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.
All forward-looking statements are based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Many of the factors that will determine the Company’s future results are beyond the ability of management to control or predict. The forward-looking statements in this report are only predictions and actual events or results may differ materially. In evaluating such statements, a number of risks, uncertainties and other factors could cause actual results, performance, financial condition, cash flows, prospects and opportunities to differ materially from those expressed in, or implied by, the forward-looking statements. These risks, uncertainties and other factors include those set forth in Item 1A (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 and in Item 1A (Risk Factors) to Part II of this Quarterly Report on Form 10-Q, as well as the following factors:
● market acceptance of the Company’s ThrustSense® full-regime Autothrottle, 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 impact of general economic trends on the Company’s business;
● disruptions in the Company’s supply chain, customer base and workforce;
● the ability to gain, drive and sustain regulatory approval, including domestic and international certifications, of products in a timely manner;
● delays in receiving components from third-party suppliers;
● the bankruptcy or insolvency of one or more key customers;
● protection of intellectual property rights;
● the ability to respond to technological change;
● failure to retain/recruit key personnel;
● risks related to succession planning;
● a cyber security incident;
● risks related to our self-insurance program;
● ability to successfully manage and integrate key acquisitions, mergers and other transactions, such as the recent asset acquisition of certain Inertial, Communication and Navigation product lines from Honeywell International, Inc., as well as the failure to realize expected synergies and benefits anticipated when we make an acquisition;
● potential future acquisitions or dispositions;
● the costs of compliance with present and future laws and regulations;
● changes in law, including changes to corporate tax laws in the United States and the availability of certain tax credits; and
● other factors disclosed from time to time in the Company’s filings with the United States Securities and Exchange Commission (the “SEC”).
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report, or to reflect the occurrence of unanticipated events. The
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forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act of 1933, as amended (the “Securities Act”) and 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Investors should also be aware that while the Company, from time to time, communicates with securities analysts, it is against its policy to disclose any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.
Company Overview
Innovative Solutions and Support, Inc. was incorporated in Pennsylvania on February 12, 1988. The Company operates in one business segment as a systems integrator that designs, develops, manufactures, sells and services air data equipment, engine display systems, standby equipment, primary flight guidance, autothrottles and cockpit display systems for retrofit applications and original equipment manufacturers (“OEMs”). The Company supplies integrated flight management systems (“FMS”), flat panel display systems (“FPDS”), FPDS with autothrottle, air data equipment, integrated standby units, integrated standby units with autothrottle and advanced GPS receivers that enable reduced carbon footprint navigation, communication and navigation products and inertial reference units.
The Company has continued to position itself as a system integrator, which 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.
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 state-of-the-art integrated standby units, integrating the full functionality of the primary and navigation displays into a small backup-powered unit. These integrated standby units builds on the Company’s legacy air data computer to form a complete next-generation cockpit display and navigation upgrade offering to the commercial and military markets.
The Company has developed and received certification from the FAA on its NextGen Flight Deck featuring its ThrustSense® Integrated PT6 Autothrottle (“ThrustSense® Autothrottle”) for retrofit in the Pilatus PC-12. The NextGen Flight Deck features Primary Flight and Multi-Function Displays and integrated standby units, as well as an Integrated FMS and EFB System. The innovative avionics suite includes dual flight management systems, autothrottles, synthetic vision and enhanced vision. The NextGen enhanced avionics suite is available for integration into other business aircraft with full-authority digital engine control (“FADEC”) and non-FADEC engines.
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The Company has developed its FAA-certified ThrustSense® Autothrottle for retrofit in the King Air and 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 Air aircraft through Textron service centers and third-party service centers. The Company has also developed an FAA-certified safety mode feature for its King Airs aircraft ThrustSense® Autothrottle, LifeGuard™, which provides critical Vmca protection that proportionally reduces engine power to maintain directional control during an engine-out condition.
