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ISSC Innovative Solutions And Support

Document and Entity Information

Document and Entity Information - shares3 Months Ended
Dec. 31, 2020Jan. 29, 2021
Cover [Abstract]
Entity Registrant NameINNOVATIVE SOLUTIONS & SUPPORT INC
Entity Central Index Key0000836690
Document Type10-Q
Document Period End DateDec. 31,
2020
Amendment Flagfalse
Current Fiscal Year End Date--09-30
Entity Current Reporting StatusYes
Entity Filer CategoryNon-accelerated Filer
Entity Small Businesstrue
Entity Emerging Growth Companyfalse
Entity Shell Companyfalse
Entity Common Stock, Shares Outstanding17,241,872
Document Fiscal Year Focus2021
Document Fiscal Period FocusQ1
Entity Interactive Data CurrentYes
Title of 12(b) SecurityCommon Stock, par value $0.001 per share
Security Exchange NameNASDAQ
Document Quarterly Reporttrue
Document Transition Reportfalse
Trading SymbolISSC

CONDENSED CONSOLIDATED BALANCE

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)Dec. 31, 2020Sep. 30, 2020
Current assets
Cash and cash equivalents $ 5,608,255 $ 12,603,967
Restricted Cash11,180,900
Accounts receivable2,544,529 4,369,111
Inventories4,180,743 4,291,335
Prepaid expenses and other current assets850,861 675,109
Total current assets13,184,388 33,120,422
Property and equipment, net8,155,667 8,175,872
Other assets208,093 249,543
Total assets21,548,148 41,545,837
Current liabilities
Accounts payable727,593 790,892
Dividends payable11,180,900
Accrued expenses1,121,818 1,361,960
Contract liability121,473 313,365
Total current liabilities1,970,884 13,647,117
Non-current deferred income taxes129,689 129,689
Total liabilities2,100,573 13,776,806
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 December 31, 2020 and September 30, 2020
Common stock, $.001 par value: 75,000,000 shares authorized, 19,310,835 issued at December 31, 2020 and September 30, 202019,311 19,311
Additional paid-in capital51,504,378 51,458,787
(Accumulated deficit)(10,707,577)(2,340,530)
Treasury stock, at cost, 2,096,451 shares at December 31, 2020 and 30-Sep-20(21,368,537)(21,368,537)
Total shareholders' equity19,447,575 27,769,031
Total liabilities and shareholders' equity $ 21,548,148 $ 41,545,837

CONDENSED CONSOLIDATED BALANC_2

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / sharesDec. 31, 2020Sep. 30, 2020
Preferred stock, shares authorized10,000,000 10,000,000
Preferred stock, par value (in dollars per share) $ 0.001 $ 0.001
Preferred stock, shares issued0 0
Preferred stock, shares outstanding0 0
Common stock, par value (in dollars per share) $ 0.001 $ 0.001
Common stock, shares authorized75,000,000 75,000,000
Common stock, shares issued19,310,835 19,310,835
Treasury stock, shares2,096,451 2,096,451
Class A Convertible stock
Preferred stock, shares authorized200,000 200,000

CONDENSED CONSOLIDATED STATEMEN

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)3 Months Ended
Dec. 31, 2020Dec. 31, 2019
Net Sales:
Total net sales $ 4,869,652 $ 4,511,428
Cost of sales:
Total cost of sales2,303,829 1,909,781
Gross profit2,565,823 2,601,647
Operating expenses:
Research and development600,298 666,615
Selling, general and administrative1,733,154 1,703,274
Total operating expenses2,333,452 2,369,889
Operating income232,371 231,758
Interest income879 78,870
Other income16,392 17,280
Income before income taxes249,642 327,908
Income tax expense9,497 0
Net income $ 240,145 $ 327,908
Net income per common share:
Basic (in dollars per share) $ 0.01 $ 0.02
Diluted (in dollars per share) $ 0.01 $ 0.02
Weighted average shares outstanding:
Basic (in shares)17,214,384 16,909,036
Diluted (in shares)17,216,287 17,081,578
Product
Net Sales:
Total net sales $ 4,802,835 $ 4,458,694
Cost of sales:
Total cost of sales2,294,294 1,844,480
Engineering development contracts
Net Sales:
Total net sales66,817 52,734
Cost of sales:
Total cost of sales $ 9,535 $ 65,301

CONDENSED CONSOLIDATED STATEM_2

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY - USD ($)Common StockAdditional Paid-In Capital(Accumulated Deficit) Retained EarningsTreasury StockTotal
Balance at Sep. 30, 2019 $ 19,006 $ 51,987,096 $ 5,570,587 $ (21,368,537) $ 36,208,152
Increase (Decrease) in Stockholders' Equity
Net income327,908 327,908
Balance at Dec. 31, 201919,006 51,987,096 5,898,495 (21,368,537)36,536,060
Balance at Sep. 30, 202019,311 51,458,787 (2,340,530)(21,368,537)27,769,031
Increase (Decrease) in Stockholders' Equity
Share-based compensation45,591 45,591
Dividends declared(8,607,192)(8,607,192)
Net income240,145 240,145
Balance at Dec. 31, 2020 $ 19,311 $ 51,504,378 $ (10,707,577) $ (21,368,537) $ 19,447,575

CONDENSED CONSOLIDATED STATEM_3

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)3 Months Ended
Dec. 31, 2020Dec. 31, 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 240,145 $ 327,908
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization113,682 104,135
Share-based compensation expense:
Stock options45,591
(Increase) decrease in:
Accounts receivable1,824,582 (628,212)
Contract asset80,182
Inventories110,592 (201,769)
Prepaid expenses and other current assets(175,752)(42,109)
Income taxes receivable(2,456)
Increase (decrease) in:
Accounts payable(63,299)(101,437)
Accrued expenses(228,820)218,758
Income taxes payable9,497
Contract liability(191,892)4,355
Net cash provided by (used in) operating activities1,684,326 (240,645)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment(72,846)(17,429)
Net cash (used in) investing activities(72,846)(17,429)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend paid(19,788,092)
Net cash (used in) financing activities(19,788,092)
Net (decrease) in cash and cash equivalents and restricted cash(18,176,612)(258,074)
Cash and cash equivalents and restricted cash, beginning of year23,784,867 22,416,830
Cash and cash equivalents and restricted cash, end of year $ 5,608,255 22,158,756
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes $ 2,456

