Innovative Solutions and Support(ISSC) - 2021 Q3 - Quarterly Report

markdown PART I. FINANCIAL INFORMATION [Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) For the nine months ended June 30, 2021, net income increased to **$3.5 million** due to a tax benefit, while total assets decreased to **$27.0 million** primarily from **$19.8 million** in dividend payments [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets decreased to **$27.0 million** as of June 30, 2021, from **$41.5 million**, primarily due to reduced cash and restricted cash from dividend payments, while total liabilities also significantly decreased Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2021 | September 30, 2020 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $7,482,863 | $12,603,967 | | Restricted Cash | $0 | $11,180,900 | | Total current assets | $17,312,730 | $33,120,422 | | **Total assets** | **$27,016,964** | **$41,545,837** | | **Liabilities & Equity** | | | | Total current liabilities | $4,008,223 | $13,647,117 | | **Total liabilities** | **$4,008,223** | **$13,776,806** | | **Total shareholders' equity** | **$23,008,741** | **$27,769,031** | [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) For Q3 2021, net sales slightly increased to **$6.2 million**, and net income surged to **$2.7 million** due to a **$1.5 million** income tax benefit, with nine-month net income reaching **$3.5 million** Statement of Operations Summary (Unaudited) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total net sales | $6,180,183 | $5,953,689 | $16,171,680 | $15,300,182 | | Gross profit | $3,354,502 | $3,394,673 | $8,823,316 | $8,291,491 | | Operating income | $1,195,569 | $1,244,446 | $2,039,159 | $1,527,967 | | Net income | $2,685,921 | $1,259,858 | $3,534,643 | $2,025,871 | | Diluted EPS | $0.16 | $0.07 | $0.21 | $0.12 | [Condensed Consolidated Statements of Shareholders' Equity](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders%27%20Equity) Shareholders' equity decreased from **$27.8 million** to **$23.0 million** primarily due to **$8.6 million** in declared dividends, partially offset by **$3.5 million** in net income - For the nine months ended June 30, 2021, the company declared dividends of **$8,607,192**, which significantly impacted shareholders' equity[12](index=12&type=chunk) - Total shareholders' equity decreased from **$27,769,031** at the beginning of the period to **$23,008,741** at June 30, 2021[12](index=12&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Operating activities generated **$3.8 million** in cash, while financing activities used **$19.8 million** primarily for dividends, resulting in a **$16.3 million** net decrease in cash and restricted cash Cash Flow Summary (Unaudited) | Activity | Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $3,793,103 | $626,221 | | Net cash (used in) investing activities | ($324,025) | ($67,624) | | Net cash (used in) provided by financing activities | ($19,771,082) | $8,822 | | **Net (decrease) increase in cash** | **($16,302,004)** | **$567,419** | [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Notes detail accounting policies, a significant tax benefit from releasing a valuation allowance, customer concentration with Pilatus and Textron, and special cash dividends declared in late 2020 - The company operates in a single business segment as a systems integrator for the aviation industry, providing products like flight management systems, cockpit displays, and autothrottles[17](index=17&type=chunk) - In the third quarter of 2021, two customers, Pilatus Aircraft Ltd and Textron Aviation, Inc., accounted for **25%** and **21%** of net sales, respectively, and for the nine-month period, they accounted for **20%** and **17%**[66](index=66&type=chunk) - The company released the valuation allowance for all federal and certain state deferred tax assets during the quarter ended June 30, 2021, as it determined they were more likely than not to be realized[89](index=89&type=chunk) - The company declared a special cash dividend of **$0.50 per share** in December 2020, totaling approximately **$8.6 million**[26](index=26&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=32&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Quarterly net sales increased **3.8%** driven by King Air autothrottle systems, gross margin declined to **54.3%**, and a significant tax benefit boosted net income, while backlog grew to **$9.5 million** despite