The Company sells to both the OEM and the retrofit markets. Customers include various OEMs, commercial air transport carriers and corporate/general aviation companies, DoD and its commercial contractors, aircraft operators, aircraft modification centers, government agencies and foreign militaries. Occasionally, IS&S sells its products directly to DoD; however, the Company sells its products primarily to commercial customers for end use in DoD programs. Sales to defense contractors are generally made on commercial terms, although some of the termination and other provisions of government contracts are applicable to these contracts. The Company’s retrofit projects are generally pursuant to either a direct contract with a customer or a subcontract with a general contractor to a customer (including government agencies).
In June 2023, the Company entered into an Asset Purchase and License Agreement (the “Honeywell Agreement”) with Honeywell International, Inc. (“Honeywell”) pursuant to which Honeywell sold, assigned or licensed certain assets related to its inertial, communication and navigation product lines, including a sale of certain inventory, equipment and customer-related documents, an assignment of certain contracts and a grant of exclusive and non-exclusive licenses to use certain Honeywell intellectual property related to its inertial, communication and navigation product lines to repair, overhaul, manufacture sell, import, export and distribute certain products to the Company for cash consideration of $35.9 million (the “Transaction”).
The exclusive licensing of these product lines from Honeywell enhances the Company’s current offerings in the air transport, military and business aviation markets. In addition, there are potential cost synergies from better utilization of the Company’s skilled engineering team and its existing operational capacity. The Company believes the Honeywell Agreement will help to accelerate the Company’s growth and enhance its global reputation for delivering some of the industry’s best price-for-performance value propositions.
Costs 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.
Costs 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 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.
The Company sells its products to agencies of the United States and foreign governments, aircraft operators, aircraft modification centers and OEMs. Customers have been and may continue to be affected by changes in economic conditions both in the United States and abroad. Such changes may cause customers to curtail or delay their spending on both new and existing aircraft. Factors that can impact general economic conditions and the level of spending by customers include, but are not limited to, general levels of consumer spending, increases in fuel and energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence, inflation, public health crises and pandemics, including the COVID-19 pandemic and other macroeconomic factors that affect spending behavior. Furthermore, spending by government agencies may be reduced in the future. If customers curtail or delay their spending or are forced to declare bankruptcy or liquidate their operations because of adverse economic conditions, the Company’s revenues and results of operations would be affected adversely. For example, in the 2020 fiscal year, certain of the Company’s customers temporarily suspended product deliveries as a result of the COVID-19 pandemic, and while these
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deliveries subsequently resumed, there is a possibility that the COVID-19 or similar pandemics will result in other suspensions, delays or order cancellations by the Company’s customers or suppliers.
Environmental, Social and Governance Considerations
In recent years, environmental, social and governance (“ESG”) issues have become an increasing area of focus for some of our shareholders, customers and suppliers. Management and the Company’s Board of Directors are committed to identifying, assessing and understanding the potential impact of ESG issues and related risks on the Company’s business model, as well as potential areas of improvement.
We are committed to recruiting, motivating and developing a diversity of talent. We are an equal opportunity employer and a Vietnam Era Veterans’ Readjustment Assistance Act federal contractor. All qualified applicants receive consideration for employment without regard to race, color, religion, sex, sexual orientation, gender identity, national origin, disability status, protected veteran status, or any other characteristic protected by law.
The nature of our business also supports long-term sustainability. Historically, a majority of the Company’s sales have come from the retrofit market, in which the Company, by making upgrades to improve the functionality and safety of existing machinery, facilitates the re-use and recycling of aircraft and equipment that might otherwise be scrapped as obsolete. The Company’s GPS receivers also facilitate reduced carbon footprint navigation. The Company also plans to enhance its focus on the environmental impact of its operations.
Critical Accounting Policies and Estimates
The discussion and analysis of financial condition and consolidated results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The preparation of these condensed consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses and related disclosure of contingent assets and liabilities. Management has determined that the most critical accounting policies and estimates are those related to revenue recognition, inventory valuation and valuation of tangible and intangible assets acquired. On an ongoing basis, the Company’s management evaluates its estimates based upon historical experience and various other assumptions that it believes to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The Company believes that its critical accounting policies affect its more significant estimates and judgments used in the preparation of its condensed consolidated financial statements. The Annual Report on Form 10-K for the fiscal year ended September 30, 2023 contains a discussion of these critical accounting policies. There have been no significant changes in the Company’s critical accounting policies since September 30, 2023. See also Note 1 to the unaudited condensed consolidated financial statements for the three- and six-month periods ended March 31, 2024 as set forth herein.
