Document and Entity Information
Document and Entity Information - shares | 9 Months Ended | |
Jun. 30, 2016 | Jul. 29, 2016 | |
Document and Entity Information | ||
Entity Registrant Name | INNOVATIVE SOLUTIONS & SUPPORT INC | |
Entity Central Index Key | 836,690 | |
Document Type | 10-Q | |
Document Period End Date | Jun. 30, 2016 | |
Amendment Flag | false | |
Current Fiscal Year End Date | --09-30 | |
Entity Current Reporting Status | Yes | |
Entity Filer Category | Smaller Reporting Company | |
Entity Common Stock, Shares Outstanding | 16,908,849 | |
Document Fiscal Year Focus | 2,016 | |
Document Fiscal Period Focus | Q3 |
CONDENSED CONSOLIDATED BALANCE
CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) | Jun. 30, 2016 | Sep. 30, 2015 |
Current Assets | ||
Cash and cash equivalents | $ 17,530,210 | $ 16,282,039 |
Accounts receivable | 5,838,818 | 2,394,695 |
Unbilled receivables, net | 1,611,357 | 3,920,209 |
Inventories | 4,008,114 | 4,597,316 |
Deferred income taxes | 741,109 | 933,499 |
Prepaid expenses and other current assets | 1,136,268 | 1,221,717 |
Total current assets | 30,865,876 | 29,349,475 |
Property and equipment, net | 7,014,638 | 7,095,330 |
Other assets | 156,948 | 168,948 |
Total Assets | 38,037,462 | 36,613,753 |
Current Liabilities | ||
Accounts payable | 1,849,274 | 1,435,981 |
Accrued expenses | 2,295,897 | 2,568,531 |
Deferred revenue | 299,052 | 756,745 |
Total current liabilities | 4,444,223 | 4,761,257 |
Non-current deferred income taxes | 576,629 | 507,184 |
Other liabilities | 2,930 | 2,826 |
Total liabilities | 5,023,782 | 5,271,267 |
Commitments and contingencies (See Note 6) | ||
Shareholders' Equity | ||
Preferred stock, 10,000,000 shares authorized, $.001 par value, of which 200,000 shares are authorized as Class A Convertible stock. No shares issued and outstanding at June 30, 2016 and September 30, 2015 | ||
Common stock, $.001 par value: 75,000,000 shares authorized, 18,812,465 and 18,756,089 issued at June 30, 2016 and September 30, 2015, respectively | 18,813 | 18,756 |
Additional paid-in capital | 51,400,058 | 51,148,722 |
Retained earnings | 2,408,440 | 818,768 |
Treasury stock, at cost, 1,903,616 and 1,846,451 shares at June 30, 2016 and September 30, 2015, respectively | (20,813,631) | (20,643,760) |
Total shareholders' equity | 33,013,680 | 31,342,486 |
Total liabilities and shareholders' equity | $ 38,037,462 | $ 36,613,753 |
CONDENSED CONSOLIDATED BALANCE3
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares | Jun. 30, 2016 | Sep. 30, 2015 |
Preferred Stock, shares authorized | 10,000,000 | 10,000,000 |
Preferred Stock, par value (in dollars per share) | $ 0.001 | $ 0.001 |
Preferred Stock, shares issued | 0 | 0 |
Preferred Stock, shares outstanding | 0 | 0 |
Common stock, par value (in dollars per share) | $ 0.001 | $ 0.001 |
Common stock, shares authorized | 75,000,000 | 75,000,000 |
Common stock, shares issued | 18,812,465 | 18,756,089 |
Treasury stock, shares | 1,903,616 | 1,846,451 |
Class A Convertible stock | ||
Preferred Stock, shares authorized | 200,000 | 200,000 |
CONDENSED CONSOLIDATED STATEMEN
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - USD ($) | 3 Months Ended | 9 Months Ended | ||
Jun. 30, 2016 | Jun. 30, 2015 | Jun. 30, 2016 | Jun. 30, 2015 | |
Net sales: | ||||
Product | $ 6,376,042 | $ 4,114,837 | $ 20,771,687 | $ 12,152,290 |
Engineering development contracts | 128,550 | 804,852 | 977,465 | 4,777,705 |
Total net sales | 6,504,592 | 4,919,689 | 21,749,152 | 16,929,995 |
Cost of sales: | ||||
Product | 2,490,681 | 2,300,470 | 8,461,419 | 6,918,457 |
Engineering development contracts | 130,335 | 687,574 | 185,000 | 3,734,692 |
Total cost of sales | 2,621,016 | 2,988,044 | 8,646,419 | 10,653,149 |
Gross profit | 3,883,576 | 1,931,645 | 13,102,733 | 6,276,846 |
Operating expenses: | ||||
Research and development | 1,405,158 | 799,340 | 3,674,374 | 2,101,812 |
Selling, general and administrative | 2,246,074 | 1,397,165 | 7,531,633 | 4,911,546 |
Total operating expenses | 3,651,232 | 2,196,505 | 11,206,007 | 7,013,358 |
Operating income (loss) | 232,344 | (264,860) | 1,896,726 | (736,512) |
Interest income | 9,092 | 6,372 | 24,458 | 18,269 |
Other income | 12,457 | 11,173 | 71,490 | 31,405 |
Income (loss) before income taxes | 253,893 | (247,315) | 1,992,674 | (686,838) |
Income tax expense | 27,096 | 3,284,658 | 403,002 | 2,615,484 |
Net income (loss) | $ 226,797 | $ (3,531,973) | $ 1,589,672 | $ (3,302,322) |
Net income (loss) per common share: | ||||
Basic (in dollars per share) | $ 0.01 | $ (0.21) | $ 0.09 | $ (0.20) |
Diluted (in dollars per share) | $ 0.01 | $ (0.21) | $ 0.09 | $ (0.20) |
Weighted average shares outstanding: | ||||
Basic (in shares) | 16,941,707 | 16,910,475 | 16,925,688 | 16,930,522 |
Diluted (in shares) | 17,059,546 | 16,910,475 | 17,027,216 | 16,930,522 |
CONDENSED CONSOLIDATED STATEME5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) | 9 Months Ended | |
Jun. 30, 2016 | Jun. 30, 2015 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | ||
Net income(loss) | $ 1,589,672 | $ (3,302,322) |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||
Depreciation and amortization | 355,930 | 430,525 |
Share-based compensation expense: | ||
Stock options | 68,172 | 259,582 |
Stock awards | 183,222 | 149,952 |
Tax adjustment from share-based compensation | (54,055) | |
Recovery of loss on unbilled receivables | (62,159) | |
(Gain) loss on disposal of property and equipment | (563) | (56,824) |
Excess and obsolete inventory cost | 246,663 | |
Deferred income taxes | 261,835 | 2,837,888 |
(Increase) decrease in: | ||
Accounts receivable | (3,444,668) | 516,769 |
Unbilled receivables, net | 2,308,852 | 2,622,729 |
Inventories | 589,202 | 1,085,418 |
Prepaid expenses and other current assets | 85,449 | 97,287 |
Other non-current assets | (75,300) | |
Increase (decrease) in: | ||
Accounts payable | 413,293 | (2,043,154) |
Accrued expenses | (272,634) | (1,593,150) |
Income taxes payable/receivable | 104 | (359,491) |
Deferred revenue | (457,694) | 213,218 |
Net cash provided by operating activities | 1,680,172 | 913,576 |
CASH FLOWS FROM INVESTING ACTIVITIES: | ||
Purchases of property and equipment | (263,238) | (171,474) |
Proceeds from the sale of property and equipment | 1,108 | 57,000 |
Net cash (used in) investing activities | (262,130) | (114,474) |
CASH FLOWS FROM FINANCING ACTIVITIES: | ||
Purchase of Company's stock | (169,871) | (254,170) |
Net cash (used in) financing activities | (169,871) | (254,170) |
Net increase in cash and cash equivalents | 1,248,171 | 544,932 |
Cash and cash equivalents, beginning of year | 16,282,039 | 15,214,584 |
Cash and cash equivalents, end of period | 17,530,210 | 15,759,516 |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||
Cash paid for income tax | $ 135,000 | $ 191,000 |
Summary of Significant Accounti
Summary of Significant Accounting Policies | 9 Months Ended |
Jun. 30, 2016 | |
Summary of Significant Accounting Policies | |
Summary of Significant Accounting Policies | 1. Summary of Significant Accounting Policies Description of the Company Innovative Solutions and Support, Inc. (the “Company” or “IS&S”) was incorporated in Pennsylvania on February 12, 1988. The Company operates in one business segment as a systems integrator that designs, manufactures, sells, and services air data equipment, engine display systems, standby equipment, primary flight guidance, 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”), Integrated Standby Units (“ISU”) and advanced Global Positioning System (“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. The 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. Customers include commercial air transport carriers and corporate/general aviation companies, the DoD and its commercial contractors, aircraft operators, aircraft modification centers, foreign militaries, and various OEMs. Basis of Presentation The accompanying unaudited condensed consolidated financial statements are presented pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) in accordance with the disclosure requirements for the quarterly report on Form 10-Q and, therefore, do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete annual financial statements. In the opinion of Company management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the results for the interim periods presented. The condensed consolidated balance sheet as of September 30, 2015 is derived from the audited financial statements of the Company. Operating results for the three and nine months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2016. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015. The Company’s condensed consolidated financial statements include the accounts of its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Use of Estimates Preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, as of the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Estimates are used in accounting for, among other items, long term contracts, allowance for doubtful accounts, inventory obsolescence, product warranty cost liabilities, income taxes, engineering and material costs on Engineering Development Contracts (“EDC”) programs, percentage-of-completion on EDC, recoverability of long-lived assets, stock-based compensation expense self-insurance reserves, and contingencies. Actual results could differ materially from those estimates. Cash and Cash Equivalents Highly liquid investments, purchased with an original maturity of three months or less, are classified as cash equivalents. Cash equivalents at June 30, 2016 and September 30, 2015 consist of funds invested in money market funds with financial institutions. Property and Equipment Property and equipment are stated at cost. Depreciation is provided using an accelerated method over the estimated useful lives of the assets (the lesser of three to seven years or over the related lease term), except for the manufacturing facility and the corporate airplane. The building is being depreciated on a straight line basis over 39 years. Major additions and improvements are capitalized. Maintenance and repairs that do not improve or extend the life of assets are charged to expense as incurred. The airplane was depreciated on a straight-line basis over its estimated useful life of ten years; however, because the airplane had been depreciated previously to its estimated salvage value, no depreciation expense was recorded for this asset during the nine months ended June 30, 2016 or 2015, respectively . Fair Value of Financial Instruments The net carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate their fair value because of the short-term nature of these instruments. For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value as follows: Level 1 — Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date. Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including: · Quoted prices for similar assets or liabilities in active markets; · Quoted prices for identical or similar assets in non-active markets; · Inputs other than quoted prices that are observable for the asset or liability; and · Inputs that are derived principally from or corroborated by other observable market data. Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2016 and September 30, 2015, according to the valuation techniques the Company used to determine their fair values. Fair Value Measurement on June 30, 2016 Quoted Price in Significant Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs (Level 1) (Level 2) (Level 3) Assets Cash and cash equivalents: Money market funds $ $ — $ — Fair Value Measurement on September 30, 2015 Quoted Price in Significant Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs (Level 1) (Level 2) (Level 3) Assets Cash and cash equivalents: Money market funds $ $ — $ — Long-Lived Assets The Company assesses the impairment of long-lived assets in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360-10, “Property, Plant and Equipment” (“ASC Topic 360-10”) . This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In addition, long-lived assets to be disposed of must be reported at the lower of the carrying amount or fair value less cost to sell. The Company considers historical performance and future estimated results in its evaluation of potential impairment and compares the carrying amount of the asset to estimated future cash flows expected from use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is measured by discounting expected future cash flows. No impairment charges were recorded during the nine months ended June 30, 2016 or 2015. Revenue Recognition The Company enters into sales arrangements with customers that, in general, provide for the Company to design, develop, manufacture, and deliver large FPDS, flight information computers and advanced monitoring systems that measure and display critical flight information, including data relative to aircraft separation, airspeed, altitude, and engine and fuel data measurements. The Company’s sales arrangements include multiple deliverables as defined in FASB ASC Topic 605-25 “Multiple-Element Arrangements” (“ASC Topic 605-25”), which typically include design and engineering services, and the production and delivery of the flat panel display and related components. The Company includes any design and engineering services elements in EDC sales and any functional upgrade and product elements in product sales in the accompanying consolidated statements of operations. To the extent that an arrangement contains software elements that are essential to the functionality of tangible products sold in the arrangement, the Company recognizes revenue for the deliverables in accordance with the guidance included in FASB Accounting Standards Update 2009-14, “ Revenue Arrangements That Include Software Elements ” (“ASU 2009-14”), FASB Accounting Standards Update 2009-13, “ Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force ” (“ASU 2009-13”), and FASB ASC Topic 605, “ Revenue Recognition ” (“ASC Topic 605”). To the extent that an arrangement contains software components, which may include functional upgrades, that the Company sells on a standalone basis and which it has deemed outside the scope of the exception defined by ASU 2009-14, the Company recognizes software revenue in accordance with ASC Topic 985, “ Software ” (“ASC Topic 985”). Multiple Element Arrangements - The Company identifies all goods and/or services that are to be delivered separately under such a sales arrangement and allocates sales to each deliverable (if more than one) based on that deliverable’s fair value. The Company then considers the appropriate recognition method for each deliverable. The Company’s multiple element arrangements can include defined design and development activities, functional upgrades, and product sales. The Company utilizes the selling price hierarchy that has been established by ASU 2009-13, which requires that the selling price for each deliverable be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. To the extent that an arrangement includes a deliverable for which estimated selling price is used, the Company determines the best estimate of selling price by applying the same pricing policies and methodologies that would be used to determine the price to sell the deliverable on a standalone basis. To the extent that an arrangement contains defined design and EDC activities as identified deliverables and products (resulting in a multiple element arrangement), the Company recognizes as EDC sales amounts earned during the design and development phase of the contract following the guidance included in FASB ASC Topic 605-35, “Construction-Type and Production-Type Contracts” (“ASC Topic 605-35”) under the percentage-of-completion method. To the extent that multiple element arrangements include product sales, sales are generally recognized once revenue recognition criteria for the product deliverables have been met based on the provisions of ASC Topic 605. The Company includes any design and engineering services elements in EDC sales, and any functional upgrade and product elements in “product” sales on the accompanying consolidated statements of operations. Single Element Arrangements — Products To the extent that a single element arrangement provides for product sales and repairs, the Company recognizes sales when revenue recognition criteria for the product deliverables have been met based on the provisions of ASC Topic 605. In addition, the Company receives orders for equipment and parts. Generally, revenue from the sale of such products is recognized upon shipment to the customer. The Company offers its customers extended warranties for additional fees. These warranty sales are recorded as deferred revenue and recognized as sales on a straight-line basis over the warranty period. Engineering Development Contracts The Company may enter into contracts to perform specified design and EDC services related to its products. The Company recognizes revenue from these arrangements as EDC sales, following the guidance included in ASC Topic 605-35, and considers the nature of these contracts (including term, size of contract, and level of effort) when determining the appropriate accounting treatment for a particular contract. Certain of these contracts are accounted for under the percentage-of-completion method of accounting when the Company determines that progress toward completion is reasonable and reliably estimable, and the contract is long-term in nature. The Company uses the completed contract method for all other contracts because these contracts are short-term in nature and meet the criteria set forth in ASC Topic 605-35. Sales and profit margins under the percentage-of-completion method are recorded based on the ratio of actual costs incurred to total estimated costs expected to be incurred related to the contract under the cost-to-cost method (for development effort). The percentage-of-completion method of accounting requires the Company to estimate the profit margin for each individual contract, and to apply that profit margin on a uniform basis as sales are recorded under the contract. The estimation of profit margin requires the Company to make projections of the total sales to be generated and the total costs that will be incurred under each contract. The projections require the Company to make numerous assumptions and estimates relating to items, such as the complexity of design and related development costs, performance of subcontractors, availability and cost of materials, engineering productivity and cost, overhead, and capital costs. Contracts sometimes include purchase options for additional quantities and customer change orders for additional or revised product functionality. Sales and costs related to profitable purchase options are included in the Company’s estimates only when the options are exercised, while sales and costs related to unprofitable purchase options are included in the Company’s estimates when exercise is determined to be probable. Sales related to change orders are included in profit estimates only if they can be reliably estimated and collectability is reasonably assured. Purchase options and change orders are accounted for, either as an integral part of the original contract or separately, depending upon the nature and value of the item. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable. The Company reviews estimates of profit margins for contracts on a quarterly basis. The percentage-of-completion method results in the profit margin being recorded evenly as revenue is recognized under the contract. Changes in these underlying estimates because of revisions in revenue and cost estimates or to the exercise of contract options may result in profit margins being recognized unevenly over a contract as such changes are accounted for on a cumulative basis in the period estimates are revised. Significant changes in estimates related to accounting for long-term contracts may have a material effect on the Company’s results of operations in the period in which the revised estimate is made. Cumulative catch-up adjustments resulting from changes in estimates are disclosed in the notes to the consolidated financial statements of the Company. Customer Service Revenue The Company enters into sales arrangements with customers for the repair or upgrade of its various products that are not under warranty. The Company’s customer service revenue and cost of sales for the three and nine months ended June 30, 2016 and 2015, respectively are as follows: For the Three Months Ended June 30, For the Nine Months Ended June 30, 2016 2015 2016 2015 Customer Service Sales $ $ $ $ Customer Service Cost of Sales Gross Profit $ $ $ $ Income Taxes Income taxes are recorded in accordance with FASB ASC Topic 740, “Income Taxes” (“ASC Topic 740”), which utilizes a balance sheet approach to provide for income taxes. Under this method, the Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets, liabilities, and expected benefits of utilizing net operating losses (“NOL”) and tax credit carry-forwards. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and are reflected in the consolidated financial statements in the period of enactment. At the end of each interim reporting period, the Company prepares an estimate of the annual effective income tax rate and applies that annual effective income tax rate to ordinary year-to-date pre-tax income or loss for the interim period. Specific tax items discrete to a particular quarter are recorded in income tax expense for that quarter. The estimated annual effective tax rate used in providing for income taxes on a year-to-date basis may change in subsequent interim periods. Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be objectively verified, and significant management judgment is required in determining any valuation allowances recorded against net deferred tax assets. The Company evaluates deferred income taxes on a quarterly basis to determine if valuation allowances are required by considering available evidence. Deferred tax assets are recognized when expected future taxable income is sufficient to allow the related tax benefits to reduce taxes that would otherwise be payable. The sources of taxable income that may be available to realize the benefit of deferred tax assets are future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and credit carry-forwards, taxable income in carry-back years, and tax planning strategies. In the period ended June 30, 2015, a valuation allowance was recorded on a majority of the Company’s federal and state deferred tax assets, net of liabilities, due to uncertainty with respect to the Company’s ability to generate sufficient future taxable income to realize such deferred tax assets. The remaining amount of the Company’s recognized deferred tax assets were related to tax planning strategies and the ability to carry-back federal tax losses to claim a tax refund. For the nine months ended June 30, 2016, the valuation allowance was reduced due to the current year profitability of the Company which represents an additional source of taxable income to realize certain federal and state deferred tax assets. However, the Company will continue to maintain a valuation allowance until the Company generates a sufficient level of profitability to warrant a conclusion that it is no longer more likely than not that the entirety of these net federal and state deferred tax assets will not be realized in future periods. The Company will also continue to assess all available evidence during future periods to evaluate any changes to the realization thereof. The accounting for uncertainty in income taxes requires a more likely than not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company records a liability for the difference between the (i) benefit recognized and measured for financial statement purposes and (ii) the tax position taken or expected to be taken on the Company’s tax return. To the extent that the Company’s assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The Company has elected to record any interest or penalties associated with uncertain tax positions as income tax expense. The Company files a consolidated United States federal income tax return. The Company prepares and files tax returns based on the interpretation of tax laws and regulations, and records estimates based on these judgments and interpretations. In the normal course of business, the tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities, and the Company records a liability when it is probable that there will be an assessment. The Company adjusts the estimates periodically as the result of ongoing examinations by and settlements with the various taxing authorities and changes in tax laws, regulations and precedent. The consolidated tax provision of any given year includes adjustments to prior years’ income tax accruals that are considered appropriate and any related estimated interest. Management believes that adequate accruals have been made for income taxes. Differences between estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material adverse effect on the Company’s consolidated financial position but could possibly be