Innovative Solutions and Support(ISSC) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for the periods ended March 31, 2020, and 2019, detailing the company's financial position and performance Condensed Consolidated Balance Sheets | Financial Metric | March 31, 2020 ($) | September 30, 2019 ($) | | :--- | :--- | :--- | | Total Assets | $39,908,261 | $38,557,025 | | Total Liabilities | $2,765,282 | $2,348,873 | | Total Shareholders' Equity | $37,142,979 | $36,208,152 | - Total assets increased by approximately $1.35 million from September 30, 2019, to March 31, 2020, primarily driven by an increase in current assets[9] Condensed Consolidated Statements of Operations Three Months Ended March 31 Performance | Metric | Three Months Ended Mar 31, 2020 ($) | Three Months Ended Mar 31, 2019 ($) | | :--- | :--- | :--- | | Total Net Sales | $4,835,065 | $4,203,127 | | Gross Profit | $2,295,171 | $2,346,206 | | Operating Income | $51,763 | $173,067 | | Net Income | $438,105 | $202,499 | | Diluted EPS | $0.03 | $0.01 | Six Months Ended March 31 Performance | Metric | Six Months Ended Mar 31, 2020 ($) | Six Months Ended Mar 31, 2019 ($) | | :--- | :--- | :--- | | Total Net Sales | $9,346,493 | $8,180,777 | | Gross Profit | $4,896,818 | $4,512,009 | | Operating Income | $283,521 | $269,082 | | Net Income | $766,013 | $341,920 | | Diluted EPS | $0.04 | $0.02 | - Net income more than doubled for both the three-month and six-month periods ended March 31, 2020, compared to the prior year, significantly boosted by an income tax benefit in the current period[12] Condensed Consolidated Statement of Shareholders' Equity - Total shareholders' equity increased from $36,208,152 at September 30, 2019, to $37,142,979 at March 31, 2020[13] - The growth in shareholders' equity during the six-month period was primarily driven by net income of $766,013[13][12] Condensed Consolidated Statements of Cash Flows Cash Flow Activity (Six Months Ended) | Cash Flow Activity (Six Months Ended) | March 31, 2020 ($) | March 31, 2019 ($) | | :--- | :--- | :--- | | Net cash provided by operating activities | $250,805 | $922,678 | | Net cash used in investing activities | ($32,420) | ($72,195) | | Net cash provided by financing activities | $8,822 | $0 | | Net increase in cash | $227,207 | $850,483 | - Cash provided by operating activities decreased significantly in the first six months of fiscal 2020 compared to the prior year, mainly due to increases in accounts receivable, inventories, and a new income tax receivable[18] Notes to Condensed Consolidated Financial Statements - The company operates in a single business segment as a systems integrator, designing and manufacturing air data equipment, display systems, and autothrottles for various aviation markets[21] - The CARES Act, enacted in March 2020 in response to the COVID-19 pandemic, allowed the company to carry back net operating losses (NOLs), resulting in a cash impact (tax refund) of $309,412 and the recording of an income tax receivable of $310,135[54][88] Customer Concentration (Q2 2020) | Customer Concentration (Q2 2020) | % of Net Sales | | :--- | :--- | | Pilatus Aircraft Ltd | 38% | | Kalitta Air | 19% | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results of operations for the three and six months ended March 31, 2020, covering business overview, product developments, financial performance, liquidity, capital resources, backlog, and COVID-19 impact Company Overview - The company operates as a systems integrator for various aviation markets, including general aviation, commercial air transport, and military[130][131] - Key product developments include the ThrustSense® Integrated PT6 Autothrottle, which received FAA certification for King Air aircraft in April 2019 and a safety mode feature in December 2019[135][136] - The company acknowledges risks from the COVID-19 pandemic, including potential customer spending delays and supply chain disruptions, and has implemented safety measures for employees[139][140] Results of Operations Q2 2020 vs Q2 2019 Performance | Metric | Q2 2020 | Q2 2019 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $4.84M | $4.20M | +15.0% | | Gross Margin | 47.5% | 55.8% | -8.3 p.p. | | Net Income | $438,105 | $202,499 | +116.3% | | Diluted EPS | $0.03 | $0.01 | +$0.02 | Six Months Ended March 31, 2020 vs 2019 Performance | Metric | 6M 2020 | 6M 2019 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $9.35M | $8.18M | +14.2% | | Gross Margin | 52.4% | 55.2% | -2.8 p.p. | | Net Income | $766,013 | $341,920 | +124.0% | | Diluted EPS | $0.04 | $0.02 | +$0.02 | - The increase in net sales was driven by higher product sales, particularly customer service shipments, while the decrease in gross margin was due to higher labor, material, and warranty costs reflecting product mix and increased activity[147][148][157] Liquidity and Capital Resources - The company's principal source of liquidity is cash from operations, with cash and cash equivalents standing at $22.6 million as of March 31, 2020[166] - Backlog increased significantly from $5.9 million at the beginning of the fiscal year to $9.8 million at March 31, 2020, with the majority expected to be filled within the next twelve months[174] - The company believes its existing cash and cash equivalents will be sufficient to fund operations for at least the next twelve months[172] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate exposure on cash equivalents held in money market accounts, as it does not use derivative financial instruments - The company's main market risk is interest rate risk on its cash equivalents held in money market accounts[176] - A hypothetical 1% increase in variable interest rates would have increased interest income by approximately $54,000 for the quarter and $108,000 for the six-month period ended March 31, 2020[176] Controls and Procedures Management, including the CEO and CFO, concluded the company's disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2020[177] - No material changes were made to the internal control over financial reporting during the most recent fiscal quarter[179] PART II. OTHER INFORMATION Legal Proceedings The company is subject to ordinary course legal proceedings but does not anticipate any material effect on its financial position or results of operations - The company is not aware of any pending legal proceedings that would have a material effect on its financial results[180] Risk Factors This section highlights significant risks from the COVID-19 pandemic, detailing potential adverse effects on employees, customers, and the supply chain, including business disruptions and reduced demand - The COVID-19 pandemic is identified as a significant risk, creating volatility, uncertainty, and economic disruption that is expected to adversely affect the business[182] - Potential impacts include disruptions in the supply chain, reduced demand from the travel industry, delays in FAA certifications, and staffing shortages[183][184] - The company returned its Paycheck Protection Program (PPP) loan out of caution due to changing guidance and is navigating the crisis without this government support[183] Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities during the period - There were no unregistered sales of equity securities[187] Defaults upon Senior Securities The company reports no defaults upon senior securities - There were no defaults upon senior securities[187] Mine Safety Disclosures This item is not applicable to the company - Not applicable[187] Other Information The company's subsidiary received a $1.2 million Paycheck Protection Program (PPP) loan on May 4, 2020, which was subsequently repaid due to new guidance creating uncertainty regarding qualification - The company's subsidiary received a $1,203,900 loan under the Paycheck Protection Program (PPP) on May 4, 2020[187] - Due to new guidance from the Small Business Administration and Treasury Department that created uncertainty regarding qualification, the company concluded it was prudent to repay the unused loan[187] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - This section lists required certifications from the CEO and CFO (Rule 13a-14(a) and Section 906 of Sarbanes-Oxley) and XBRL data files as exhibits to be filed with the report[188]