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RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
MARCH 31, 2024 AND 2023
The following table sets forth the statements of operations data expressed as a percentage of total net sales for the periods indicated (some items may not add due to rounding):
Three Months Ended March 31,
Six Months Ended March 31,
2024
2023
2024
2023
Net sales:
Product
45.6
%
81.0
%
46.5
%
79.6
%
Customer service
47.5
%
19.0
%
46.5
%
17.7
%
Engineering development contracts
6.9
%
—
%
7.0
%
2.6
%
Total net sales
100.0
%
100.0
%
100.0
%
100.0
%
Cost of sales:
Product
21.9
%
30.0
%
20.6
%
33.3
%
Customer service
22.9
%
5.4
%
20.9
%
5.2
%
Engineering development contracts
3.2
%
—
%
3.1
%
0.4
%
Total cost of sales
48.0
%
35.4
%
44.6
%
38.9
%
Gross profit
52.0
%
64.6
%
55.4
%
61.1
%
Operating expenses:
Research and development
9.6
%
11.8
%
9.6
%
11.1
%
Selling, general and administrative
27.1
%
33.3
%
29.5
%
34.0
%
Total operating expenses
36.7
%
45.1
%
39.1
%
45.1
%
Operating income
15.3
%
19.4
%
16.3
%
16.0
%
Interest expense
(1.6)
%
—
%
(2.7)
%
—
%
Interest income
0.3
%
1.8
%
0.6
%
1.8
%
Other income
0.2
%
0.3
%
0.2
%
0.3
%
Income before income taxes
14.3
%
21.5
%
14.4
%
18.1
%
Income tax expense
3.0
%
4.2
%
3.1
%
3.9
%
Net income
11.3
%
17.3
%
11.3
%
14.2
%
Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023
Net sales. Net sales were $10,739,516 for the three months ended March 31, 2024 compared to $7,340,454 for the three months ended March 31, 2023, an increase of 46.3%. Product sales decreased $1,049,562 or 17.7% and customer service sales increased $3,702,919 or 265.4% as compared to the prior year quarter. The decrease in product sales for the three months ended March 31, 2024 compared to the prior year quarter was primarily the result of reduced shipments of displays for retrofit programs to commercial air transport customers, partially offset by an increase of shipments of displays to general aviation and military customers. The increase in customer service primarily reflects customer service sales of the product lines acquired from Honeywell. EDC sales increased $745,705, compared to the year-ago quarter, reflecting increased EDC business.
Cost of sales. Cost of sales increased by $2,556,851 or 98.3%, to $5,157,154, or 48.0% of net sales, in the three months ended March 31, 2024, compared to $2,600,303 or 35.4% of net sales, in the three months ended March 31, 2023. The increase in cost of sales was primarily the result of an increase in customer service sales volume for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The Company’s overall gross margin was 52.0% and 64.6% for the three months ended March 31, 2024 and 2023, respectively. This decrease in overall gross margin percentage for the three months ended March 31, 2024 is primarily the result of changes in product mix and higher unit manufacturing costs, which resulted principally from production inefficiencies
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and lower manufacturing utilization due to new products in development and the Honeywell integration. Customer service gross margin percentage declined for the three month period ended March 31, 2024 compared to the year ago quarter due to increased material costs for the repair of product lines acquired from Honeywell.
Research and development. R&D expenses were $1,031,119 an increase of $164,921, or 19.0%, in the three months ended March 31, 2024 from $866,198 in the three months ended March 31, 2023. This increase in R&D expense was the result of higher salaries and benefits due to higher headcount. As a percentage of net sales, R&D expenses decreased to 9.6% of net sales for the three months ended March 31, 2024 from 11.8% of net sales for the three months ended March 31, 2023.