material to its consolidated results of operations or cash flow of any one period. Engineering Development The Company invests a large percentage of its sales in engineering development, both research and development (“R&D”) and EDC. At June 30, 2016, approximately 38% of the Company’s employees were engaged in various engineering development projects. Total engineering development expense is comprised of both design and EDC charges related to specific customer contracts and R&D. EDC expense consists primarily of payroll-related expenses of employees engaged in EDC projects, engineering related product materials and equipment, and subcontracting costs. R&D charges incurred for product design, product enhancements and future product development are expensed as incurred. EDC and design charges related to specific customer arrangements are charged to cost of sales-EDC based on the method of contract accounting (either percentage-of-completion or completed-contract) applicable to such contracts. Treasury Stock Treasury stock is recorded at acquisition cost. Gains and losses on disposition are recorded as increases or decreases to additional paid-in capital with losses in excess of previously recorded gains charged directly to retained earnings. When treasury shares are retired and returned to authorized but unissued status, the carrying value in excess of par is allocated to additional paid-in capital and retained earnings on a pro rata basis. Comprehensive Income Pursuant to FASB ASC Topic 220, “Comprehensive Income” (“ASC Topic 220”), the Company is required to classify items of other comprehensive income by their nature in the balance sheet and to display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of its condensed consolidated balance sheets. For the three and nine months ended June 30, 2016 and 2015, respectively, comprehensive income consisted of net income only. There were no items of other comprehensive income or accumulated other comprehensive income balances in the equity accounts for any of the periods presented. Share-Based Compensation The Company accounts for share-based compensation under FASB ASC Topic 505-50, “Equity-Based Payments to Non-Employees” (“ASC Topic 505-50”), and FASB ASC Topic 718, “Stock Compensation” (“ASC Topic 718”), which require the Company to measure the cost of employee or non-employee director services received in exchange for an award of equity instruments based on the grant-date fair value of the award using an option pricing model. That cost is recognized over the period during which an employee or non-employee director is required to provide service in exchange for the award. Warranty The Company offers warranties of various lengths; however the standard warranty is twenty-four months. At the time of shipment, the Company establishes a reserve for estimated costs of warranties based on its best estimate of the amounts necessary to settle future and existing claims using historical data on products sold as of the balance sheet date. The length of the warranty period, the product’s failure rates, and the customer’s usage affect warranty cost. If actual warranty costs are higher than the Company’s estimated amounts, future results of operations could be affected adversely. Warranty cost is recorded as cost of sales, and the reserve balance is recorded as an accrued expense. Although the Company maintains product quality programs and processes, its warranty obligations are affected by product failure rates and the related corrective costs. If actual product failure rates and/or corrective costs differ from the estimates, the Company revises the estimated warranty liability accordingly. Self-Insurance Reserves Beginning January 1, 2014, the Company began self-insuring a significant portion of its employee medical insurance. The Company maintains a stop-loss insurance policy that limits its losses both on a per employee basis and an aggregate basis. Liabilities associated with the risks that are retained by the Company are estimated based upon actuarial assumptions including historical claim experience and demographic factors. The Company has estimated the total medical claims incurred but not reported and the Company believes that it has adequate reserves for these claims at June 30, 2016. However, the actual value of such claims could be significantly affected if future occurrences and claims differ from these assumptions. At June 30, 2016 and September 30, 2015, the estimated liability for medical claims incurred but not reported was $53,000 and $80,000, respectively. The Company has recorded the excess of funded premiums over estimated claims incurred but not reported in the amounts of $272,000 and $119,000 as a current asset in the accompanying condensed consolidated balance sheets as of June 30, 2016 and September 30, 2015, respectively. Concentrations Major Customers and Products For the three months ended June 30, 2016, two customers, Sierra Nevada Corporation (“Sierra Nevada”) and iAccess Technologies, Inc. (“iAccess”), accounted for 45% and 12% of net sales, respectively. During the nine months ended June 30, 2016, three customers, Jet2.com Limited (“Jet2”), Sierra Nevada and DHL Aviation Services (“DHL”) accounted for 16%, 15% and 14% of net sales, respectively. For the three months ended June 30, 2015, three customers, Eclipse Aerospace, Inc. (“Eclipse”), American Airlines, Inc. (“American”) and Pilatus Aircraft Limited (“Pilatus”), accounted for 23%, 20% and 11% of net sales, respectively. During the nine months ended June 30, 2015, three customers, Pilatus, Eclipse and the DoD accounted for 23%, 18% and 11% of net sales, respectively. Major Suppliers The Company buys several components from sole source suppliers. Although there are a limited number of manufacturers of particular components, the Company believes other suppliers could provide similar components on comparable terms. For the three and nine months ended June 30, 2016, the Company had one supplier that was individually responsible for greater than 10% of the Company’s total inventory related purchases. For the three and nine months ended June 30, 2015, the Company had five and two suppliers respectively that were individually responsible for greater than 10% of the Company’s total inventory related purchases. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash balances and accounts receivable. The Company invests its excess cash where preservation of principal is the primary consideration. Cash balances are maintained with two major banks. Balances on deposit with certain money market accounts and operating accounts may exceed the Federal Deposit Insurance Corporation (“FDIC”) limits. The Company’s customer base consists principally of companies within the aviation industry. The Company requests advance payments and/or letters of credit from customers that it considers to be credit risks. As of June 30, 2016, the Company had allowances for doubtful accounts for unbilled receivables in the amount of $3.6 million related to the Delta contract (see “Note 6, Contingencies” for a description of the Delta contract). As of September 30, 2015, the Company had allowances for doubtful accounts for unbilled receivables of $1.3 million related to a certain customer contract and $3.6 million related to the Delta contract. In January 2016, the Company negotiated changes to its agreement with a customer whereby $1.3 million of unbilled receivables previously charged to bad debt expense in the quarter ended September 30, 2015 were cancelled. (See Unbilled Receivables below under Note 2. Supplemental Balance Sheet Disclosures). Recent Accounting Pronouncements In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09, “ Compensation - Stock Compensation - Improvements to Employee Share-Based Payment Accounting ” (“ASU 2016-09”), which involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the new standard, income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity should also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with other income tax cash flows as an operating activity. In regards to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. The Company is assessing the impact the adoption of ASU 2016-09 will have on its financial statements. In February 2016, the FASB issued ASU 2016-02, “ Leases ” (“ASU 2016-02”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is assessing the impact the adoption of ASU 2016-02 will have on |
Supplemental Balance Sheet Disc
Supplemental Balance Sheet Disclosures | 9 Months Ended |
Jun. 30, 2016 | |
Supplemental Balance Sheet Disclosures | |
Supplemental Balance Sheet Disclosures | 2. Supplemental Balance Sheet Disclosures Unbilled Receivables Unbilled receivables principally represent sales recorded under the percentage-of-completion method of accounting that, in accordance with applicable contract terms, have not been billed to customers. Unbilled receivables, net of progress payments and an impairment of $3.6 million related to the Delta contract at June 30, 2016 were $1.6 million. Unbilled receivables, net of progress payments and an impairment of $1.3 million related to a certain customer and an impairment of $3.6 million related to the Delta contract, at September 30, 2015 were $3.9 million. The Company negotiated changes to its agreement with a customer in January 2016 whereby the $1.3 million of unbilled receivables previously charged to bad debt expense in the quarter ended September 30, 2015 were cancelled. Significant changes in estimates related to accounting for long-term contracts under the percentage-of-completion method may have a material effect on the Company’s results of operations in the period in which the revised estimates are made. Cumulative catch-up adjustments resulting from changes in estimates decreased operating income by $120,000 for the three months ended June 30, 2016 and increased operating income by $232,000 for the nine months ended June 30, 2016. These increases to operating income are primarily related to reversals of loss accruals due to the cancellation of certain product deliverables as negotiated with a certain customer in January, 2016. Cumulative catch-up adjustments resulting from changes in estimates decreased operating income by $125,000 for the three months ended June 30, 2015 and increased operating income by $595,000 for the nine months ended June 30, 2015. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market, net of reserve for excess and obsolete inventory, and consist of the following: June 30, September 30, 2016 2015 Raw materials $ $ Work-in-process Finished goods $ $ Prepaid expenses and other current assets Prepaid expenses and other current assets consist of the following: June 30, September 30, 2016 2015 Prepaid insurance $ $ Income tax refund receivable Other $ $ Property and equipment Property and equipment, net consists of the following: June 30, September 30, 2016 2015 Land $ $ Computer equipment Corporate airplane Furniture and office equipment Manufacturing facility Equipment Less: accumulated depreciation and amortization ) ) $ $ Depreciation related to property and equipment was approximately $117,000 and $138,000 for the three months ended June 30, 2016 and 2015, respectively. The corporate airplane is utilized primarily in support of product development and has been depreciated to its estimated salvage value. Depreciation related to property and equipment was approximately $344,000 and $413,000 for the nine months ended June 30, 2016 and 2015, respectively. Other assets Other assets consist of the following: June 30, September 30, 2016 2015 Intangible assets, net of accumulated amortization of $529,037 and $517,037 at June 30, 2016 and September 30, 2015 $ $ Other non-current assets $ $ Intangible assets consist of licensing and certification rights which are amortized over a defined number of units. No impairment charges were recorded in the nine months ended June 30, 2016 and 2015. Total amortization expense was approximately $7,200 and $5,000 for the three months ended June 30, 2016 and 2015, respectively. Total amortization expense was approximately $12,000 and $17,000 for the nine months ended June 30, 2016 and 2015, respectively. Accrued expenses Accrued expenses consist of the following: June 30, September 30, 2016 2015 Warranty $ $ Salary, benefits and payroll taxes Professional fees Other, including losses on contracts $ $ Other accrued expense at June 30, 2016 and September 30, 2015 includes $0 and $0.6 million of EDC program costs, respectively. Warranty cost and accrual information for the three and nine months ended June 30, 2016 is highlighted below: Three Months Ending Nine Months Ending June 30, 2016 June 30, 2016 Warranty accrual, beginning of period $ $ Accrued expense Warranty cost ) ) Warranty accrual, end of period $ $ |