Summary of Significant Accounti

Summary of Significant Accounting Policies3 Months Ended
Dec. 31, 2020
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies1. Summary of Significant Accounting Policies
Description of the Company
Innovative Solutions and Support, Inc. (the “Company,” “IS&S,” “we” or “us”) was incorporated in Pennsylvania on February 12, 1988. The Company operates in one business segment as a systems integrator that designs, develops, manufactures, sells and services air data equipment, engine display systems, standby equipment, primary flight guidance, autothrottles and cockpit display systems for retrofit applications and original equipment manufacturers (“OEMs”). The Company supplies integrated Flight Management Systems (“FMS”), Flat Panel Display Systems (“FPDS”), FPDS with Autothrottle, air data equipment, Integrated Standby Units (“ISU”), ISU with Autothrottle 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.
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, 2020 is derived from the audited financial statements of the Company. Operating results for the three-month period ended December 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2021, including in terms of the impact of the coronavirus pandemic (the “COVID-19 pandemic”), which cannot be determined at this time. 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, 2020.
Principles of Consolidation
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.
Impact of the COVID-19 Pandemic
The ongoing global outbreak of coronavirus, which was declared a pandemic by the World Health Organization on March 11, 2020 and a national emergency by the President of the United States on March 13, 2020, has caused and is continuing to cause business slowdowns and shutdowns and turmoil in the financial markets both in the United States and abroad. IS&S is monitoring the impact of the COVID-19 pandemic on its business, including how it has impacted and will impact the Company's employees, customers, suppliers and distribution channels. The Company has not yet seen a material impact from the COVID-19 pandemic on its business, financial position, liquidity, or ability to service customers or maintain critical operations. However, the COVID-19 pandemic, as well as the quarantines and other governmental and non‑governmental restrictions which have been imposed throughout the world in an effort to contain or mitigate the spread of the coronavirus, has created significant volatility, uncertainty and disruption which may adversely affect IS&S’ business and has caused and is continuing to cause significant market turbulence and disruption that may continue for some time even after business restrictions are lifted and the threat of the coronavirus diminishes. As a result, the Company may face liquidity shortages, weaker product demand from its customers, disruptions in its supply chain, and/or staffing shortages in its workforce for the foreseeable future due to the direct and indirect effects of the COVID-19 pandemic.
Use of Estimates
The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Estimates are used in accounting for, among other items, long term contracts, allowances for doubtful accounts, inventory obsolescence, product warranty cost liabilities, income taxes, engineering and material costs on Engineering Development Contract (“EDC”) programs, percentage of completion on EDC contracts, recoverability of long-lived assets and contingencies. Estimates and assumptions are reviewed periodically and the effects of changes, if any, are reflected in the consolidated statements of operations in the period they are determined.
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 December 31, 2020 and September 30, 2020 consist of cash on deposit and cash invested in money market funds with financial institutions.
Restricted Cash
On September 4, 2020, the Company’s Board of Directors declared a special cash dividend in the amount of $0.65 per share, payable on October 1, 2020 to shareholders of record as of the close of business on September 15, 2020. The total dividend payment was approximately $11.2 million and is included in restricted cash on the accompanying condensed consolidated balance sheet as of September 30, 2020.
On December 10, 2020, the Company's Board of Directors declared a special cash dividend in the amount of $0.50 per share, payable on or about December 30, 2020 to shareholders of record as of the close of business on December 21, 2020. The total dividend payment was approximately $8.6 million.
The Company did not pay dividends in the three-month period ended December 31, 2019. The declaration and payment of any dividend in the future will be at the discretion of the Company’s Board of Directors.
As of December 31, 2020, the Company had $5.6 million in cash and cash equivalents and $0 in restricted cash. Total cash and cash equivalents and restricted cash as of December 31, 2020 was $5.6 million.
As of September 30, 2020, the Company had $12.6 million in cash and cash equivalents and $11.2 million in restricted cash. Total cash and cash equivalents and restricted cash as of September 30, 2020 was $23.8 million.
Inventory Valuation
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value, net of write-downs for excess and obsolete inventory.
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 lease term), except for the manufacturing facility and the corporate airplanes, which are depreciated using the straight-line method over their estimated useful lives of thirty-nine years and ten years, respectively. Major additions and improvements are capitalized, while maintenance and repairs that do not improve or extend the life of assets are charged to expense as incurred.
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.” 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 should 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 then compares the carrying amount of the asset to estimated future cash flows expected to result 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 generally measured by discounting expected future cash flows. No impairment charges were recorded during the three-month period ended December 31, 2020 or 2019.
Fair Value of Financial Instruments
The net carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and short-term debt 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 December 31, 2020 and September 30, 2020, according to the valuation techniques the Company used to determine their fair values.
Fair Value Measurement on December 31, 2020
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
$
4,800,880
$

$

Fair Value Measurement on September 30, 2020
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
$
11,607,293
$

$

Revenue Recognition
The Company enters into sales arrangements with customers that, in general, provide for the Company to design, develop, manufacture and deliver large flat-panel display systems, flight information computers, autothrottles 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.
Revenue from Contracts with Customers
The Company adopted ASC 606 on October 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for fiscal years ended September 30, 2020 and 2019 reflect the application of ASC 606 guidance. The adoption of ASC 606 represents a change in accounting principles. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services. To achieve this core principle, the Company applies the following five steps:
1)
The Company’s contract with its customers typically is the form of a purchase order issued to the Company by its customers and, to a lesser degree, in the form of a purchase order issued in connection with a formal contract executed with a customer. For the purpose of accounting for revenue under ASC 606, a contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
2)
Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. Most of our revenue is derived from purchases under which we provide a specific product or service and, as a result, there is only one performance obligation. In the event that a contract includes multiple promised goods or services, such as an EDC contract which includes both engineering services and a resulting product shipment, the Company must apply judgment to determine whether promised goods or services are capable of being distinct in the context of the contract. In these cases, the Company considers whether the customer could, on its own, or together with other resources that are readily available from third parties, produce the physical product using only the output resulting from the Company’s completion of engineering services. If the customer cannot produce the physical product, then the promised goods or services are accounted for as a combined performance obligation.
3)
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company's contracts for all periods presented included variable consideration .
4)
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price by taking into account available information such as market conditions as well as the cost of the goods or services and the Company’s normal margins for similar performance obligations.
5)
Recognize revenue when or as the Company satisfies a performance obligation
The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer. Revenue from products transferred to customers at a point in time accounted for 100 percent and 99.6 percent of our revenue for the quarters ended December 31, 2020 and 2019, respectively, and is typically recognized at the time of shipment of products to the customer. The remaining revenue results from EDC contracts and is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Contract costs include material, components and third-party avionics purchased from suppliers, direct labor, and overhead costs.
At December 31, 2020, we had $4,187,271 of remaining performance obligations, which we also refer to as total backlog. We expect to recognize the majority of the Company's backlog as revenue over the next twelve months.
Contract Estimates
Accounting for performance obligations in long-term contracts that are satisfied over time involves the use of various techniques to estimate progress towards satisfaction of the performance obligation. The Company typically measures progress based on costs incurred compared to estimated total contract costs. Contract cost estimates are based on various assumptions to project the outcome of future events that often span more than a single year. These assumptions include the amount of labor and labor costs, the quantity and cost of raw materials used in the completion of the performance obligation, and the complexity of the work to be performed.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter it is identified.
The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates did not change our revenue and operating earnings (and diluted earnings per share) for the three-month periods ended December 31, 2020 and 2019, respectively. Therefore, no adjustment on any contract was material to our unaudited consolidated financial statements for the three-month periods ended December 31,2020 and 2019, respectively.
Contract Balances
Contract assets consist of the right to consideration in exchange for product offerings that we have transferred to a customer under the contract. Contract liabilities primarily relate to consideration received in advance of performance under the contract. The following table reflects the Company’s contract assets and contract liabilities:
Contract
Liabilities
September 30, 2020
$
313,365
Amount transferred to receivables from contract assets