Selling, general and administrative. Selling, general and administrative expenses were $2,908,193, an increase of $461,558, or 18.9%, in the three months ended March 31, 2024 from $2,446,635 in the three months ended March 31, 2023. The overall increase in selling, general and administrative expense in the quarter ended March 31, 2024 was primarily the result of increased sales and marketing costs which included the amortization expense of the customer relationships intangible asset resulting from the Honeywell Transaction of $268,500 and professional and consulting fees. As a percentage of net sales, selling, general and administrative expenses were 27.1% in the three months ended March 31, 2024 compared to 33.3% for the prior year period.
Interest expense. Interest expense was $171,470 for the three months ended March 31, 2024 resulting from borrowings under the Company’s debt facility with PNC. There was no interest expense for the three months ended March 31, 2023 as the Company had no debt during the period.
Interest income. Interest income decreased by $94,751 to $36,200 in the three months ended March 31, 2024 from $130,951 in the three months ended March 31, 2023, mainly as a result of decreased cash balances during the current year period compared to the same period in the prior year.
Other income. Other income is mainly composed of royalties earned and remained relatively unchanged in the three months ended March 31, 2024 compared to the same period in the prior year.
Income tax expense. The income tax expense for the three months ended March 31, 2024 was $325,936 as compared to an income tax expense of $310,424 for the three months ended March 31, 2023.
The effective tax rate for the three-month period ended March 31, 2024 was 21.2% and differs from the statutory tax rate primarily due to higher state taxes related to a taxable gain from the sale of the Company’s King Air aircraft.
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.
Net income. The Company reported net income for the three months ended March 31, 2024 of $1,208,316 as compared to net income of $1,271,103 for the three months ended March 31, 2023. On a diluted basis, the net income per share was $0.07 for the three months ended March 31, 2024 compared to net income per share of $0.07 for the three months ended March 31, 2023.
Six Months Ended March 31, 2024 Compared to the Six Months Ended March 31, 2023
Net sales. Net sales were $20,047,579 for the six months ended March 31, 2024 compared to $13,856,709 for the six months ended March 31, 2023, an increase of 44.7%. Product sales decreased $1,713,661 or 15.5% and customer service sales increased $6,869,017 or 279.6% as compared to the year ago period. The decrease in product sales for the six months ended March 31, 2024 was primarily the result of reduced shipments of displays for retrofit programs to commercial air transport customers partially offset by an increase of shipments of displays to general aviation and military customers. The increase in customer service primarily reflects customer service sales of the product lines acquired from Honeywell. EDC sales increased $1,035,514, or 282.2%, compared to the year-ago period reflecting increased EDC business.
Cost of sales. Cost of sales increased by $3,549,300, or 65.8%, to $8,942,055, or 44.6% of net sales, in the six months ended March 31, 2024, compared to $5,392,755 or 38.9% of net sales, in the six months ended March 31, 2023. The increase in cost of sales was primarily the result of an increase in customer service sales volume for the six months ended March 31, 2024 compared to the six months ended March 31, 2023. The Company’s overall gross margin was 55.4% and 61.1% for the six months ended March 31, 2024 and 2023, respectively. This decrease in overall gross margin percentage for the six months ended March 31, 2024 is primarily the
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result of changes in product mix and higher unit manufacturing costs, which resulted principally from production inefficiencies and lower manufacturing utilization due to new products in development and the Honeywell integration. Customer service gross margin percentage declined for the six-month period ended March 31, 2024 compared to the year ago period due to increased material costs for the repair of product lines acquired from Honeywell.
Research and development. R&D expenses were $1,932,263 an increase of $395,620, or 25.7%, in the six months ended March 31, 2024 from $1,536,643 in the six months ended March 31, 2023. This increase in R&D expenses were due to higher salaries and benefits due to higher headcount. As a percentage of net sales, R&D expense decreased to 9.6% of net sales for the six months ended March 31, 2024.