Income Taxes
Income Taxes | 9 Months Ended |
Jun. 30, 2016 | |
Income Taxes | |
Income Taxes | 3. Income Taxes The income tax expense for the three and nine months ended June 30, 2016 was $ 27,000 and $403,000, respectively, as compared to an income tax expense of $ 3.3 million and $2.6 million respectively, for the three and nine months ended June 30, 2015 . The effective tax rate for the three months ended June 30, 2016 was 10.7% . The effective tax rate for the three months ended June 30, 2016 differs from the statutory rate primarily due to a reduction in the valuation allowance of approximately $150,000 included in our current year estimated annual effective tax rate that is attributable to the anticipated profitability in the current year . The effective tax rate for the three months ended June 30, 2015 was (1,328.1%). The effective tax rate for the three months ended June 30, 2015 differs from the statutory rate primarily because of the Company recorded a valuation allowance against the deferred tax assets of $3.3 million reflecting only those deferred tax assets that could be realized. The effective tax rate for the nine months ended June 30, 2016 was 20.2%. The effective tax rate for the nine months ended June 30, 2016 differs from the statutory rate primarily due to a reduction in the valuation allowance of approximately $150,000 included in our current year estimated annual effective tax rate that is attributable to the anticipated profitability in the current year. The effective tax benefit rate for the nine months ended June 30, 2015 was (380.8%). The effective tax rate for the nine months ended June 30, 2015 differs from the statutory rate primarily because of the $3.3 million valuation allowance recorded against the deferred tax assets in the three months ended June 30, 2015. On December 18, 2015, the Protecting Americans from Tax Hikes (PATH) Act of 2015 was enacted. This legislation retroactively extended various temporary tax provisions which expired on December 31, 2014, including the permanent extension of the R&D Tax Credit. No income tax benefit was recorded in the period on the retroactive benefit for the period from January 1, 2015 to September 30, 2015 due to the uncertainty on the Company’s ability to generate future taxable income. In the period ended June 30, 2015, a valuation allowance was recorded on a majority of the Company’s federal and state deferred tax assets, net of liabilities, due to the uncertainty on the Company’s ability to generate sufficient future taxable income to realize such deferred tax assets. The remaining amount of the deferred tax assets recognized were attributable to tax planning strategies and the ability to carry-back federal tax losses to claim a tax refund. For the nine months ended June 30, 2016, the valuation allowance was reduced due to the current year profitability of the Company which represented an additional source of taxable income to realize certain federal and state deferred tax assets. However the Company will continue to maintain a valuation allowance until the Company generates a sufficient level of profitability to warrant a conclusion that it no longer is more likely than not that these net federal and state deferred tax assets will not be realized in future periods. On September 13, 2014, the U.S. Treasury Department and the IRS issued final regulations that addressed cost incurred in acquiring, producing, or improving tangible property (the “tangible property regulations”). The tangible property regulations were generally effective for tax years beginning on or after January 1, 2014 and required the Company to make additional tax accounting method changes as of October 1, 2014. However, the impact of these changes to the Company’s consolidated financial statements was immaterial as of and for the three and nine months ended June 30, 2016 and 2015 . |
Shareholders' Equity and Share-
Shareholders' Equity and Share-based Payments | 9 Months Ended |
Jun. 30, 2016 | |
Shareholders' Equity and Share-based Payments | |
Shareholders' Equity and Share-based Payments | 4. Shareholders’ Equity and Share-based Payments At June 30, 2016, the Company’s Amended and Restated Articles of Incorporation provides the Company authority to issue 75,000,000 shares of common stock and 10,000,000 shares of preferred stock. Share-based compensation The Company accounts for share-based compensation under the provisions of ASC Topic 505-50 and ASC Topic 718 by using the fair value method for expensing stock options and stock awards. Total share-based compensation expense was approximately $0 and $59,000 for the three months ended June 30, 2016 and 2015, respectively. The income tax effect recognized as a (charge) to additional paid-in capital related to share-based compensation arrangements was ($0) and ($7,000) for the three months ended June 30, 2016 and 2015, respectively. Total share-based compensation expense was approximately $68,000 and $409,000 for the nine months ended June 30, 2016 and 2015, respectively. The income tax effect recognized as a (charge) to additional paid-in capital related to share-based compensation arrangements was approximately ($0) and ($54,000) for the nine months ended June 30, 2016 and 2015, respectively. Compensation expense related to share-based awards is recorded as a component of general and administrative expense. The Company maintains three share-based compensation plans; the 1998 Stock Option Plan (the “1998 Plan”), the 2003 Restricted Stock Plan (the “Restricted Plan”), and the 2009 Stock-Based Incentive Compensation Plan (the “2009 Plan”). The Company’s shareholders approved each of these plans. The 1998 Plan expired on November 13, 2008. The last awards under the Restricted Plan were made in 2010, and no further shares remain to be awarded under the Restricted Plan. 1998 Stock Option Plan The 1998 Plan authorized the grant of incentive and nonqualified stock options to employees, officers, directors, and independent contractors and consultants. No stock options were granted to independent contractors or consultants under this Plan. There was no compensation expense associated with awards under the 1998 Plan for the nine months ended June 30, 2016 and 2015. Incentive stock options granted under the 1998 Plan have exercise prices that must be at least equal to the fair value of the common stock on the grant date. Nonqualified stock options granted under the 1998 Plan have exercise prices that may be less than, equal to, or greater than the fair value of the common stock on the date of grant. The Company reserved 3,389,000 shares of common stock for awards under the 1998 Plan. On November 13, 2008, the 1998 Plan expired, and no additional shares were granted under the Plan after that date. 2003 Restricted Stock Plan The Restricted Plan for non-employee directors was approved by shareholders at the Company’s February 26, 2004 Annual Meeting of Shareholders. It provided for an annual award of non-vested shares of common stock having a fair market value of $40,000 at close of business on October 1 of each year for each eligible non-employee director. The shares of common stock were awarded in four quarterly installments during the fiscal year if the director was still serving on the board on the quarterly issue date. The last awards under the Restricted Plan were made in 2010, and the Company has awarded all available shares under the Restricted Plan. However, the Company has continued to make an annual grant of shares to eligible non-employee directors under the 2009 Plan. There was no compensation expense under the Restricted Plan for the nine months ended June 30, 2016 and 2015. 2009 Stock-Based Incentive Compensation Plan The 2009 Plan authorizes the grant of Stock Appreciation Rights (“SARs”), Restricted Stock, Options, and other equity-based awards (collectively referred to as “Awards”). Options granted under the 2009 Plan may be either “Incentive Stock Options” as defined in section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or “Nonqualified Stock Options” as determined by the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”). Subject to an adjustment required because of a stock dividend, recapitalization, forward split or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase or share exchange, extraordinary or unusual cash distribution, or other similar corporate transaction or event, the maximum number of shares of common stock available for Awards under the 2009 Plan is 1,200,000, all of which may be issued pursuant to Awards of Incentive Stock Options. In addition, the 2009 Plan provides that no more than 300,000 shares of common stock per year may be awarded to any employee as a performance-based Award under Section 162(m) of the Code. At June 30, 2016, there were 268,439 shares of common stock available for Awards under the 2009 Plan. If any Award is forfeited, or if any Option terminates, expires, or lapses without being exercised, the shares of common stock subject to such Award will again be available for future grant. Any shares tendered by a participant in payment of the exercise price of an Option or the tax liability with respect to an Award (including, in any case, shares withheld from any such Award) will not be available for future grant under the 2009 Plan. If there is any change in the Company’s corporate capitalization, the Compensation Committee must adjust proportionately and equitably the number and kind of shares of common stock which may be issued in connection with future Awards, the number and type of shares of common stock covered by Awards then outstanding under the 2009 Plan, the number and type of shares of common stock available under the 2009 Plan, the exercise or grant price of any Award, or, if deemed appropriate, make provision for a cash payment with respect to any outstanding Award, provided that no adjustment may be made that would affect adversely the status of any Award that is intended to be a performance-based Award under Section 162(m) of the Code, unless otherwise determined by the Compensation Committee. In addition, the Compensation Committee may make adjustments in the terms and conditions of any Awards, including any performance goals, in recognition of unusual or nonrecurring events affecting the Company or any subsidiary, or in response to changes in applicable laws, regulations or accounting principles, provided that no adjustment may be made that would affect adversely the status of any Award that is intended to be a performance-based Award under Section 162(m) of the Code, unless otherwise determined by the Compensation Committee. On April 17, 2014, the Board of Directors resolved to revise the valuation date and the timing of the issuance of the awards of non-vested shares of common stock to each eligible non-employee director under the 2009 Plan. Effective January 1, 2015, the awards had a fair market value of $40,000 each at the close of business on the first business day after January 1 of each calendar year and will be issued on the first business day after January 1 of the following year. If any non-employee director resigns from the Board of Directors prior to December 31 of such calendar year, the Company will issue to such non-employee director a pro-rata number of shares through the date of resignation. On November 12, 2015, the Board of Directors resolved that effective January 1, 2016, such awards would be in the form of restricted stock units (“RSUs”) with a fair market value of 40,000 each at the close of business on the first business day after January 1 of the calendar year of service, which RSU’s shall vest in full on the first business day of the calendar year following the year of service. Total compensation expense related to Options issued to employees under the 2009 Plan was approximately $0 and $59,000 for the three months ended June 30, 2016 and 2015, respectively; and $68,000 and $259,000 for the nine months ended June 30, 2016 and 2015, respectively. The expense under the 2009 Plan related to shares issued to non-employee members of the Company’s Board of Directors as compensation was $0 for the three months ended June 30, 2016 and 2015, respectively, and $183,000 and $150,000 for each of the nine months ended June 30, 2016 and 2015, respectively. Total compensation expense associated with the 2009 Plan was $0 and $59,000 for the three months ended June 30, 2016 and 2015, respectively; and $251,000 and $409,000 for the nine months ended June 30, 2016 and 2015, respectively. Stock repurchase program On April 14, 2016, the Company’s Board of Directors approved the extension of the current share repurchase program (originally approved on April 29, 2013 and previously extended in each of April 2014 and April 2015) which allows the Company to acquire up to 250,000 shares of its outstanding common stock for one year beginning May 1, 2016. Under the share repurchase program, the Company may purchase shares of its common stock through open market transactions, in privately negotiated block purchases, or in other private transactions (either solicited or unsolicited). The timing and amount of repurchase transactions under this program will depend on market conditions, and corporate and regulatory considerations. The program may be discontinued or suspended at any time. The Company anticipates funding for this program to come from available corporate funds, including cash on hand and future cash flow. During the three months ended June 30, 2016, the Company purchased 57,165 shares of its common stock under the program. The aggregate cost of the shares purchased in the three months ended June 30, 2016 was $169,871 at an average cost per share of $2.97. As of June 30, 2016, the number of shares that may yet be purchased under the current share repurchase program was 192,835 shares. |