Contract asset additions

Performance obligations satisfied during the period that were included in the contract liability balance at the beginning of the period
(278,472)
Increases due to invoicing prior to satisfaction of performance obligations
86,580
December 31, 2020
$
121,473
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 are included in product sales and product cost of sales, respectively, on the accompanying consolidated statements of operations. The Company’s customer service revenue and cost of sales for the three-month periods ended December 31, 2020 and 2019 respectively are as follows:
For the Three Months Ended December 31,
2020
2019
Customer Service Sales
$
815,503
$
1,189,040
Customer Service Cost of Sales
316,637
349,615
Gross Profit
$
498,866
$
839,425
Lease Recognition
On October 1, 2019, we adopted ASU 2016-02 using the required modified retrospective approach. This pronouncement requires lessees to record “right-of-use” assets and corresponding lease liabilities on the balance sheet for most leases. We adopted this pronouncement utilizing the transition practical expedient which eliminated the requirement that entities apply the new lease standard to the comparative periods presented in the year of adoption. See
Income Taxes
I ncome taxes are recorded in accordance with 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 NOLs 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 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 periods.
Deferred tax assets are reduced by a valuation allowance 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 verified objectively, and significant management judgment is required in determining any valuation allowance recorded against net deferred tax assets. The Company evaluates deferred income taxes on a quarterly basis to determine if a valuation allowance is 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 carryforwards, taxable income in carry-back years, and tax planning strategies which are both prudent and feasible. The Company’s current balance of the deferred tax valuation allowance is recorded against all of its federal and state deferred tax assets. The Company will continue to assess all available evidence during future periods to evaluate any changes to the realization of its deferred tax assets. If the Company were to determine that it would be able to realize additional federal or state deferred tax assets in the future, it would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
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 U.S. 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 a 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 it has made adequate accruals 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 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.
On December 22, 2017, the U.S. government enacted the Tax Act, which made broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 34 percent to 21 percent; (2) bonus depreciation that will allow for full expensing of qualified property; (3) elimination of the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (4) a new limitation on deductible interest expense; (5) the repeal of the domestic production activity deduction; and (6) limitations on NOLs generated after December 31, 2017, to 80 percent of taxable income.
The Tax Act reduced the corporate tax rate to 21 percent, effective January 1, 2018. Consequently, we recorded a provisional adjustment to decrease related to DTAs and DTLs with a corresponding net adjustment to deferred income tax expense of $321,038 for the period ended December 31, 2017. This expense is offset fully by a change in the valuation allowance.
In March 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law to provide emergency assistance to affected individuals, families, and businesses. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of NOLs. The CARES Act amends the NOL provisions of the Tax Act, allowing for the carryback of losses arising in tax years beginning before December 31, 2017, to each of the two taxable years preceding the taxable year of loss. Approximately $1,500,000 of pre-tax NOL was carried back two years to fully offset taxable income. This carryback frees up previously utilized R&D credits, resulting in an estimated increase in R&D credit carryforward of $196,000. The carryback created approximately $16,000 of AMT tax, which was refunded. The cash impact of this carryback was $309,412. A receivable was setup for this amount as of March 31, 2020 and the cash has since been received.
On December 27, 2020, the Consolidations Appropriations Act ("CAA") 2020 was enacted. The CCA was enacted as a supplement to the CARES legislation providing additional financial relief to taxpayers adversely impacted by restrictions put into place in response to the COVID-19 pandemic. In addition, the CCA provides funding for public health initiatives in response to the pandemic. This legislation does not have a material impact on the Company's tax provision.
Engineering Development
The Company invests a significant percentage of its sales on engineering development, both Research & Development (“R&D”) and EDC. At December 31, 2020, approximately 21% of the Company’s employees were engineers engaged in various engineering development projects. Total engineering development expense comprises both internally funded R&D and product development and design charges related to specific customer contracts. Engineering development 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. Product development and design charges related to specific customer contracts 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
We account for treasury stock purchased under the cost method and include treasury stock as a component of shareholders’ equity. Treasury stock purchased with intent to retire (whether or not the retirement is actually accomplished) is charged to common stock.
Comprehensive Income
Pursuant to FASB ASC Topic 220, “Comprehensive Income,” the Company is required to classify items of other comprehensive income by their nature in a financial statement and 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-month periods ended December 31, 2020 and 2019, comprehensive income consisted of net income only, and there were no items of other comprehensive income for any of the periods presented.
Share-Based Compensation
The Company accounts for share-based compensation under ASC Topic 718, “Stock Compensation” (“ASC Topic 718”), which requires 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. The Company recognizes such cost over the period during which an employee or non-employee director is required to provide service in exchange for the award.
Accordingly, adoption of ASC Topic 718’s fair value method results in recording compensation costs under the Company’s stock-based compensation plans. The Company determined the fair value of its stock option awards at the date of grant using the Black-Scholes option pricing model. Option pricing models and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of its awards. These assumptions and judgments include estimating future volatility of the Company’s stock price, expected dividend yield, future employee turnover rates, and future employee stock option exercise behaviors. Changes in these assumptions can materially affect fair value estimates. The Company does not believe that a reasonable likelihood exists that there will be a material change in future estimates or assumptions used to determine share-based compensation expense. However, if actual results are not consistent with the Company’s estimates or assumptions, the Company would adjust its estimates. Such adjustments could have a material impact on the Company’s financial position.
Warranty Reserves
The Company offers warranties on some products of various lengths, however the standard warranty period 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 fu

Supplemental Balance Sheet Disc

Supplemental Balance Sheet Disclosures3 Months Ended
Dec. 31, 2020
Supplemental Balance Sheet Disclosures
Supplemental Balance Sheet Disclosures2. Supplemental Balance Sheet Disclosures
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value, net of write-downs for excess and obsolete inventory, and consist of the following:
Decmber 31,
September 30,
2020
2020
Raw materials
$
3,248,163
$
3,378,246
Work-in-process
663,900
656,382
Finished goods
268,680
256,707
$
4,180,743
$
4,291,335
Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:
Decmber 31,
September 30,
2020
2020
Prepaid insurance
$
576,804
$
336,331
Other
274,057
338,778
$
850,861
$
675,109
Property and equipment
Property and equipment, net consists of the following:
Decmber 31,
September 30,
2020
2020
Computer equipment
$
2,308,218
$
2,302,978
Corporate airplanes
5,601,039
5,601,039
Furniture and office equipment
1,019,891
1,031,099
Manufacturing facility
5,733,313
5,733,313
Equipment
5,776,906
5,723,355
Land
1,021,245
1,021,245
21,460,612
21,413,029
Less: accumulated depreciation and amortization
(13,304,945)
(13,237,157)
$
8,155,667
$
8,175,872
Depreciation and amortization related to property and equipment was approximately $93,051 and $96,644 for the three-month periods ended December 31, 2020 and 2019, respectively. The corporate airplanes are utilized primarily in support of product development. The Pilatus PC-12 airplane, one of the Company’s two corporate airplanes, has been depreciated to its estimated salvage value.
Other assets
Other assets consist of the following:
Decmber 31,
September 30,
2020
2020
Intangible assets, net of accumulated amortization of $603,569 and $583,655 at December 31, 2020 and September 30, 2020, respectively
$
92,937
$
112,851
Operating lease right-of-use asset
24,307
45,126
Other non-current assets
90,849
91,566
$
208,093
$
249,543
Intangible assets consist of licensing and certification rights which are amortized over a defined number of units. No impairment charges were recorded in the three months ended December 31, 2020 and 2019.
Intangible asset amortization expense was approximately $19,914 and $4,800 for the three months ended December 31, 2020 and 2019, respectively. The timing of future amortization expense is not determinable because the intangible assets are being amortized over a defined number of units.
Other non-current assets as of December 31, 2020 and September 30, 2020 include the security deposit for an airplane hangar and a deposit for medical claims required under the Company’s medical plan. In addition, other non-current assets as of December 31, 2020 and September 30, 2020 includes $15,548 and $16,266, respectively, of prepaid software licenses that will be earned upon the shipment of a certain product to a customer. Other non-current assets amortization expense was approximately $717 and $2,691 for the three months ended December 31, 2020 and 2019, respectively.
Accrued expenses
Accrued expenses consist of the following:
Decmber 31,
September 30,
2020
2020
Warranty
$
578,172
$
547,743
Salary, benefits and payroll taxes
180,218
483,797
Professional fees
235,661
151,956
Operating lease
24,307
45,126
Other
103,460
133,338
$
1,121,818
$
1,361,960
Warranty cost and accrual information for the three-month period ended December 31, 2020 is highlighted below:
Three Months Ending
December 31, 2020
Warranty accrual, beginning of period
$
547,743
Accrued expense
73,866
Warranty cost
(43,437)
Warranty accrual, end of period
$
578,172

Income Taxes

Income Taxes3 Months Ended
Dec. 31, 2020
Income Taxes
Income Taxes3. Income Taxes
In March 2020, the CARES Act was signed into law providing numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of NOLs. The CARES Act amends the NOL provisions of the Tax Act, allowing for the carryback of losses arising in tax years beginning before December 31, 2017, to each of the two taxable years preceding the taxable year of loss. Approximately $1,500,000 of pre-tax NOL was carried back two years to fully offset taxable income. This carryback frees up previously utilized R&D credits, resulting in an estimated increase in R&D credit carryforward of $196,000. The carryback created approximately $16,000 of AMT tax, which was refunded. The cash impact of this carryback was $309,412. A receivable was setup for this amount as of March 31, 2020 and the cash has since been received.
On December 27, 2020, the CAA was enacted. The CCA was enacted as a supplement to the CARES legislation providing additional financial relief to taxpayers adversely impacted by restrictions put into place in response to the COVID-19 pandemic. In addition, the CCA provides funding for public health initiatives in response to the pandemic. This legislation does not have a material impact on the Company's tax provision.
The income tax expense for the three-month period ended December 31, 2020 was $9,497 as compared to an income tax expense of $0 for the three-month period ended December 31, 2019.
The effective tax rate for the three-month period ended December 31, 2020 was 3.8% and differs from the statutory tax rate primarily due to net operating loss realization due to an increase in pretax book income and the release of the valuation allowance. This loss utilization both decreased the deferred tax asset and the valuation allowance. For the three months ended December 31, 2020, the valuation allowance decreased by approximately $40,000.
The effective tax rate for the three months ended December 31, 2019 was 0% and differs from the statutory tax rate primarily due to net operating loss realization. This loss realization both decreased the deferred tax asset and the valuation allowance. For the three months ended December 31, 2019 the valuation allowance decreased by approximately $55,000.