Selling, general and administrative. Selling, general and administrative expenses were $5,915,012, an increase of $1,206,514, or 25.6%, in the six months ended March 31, 2024 from $4,708,498 in the six months ended March 31, 2023. The overall increase in selling, general and administrative expense in the six months ended March 31, 2024 was primarily the result of increased sales and marketing costs which included the amortization expense of the customer relationships intangible asset resulting from the Honeywell Transaction and professional and consulting fees. These increases were partially offset by the $162,000 gain from the sale of the Company’s King Air aircraft. As a percentage of net sales, selling, general and administrative expenses were 29.5% in the six months ended March 31, 2024 compared to 34.0% for the prior year period.
Interest expense. Interest expense was $531,483 for the six months ended March 31, 2024 resulting from borrowings under the Company’s debt facility with PNC. There was no interest expense in the six months ended March 31, 2023 as the Company had no debt during the period.
Interest income. Interest income decreased by $131,164 to $115,679 in the six months ended March 31, 2024 from $246,843 in the six months ended March 31, 2023, mainly as a result of decreased cash balances during the current year period compared to the same period in the prior year.
Other income. Other income is mainly composed of royalties earned and remained relatively unchanged in the six months ended March 31, 2024 compared to the same period in the prior year.
Income tax expense. The income tax expense for the six months ended March 31, 2024 was $620,950 as compared to an income tax expense of $537,357 for the six months ended March 31, 2023.
The effective tax rate for the six-month period ended March 31, 2024 was 21.5% and differs from the statutory tax rate primarily due to higher state taxes related to a taxable gain from the sale of the Company’s King Air aircraft.
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.
Net income. The Company reported net income for the six months ended March 31, 2024 of $2,265,666 as compared to net income of $1,969,754 for the six months ended March 31, 2023. On a diluted basis, the net income per share was $0.13 for the six months ended March 31, 2024 compared to net income per share of $0.11 for the six months ended March 31, 2023.
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Liquidity and Capital Resources
The following table highlights key financial measurements of the Company:
March 31,
September 30,
2024
2023
Cash and cash equivalents
$
574,079
$
3,097,193
Accounts receivable
$
6,061,185
$
9,743,714
Current assets
$
24,474,335
$
34,673,703
Current liabilities
$
15,801,753
$
6,398,959
Contract liability
$
96,650
$
143,359
Other non-current liabilities
$
444,440
$
17,921,508
Quick ratio (1)
0.42
2.01
Current ratio (2)
1.55
5.42
Six Months Ended March 31,
2024
2023
Cash flow activities:
Net cash provided by operating activities
$
4,416,839
$
2,212,105
Net cash provided by (used in) investing activities
1,917,162
(80,151)
Net cash (used in) provided by financing activities
(8,857,115)
408,846
(1) Calculated as: the sum of cash and cash equivalents plus accounts receivable, net, divided by current liabilities
(2) Calculated as: current assets divided by current liabilities
The Company’s principal source of liquidity has been cash flows from current year operations and cash accumulated from prior years’ operations, supplemented with borrowings under our term loan and revolving credit facility. Cash is used principally to finance inventory, accounts receivable, contract assets, payroll, debt service and acquisitions, as well as the Company’s known contractual and other commitments (including those described in Note 8, “Leases”). The Company’s existing cash balances and anticipated cash flows from operations, together with borrowings under our term loan and revolving credit facility, are expected to be adequate to satisfy the Company’s liquidity needs for at least the next 12 months. Apart from what has been disclosed in this Management’s Discussion and Analysis, management is not aware of any trends, events or uncertainties that have had or are likely to have a material impact on our liquidity, financial condition and capital resources.
The declaration and payment of any dividend in the future will be at the discretion of the Company’s Board of Directors.
Debt Facility
On December 19, 2023, the Company and PNC entered into an Amendment to Loan Documents (the “Restated Loan Amendment”) and a corresponding Amended and Restated Revolving Line of Credit Note (“Restated Line of Credit Note”) and Amended and Restated Line of Credit and Investment Sweep Rider (the “Restated Rider”), to increase the aggregate principal amount available under the Company’s senior secured revolving line of credit from $10,000,000 to $30,000,000 and extend the maturity date until December 19, 2028. The proceeds of the Restated Line of Credit Note will be used for working capital and other general corporate purposes, for acquisitions as permitted under the Restated Loan Amendment and to pay off and close the loan evidenced by that certain Term Note executed in favor of PNC, dated June 28, 2023, which provided for a senior secured term loan in an aggregate principal amount of $20,000,000, with a maturity date of June 28, 2028.
