INNOVATIVE SOLUTIONS AND SUPPORT, INC. 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" 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 toInnovative 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 endedSeptember 30, 2022 and the following factors:
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;
? 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
? 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;
? potential future acquisitions;
? the costs of compliance with present and future laws and regulations;
? changes in law, including changes to corporate tax laws in
and the availability of certain tax credits; and
? other factors disclosed from time to time in the Company's filings with the
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 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
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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 inPennsylvania onFebruary 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 enableIS &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 withFederal 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. The Company has developed and received certification from theFAA on its NextGenFlight Deck featuring its ThrustSense® Integrated PT6 Autothrottle ("ThrustSense® Autothrottle") for retrofit in the Pilatus PC-12. The NextGenFlight 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. 21
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The Company has developed, it'sFAA -certified ThrustSense® Autothrottle for retrofit in theKing 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 theKing Air 360 andKing 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 anFAA -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 toDoD ; however, the Company sells its products primarily to commercial customers for end use inDoD 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
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 meetIS &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 inthe United States . The 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. 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. 22 Table of Contents
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 endedSeptember 30, 2022 contains a discussion of these critical accounting policies. There have been no significant changes in the Company's critical accounting policies sinceSeptember 30, 2022 . See also Note 1 to the unaudited consolidated financial statements for the three and six months endedMarch 31, 2023 as set forth herein. RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDEDMARCH 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 EndedMarch 31 ,
Six Months Ended
2023 2022 2023 2022
Net sales:
Product 100.0 % 97.1 % 97.4 % 98.5 %
Engineering development contracts 0.0 % 2.9 % 2.6 % 1.5 %
Total net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales:
Product 35.4 % 38.7 % 38.5 % 39.7 %
Engineering development contracts 0.0 % 0.2 % 0.4 % 0.1 %
Total cost of sales 35.4 % 38.9 % 38.9 % 39.8 %
Gross profit 64.6 % 61.1 % 61.1 % 60.2 %
Operating expenses:
Research and development 11.8 % 9.5 % 11.1 % 10.2 %
Selling, general and administrative 33.3 % 25.2 % 34.0 % 26.1 %
Total operating expenses 45.1 % 34.7 % 45.1 % 36.3 %
Operating income 19.4 % 26.4 % 16.0 % 23.9 %
Interest income 1.8 % 0.0 % 1.8 % 0.0 %
Other income 0.3 % 0.2 % 0.3 % 0.2 %
Income before income taxes 21.5 % 26.6 % 18.1 % 24.1 %
Income tax expense 4.2 % 5.7 % 3.9 % 5.2 %
Net income 17.3 % 20.9 % 14.2 % 18.9 %
Three Months Ended
Net sales. Net sales were$7.34 million for the three months endedMarch 31, 2023 compared to$6.85 million for the three months endedMarch 31, 2022 , an increase of$0.49 million , or 7.2%. Product sales increased$0.66 million , or 12.4% in the three months endedMarch 31, 2023 compared to the year ago quarter. This increase in product sales for the three months endedMarch 31, 2023 compared to the year ago quarter primarily resulted from increased shipments of displays for retrofit programs to commercial air transport customers under our 757/767 platform. Cost of sales. Cost of sales decreased slightly by$.06 million , or 2.4%, to$2.60 million , or 35.4% of net sales, in the three months endedMarch 31, 2023 , compared to$2.66 million and 38.9% of net sales, in the three months endedMarch 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 endedMarch 31, 2023 and 2022, respectively. The increase in gross margin percentage for the three months endedMarch 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. 23 Table of Contents
Research and development. R&D expense increased$0.22 million , or 33.3%, to$0.87 million in the three months endedMarch 31, 2023 from$0.65 million in the three months endedMarch 31, 2022 . As a percentage of net sales, R&D expense increased to 11.8% of net sales in the three months endedMarch 31, 2023 from 9.5% of net sales in the three months endedMarch 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$0.72 million to$2.45 million in the three months endedMarch 31, 2023 from$1.72 million in the three months endedMarch 31, 2022 . As a percentage of net sales, selling, general and administrative expenses increased to 33.3% of net sales in the three months endedMarch 31, 2023 from 25.2% of net sales in the three months endedMarch 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$130k to$131k in the three months endedMarch 31, 2023 from$346 in the three months endedMarch 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$11.7k to$23.3k in the three months endedMarch 31, 2023 compared to the same period in the prior year. Income tax expense. The income tax expense for the three months endedMarch 31, 2023 was$0.3 million as compared to an income tax expense of$0.4 million for the three months endedMarch 31, 2022 .