Shareholders' Equity and Share-

Shareholders' Equity and Share-Based Payments3 Months Ended
Dec. 31, 2020
Shareholders' Equity and Share-Based Payments
Shareholders' Equity and Share-Based Payments4. Shareholders’ Equity and Share-Based Payments
At December 31, 2020, 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 718 by using the fair value method for expensing stock options and stock awards.
Total share-based compensation expense was $45,591 and $0 for the three-month periods ended December 31, 2020 and 2019, respectively. The income tax impact recognized as a (charge) credit to additional paid in capital in the statement of shareholders’ equity related to share-based compensation arrangements was approximately $45,591 and $0 for the three-month periods ended December 31, 2020 and 2019, respectively. Compensation expense related to share-based awards is recorded as a component of selling, general and administrative expenses.
The Company has two share-based compensation plans: (1) the 2009 Stock-Based Incentive Compensation Plan (the “2009 Plan”), which terminated with respect to the grant of any new awards on January 20, 2019, and (2) the 2019 Stock-Based Incentive Compensation Plan (the “2019 Plan”). The 2009 Plan and the 2019 Plan were approved by the shareholders on March 12, 2009 and April 2, 2019, respectively.
2009 Stock-Based Incentive Compensation Plan
The 2009 Plan authorized the grant of stock appreciation rights, restricted stock, options, RSUs and other equity-based 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 necessary upon 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 was 1,200,000, all of which could be issued pursuant to awards of incentive stock options. In addition, the 2009 Plan provided 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. The 2009 Plan terminated on January 20, 2019 with respect to the grant of any new awards.
If there is any change in the Company’s corporate capitalization, the Compensation Committee must proportionately and equitably adjust 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 adversely affect 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 adversely affect 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.
The compensation expense related to options issued to employees under the 2009 Plan was $0 for each of the three-month periods ended December 31, 2020 and 2019. The compensation expense under the 2009 Plan related to shares issued to non-employee members of the Company’s Board of Directors (the “Board”) was $0 for the three-month periods ended December 31, 2020 and 2019, respectively. Total compensation expense associated with the 2009 Plan was approximately $0 for the three-month periods ended December 31, 2020 and 2019, respectively.
At December 31, 2020, no unrecognized compensation expense, net of forfeitures, related to non-vested stock options under the 2009 Plan, will be recognized.
2019 Stock-Based Incentive Compensation Plan
The 2019 Plan authorizes the grant of stock appreciation rights, restricted stock, options and other equity-based awards. Options granted under the 2019 Plan may be either “incentive stock options” as defined in section 422 of the Code or nonqualified stock options, as determined by the Compensation Committee.
Subject to an adjustment necessary upon 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 similar corporate transaction or event, the maximum number of shares of common stock available for awards under the 2019 Plan is 750,000, plus 139,691 shares of common stock that were authorized but unissued under the 2009 Plan as of the effective date of the 2019 Plan (i.e., April 2, 2019), all of which may be issued pursuant to awards of incentive stock options. In addition, the 2019 Plan provides that no more than 300,000 shares may be awarded in any calendar year to any employee. On August 27, 2020, 100,000 stock options have been granted to Relland M. Winand, the Company’s Chief Financial Officer, under the 2019 Plan. As of December 31, 2020, there were 716,635 shares of common stock available for awards under the 2019 Plan.
If any award is forfeited, terminates or otherwise is settled for any reason without an actual distribution of shares to the participant, the related 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 2019 Plan. If there is any change in the Company’s corporate capitalization, the Compensation Committee must proportionately and equitably adjust the number and kind of shares of common stock which may be issued in connection with future awards, the number and kind of shares of common stock covered by awards then outstanding under the 2019 Plan, the aggregate number and kind of shares of common stock available under the 2019 Plan, any applicable individual limits on the number of shares of common stock available for awards under the 2019 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. 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.
The compensation expense related to options issued to employees under the 2019 Plan was $45,591 and $0 for each of the three-month periods ended December 31, 2020 and 2019, respectively. The compensation expense under the 2019 Plan related to shares issued to non-employee members of the Board was $0 for the three-month periods ended December 31, 2020 and 2019, respectively. Total compensation expense associated with the 2019 Plan was approximately $45,591 and $0 for each of the three-month periods ended December 31, 2020 and 2019, respectively.
At December 31, 2020, unrecognized compensation expense of approximately $299,772, net of forfeitures, related to non-vested stock options under the 2019 Plan, will be recognized.

Earnings Per Share

Earnings Per Share3 Months Ended
Dec. 31, 2020
Earnings Per Share
Earnings Per Share5. Earnings Per Share
Three Months Ended December 31,
2020
2019
Numerator:
Net income
$
240,145
$
327,908
Denominator:
Basic weighted average shares
17,214,384
16,909,036
Dilutive effect of share-based awards
1,903
172,542
Diluted weighted average shares
17,216,287
17,081,578
Earnings per common share:
Basic EPS
$
0.01
$
0.02
Diluted EPS
$
0.01
$
0.02
Net income per share is calculated pursuant to ASC Topic 260, “ Earnings per Share” (“ASC Topic 260”). Basic earnings per share (“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 and restricted stock units (“RSUs”).
The number of incremental shares from the assumed exercise of stock options and RSUs is calculated by using the treasury stock method. As of December 31, 2020 and 2019, there were 104,500 and 550,834 options to purchase common stock outstanding, respectively, and no shares subject to vesting of restricted stock units 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 December 31, 2020 and 2019, respectively, 100,000 and 0 diluted weighted-average shares outstanding were excluded from the computation of diluted EPS because the effect would be anti-dilutive.

Contingencies

Contingencies3 Months Ended
Dec. 31, 2020
Commitments and Contingencies
Contingencies6. Contingencies
In the ordinary course of business, the Company is at times subject to various legal proceedings and claims. The Company does not believe any such matters that are currently pending will, individually or in the aggregate, have a material effect on the results of operations or financial position.

