, 2023 was $340,000 as compared to $359,000 for the three months ended June 30, 2022.
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 permanent items and state taxes.
Net income. The Company reported net income for the three months ended June 30, 2023 of $1.4 million and remained flat compared to net income of $1.4 for the three months ended June 30, 2022. On a diluted basis, the net income per share was $0.08 for the three months ended June 30, 2023 and remained flat compared to net income per share of $0.08 for the three months ended June 30, 2022.
Nine Months Ended June 30, 2023 Compared to the Nine Months Ended June 30, 2022
Net sales. Net sales were $21.8 million for the nine months ended June 30, 2023 compared to $20.5 million for the nine months ended June 30, 2022, an increase of 6.5%. Product sales increased $1.1 million, customer service was flat, and EDC sales doubled to $234,000 in the nine months ended June 30, 2023 compared to the same period in the prior year.This increase in product sales for the nine months ended June 30, 2023 primarily resulted from increased sales to our OEM customers, which include Pilatus, Textron and Boeing. Sales increases were also seen in our new auto-throttle installations.
Cost of sales. Cost of sales increased $347,000, or 4.2%, to $8.6 million, or 39.5% of net sales, in the nine months ended June 30, 2023, compared to $8.3 million or 40.4% of net sales, in the nine months ended June 30, 2022. The increase in cost of sales was primarily the result of an increase in product sales volume for the nine months ended June 30, 2023 compared to the nine months ended June 30, 2022. The Company’s overall gross margin was 60.5% and 59.6% for the nine months ended June 30, 2023 and 2022, respectively. The increase in gross margin percentage for the nine months ended June 30, 2023 is attributable to favorable leveraging of fixed costs resulting from the increased sales and production volume and a favorable sales mix.
Research and development. R&D expense increased $325,000, or 15.8%, to $2.4 million in the nine months ended June 30, 2023 from $2.1 million in the nine months ended June 30, 2022. As a percentage of net sales, R&D expense increased to 10.9% of net sales in the nine months ended June 30, 2023 from 10.1% of net sales in the nine months ended June 30, 2022 reflecting an increase in hiring engineers and working on product development and related programs/internal projects.
Selling, general and administrative. Selling, general and administrative expenses increased by $1.8 million to $7.0 million in the nine months ended June 30, 2023 from $5.2 million in the nine months ended June 30, 2022. As a percentage of net sales, selling, general and administrative expenses increased to 32.6% of net sales in the nine months ended June 30, 2023 from 25.5% of net sales in the nine months ended June 30, 2022. The increase in selling, general and administrative expense in the period was primarily the result of personnel additions in sales and marketing, legal and business development related to the acquisition, investor relations and investor facing activities and non-cash long-term compensations post COVID.
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Interest income. Interest income increased by $422,000 to $432,000 in the nine months ended June 30, 2023 from $11,000 in the nine months ended June 30, 2022, mainly 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 $82,000 to $132,000 in the nine months ended June 30, 2023 compared to the same period in the prior year.
Income tax expense. The income tax expense for the nine months ended June 30, 2023 was $877,000 as compared to $1.1 million the nine months ended June 30, 2021.
The effective tax rate for the nine-month period ended June 30, 2022 was 20.5% and differs from the statutory tax rate primarily due to permanent items and state taxes.
Net income. The Company reported net income for the nine months ended June 30, 2023 of $3.4 million compared to net income of $3.9 million for the nine months ended June 30, 2022. On a diluted basis, the net income per share was $0.19 for the nine months ended June 30, 2023 compared to net income per share of $0.23 for the nine months ended June 30, 2022.
Liquidity and Capital Resources
The following table highlights key financial measurements of the Company:
June 30,
September 30,
2023
2022
Cash and cash equivalents
$
2,572,233
$
17,250,546
Accounts receivable
5,944,015
4,297,457
Current assets
25,937,217
28,202,319
Current liabilities
8,145,090
3,940,303
Contract liability
102,953
259,183
Other non-current liabilities (1)
18,420,949
15,065
Quick ratio (2)
1.05
5.47
Current ratio (3)
3.18
7.16
Nine Months Ended June 30,
2023
2022
Cash flow activities:
Net cash provided by operating activities
$
937,925
$
6,420,371
Net cash used in investing activities
(36,025,084)
(161,230)
Net cash provided by financing activities
20,408,846
17,154
(1) Excludes contract liability
(2) Calculated as: the sum of cash and cash equivalents plus accounts receivable, net, divided by current liabilities
(3) 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.
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Operating activities
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.
Net cash provided by operating activities of $6.4 million for the nine-month period ended June 30, 2022 resulted primarily from funding from net income of $3.9 million, a decrease in accounts receivables of $1.0 million and a decrease in deferred income taxes of $0.8 million.
Investing activities
Net cash used in investing activities was $36.0 million for the nine-month period ended June 30, 2023 and consisted primarily of the asset purchase acquisition of Honeywell.
Net cash used in investing activities was $0.2 million for the nine-month period ended June 30, 2022 and consisted primarily of the purchase of laboratory test equipment and computer hardware.
Financing activities
Net cash provided by financing activities was $20.4 million for the nine-month period ended June 30, 2023 and consisted of proceeds from a new credit facility of $20.0 million and the exercise of stock options.
Net cash provided by financing activities was $0.02 million for the nine-month period ended June 30, 2022 and consisted of proceeds from 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 respond to unanticipated requirements or developments. If insufficient funds are available, the Company may not be able to introduce new products or compete effectively.
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.
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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 three- and nine-month periods ended June 30, 2023:
Three Months Ended
Six Months Ended
June 30, 2023
Backlog, beginning of period
$
14,780,588
$
11,778,988
Bookings, net
6,942,680
23,800,989
Recognized in revenue
(7,959,208)
(21,815,917)
Backlog, end of period
$
13,764,060
$
13,764,060
At June 30, 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.
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.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.