Earnings Per Share
Earnings Per Share | 9 Months Ended |
Jun. 30, 2016 | |
Earnings Per Share | |
Earnings Per Share | 5. Earnings Per Share Three Months Ended June 30, Nine Months Ended June 30, 2016 2015 2016 2015 Numerator: Net income (loss) $ $ ) $ $ ) Denominator: Basic weighted average shares Dilutive effect of share-based awards — — Diluted weighted average shares Earnings per common share: Basic EPS $ $ ) $ $ ) Diluted EPS $ $ ) $ $ ) Earnings per share (“EPS”) are calculated pursuant to FASB ASC Topic 260, Earnings Per Share (“ASC Topic 260”). Basic EPS excludes potentially dilutive securities and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed assuming the conversion or exercise of all dilutive securities such as employee stock options. The number of incremental shares from the assumed exercise of stock options is calculated by using the treasury stock method. As of June 30, 2016 and 2015, there were 590,168 and 667,168 options to purchase common stock outstanding, respectively. The average outstanding diluted shares calculation excludes options with an exercise price that exceeds the average market price of shares during the period. For the three months ended June 30, 2016 and 2015, respectively, 340,586 and 400,641 diluted weighted —average- shares outstanding were excluded from the computation of diluted EPS because the effect would be anti-dilutive. For the nine months ended June 30, 2016 and 2015, respectively, 359,571 and 402,063 diluted weighted- average- shares outstanding were excluded from the computation of diluted EPS because the effect would be anti-dilutive. |
Contingencies
Contingencies | 9 Months Ended |
Jun. 30, 2016 | |
Contingencies | |
Contingencies | 6. Contingencies The Company previously announced that Delta Airlines (“Delta”) purported to terminate its contract with the Company to develop, manufacture and install new cockpit displays and certain navigation capabilities on Delta’s fleet of approximately 182 MD88 and MD90 aircraft. The Company initiated and engaged in a non-binding mediation with Delta on February 25, 2015. The mediation session did not resolve the dispute. On February 25, 2015, the Company filed a complaint against Delta in the United States District Court for the Eastern District of Pennsylvania for breach of contract. The Company has alleged in the case, captioned Innovative Solutions & Support, Inc. v. Delta Airlines, Inc. E.D. Pa. Civ. No. 15-959, that Delta’s purported termination of the contract was wrongful and in breach of the terms of the contract, and is seeking monetary damages. On March 20, 2015, Delta answered the Company’s complaint and filed counterclaims against the Company for breach of contract and breach of the duty of good faith and fair dealing, also seeking monetary damages. The parties have completed discovery and have each filed motions for summary judgment. The outcome of the litigation is not determinable at this time. The Company had $3.6 million of unbilled receivables and $0.2 million of inventory on its balance sheet relating to the Delta program at September 30, 2015 both of which are fully reserved. On January 17, 2007 the Company filed suit in the Court of Common Pleas for Delaware County, Pennsylvania against Strathman Associates, a former software consultant for IS&S, alleging that Strathman had improperly used IS&S trade secrets and proprietary information in assisting J2 and Kollsman in developing the J2/Kollsman Air Data Computer. The case has not been resolved as of the date of the filing of this Form 10-Q. |
Summary of Significant Accoun12
Summary of Significant Accounting Policies (Policies) | 9 Months Ended |
Jun. 30, 2016 | |
Summary of Significant Accounting Policies | |
Basis of Presentation | Basis of Presentation The accompanying unaudited condensed consolidated financial statements are presented pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) in accordance with the disclosure requirements for the quarterly report on Form 10-Q and, therefore, do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete annual financial statements. In the opinion of Company management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the results for the interim periods presented. The condensed consolidated balance sheet as of September 30, 2015 is derived from the audited financial statements of the Company. Operating results for the three and nine months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2016. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015. The Company’s condensed consolidated financial statements include the accounts of its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. |
Use of Estimates | Use of Estimates Preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, as of the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Estimates are used in accounting for, among other items, long term contracts, allowance for doubtful accounts, inventory obsolescence, product warranty cost liabilities, income taxes, engineering and material costs on Engineering Development Contracts (“EDC”) programs, percentage-of-completion on EDC, recoverability of long-lived assets, stock-based compensation expense self-insurance reserves, and contingencies. Actual results could differ materially from those estimates. |
Cash and Cash Equivalents | Cash and Cash Equivalents Highly liquid investments, purchased with an original maturity of three months or less, are classified as cash equivalents. Cash equivalents at June 30, 2016 and September 30, 2015 consist of funds invested in money market funds with financial institutions. |
Property and Equipment | Property and Equipment Property and equipment are stated at cost. Depreciation is provided using an accelerated method over the estimated useful lives of the assets (the lesser of three to seven years or over the related lease term), except for the manufacturing facility and the corporate airplane. The building is being depreciated on a straight line basis over 39 years. Major additions and improvements are capitalized. Maintenance and repairs that do not improve or extend the life of assets are charged to expense as incurred. The airplane was depreciated on a straight-line basis over its estimated useful life of ten years; however, because the airplane had been depreciated previously to its estimated salvage value, no depreciation expense was recorded for this asset during the nine months ended June 30, 2016 or 2015, respectively . |
Fair Value of Financial Instruments | Fair Value of Financial Instruments The net carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate their fair value because of the short-term nature of these instruments. For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value as follows: Level 1 — Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date. Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including: · Quoted prices for similar assets or liabilities in active markets; · Quoted prices for identical or similar assets in non-active markets; · Inputs other than quoted prices that are observable for the asset or liability; and · Inputs that are derived principally from or corroborated by other observable market data. Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2016 and September 30, 2015, according to the valuation techniques the Company used to determine their fair values. Fair Value Measurement on June 30, 2016 Quoted Price in Significant Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs (Level 1) (Level 2) (Level 3) Assets Cash and cash equivalents: Money market funds $ $ — $ — Fair Value Measurement on September 30, 2015 Quoted Price in Significant Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs (Level 1) (Level 2) (Level 3) Assets Cash and cash equivalents: Money market funds $ $ — $ — |
Long-Lived Assets | Long-Lived Assets The Company assesses the impairment of long-lived assets in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360-10, “Property, Plant and Equipment” (“ASC Topic 360-10”) . This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In addition, long-lived assets to be disposed of must be reported at the lower of the carrying amount or fair value less cost to sell. The Company considers historical performance and future estimated results in its evaluation of potential impairment and compares the carrying amount of the asset to estimated future cash flows expected from use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is measured by discounting expected future cash flows. No impairment charges were recorded during the nine months ended June 30, 2016 or 2015. |
Revenue Recognition | Revenue Recognition The Company enters into sales arrangements with customers that, in general, provide for the Company to design, develop, manufacture, and deliver large FPDS, flight information computers and advanced monitoring systems that measure and display critical flight information, including data relative to aircraft separation, airspeed, altitude, and engine and fuel data measurements. The Company’s sales arrangements include multiple deliverables as defined in FASB ASC Topic 605-25 “Multiple-Element Arrangements” (“ASC Topic 605-25”), which typically include design and engineering services, and the production and delivery of the flat panel display and related components. The Company includes any design and engineering services elements in EDC sales and any functional upgrade and product elements in product sales in the accompanying consolidated statements of operations. To the extent that an arrangement contains software elements that are essential to the functionality of tangible products sold in the arrangement, the Company recognizes revenue for the deliverables in accordance with the guidance included in FASB Accounting Standards Update 2009-14, “ Revenue Arrangements That Include Software Elements ” (“ASU 2009-14”), FASB Accounting Standards Update 2009-13, “ Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force ” (“ASU 2009-13”), and FASB ASC Topic 605, “ Revenue Recognition ” (“ASC Topic 605”). To the extent that an arrangement contains software components, which may include functional upgrades, that the Company sells on a standalone basis and which it has deemed outside the scope of the exception defined by ASU 2009-14, the Company recognizes software revenue in accordance with ASC Topic 985, “ Software ” (“ASC Topic 985”). Multiple Element Arrangements - The Company identifies all goods and/or services that are to be delivered separately under such a sales arrangement and allocates sales to each deliverable (if more than one) based on that deliverable’s fair value. The Company then considers the appropriate recognition method for each deliverable. The Company’s multiple element arrangements can include defined design and development activities, functional upgrades, and product sales. The Company utilizes the selling price hierarchy that has been established by ASU 2009-13, which requires that the selling price for each deliverable be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. To the extent that an arrangement includes a deliverable for which estimated selling price is used, the Company determines the best estimate of selling