Leases

Leases3 Months Ended
Dec. 31, 2020
Lease
Leases7. Leases
On October 1, 2019, we adopted ASU 2016-02. This pronouncement requires lessees to record "right-of-use" assets and corresponding lease liabilities on the balance sheet for most leases. We adopted this pronouncement utilizing the transition practical expedient which eliminated the requirement that entities apply the new lease standard to the comparative periods presented in the year of adoption.
As part of our adoption, we elected to utilize the package of practical expedients permitted under the new standard, which allowed us to not reassess: (a) whether an existing contract is or contains a lease, (b) the classification for existing leases and (c) initial direct costs. Further, as permitted by the standard, we made an accounting policy election not to record right-of-use assets or lease liabilities for leases with an initial term of 12 months or less. Instead, consistent with previous accounting guidance, we will recognize payments for such leases in the statement of operations on a straight-line basis over the lease term.
We lease real estate and equipment under various operating leases. A lease exists when a contract or part of a contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In determining whether a lease exists, we consider whether a contract provides us with both: (a) the right to obtain substantially all of the economic benefits from the use of the identified asset and (b) the right to direct the use of the identified asset.
Some of our leases include base rental periods coupled with options to renew or terminate the lease, generally at our discretion. In evaluating the lease term, we consider whether we are reasonably certain to exercise such options. To the extent a significant economic incentive exists to exercise an option, that option is included within the lease term. However, based on the nature of our lease arrangements, options generally do not provide us with a significant economic incentive and are therefore excluded from the lease term for the majority of our arrangements.
Our leases typically include a combination of fixed and variable payments. Fixed payments are generally included when measuring the right-of-use asset and lease liability. Variable payments, which primarily represent payments based on usage of the underlying asset, are generally excluded from such measurement and expensed as incurred. In addition, certain of our lease arrangements may contain a lease coupled with an arrangement to provide other services, such as maintenance, or may require us to make other payments on behalf of the lessor related to the leased asset, such as payments for taxes or insurance. As permitted by ASU 2016-02, we have elected to account for these non-lease components together with the associated lease component if included in the lease payments. This election has been made for each of our asset classes.
The measurement of "right-of-use" assets and lease liabilities requires us to estimate appropriate discount rates. To the extent the rate implicit in the lease is readily determinable, such rate is utilized. However, based on information available at lease commencement for our leases, the rate implicit in the lease is not known. In these instances, we utilize an incremental borrowing rate, which represents the rate of interest that we would pay to borrow on a collateralized basis over a similar term.
The following table presents the lease-related assets and liabilities reported in the Consolidated Balance Sheet as of December 31, 2020:
Classification on the Consolidated Balance Sheet on December 31, 2020
Assets
Operating leases
Other assets
$
24,307
Liabilities
Operating leases- current
Accrued expenses
$
24,307
Operating leases – noncurrent
Other liabilities
$
0
Total lease liabilities
$
24,307
Rent expense and cash paid for various operating leases in aggregate are $21,952 and $21,430 for the three-month periods ended December 31, 2020. The weighted average remaining lease term is 0.4 years and the weighted average discount rate is 5.0% as of December 31, 2020.
Future minimum lease payments under operating leases are as follows at December 31, 2020:
Twelve Months
Ending
Operating
December 31, 2021
Leases
$
23,590

Total minimum lease payments
$
23,590
Amount representing interest
718
Present value of minimum lease payments
24,307
Current portion
(24,307)
Long-term portion of lease obligations
$

Summary of Significant Accoun_2

Summary of Significant Accounting Policies (Policies)3 Months Ended
Dec. 31, 2020
Summary of Significant Accounting Policies
Basis of PresentationBasis 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, 2020 is derived from the audited financial statements of the Company. Operating results for the three-month period ended December 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2021, including in terms of the impact of the coronavirus pandemic (the “COVID-19 pandemic”), which cannot be determined at this time. 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, 2020.
Principles of ConsolidationPrinciples of Consolidation
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.
Impact of the COVID-19 PandemicImpact of the COVID-19 Pandemic
The ongoing global outbreak of coronavirus, which was declared a pandemic by the World Health Organization on March 11, 2020 and a national emergency by the President of the United States on March 13, 2020, has caused and is continuing to cause business slowdowns and shutdowns and turmoil in the financial markets both in the United States and abroad. IS&S is monitoring the impact of the COVID-19 pandemic on its business, including how it has impacted and will impact the Company's employees, customers, suppliers and distribution channels. The Company has not yet seen a material impact from the COVID-19 pandemic on its business, financial position, liquidity, or ability to service customers or maintain critical operations. However, the COVID-19 pandemic, as well as the quarantines and other governmental and non‑governmental restrictions which have been imposed throughout the world in an effort to contain or mitigate the spread of the coronavirus, has created significant volatility, uncertainty and disruption which may adversely affect IS&S’ business and has caused and is continuing to cause significant market turbulence and disruption that may continue for some time even after business restrictions are lifted and the threat of the coronavirus diminishes. As a result, the Company may face liquidity shortages, weaker product demand from its customers, disruptions in its supply chain, and/or staffing shortages in its workforce for the foreseeable future due to the direct and indirect effects of the COVID-19 pandemic.
Use of EstimatesUse of Estimates
The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Estimates are used in accounting for, among other items, long term contracts, allowances for doubtful accounts, inventory obsolescence, product warranty cost liabilities, income taxes, engineering and material costs on Engineering Development Contract (“EDC”) programs, percentage of completion on EDC contracts, recoverability of long-lived assets and contingencies. Estimates and assumptions are reviewed periodically and the effects of changes, if any, are reflected in the consolidated statements of operations in the period they are determined.
Cash and Cash EquivalentsCash and Cash Equivalents
Highly liquid investments, purchased with an original maturity of three months or less, are classified as cash equivalents. Cash equivalents at December 31, 2020 and September 30, 2020 consist of cash on deposit and cash invested in money market funds with financial institutions.
Restricted CashRestricted Cash
On September 4, 2020, the Company’s Board of Directors declared a special cash dividend in the amount of $0.65 per share, payable on October 1, 2020 to shareholders of record as of the close of business on September 15, 2020. The total dividend payment was approximately $11.2 million and is included in restricted cash on the accompanying condensed consolidated balance sheet as of September 30, 2020.
On December 10, 2020, the Company's Board of Directors declared a special cash dividend in the amount of $0.50 per share, payable on or about December 30, 2020 to shareholders of record as of the close of business on December 21, 2020. The total dividend payment was approximately $8.6 million.
The Company did not pay dividends in the three-month period ended December 31, 2019. The declaration and payment of any dividend in the future will be at the discretion of the Company’s Board of Directors.
As of December 31, 2020, the Company had $5.6 million in cash and cash equivalents and $0 in restricted cash. Total cash and cash equivalents and restricted cash as of December 31, 2020 was $5.6 million.
As of September 30, 2020, the Company had $12.6 million in cash and cash equivalents and $11.2 million in restricted cash. Total cash and cash equivalents and restricted cash as of September 30, 2020 was $23.8 million.
Inventory ValuationInventory Valuation
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value, net of write-downs for excess and obsolete inventory.
Property and EquipmentProperty 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 lease term), except for the manufacturing facility and the corporate airplanes, which are depreciated using the straight-line method over their estimated useful lives of thirty-nine years and ten years, respectively. Major additions and improvements are capitalized, while maintenance and repairs that do not improve or extend the life of assets are charged to expense as incurred.
Long-Lived AssetsLong-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.” 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 should 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 then compares the carrying amount of the asset to estimated future cash flows expected to result 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 generally measured by discounting expected future cash flows. No impairment charges were recorded during the three-month period ended December 31, 2020 or 2019.
Fair Value of Financial InstrumentsFair Value of Financial Instruments
The net carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and short-term debt 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 December 31, 2020 and September 30, 2020, according to the valuation techniques the Company used to determine their fair values.
Fair Value Measurement on December 31, 2020
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
$
4,800,880
$

$

Fair Value Measurement on September 30, 2020
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
$
11,607,293
$

$
Revenue RecognitionRevenue Recognition
The Company enters into sales arrangements with customers that, in general, provide for the Company to design, develop, manufacture and deliver large flat-panel display systems, flight information computers, autothrottles 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.
Revenue from Contracts with Customers
The Company adopted ASC 606 on October 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for fiscal years ended September 30, 2020 and 2019 reflect the application of ASC 606 guidance. The adoption of ASC 606 represents a change in accounting principles. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services. To achieve this core principle, the Company applies the following five steps:
1)
The Company’s contract with its customers typically is the form of a purchase order issued to the Company by its customers and, to a lesser degree, in the form of a purchase order issued in connection with a formal contract executed with a customer. For the purpose of accounting for revenue under ASC 606, a contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
2)
Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. Most of our revenue is derived from purchases under which we provide a specific product or service and, as a result, there is only one performance obligation. In the event that a contract includes multiple promised goods or services, such as an EDC contract which includes both engineering services and a resulting product shipment, the Company must apply judgment to determine whether promised goods or services are capable of being distinct in the context of the contract. In these cases, the Company considers whether the customer could, on its own, or together with other resources that are readily available from third parties, produce the physical product using only the output resulting from the Company’s completion of engineering services. If the customer cannot produce the physical product, then the promised goods or services are accounted for as a combined performance obligation.
3)
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company's contracts for all periods presented included variable consideration .
4)
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price by taking into account available information such as market conditions as well as the cost of the goods or services and the Company’s normal margins for similar performance obligations.
5)
Recognize revenue when or as the Company satisfies a performance obligation
The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer. Revenue from products transferred to customers at a point in time accounted for 100 percent and 99.6 percent of our revenue for the quarters ended December 31, 2020 and 2019, respectively, and is typically recognized at the time of shipment of products to the customer. The remaining revenue results from EDC contracts and is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Contract costs include material, components and third-party avionics purchased from suppliers, direct labor, and overhead costs.
At December 31, 2020, we had $4,187,271 of remaining performance obligations, which we also refer to as total backlog. We expect to recognize the majority of the Company's backlog as revenue over the next twelve months.
Contract Estimates
Accounting for performance obligations in long-term contracts that are satisfied over time involves the use of various techniques to estimate progress towards satisfaction of the performance obligation. The Company typically measures progress based on costs incurred compared to estimated total contract costs. Contract cost estimates are based on various assumptions to project the outcome of future events that often span more than a single year. These assumptions include the amount of labor and labor costs, the quantity and cost of raw materials used in the completion of the performance obligation, and the complexity of the work to be performed.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter it is identified.
The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates did not change our revenue and operating earnings (and diluted earnings per share) for the three-month periods ended December 31, 2020 and 2019, respectively. Therefore, no adjustment on any contract was material to our unaudited consolidated financial statements for the three-month periods ended December 31,2020 and 2019, respectively.
Contract Balances
Contract assets consist of the right to consideration in exchange for product offerings that we have transferred to a customer under the contract. Contract liabilities primarily relate to consideration received in advance of performance under the contract. The following table reflects the Company’s contract assets and contract liabilities:
Contract
Liabilities
September 30, 2020
$
313,365
Amount transferred to receivables from contract assets