The interest rate applicable to loans outstanding under the Restated Line of Credit is a rate per annum equal to the sum of (A) Daily SOFR (as defined in the Restated Line of Credit Note) plus (B) an unadjusted spread of Applicable SOFR Margin (as defined in the Restated Line of Credit Note) plus (C) a SOFR adjustment of ten basis points. The Applicable SOFR Margin ranges from 1.5% to 2.5% depending on the Company’s funded debt to EBITDA ratio, as defined in the Restated Line of Credit Note.
Stifel Sales Agreement
On September 22, 2023, the Company entered into an at-the-market equity offering Sales Agreement (the “ATM Sales Agreement”) with Stifel, Nicolaus & Company, Incorporated (the “Sales Agent”), pursuant to which the Company may offer and sell from time to
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time through the Sales Agent up to $40 million of shares of its common stock. The shares will be offered and sold pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-267595), which was declared effective by the SEC on October 14, 2022. The Company filed a prospectus supplement, dated September 22, 2023, with the SEC in connection with the offer and sale of the shares. Subject to the terms and conditions of the ATM Sales Agreement, the Sales Agent will use commercially reasonable efforts to sell shares of the Company’s common stock from time to time, based upon the Company’s instructions. The Company is not obligated to sell any shares under the ATM Sales Agreement and the Company or the Sales Agent may at any time suspend solicitation and offers under the ATM Sales Agreement or terminate the ATM Sales Agreement. The Company has provided the Sales Agent with customary indemnification rights and the Sales Agent will be entitled to compensation for its services of up to 3.0% of the gross sales price per share of the shares of the Company’s common stock sold through the Sales Agent. Sales of the shares of the Company’s common stock, if any, under the ATM Sales Agreement may be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act, including sales made directly on or through Nasdaq or any other existing trading market for the Company’s common stock, in negotiated transactions at market prices prevailing at the time of sale or at prices related to such prevailing market prices and/or any other method permitted by law.
During the year ended September 30, 2023 and the three- and six-month periods ended March 31, 2024, we did not sell any shares of common stock under the ATM Sales Agreement.
Operating activities
Net cash provided by operating activities was $4.4 million for the six-month period ended March 31, 2024 and consisted primarily of funding from net income of $2.3 million and a decrease in accounts receivable of $3.7 million, partially offset by an increase in inventory of $2.2 million.
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.
Investing activities
Net cash provided by investing activities was $1.9 million for the six-month period ended March 31, 2024 and consisted primarily of proceeds of $2.2 million from the sale of the Company’s King Air aircraft.
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.
Financing activities
Net cash used in financing activities was $8.9 million for the six-month period ended March 31, 2024 and consisted of payments of $19.5 million to pay off and close the loan evidenced by the Term Note and repayments of $13.8 million against the Company’s line of credit, offset by proceeds from the Company’s line of credit of $24.5 million.
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.
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.
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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 six-month period ended March 31, 2024:
Three Months Ended
Six Months Ended
March 31, 2024
Backlog, beginning of period
$
14,558,781
$
13,450,881
Plus: bookings during period, net
6,613,417
17,029,380
Less: sales recognized during period
(10,739,516)
(20,047,579)
Backlog, end of period
$
10,432,682
$
10,432,682
At March 31, 2024, the majority of the Company’s backlog is expected to be filled within the next twelve months. To the extent new business orders do not continue to equal or exceed sales recognized in the future from the Company’s existing backlog, future operating results may be impacted negatively.
Off-Balance Sheet Arrangements
The Company has no relationships with unconsolidated entities or financial partnerships, such as Special Purpose Entities or Variable Interest Entities, established for the purpose of facilitating off-balance sheet arrangements or other limited purposes.
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.