price by applying the same pricing policies and methodologies that would be used to determine the price to sell the deliverable on a standalone basis. To the extent that an arrangement contains defined design and EDC activities as identified deliverables and products (resulting in a multiple element arrangement), the Company recognizes as EDC sales amounts earned during the design and development phase of the contract following the guidance included in FASB ASC Topic 605-35, “Construction-Type and Production-Type Contracts” (“ASC Topic 605-35”) under the percentage-of-completion method. To the extent that multiple element arrangements include product sales, sales are generally recognized once revenue recognition criteria for the product deliverables have been met based on the provisions of ASC Topic 605. The Company includes any design and engineering services elements in EDC sales, and any functional upgrade and product elements in “product” sales on the accompanying consolidated statements of operations. Single Element Arrangements — Products To the extent that a single element arrangement provides for product sales and repairs, the Company recognizes sales when revenue recognition criteria for the product deliverables have been met based on the provisions of ASC Topic 605. In addition, the Company receives orders for equipment and parts. Generally, revenue from the sale of such products is recognized upon shipment to the customer. The Company offers its customers extended warranties for additional fees. These warranty sales are recorded as deferred revenue and recognized as sales on a straight-line basis over the warranty period. Engineering Development Contracts The Company may enter into contracts to perform specified design and EDC services related to its products. The Company recognizes revenue from these arrangements as EDC sales, following the guidance included in ASC Topic 605-35, and considers the nature of these contracts (including term, size of contract, and level of effort) when determining the appropriate accounting treatment for a particular contract. Certain of these contracts are accounted for under the percentage-of-completion method of accounting when the Company determines that progress toward completion is reasonable and reliably estimable, and the contract is long-term in nature. The Company uses the completed contract method for all other contracts because these contracts are short-term in nature and meet the criteria set forth in ASC Topic 605-35. Sales and profit margins under the percentage-of-completion method are recorded based on the ratio of actual costs incurred to total estimated costs expected to be incurred related to the contract under the cost-to-cost method (for development effort). The percentage-of-completion method of accounting requires the Company to estimate the profit margin for each individual contract, and to apply that profit margin on a uniform basis as sales are recorded under the contract. The estimation of profit margin requires the Company to make projections of the total sales to be generated and the total costs that will be incurred under each contract. The projections require the Company to make numerous assumptions and estimates relating to items, such as the complexity of design and related development costs, performance of subcontractors, availability and cost of materials, engineering productivity and cost, overhead, and capital costs. Contracts sometimes include purchase options for additional quantities and customer change orders for additional or revised product functionality. Sales and costs related to profitable purchase options are included in the Company’s estimates only when the options are exercised, while sales and costs related to unprofitable purchase options are included in the Company’s estimates when exercise is determined to be probable. Sales related to change orders are included in profit estimates only if they can be reliably estimated and collectability is reasonably assured. Purchase options and change orders are accounted for, either as an integral part of the original contract or separately, depending upon the nature and value of the item. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable. The Company reviews estimates of profit margins for contracts on a quarterly basis. The percentage-of-completion method results in the profit margin being recorded evenly as revenue is recognized under the contract. Changes in these underlying estimates because of revisions in revenue and cost estimates or to the exercise of contract options may result in profit margins being recognized unevenly over a contract as such changes are accounted for on a cumulative basis in the period estimates are revised. Significant changes in estimates related to accounting for long-term contracts may have a material effect on the Company’s results of operations in the period in which the revised estimate is made. Cumulative catch-up adjustments resulting from changes in estimates are disclosed in the notes to the consolidated financial statements of the Company. Customer Service Revenue The Company enters into sales arrangements with customers for the repair or upgrade of its various products that are not under warranty. The Company’s customer service revenue and cost of sales for the three and nine months ended June 30, 2016 and 2015, respectively are as follows: For the Three Months Ended June 30, For the Nine Months Ended June 30, 2016 2015 2016 2015 Customer Service Sales $ $ $ $ Customer Service Cost of Sales Gross Profit $ $ $ $ |
Income Taxes | Income Taxes Income taxes are recorded in accordance with FASB ASC Topic 740, “Income Taxes” (“ASC Topic 740”), which utilizes a balance sheet approach to provide for income taxes. Under this method, the Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets, liabilities, and expected benefits of utilizing net operating losses (“NOL”) and tax credit carry-forwards. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and are reflected in the consolidated financial statements in the period of enactment. At the end of each interim reporting period, the Company prepares an estimate of the annual effective income tax rate and applies that annual effective income tax rate to ordinary year-to-date pre-tax income or loss for the interim period. Specific tax items discrete to a particular quarter are recorded in income tax expense for that quarter. The estimated annual effective tax rate used in providing for income taxes on a year-to-date basis may change in subsequent interim periods. Deferred tax assets are reduced by valuation allowances if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be objectively verified, and significant management judgment is required in determining any valuation allowances recorded against net deferred tax assets. The Company evaluates deferred income taxes on a quarterly basis to determine if valuation allowances are required by considering available evidence. Deferred tax assets are recognized when expected future taxable income is sufficient to allow the related tax benefits to reduce taxes that would otherwise be payable. The sources of taxable income that may be available to realize the benefit of deferred tax assets are future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and credit carry-forwards, taxable income in carry-back years, and tax planning strategies. In the period ended June 30, 2015, a valuation allowance was recorded on a majority of the Company’s federal and state deferred tax assets, net of liabilities, due to uncertainty with respect to the Company’s ability to generate sufficient future taxable income to realize such deferred tax assets. The remaining amount of the Company’s recognized deferred tax assets were related to tax planning strategies and the ability to carry-back federal tax losses to claim a tax refund. For the nine months ended June 30, 2016, the valuation allowance was reduced due to the current year profitability of the Company which represents an additional source of taxable income to realize certain federal and state deferred tax assets. However, the Company will continue to maintain a valuation allowance until the Company generates a sufficient level of profitability to warrant a conclusion that it is no longer more likely than not that the entirety of these net federal and state deferred tax assets will not be realized in future periods. The Company will also continue to assess all available evidence during future periods to evaluate any changes to the realization thereof. The accounting for uncertainty in income taxes requires a more likely than not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company records a liability for the difference between the (i) benefit recognized and measured for financial statement purposes and (ii) the tax position taken or expected to be taken on the Company’s tax return. To the extent that the Company’s assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The Company has elected to record any interest or penalties associated with uncertain tax positions as income tax expense. The Company files a consolidated United States federal income tax return. The Company prepares and files tax returns based on the interpretation of tax laws and regulations, and records estimates based on these judgments and interpretations. In the normal course of business, the tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities, and the Company records a liability when it is probable that there will be an assessment. The Company adjusts the estimates periodically as the result of ongoing examinations by and settlements with the various taxing authorities and changes in tax laws, regulations and precedent. The consolidated tax provision of any given year includes adjustments to prior years’ income tax accruals that are considered appropriate and any related estimated interest. Management believes that adequate accruals have been made for income taxes. Differences between estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material adverse effect on the Company’s consolidated financial position but could possibly be material to its consolidated results of operations or cash flow of any one period. |
Engineering Development | Engineering Development The Company invests a large percentage of its sales in engineering development, both research and development (“R&D”) and EDC. At June 30, 2016, approximately 38% of the Company’s employees were engaged in various engineering development projects. Total engineering development expense is comprised of both design and EDC charges related to specific customer contracts and R&D. EDC expense consists primarily of payroll-related expenses of employees engaged in EDC projects, engineering related product materials and equipment, and subcontracting costs. R&D charges incurred for product design, product enhancements and future product development are expensed as incurred. EDC and design charges related to specific customer arrangements are charged to cost of sales-EDC based on the method of contract accounting (either percentage-of-completion or completed-contract) applicable to such contracts. |
Treasury Stock | Treasury Stock Treasury stock is recorded at acquisition cost. Gains and losses on disposition are recorded as increases or decreases to additional paid-in capital with losses in excess of previously recorded gains charged directly to retained earnings. When treasury shares are retired and returned to authorized but unissued status, the carrying value in excess of par is allocated to additional paid-in capital and retained earnings on a pro rata basis. |
Comprehensive Income | Comprehensive Income Pursuant to FASB ASC Topic 220, “Comprehensive Income” (“ASC Topic 220”), the Company is required to classify items of other comprehensive income by their nature in the balance sheet and to display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of its condensed consolidated balance sheets. For the three and nine months ended June 30, 2016 and 2015, respectively, comprehensive income consisted of net income only. There were no items of other comprehensive income or accumulated other comprehensive income balances in the equity accounts for any of the periods presented. |
Share-Based Compensation | Share-Based Compensation The Company accounts for share-based compensation under FASB ASC Topic 505-50, “Equity-Based Payments to Non-Employees” (“ASC Topic 505-50”), and FASB ASC Topic 718, “Stock Compensation” (“ASC Topic 718”), which require the Company to measure the cost of employee or non-employee director services received in exchange for an award of equity instruments based on the grant-date fair value of the award using an option pricing model. That cost is recognized over the period during which an employee or non-employee director is required to provide service in exchange for the award. |