Contract asset additions

Performance obligations satisfied during the period that were included in the contract liability balance at the beginning of the period
(278,472)
Increases due to invoicing prior to satisfaction of performance obligations
86,580
December 31, 2020
$
121,473
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 are included in product sales and product cost of sales, respectively, on the accompanying consolidated statements of operations. The Company’s customer service revenue and cost of sales for the three-month periods ended December 31, 2020 and 2019 respectively are as follows:
For the Three Months Ended December 31,
2020
2019
Customer Service Sales
$
815,503
$
1,189,040
Customer Service Cost of Sales
316,637
349,615
Gross Profit
$
498,866
$
839,425
Lease RecognitionLease Recognition
On October 1, 2019, we adopted ASU 2016-02 using the required modified retrospective approach. This pronouncement requires lessees to record “right-of-use” assets and corresponding lease liabilities on the balance sheet for most leases. We adopted this pronouncement utilizing the transition practical expedient which eliminated the requirement that entities apply the new lease standard to the comparative periods presented in the year of adoption. See
Income TaxesIncome Taxes
I ncome taxes are recorded in accordance with 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 NOLs 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 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 periods.
Deferred tax assets are reduced by a valuation allowance 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 verified objectively, and significant management judgment is required in determining any valuation allowance recorded against net deferred tax assets. The Company evaluates deferred income taxes on a quarterly basis to determine if a valuation allowance is 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 carryforwards, taxable income in carry-back years, and tax planning strategies which are both prudent and feasible. The Company’s current balance of the deferred tax valuation allowance is recorded against all of its federal and state deferred tax assets. The Company will continue to assess all available evidence during future periods to evaluate any changes to the realization of its deferred tax assets. If the Company were to determine that it would be able to realize additional federal or state deferred tax assets in the future, it would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
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 U.S. 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 a 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 it has made adequate accruals 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 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.
On December 22, 2017, the U.S. government enacted the Tax Act, which made broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 34 percent to 21 percent; (2) bonus depreciation that will allow for full expensing of qualified property; (3) elimination of the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (4) a new limitation on deductible interest expense; (5) the repeal of the domestic production activity deduction; and (6) limitations on NOLs generated after December 31, 2017, to 80 percent of taxable income.
The Tax Act reduced the corporate tax rate to 21 percent, effective January 1, 2018. Consequently, we recorded a provisional adjustment to decrease related to DTAs and DTLs with a corresponding net adjustment to deferred income tax expense of $321,038 for the period ended December 31, 2017. This expense is offset fully by a change in the valuation allowance.
In March 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law to provide emergency assistance to affected individuals, families, and businesses. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of NOLs. The CARES Act amends the NOL provisions of the Tax Act, allowing for the carryback of losses arising in tax years beginning before December 31, 2017, to each of the two taxable years preceding the taxable year of loss. Approximately $1,500,000 of pre-tax NOL was carried back two years to fully offset taxable income. This carryback frees up previously utilized R&D credits, resulting in an estimated increase in R&D credit carryforward of $196,000. The carryback created approximately $16,000 of AMT tax, which was refunded. The cash impact of this carryback was $309,412. A receivable was setup for this amount as of March 31, 2020 and the cash has since been received.
On December 27, 2020, the Consolidations Appropriations Act ("CAA") 2020 was enacted. The CCA was enacted as a supplement to the CARES legislation providing additional financial relief to taxpayers adversely impacted by restrictions put into place in response to the COVID-19 pandemic. In addition, the CCA provides funding for public health initiatives in response to the pandemic. This legislation does not have a material impact on the Company's tax provision.
Engineering DevelopmentEngineering Development
The Company invests a significant percentage of its sales on engineering development, both Research & Development (“R&D”) and EDC. At December 31, 2020, approximately 21% of the Company’s employees were engineers engaged in various engineering development projects. Total engineering development expense comprises both internally funded R&D and product development and design charges related to specific customer contracts. Engineering development 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. Product development and design charges related to specific customer contracts 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 StockTreasury Stock
We account for treasury stock purchased under the cost method and include treasury stock as a component of shareholders’ equity. Treasury stock purchased with intent to retire (whether or not the retirement is actually accomplished) is charged to common stock.
Comprehensive IncomeComprehensive Income
Pursuant to FASB ASC Topic 220, “Comprehensive Income,” the Company is required to classify items of other comprehensive income by their nature in a financial statement and 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-month periods ended December 31, 2020 and 2019, comprehensive income consisted of net income only, and there were no items of other comprehensive income for any of the periods presented.
Share-Based CompensationShare-Based Compensation
The Company accounts for share-based compensation under ASC Topic 718, “Stock Compensation” (“ASC Topic 718”), which requires 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. The Company recognizes such cost over the period during which an employee or non-employee director is required to provide service in exchange for the award.
Accordingly, adoption of ASC Topic 718’s fair value method results in recording compensation costs under the Company’s stock-based compensation plans. The Company determined the fair value of its stock option awards at the date of grant using the Black-Scholes option pricing model. Option pricing models and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of its awards. These assumptions and judgments include estimating future volatility of the Company’s stock price, expected dividend yield, future employee turnover rates, and future employee stock option exercise behaviors. Changes in these assumptions can materially affect fair value estimates. The Company does not believe that a reasonable likelihood exists that there will be a material change in future estimates or assumptions used to determine share-based compensation expense. However, if actual results are not consistent with the Company’s estimates or assumptions, the Company would adjust its estimates. Such adjustments could have a material impact on the Company’s financial position.
Warranty ReservesWarranty Reserves
The Company offers warranties on some products of various lengths, however the standard warranty period 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 differ from 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 recorded as an accrued expense. While the Company maintains product quality programs and processes, its warranty obligation is 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 ReservesSelf-Insurance Reserves
Since January 1, 2014, the Company has self-insured 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 such as historical claims experience and demographic factors. The Company estimated the total medical claims incurred but not reported and the Company believes that it has adequate reserves for these claims at December 31, 2020 and September 30, 2020, respectively. However, the actual value of such claims could be significantly affected if future occurrences and claims differ from these assumptions. At December 31, 2020 and September 30, 2020, the estimated liability for medical claims incurred but not reported was $44,787 and $48,200, respectively. The Company has recorded the excess of funded premiums over estimated claims incurred but not reported of $250,146 and 225,200 as a current asset in the accompanying condensed consolidated balance sheets as of December 31, 2020 and September 30, 2020, respectively.
ConcentrationsConcentrations
Major Customers and Products
In the three-month period ended December 31, 2020, three customers, Sierra Nevada Corporation, Amazon.com, Inc. and Textron Aviation, Inc, accounted for 17%, 12% and 11% of net sales, respectively. In the three-month period ended December 31, 2019, two customers, Pilatus Aircraft Ltd (“Pilatus”) and Empresa Nacional de Aeronautica, accounted for 32% and 22% of net sales, respectively.
Major Suppliers
The Company buys several of its components from sole source suppliers. Although there are a limited number of suppliers of particular components, management believes other suppliers could provide similar components on comparable terms.
For the three-month period ended December 31, 2020, the Company had two suppliers that were individually responsible for greater than 10% of the Company’s total inventory related purchases.
For the three-month period ended December 31, 2019, the Company had one supplier that was 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 major 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 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.
Recent Accounting PronouncementsRecent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) as modified, which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. ASU 2016-02 will require lessees to recognize most leases on their balance sheets as liabilities, with corresponding “right-of-use” assets and is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption. For income statement recognition purposes, leases will be classified as either a finance or an operating lease without relying upon the bright-line tests under current GAAP. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that we may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. We adopted ASU 2016-02 effective October 1, 2019 using the required modified retrospective approach. See Note 18, “ Lease Recognition ,” to the consolidated financial statements for a discussion of the impact resulting from the adoption of this guidance.
In June 2016, FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument (“ASU 2016-13”). ASU 2016-13 replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for SEC small business filers for fiscal years beginning after December 15, 2022. Management is currently assessing the impact ASU 2016-13 will have on the Company.
In June 2018, the FASB issued ASU 2018-07, “ Stock-based Compensation: Improvements to Nonemployee Share-based Payment Accounting ,” (“ASU 2018-07”) which amends the existing accounting standards for share-based payments to nonemployees. This ASU aligns much of the guidance on measuring and classifying nonemployee awards with that of awards to employees. Under the new guidance, the measurement of nonemployee equity awards is fixed on the grant date. This ASU becomes effective in the first quarter of fiscal year 2019 and early adoption is permitted but no earlier than an entity’s adoption date of Topic 606. Entities will apply the ASU by recognizing a cumulative-effect adjustment to retained earnings as of the beginning of the annual period of adoption. We adopted ASU 2018-07 effective October 1, 2018 and the implementation had no material impact on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “ Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement ,” (“ASU 2018-13”) which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reason for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income. We adopted this update effective October 1, 2020. The adoption of this standard did not have a material impact on our Condensed Consolidated Financial Statements.
As new accounting pronouncements are issued, we will adopt those that are applicable.