large dividend payments [Results of Operations](index=38&type=section&id=Results%20of%20Operations) Q3 2021 net sales rose **3.8%** to **$6.2 million** due to autothrottle shipments, gross margin fell to **54.3%**, and a **$1.47 million** tax benefit drove net income to **$2.7 million** Q3 2021 vs Q3 2020 Performance | Metric | Q3 2021 | Q3 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $6.2M | $6.0M | +3.8% | | Gross Profit | $3.4M | $3.4M | -1.2% | | Gross Margin | 54.3% | 57.0% | -2.7 p.p. | | R&D Expense | $0.65M | $0.87M | -25.7% | | SG&A Expense | $1.51M | $1.28M | +18.2% | | Net Income | $2.7M | $1.3M | +113.2% | - The increase in product sales for the quarter was primarily due to increased shipments of King Air autothrottle systems to the company's OEM customer[147](index=147&type=chunk) - The effective tax benefit rate for Q3 2021 was **121.4%**, differing from the statutory rate primarily due to the release of the valuation allowance for deferred tax assets[152](index=152&type=chunk) [Liquidity and Capital Resources](index=41&type=section&id=Liquidity%20and%20Capital%20Resources) Cash and cash equivalents decreased to **$7.5 million** due to **$19.8 million** in dividend payments, yet the current ratio improved to **4.32**, with management confident in sufficient liquidity for the next year Key Liquidity Metrics | Metric | June 30, 2021 | September 30, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $7,482,863 | $12,603,967 | | Current assets | $17,312,730 | $33,120,422 | | Current liabilities | $4,008,223 | $13,647,117 | | Current ratio | 4.32 | 2.43 | - The company declared and paid two special cash dividends: **$0.65 per share** (approx. **$11.2 million**) paid on Oct 1, 2020, and **$0.50 per share** (approx. **$8.6 million**) paid on Dec 30, 2020[167](index=167&type=chunk)[168](index=168&type=chunk) - Net cash used in financing activities for the nine months ended June 30, 2021, was **$19,771,082**, primarily due to dividend payments[173](index=173&type=chunk) [Backlog](index=44&type=section&id=Backlog) The company's backlog significantly increased to **$9.5 million** as of June 30, 2021, from **$3.6 million** at the fiscal year start, driven by strong net bookings of nearly **$22.0 million** Backlog Activity (Nine Months Ended June 30, 2021) | Item | Amount | | :--- | :--- | | Backlog, beginning of period | $3,640,637 | | Bookings, net | $21,984,917 | | Recognized in revenue | ($16,171,680) | | **Backlog, end of period** | **$9,453,874** | [Quantitative and Qualitative Disclosures About Market Risk](index=45&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate changes on variable-rate cash equivalents, where a hypothetical **1%** increase would yield approximately **$14,000** more in interest income for the quarter - The company's main market risk exposure is from interest rate fluctuations on its cash equivalent balances[178](index=178&type=chunk) - A hypothetical **1%** increase in variable interest rates would have increased interest income by approximately **$14,000** for the three-month period ended June 30, 2021[178](index=178&type=chunk) [Controls and Procedures](index=45&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[179](index=179&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[180](index=180&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=46&type=section&id=Item%201.%20Legal%20Proceedings) The company is not currently involved in any legal proceedings expected to have a material impact on its financial position or results of operations - The Company does not believe any currently pending legal matters will have a material effect on its results of operations or financial position[182](index=182&type=chunk) [Risk Factors](index=46&type=section&id=Item%201A.%20Risk%20Factors) This section refers readers to risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020 - The report refers to the risk factors described in the Company's Form 10-K for the fiscal year ended September 30, 2020[183](index=183&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=46&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities during the period - None reported[184](index=184&type=chunk) [Exhibits](index=47&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL interactive data files - The exhibits filed with the report include CEO and CFO certifications (Exhibits 31.1, 31.2), a Section 906 certification (Exhibit 32.1), and XBRL data files[185](index=185&type=chunk)