Warranty | Warranty The Company offers warranties of various lengths; however the standard warranty is twenty-four months. At the time of shipment, the Company establishes a reserve for estimated costs of warranties based on its best estimate of the amounts necessary to settle future and existing claims using historical data on products sold as of the balance sheet date. The length of the warranty period, the product’s failure rates, and the customer’s usage affect warranty cost. If actual warranty costs are higher than the Company’s estimated amounts, future results of operations could be affected adversely. Warranty cost is recorded as cost of sales, and the reserve balance is recorded as an accrued expense. Although the Company maintains product quality programs and processes, its warranty obligations are affected by product failure rates and the related corrective costs. If actual product failure rates and/or corrective costs differ from the estimates, the Company revises the estimated warranty liability accordingly. |
Self-Insurance Reserves | Self-Insurance Reserves Beginning January 1, 2014, the Company began self-insuring a significant portion of its employee medical insurance. The Company maintains a stop-loss insurance policy that limits its losses both on a per employee basis and an aggregate basis. Liabilities associated with the risks that are retained by the Company are estimated based upon actuarial assumptions including historical claim experience and demographic factors. The Company has estimated the total medical claims incurred but not reported and the Company believes that it has adequate reserves for these claims at June 30, 2016. However, the actual value of such claims could be significantly affected if future occurrences and claims differ from these assumptions. At June 30, 2016 and September 30, 2015, the estimated liability for medical claims incurred but not reported was $53,000 and $80,000, respectively. The Company has recorded the excess of funded premiums over estimated claims incurred but not reported in the amounts of $272,000 and $119,000 as a current asset in the accompanying condensed consolidated balance sheets as of June 30, 2016 and September 30, 2015, respectively. |
Concentrations | Concentrations Major Customers and Products For the three months ended June 30, 2016, two customers, Sierra Nevada Corporation (“Sierra Nevada”) and iAccess Technologies, Inc. (“iAccess”), accounted for 45% and 12% of net sales, respectively. During the nine months ended June 30, 2016, three customers, Jet2.com Limited (“Jet2”), Sierra Nevada and DHL Aviation Services (“DHL”) accounted for 16%, 15% and 14% of net sales, respectively. For the three months ended June 30, 2015, three customers, Eclipse Aerospace, Inc. (“Eclipse”), American Airlines, Inc. (“American”) and Pilatus Aircraft Limited (“Pilatus”), accounted for 23%, 20% and 11% of net sales, respectively. During the nine months ended June 30, 2015, three customers, Pilatus, Eclipse and the DoD accounted for 23%, 18% and 11% of net sales, respectively. Major Suppliers The Company buys several components from sole source suppliers. Although there are a limited number of manufacturers of particular components, the Company believes other suppliers could provide similar components on comparable terms. For the three and nine months ended June 30, 2016, the Company had one supplier that was individually responsible for greater than 10% of the Company’s total inventory related purchases. For the three and nine months ended June 30, 2015, the Company had five and two suppliers respectively that were individually responsible for greater than 10% of the Company’s total inventory related purchases. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash balances and accounts receivable. The Company invests its excess cash where preservation of principal is the primary consideration. Cash balances are maintained with two major banks. Balances on deposit with certain money market accounts and operating accounts may exceed the Federal Deposit Insurance Corporation (“FDIC”) limits. The Company’s customer base consists principally of companies within the aviation industry. The Company requests advance payments and/or letters of credit from customers that it considers to be credit risks. As of June 30, 2016, the Company had allowances for doubtful accounts for unbilled receivables in the amount of $3.6 million related to the Delta contract (see “Note 6, Contingencies” for a description of the Delta contract). As of September 30, 2015, the Company had allowances for doubtful accounts for unbilled receivables of $1.3 million related to a certain customer contract and $3.6 million related to the Delta contract. In January 2016, the Company negotiated changes to its agreement with a customer whereby $1.3 million of unbilled receivables previously charged to bad debt expense in the quarter ended September 30, 2015 were cancelled. (See Unbilled Receivables below under Note 2. Supplemental Balance Sheet Disclosures). |
Recent Accounting Pronouncements | Recent Accounting Pronouncements In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09, “ Compensation - Stock Compensation - Improvements to Employee Share-Based Payment Accounting ” (“ASU 2016-09”), which involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the new standard, income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity should also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with other income tax cash flows as an operating activity. In regards to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. The Company is assessing the impact the adoption of ASU 2016-09 will have on its financial statements. In February 2016, the FASB issued ASU 2016-02, “ Leases ” (“ASU 2016-02”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is assessing the impact the adoption of ASU 2016-02 will have on its financial statements. In November 2015, the FASB issued guidance regarding Balance Sheet Classification of Deferred Taxes. Current guidance requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. However, the new guidance requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The guidance is effective for the Company beginning October 1, 2017. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure. In July 2015, the FASB issued guidance regarding Simplifying the Measurement of Inventory. This guidance requires entities to measure most inventory “at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market (market in this context is defined as one of three different measures). The guidance will not apply to inventories that are measured by using either the last-in, first-out (“LIFO”) method or the retail inventory method (“RIM”). The guidance is effective for the Company beginning October 1, 2017. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its financial statements disclosure. In August 2014, the FASB issued ASU No. 2014-15, “ Presentation of Financial Statements - Going Concern (Subtopic 205-40)” (“ASU 2014-15”). The objective of ASU 2014-15 is to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and provide related disclosures. Currently, GAAP does not provide guidance to evaluate whether there is substantial doubt regarding an organization’s ability to continue as a going concern. ASU 2014-15 provides guidance to an organization’s management, with principles and definitions to reduce diversity in the timing and content of financial statement disclosures commonly provided by organizations. ASU 2014-15 is effective for periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not believe that ASG 2014-15 will have a material effect on the accompanying financial statements. In June 2014, the FASB issued ASU No. 2014-12, “Compensation - Stock Compensation (ASC Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU 2014-12”). The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period to be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This ASU further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. The Company does not believe that ASG 2014-12 will have a material effect on the accompanying financial statements. In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (ASC Topic 606)” (“ASU 2014-09”) . ASU 2014-09 will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard was scheduled to be effective for reporting periods beginning after December 15, 2016, and early adoption is not permitted. However, on July 9, 2015, the FASB decided to delay the effective date of the new revenue standard by one year, but reporting entities may choose to adopt the standard as of the original effective date. Adoption of the new rules could affect the timing of revenue recognition for certain transactions. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring retrospective application of the new standard with the cumulative effect of applying the new standard as of the date of initial application recognized and disclosure of results under old standards. The FASB has recently issued an Exposure Draft of a proposed ASU that would delay by one year the effective date of this standard. The Company is currently evaluating the impacts of adoption and the implementation approach to be used. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances. |
Summary of Significant Accoun13
Summary of Significant Accounting Policies (Tables) | 9 Months Ended |
Jun. 30, 2016 | |
Summary of Significant Accounting Policies | |
Schedule of financial assets and liabilities accounted for at fair value on a recurring basis | Fair Value Measurement on June 30, 2016 Quoted Price in Significant Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs (Level 1) (Level 2) (Level 3) Assets Cash and cash equivalents: Money market funds $ $ — $ — Fair Value Measurement on September 30, 2015 Quoted Price in Significant Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs (Level 1) (Level 2) (Level 3) Assets Cash and cash equivalents: Money market funds $ $ — $ — |
Customer service revenue and cost of sales | For the Three Months Ended June 30, For the Nine Months Ended June 30, 2016 2015 2016 2015 Customer Service Sales $ $ $ $ Customer Service Cost of Sales Gross Profit $ $ $ $ |
Supplemental Balance Sheet Di14
Supplemental Balance Sheet Disclosures (Tables) | 9 Months Ended |
Jun. 30, 2016 | |
Supplemental Balance Sheet Disclosures | |
Schedule of inventories | June 30, September 30, 2016 2015 Raw materials $ $ Work-in-process Finished goods $ $ |
Schedule of prepaid expenses and other current assets | June 30, September 30, 2016 2015 Prepaid insurance $ $ Income tax refund receivable Other $ $ |
Schedule of property and equipment, net | June 30, September 30, 2016 2015 Land $ $ Computer equipment Corporate airplane Furniture and office equipment Manufacturing facility Equipment Less: accumulated depreciation and amortization ) ) $ $ |
Schedule of other assets | June 30, September 30, 2016 2015 Intangible assets, net of accumulated amortization of $529,037 and $517,037 at June 30, 2016 and September 30, 2015 $ $ Other non-current assets $ $ |
Schedule of accrued expenses | June 30, September 30, 2016 2015 Warranty $ $ Salary, benefits and payroll taxes Professional fees Other, including losses on contracts $ $ |
Schedule of warranty cost and accrual information | Three Months Ending Nine Months Ending June 30, 2016 June 30, 2016 Warranty accrual, beginning of period $ $ Accrued expense Warranty cost ) ) Warranty accrual, end of period $ $ |
Earnings Per Share (Tables)
Earnings Per Share (Tables) | 9 Months Ended |
Jun. 30, 2016 | |
Earnings Per Share | |
Schedule of net income per share | Three Months Ended June 30, Nine Months Ended June 30, 2016 2015 2016 2015 Numerator: Net income (loss) $ $ ) $ $ ) Denominator: Basic weighted average shares Dilutive effect of share-based awards — — Diluted weighted average shares Earnings per common share: Basic EPS $ $ ) $ $ ) Diluted EPS $ $ ) $ $ ) |
Summary of Significant Accoun16
Summary of Significant Accounting Policies (Details) | 3 Months Ended | 9 Months Ended | ||
Jun. 30, 2016USD ($) | Jun. 30, 2015USD ($) | Jun. 30, 2016USD ($)segmentitem | Jun. 30, 2015USD ($) | |
Property and Equipment | ||||
Depreciation | $ 117,000 | $ 138,000 | $ 344,000 | $ 413,000 |
Long-Lived Assets | ||||
Impairment charges | $ 0 | 0 | ||
Revenue Recognition | ||||