The effective tax rate for the three-month period ended
Net income. The Company reported net income for the three months endedMarch 31, 2023 of$1.27 million compared to net income of$1.43 million for the three months endedMarch 31, 2022 . On a diluted basis, the net income per share was$0.07 for the three months endedMarch 31, 2023 compared to net income per share of$0.08 for the three months endedMarch 31, 2022 .
Six Months Ended
Net sales. Net sales were$13.86 million for the six months endedMarch 31, 2023 compared to$13.54 million for the six months endedMarch 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 endedMarch 31, 2023 compared to the same period in the prior year. This increase in product sales for the six months endedMarch 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 endedMarch 31, 2023 , compared to$5.39 million or 39.8% of net sales, in the six months endedMarch 31, 2022 . The Company's overall gross margin was 61.1% and 60.2% for the six months endedMarch 31, 2023 and 2022, respectively. The increase in gross margin percentage for the six months endedMarch 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 endedMarch 31, 2023 from$1.39 million in the six months endedMarch 31, 2022 . As a percentage of net sales, R&D expense increased to 11.1% of net sales in the six months endedMarch 31, 2023 from 10.2% of net sales in the six months endedMarch 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 endedMarch 31, 2023 from$3.53 in the six months endedMarch 31, 2022 . As a percentage of net sales, selling, general and administrative expenses increased to 34.0% of net sales in the six months endedMarch 31, 2023 from 26.1% of net sales in the six months endedMarch 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. 24
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Interest income. Interest income increased by$0.25 million to$0.25 million in the six months endedMarch 31, 2023 from$442 in the six months endedMarch 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 endedMarch 31, 2023 compared to the same period in the prior year. Income tax expense. The income tax expense for the six months endedMarch 31, 2023 was$0.54 as compared to an income tax expense of$0.70 for the six months endedMarch 31, 2022 .
The effective tax rate for the six-month period ended
Net income. The Company reported net income for the six months endedMarch 31, 2023 of$1.97 million compared to net income of$2.56 million for the six months endedMarch 31, 2022 . On a diluted basis, the net income per share was$0.11 for the six months endedMarch 31, 2023 compared to$0.15 for the six months endedMarch 31, 2022 .
Liquidity and Capital Resources
The following table highlights key financial measurements of the Company:
March 31, September 30,
2023 2022
Cash and cash equivalents $ 19,791,346 $ 17,250,546
Accounts receivable 3,966,646 4,297,457
Current assets 31,063,912 28,202,319
Current liabilities 3,553,103 3,940,303
Contract liability 191,731 259,183
Other non-current liabilities (1) 424,157 15,065
Quick ratio (2) 6.69 5.47
Current ratio (3) 8.74 7.16
Six Months Ended March 31,
2023 2022
Cash flow activities:
Net cash provided by operating activities
(80,151) (84,358)
Net cash provided by financing activities 408,846 -(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. Cash is used principally to finance inventory, accounts receivable, contract assets, and payroll, as well as the Company's known contractual and other commitments (including those described in Note 7, "Leases"). The Company's existing cash balances and anticipated cash flows from operations are expected to be adequate to satisfy the Company's liquidity needs for at least the next 12 months. Apart from what has been disclosed above, management is not aware of any trends, events or uncertainties that have had or are likely to have a material impact on our liquidity, financial condition and capital resources.
The declaration and payment of any dividend in the future will be at the discretion of the Company's Board of Directors.
Operating activities
Net cash provided by operating activities was$2.2 million for the six-month period endedMarch 31, 2023 and consisted primarily of funding from net income of$2.0 million . 25 Table of Contents Net cash provided by operating activities was$3.4 million for the six-month period endedMarch 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$0.1 million for the six-month period endedMarch 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 endedMarch 31, 2022 and consisted primarily of the purchase of laboratory
test equipment. Financing activities Net cash provided by financing activities was$0.4 million for the six-month period endedMarch 31, 2023 and consisted of proceeds from the exercise of stock options.
Net cash used in financing activities was
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 six-month periods ended March 31, 2023 :
Three Months Ended Six Months Ended
March 31, 2023
Backlog, beginning of period $ 8,513,958 $ 11,778,988
Bookings, net 13,607,084 16,858,309
Recognized in revenue (7,340,454) (13,856,709)
Backlog, end of period $ 14,780,588 $ 14,780,588 AtMarch 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.
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.
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