Summary of Significant Accoun_3

Summary of Significant Accounting Policies (Tables)3 Months Ended
Dec. 31, 2020
Summary of Significant Accounting Policies
Schedule of financial assets and liabilities accounted for at fair value on a recurring basisFair Value Measurement on December 31, 2020
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
$
4,800,880
$

$

Fair Value Measurement on September 30, 2020
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
$
11,607,293
$

$
Summary of contract assets and contract liabilities balancesContract
Liabilities
September 30, 2020
$
313,365
Amount transferred to receivables from contract assets

Contract asset additions

Performance obligations satisfied during the period that were included in the contract liability balance at the beginning of the period
(278,472)
Increases due to invoicing prior to satisfaction of performance obligations
86,580
December 31, 2020
$
121,473
Schedule of customer service revenue and cost of salesFor the Three Months Ended December 31,
2020
2019
Customer Service Sales
$
815,503
$
1,189,040
Customer Service Cost of Sales
316,637
349,615
Gross Profit
$
498,866
$
839,425

Supplemental Balance Sheet Di_2

Supplemental Balance Sheet Disclosures (Tables)3 Months Ended
Dec. 31, 2020
Supplemental Balance Sheet Disclosures
Schedule of inventoriesDecmber 31,
September 30,
2020
2020
Raw materials
$
3,248,163
$
3,378,246
Work-in-process
663,900
656,382
Finished goods
268,680
256,707
$
4,180,743
$
4,291,335
Schedule of prepaid expenses and other current assetsDecmber 31,
September 30,
2020
2020
Prepaid insurance
$
576,804
$
336,331
Other
274,057
338,778
$
850,861
$
675,109
Schedule of property and equipment, netDecmber 31,
September 30,
2020
2020
Computer equipment
$
2,308,218
$
2,302,978
Corporate airplanes
5,601,039
5,601,039
Furniture and office equipment
1,019,891
1,031,099
Manufacturing facility
5,733,313
5,733,313
Equipment
5,776,906
5,723,355
Land
1,021,245
1,021,245
21,460,612
21,413,029
Less: accumulated depreciation and amortization
(13,304,945)
(13,237,157)
$
8,155,667
$
8,175,872
Schedule of other assetsDecmber 31,
September 30,
2020
2020
Intangible assets, net of accumulated amortization of $603,569 and $583,655 at December 31, 2020 and September 30, 2020, respectively
$
92,937
$
112,851
Operating lease right-of-use asset
24,307
45,126
Other non-current assets
90,849
91,566
$
208,093
$
249,543
Schedule of accrued expensesDecmber 31,
September 30,
2020
2020
Warranty
$
578,172
$
547,743
Salary, benefits and payroll taxes
180,218
483,797
Professional fees
235,661
151,956
Operating lease
24,307
45,126
Other
103,460
133,338
$
1,121,818
$
1,361,960
Schedule of warranty cost and accrual informationThree Months Ending
December 31, 2020
Warranty accrual, beginning of period
$
547,743
Accrued expense
73,866
Warranty cost
(43,437)
Warranty accrual, end of period
$
578,172

Earnings Per Share (Tables)

Earnings Per Share (Tables)3 Months Ended
Dec. 31, 2020
Earnings Per Share
Schedule of earnings per shareThree Months Ended December 31,
2020
2019
Numerator:
Net income
$
240,145
$
327,908
Denominator:
Basic weighted average shares
17,214,384
16,909,036
Dilutive effect of share-based awards
1,903
172,542
Diluted weighted average shares
17,216,287
17,081,578
Earnings per common share:
Basic EPS
$
0.01
$
0.02
Diluted EPS
$
0.01
$
0.02

Lease (Tables)

Lease (Tables)3 Months Ended
Dec. 31, 2020
Lease
Schedule of lease-related assets and liabilities reported in the Consolidated Balance SheetClassification on the Consolidated Balance Sheet on December 31, 2020
Assets
Operating leases
Other assets
$
24,307
Liabilities
Operating leases- current
Accrued expenses
$
24,307
Operating leases – noncurrent
Other liabilities
$
0
Total lease liabilities
$
24,307
Schedule of future minimum lease payments under operating leasesFuture minimum lease payments under operating leases are as follows at December 31, 2020:
Twelve Months
Ending
Operating
December 31, 2021
Leases
$
23,590

Total minimum lease payments
$
23,590
Amount representing interest
718
Present value of minimum lease payments
24,307
Current portion
(24,307)
Long-term portion of lease obligations
$

Summary of Significant Accoun_4

Summary of Significant Accounting Policies (Details)Dec. 10, 2020$ / sharesSep. 04, 2020$ / sharesJan. 01, 2018Dec. 22, 2017Dec. 31, 2020USD ($)segmentDec. 31, 2019USD ($)Jun. 30, 2020USD ($)Sep. 30, 2020USD ($)Dec. 31, 2017USD ($)Sep. 30, 2019USD ($)
Number of business segments
Number of business segments in which the entity operates | segment1
Long-Lived Assets
Impairment charges $ 0 $ 0
Contract Balances
Balance at beginning of the period (contract liabilities)313,365 313,365 $ 313,365 $ 313,365
Performance obligations satisfied during the period that were included in the contract liability balance at the beginning of the period(278,472)
Increases due to invoicing prior to satisfaction of performance obligations86,580
Balance at end of the period (contract liabilities)121,473 $ 121,473 313,365
Customer Service Revenue
Customer Service Cost of Sales2,303,829 1,909,781
Gross profit $ 2,565,823 2,601,647
Income Taxes
U.S. Federal statutory tax rate (as a percent)21.00%34.00%21.00%
Net operating losses (as a percent)80.00%
Deferred income tax expense $ 321,038
Engineering Development
Percentage of employees who were engineers engaged in various engineering development projects21.00%
Warranty
Length of warranty period24 months
Self-Insurance Reserves
Estimated liability for medical claims incurred but not reported $ 44,787 48,200
Excess of funded premiums over estimated claims incurred but not reported250,146 225,200
Restricted Cash
Cash dividends declared per share | $ / shares $ 0.50 $ 0.65
Total cash dividend payment8,600,000 11,200,000
Cash and cash equivalents5,608,255 12,603,967
Restricted cash11,180,900
Total cash and cash equivalents and restricted cash5,608,255 22,158,756 $ 23,784,867 $ 22,416,830
Customer Service
Customer Service Revenue
Customer Service Sales815,503 1,189,040
Customer Service Cost of Sales316,637 349,615
Gross profit $ 498,866 $ 839,425
Property and equipment except manufacturing facility and the corporate airplane | Minimum
Number of business segments
Estimated useful lives3 years
Property and equipment except manufacturing facility and the corporate airplane | Maximum
Number of business segments
Estimated useful lives7 years
Manufacturing facility
Number of business segments
Estimated useful lives39 years
Corporate airplanes
Number of business segments
Estimated useful lives10 years