Minimum number of deliverable for allocating revenue to each deliverable | item | 1 | |||
Customer Service Revenue | ||||
Customer Service Sales | 1,023,302 | 772,385 | $ 2,702,956 | 1,928,966 |
Customer Service Cost of Sales | 357,390 | 266,789 | 935,995 | 823,190 |
Gross Profit | $ 665,912 | $ 505,596 | $ 1,766,961 | 1,105,776 |
Engineering Development | ||||
Percentage of employees who were engineers engaged in various engineering development projects | 38.00% | |||
Number of business segments | ||||
Number of business segments in which the entity operates | segment | 1 | |||
Warranty | ||||
Length of warranty period | 24 months | |||
Property and equipment except corporate airplane and manufacturing facility | Minimum | ||||
Property and Equipment | ||||
Estimated useful lives | 3 years | |||
Property and equipment except corporate airplane and manufacturing facility | Maximum | ||||
Property and Equipment | ||||
Estimated useful lives | 7 years | |||
Manufacturing facility | ||||
Property and Equipment | ||||
Estimated useful lives | 39 years | |||
Corporate airplane | ||||
Property and Equipment | ||||
Estimated useful lives | 10 years | |||
Depreciation | $ 0 | $ 0 |
Summary of Significant Accoun17
Summary of Significant Accounting Policies - Fair Value (Details) - USD ($) | Jun. 30, 2016 | Sep. 30, 2015 |
Self Insurance Reserves | ||
Estimated liability for medical claims incurred but not reported | $ 53,000 | $ 80,000 |
Excess Funded Premiums Over Estimated Claims | 272,000 | 119,000 |
Fair value on a recurring basis | Quoted Price in Active Markets for Identical Assets (Level 1) | Money market funds | ||
Assets | ||
Cash and cash equivalents | $ 16,414,873 | $ 14,410,806 |
Summary of Significant Accoun18
Summary of Significant Accounting Policies - Concentration Risk (Details) $ in Millions | 3 Months Ended | 9 Months Ended | ||||
Jun. 30, 2016USD ($)customeritem | Jun. 30, 2015customeritem | Jun. 30, 2016USD ($)customeritem | Jun. 30, 2015item | Jan. 31, 2016USD ($) | Sep. 30, 2015USD ($) | |
Concentration of Credit Risk | ||||||
Number of banks for maintenance of cash balances | item | 2 | 2 | ||||
Net sales | Major Customers | ||||||
Concentrations | ||||||
Number of major customers | customer | 2 | 3 | 3 | |||
Net sales | Major Customers | Jet2 | ||||||
Concentrations | ||||||
Sales percentage | 16.00% | |||||
Net sales | Major Customers | DHL | ||||||
Concentrations | ||||||
Sales percentage | 14.00% | |||||
Net sales | Major Customers | Sierra Nevada | ||||||
Concentrations | ||||||
Sales percentage | 45.00% | 15.00% | ||||
Net sales | Major Customers | DoD | ||||||
Concentrations | ||||||
Sales percentage | 11.00% | |||||
Net sales | Major Customers | Eclipse | ||||||
Concentrations | ||||||
Sales percentage | 23.00% | 18.00% | ||||
Net sales | Major Customers | American | ||||||
Concentrations | ||||||
Sales percentage | 20.00% | |||||
Net sales | Major Customers | Pilatus | ||||||
Concentrations | ||||||
Sales percentage | 11.00% | 23.00% | ||||
Net sales | Major Customers | iAccess | ||||||
Concentrations | ||||||
Sales percentage | 12.00% | |||||
Inventory | Supplier Concentration Risk | ||||||
Concentrations | ||||||
Number of major suppliers | item | 1 | 5 | 1 | 2 | ||
Delta | ||||||
Concentration of Credit Risk | ||||||
Allowance for doubtful accounts | $ 3.6 | $ 3.6 | $ 3.6 | |||
A Certain Customer | ||||||
Concentration of Credit Risk | ||||||
Allowance for doubtful accounts | $ 1.3 | |||||
Unbilled receivables that have been cancelled | $ 1.3 |
Supplemental Balance Sheet Di19
Supplemental Balance Sheet Disclosures - Unbilled Receivables (Details) - USD ($) | 3 Months Ended | 9 Months Ended | ||||
Jun. 30, 2016 | Jun. 30, 2015 | Jun. 30, 2016 | Jun. 30, 2015 | Jan. 31, 2016 | Sep. 30, 2015 | |
Unbilled receivables | ||||||
Unbilled receivables, net | $ 1,611,357 | $ 1,611,357 | $ 3,920,209 | |||
Change in operating income resulting from revised estimates | 232,344 | $ (264,860) | 1,896,726 | $ (736,512) | ||
Inventories valuation | ||||||
Raw materials | 3,151,301 | 3,151,301 | 3,346,778 | |||
Work-in-process | 474,767 | 474,767 | 745,311 | |||
Finished goods | 382,046 | 382,046 | 505,227 | |||
Inventory, Net, Total | 4,008,114 | 4,008,114 | 4,597,316 | |||
Prepaid expenses and other current assets | ||||||
Prepaid insurance | 434,017 | 434,017 | 290,543 | |||
Income tax refund receivable | 380,806 | 380,806 | 386,869 | |||
Other | 321,445 | 321,445 | 544,305 | |||
Total | 1,136,268 | 1,136,268 | 1,221,717 | |||
Delta | ||||||
Unbilled receivables | ||||||
Provision for loss on unbilled receivables | 3,600,000 | 3,600,000 | 3,600,000 | |||
Unbilled receivables, net | 3,600,000 | |||||
Inventories valuation | ||||||
Inventory, Net, Total | 200,000 | |||||
A Certain Customer | ||||||
Unbilled receivables | ||||||
Provision for loss on unbilled receivables | $ 1,300,000 | |||||
Unbilled receivables that have been cancelled | $ 1,300,000 | |||||
Contracts accounted for under percentage of completion | ||||||
Unbilled receivables | ||||||
Change in operating income resulting from revised estimates | $ (120,000) | $ (125,000) | $ 232,000 | $ 595,000 |
Supplemental Balance Sheet Di20
Supplemental Balance Sheet Disclosures - Property and Equipment (Details) - USD ($) | 3 Months Ended | 9 Months Ended | |||
Jun. 30, 2016 | Jun. 30, 2015 | Jun. 30, 2016 | Jun. 30, 2015 | Sep. 30, 2015 | |
Property and equipment | |||||
Total | $ 18,620,234 | $ 18,620,234 | $ 18,375,537 | ||
Less: Accumulated depreciation and amortization | (11,605,596) | (11,605,596) | (11,280,207) | ||
Property and equipment, net | 7,014,638 | 7,014,638 | 7,095,330 | ||
Depreciation | 117,000 | $ 138,000 | 344,000 | $ 413,000 | |
Other assets: | |||||
Intangible assets, net of accumulated amortization of $529,037 and $517,037 at June 30, 2016 and September 30, 2015 | 71,200 | 71,200 | 83,200 | ||
Other non-current assets | 85,748 | 85,748 | 85,748 | ||
Total other assets | 156,948 | 156,948 | 168,948 | ||
Accumulated amortization of intangible assets | 529,037 | 529,037 | 517,037 | ||
Impairment charges | 0 | 0 | |||
Total intangible amortization expense | 7,200 | $ 5,000 | 12,000 | 17,000 | |
Land | |||||
Property and equipment | |||||
Total | 1,021,245 | 1,021,245 | 1,021,245 | ||
Computer equipment | |||||
Property and equipment | |||||
Total | 2,260,506 | 2,260,506 | 2,270,799 | ||
Corporate airplane | |||||
Property and equipment | |||||
Total | 3,194,571 | 3,194,571 | 3,128,504 | ||
Depreciation | 0 | $ 0 | |||
Furniture and office equipment | |||||
Property and equipment | |||||
Total | 1,052,284 | 1,052,284 | 1,056,486 | ||
Manufacturing facility | |||||
Property and equipment | |||||
Total | 5,733,313 | 5,733,313 | 5,733,313 | ||
Equipment | |||||
Property and equipment | |||||
Total | $ 5,358,315 | $ 5,358,315 | $ 5,165,190 |
Supplemental Balance Sheet Di21
Supplemental Balance Sheet Disclosures - Accrued Expenses (Details) - USD ($) | 3 Months Ended | 9 Months Ended | ||
Jun. 30, 2016 | Jun. 30, 2016 | Jun. 30, 2016 | Sep. 30, 2015 | |
Accrued expenses | ||||
Warranty | $ 996,660 | $ 878,901 | $ 950,432 | $ 878,901 |
Salary, benefits and payroll taxes | 451,910 | 537,451 | ||
Professional fees | 689,453 | 353,012 | ||
Other, including losses on contracts | 204,102 | 799,167 | ||
Total accrued expenses | 2,295,897 | 2,568,531 | ||
EDC program costs | $ 0 | $ 600,000 | ||
Warranty cost and accrual information | ||||
Warranty accrual, beginning of period | 996,660 | 878,901 | ||
Accrued expense | 35,890 | 308,200 | ||
Warranty cost | (82,118) | (236,669) | ||
Warranty accrual, end of period | $ 950,432 | $ 950,432 |
Income Taxes (Details)
Income Taxes (Details) - USD ($) | 3 Months Ended | 9 Months Ended | |||
Jun. 30, 2016 | Jun. 30, 2015 | Jun. 30, 2016 | Sep. 30, 2015 | Jun. 30, 2015 | |
Deferred provision (benefit): | |||||
Income tax expense | $ 27,096 | $ 3,284,658 | $ 403,002 | $ 2,615,484 | |
Income tax benefit from retroactive benefit of R&D tax credit | $ 0 | ||||
Reconciliation of the statutory federal rate to the Company's effective income tax rate | |||||
Effective tax rates (as a percent) | 10.70% | (1328.10%) | 20.20% | (380.80%) | |
Change in valuation allowance | $ (150,000) | $ 3,300,000 | $ (150,000) |
Shareholders' Equity and Shar23
Shareholders' Equity and Share-based Payments (Details) | Apr. 14, 2016shares | Jun. 30, 2016USD ($)$ / sharesshares | Jun. 30, 2015USD ($) | Jun. 30, 2016USD ($)itemshares | Jun. 30, 2015USD ($) | Jan. 01, 2016USD ($) | Sep. 30, 2015shares | Jan. 01, 2015USD ($) | Oct. 01, 2014USD ($) |
Share-based compensation | |||||||||
Common stock, shares authorized | shares | 75,000,000 | 75,000,000 | 75,000,000 | ||||||
Preferred Stock, shares authorized | shares | 10,000,000 | 10,000,000 | 10,000,000 | ||||||
Share-based compensation expense | $ | $ 0 | $ 59,000 | $ 68,000 | $ 409,000 | |||||
Income tax effect recognized as a charge to additional paid-in capital related to share-based compensation | $ | $ 0 | (7,000) | $ 0 | (54,000) | |||||
Number of share-based compensation plans maintained by the company | item | 3 | ||||||||
Stock repurchase program | |||||||||
Maximum number of shares approved under repurchase program | shares | 250,000 | ||||||||
Period of time repurchase plan was authorized for beginning May 1, 2016 | 1 year | ||||||||
Number of shares of common stock purchased under the repurchase program | shares | 57,165 | ||||||||
Cost of common stock purchased under the repurchase program | $ | $ 169,871 | ||||||||
Average market price of common stock purchased under the repurchase program (in dollars per share) | $ / shares | $ 2.97 | ||||||||
Number of shares of common stock yet to be purchased under the repurchase program | shares | 192,835 | 192,835 | |||||||
1998 Plan | |||||||||
Share-based compensation | |||||||||
Share-based compensation expense | $ | $ 0 | 0 | |||||||
Number of shares of common stock reserved for awards | shares | 3,389,000 | 3,389,000 | |||||||
1998 Plan | Independent contractors or consultants | |||||||||
Share-based compensation | |||||||||
Options granted | shares | 0 | ||||||||
2003 Plan | |||||||||
Share-based compensation | |||||||||
Share-based compensation expense | $ | $ 0 | 0 | |||||||
Number of quarterly installments of shares awards | item | 4 | ||||||||
2003 Plan | Non-employee director | |||||||||
Share-based compensation | |||||||||
Fair market value of annual award of non-vested shares | $ | $ 40,000 | ||||||||
2009 Plan | |||||||||
Share-based compensation | |||||||||
Share-based compensation expense | $ | $ 0 | 59,000 | $ 251,000 | 409,000 | |||||
Number of shares of common stock available for awards under the plan | shares | 268,439 | 268,439 | |||||||
Number of shares of common stock reserved for awards | shares | 1,200,000 | 1,200,000 | |||||||
2009 Plan | Non-employee director | |||||||||
Share-based compensation | |||||||||
Share-based compensation expense | $ | $ 0 | 0 | $ 183,000 | 150,000 | |||||
Fair market value of annual award of non-vested shares | $ | $ 40,000 | $ 40,000 | |||||||
2009 Plan | Employee | |||||||||
Share-based compensation | |||||||||
Share-based compensation expense | $ | $ 0 | $ 59,000 | $ 68,000 | $ 259,000 | |||||
2009 Plan | Performance-based Award | Employee | |||||||||
Share-based compensation | |||||||||
Maximum award (in shares) | shares | 300,000 | 300,000 |
Earnings Per Share (Details)
Earnings Per Share (Details) - USD ($) | 3 Months Ended | 9 Months Ended | ||
Jun. 30, 2016 | Jun. 30, 2015 | Jun. 30, 2016 | Jun. 30, 2015 | |
Numerator: | ||||
Net income (loss) | $ 226,797 | $ (3,531,973) | $ 1,589,672 | $ (3,302,322) |
Denominator: | ||||
Basic weighted average shares | 16,941,707 | 16,910,475 | 16,925,688 | 16,930,522 |
Dilutive effect of share-based awards (in shares) | 117,839 | 101,528 | ||
Diluted weighted average shares | 17,059,546 | 16,910,475 | 17,027,216 | 16,930,522 |
Earnings per common share: | ||||
Basic EPS (in dollars per share) | $ 0.01 | $ (0.21) | $ 0.09 | $ (0.20) |
Diluted EPS (in dollars per share) | $ 0.01 | $ (0.21) | $ 0.09 | $ (0.20) |
Options to purchase common stock outstanding (in shares) | 590,168 | 667,168 | 590,168 | 667,168 |
Weighted dilutive shares outstanding excluded from the computation of diluted earnings per share | 340,586 | 400,641 | 359,571 | 402,063 |
Contingencies (Details)
Contingencies (Details) | Jun. 30, 2016USD ($)item | Sep. 30, 2015USD ($) |
Loss Contingencies | ||
Unbilled receivables, net | $ 1,611,357 | $ 3,920,209 |
Inventory | $ 4,008,114 | 4,597,316 |
Delta | ||
Loss Contingencies | ||
Number of aircraft | item | 182 | |
Unbilled receivables, net | 3,600,000 | |
Inventory | $ 200,000 |