Summary of Significant Accoun_5

Summary of Significant Accounting Policies - Impact of COVID-19 (Details) - COVID 191 Months Ended
Mar. 31, 2020USD ($)
Unusual or Infrequent Item, or Both [Line Items]
Net operating loss $ 1,500,000
Alternate minimum tax16,000
Cash impact of the NOL carryback309,412
R&D
Unusual or Infrequent Item, or Both [Line Items]
Tax Credit carryforwards $ 196,000

Summary of Significant Accoun_6

Summary of Significant Accounting Policies - Fair Value (Details) - USD ($)Dec. 31, 2020Sep. 30, 2020
Fair value on a recurring basis | Quoted Price in Active Markets for Identical Assets (Level 1) | Money market funds
Assets
Cash and cash equivalents $ 4,800,880 $ 11,607,293

Summary of Significant Accoun_7

Summary of Significant Accounting Policies - Revenue Recognition (Details) - USD ($)3 Months Ended
Dec. 31, 2020Dec. 31, 2019
Revenue, remaining performance obligations
Revenue, Remaining Performance Obligation, Optional Exemption, Performance Obligation [true false]true
Percentage of revenue from products to customer100.00%99.60%
Remaining performance obligations $ 4,187,271
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2020-01-01
Revenue, remaining performance obligations
Revenue, Remaining Performance Obligation,Expected Timing of Satisfaction, Period12 months

Summary of Significant Accoun_8

Summary of Significant Accounting Policies - Concentration Risk (Details)3 Months Ended
Dec. 31, 2020customeritemDec. 31, 2019customeritem
Concentration of Credit Risk
Number of banks for maintenance of cash balances2
Net sales | Major Customers and Products
Concentrations
Number of major customers | customer3 2
Net sales | Major Customers and Products | Sierra Nevada Corporation
Concentrations
Concentration of risk (as a percent)17.00%
Net sales | Major Customers and Products | Amazon.con, Inc
Concentrations
Concentration of risk (as a percent)12.00%
Net sales | Major Customers and Products | Textron Aviation, Inc
Concentrations
Concentration of risk (as a percent)11.00%
Net sales | Major Customers and Products | Pilatus Aircraft Ltd ("Pilatus")
Concentrations
Concentration of risk (as a percent)32.00%
Net sales | Major Customers and Products | Empresa Nacional de Aeronautica
Concentrations
Concentration of risk (as a percent)22.00%
Inventory | Major Suppliers
Concentrations
Concentration of risk (as a percent)10.00%10.00%
Number of major suppliers2 1

Summary of Significant Accoun_9

Summary of Significant Accounting Policies - New Accounting Pronouncements (Details) - USD ($)Dec. 31, 2020Sep. 30, 2020
Summary of Significant Accounting Policies
Operating lease right-of-use asset $ 24,307 $ 45,126
Operating lease liabilities $ 24,307

Supplemental Balance Sheet Di_3

Supplemental Balance Sheet Disclosures - Inventories and Prepaid expenses and other current assets (Details) - USD ($)Dec. 31, 2020Sep. 30, 2020
Inventory Valuation
Raw materials $ 3,248,163 $ 3,378,246
Work-in-process663,900 656,382
Finished goods268,680 256,707
Inventories4,180,743 4,291,335
Prepaid expenses and other current assets
Prepaid insurance576,804 336,331
Other274,057 338,778
Total prepaid expenses and other current assets $ 850,861 $ 675,109

Supplemental Balance Sheet Di_4

Supplemental Balance Sheet Disclosures - Property and Equipment (Details)3 Months Ended
Dec. 31, 2020USD ($)aircraftDec. 31, 2019USD ($)Sep. 30, 2020USD ($)
Property and equipment
Property and equipment, gross $ 21,460,612 $ 21,413,029
Less: accumulated depreciation and amortization(13,304,945)(13,237,157)
Property and equipment, net8,155,667 8,175,872
Depreciation and amortization for property and equipment93,051 $ 96,644
Other assets
Intangible assets, net of accumulated amortization of $583,655 at September 30, 2020 and $551,037 at September 30, 201992,937 112,851
Operating lease right-of-use asset24,307 45,126
Other non-current assets90,849 91,566
Total other assets208,093 249,543
Accumulated amortization of intangible assets603,569 583,655
Impairment charges0 0
Intangible asset amortization expense19,914 4,800
Prepaid software licenses15,548 16,266
Computer equipment
Property and equipment
Property and equipment, gross2,308,218 2,302,978
Corporate airplanes
Property and equipment
Property and equipment, gross $ 5,601,039 5,601,039
Number of airplanes depreciated | aircraft2
Pilatus PC-12
Property and equipment
Number of airplanes depreciated | aircraft1
Furniture and office equipment
Property and equipment
Property and equipment, gross $ 1,019,891 1,031,099
Manufacturing facility
Property and equipment
Property and equipment, gross5,733,313 5,733,313
Equipment
Property and equipment
Property and equipment, gross5,776,906 5,723,355
Land
Property and equipment
Property and equipment, gross1,021,245 $ 1,021,245
Prepaid software licenses
Other assets
Intangible asset amortization expense $ 717 $ 2,691

Supplemental Balance Sheet Di_5

Supplemental Balance Sheet Disclosures - Accrued Expenses (Details) - USD ($)3 Months Ended
Dec. 31, 2020Dec. 31, 2020Sep. 30, 2020
Accrued expenses
Warranty $ 578,172 $ 578,172 $ 547,743
Salary, benefits and payroll taxes180,218 483,797
Professional fees235,661 151,956
Operating lease24,307 45,126
Other103,460 133,338
Total accrued expenses $ 1,121,818 $ 1,361,960
Warranty cost and accrual information
Warranty accrual, beginning of period547,743
Accrued expense73,866
Warranty cost(43,437)
Warranty accrual, end of period $ 578,172

Income Taxes (Details)

Income Taxes (Details) - USD ($)3 Months Ended
Dec. 31, 2020Dec. 31, 2019
Income Taxes
Net operating losses (as a percent)80.00%
Income tax expense $ 9,497 $ 0
Effective tax rate benefit (as a percent)3.80%0.00%
Change in valuation allowance $ 40,000 $ 55,000

Income Taxes - Impact of COVID-

Income Taxes - Impact of COVID-19 (Details) - COVID 191 Months Ended
Mar. 31, 2020USD ($)
Unusual or Infrequent Item, or Both [Line Items]
Net operating loss $ 1,500,000
Alternate minimum tax16,000
Cash impact of the NOL carryback309,412
R&D
Unusual or Infrequent Item, or Both [Line Items]
Tax Credit carryforwards $ 196,000

Shareholders' Equity and Shar_2

Shareholders' Equity and Share-Based Payments (Details)3 Months Ended
Dec. 31, 2020USD ($)plansharesDec. 31, 2019USD ($)Sep. 30, 2020sharesAug. 27, 2020sharesJun. 30, 2020shares
Share-Based compensation
Common stock, shares authorized | shares75,000,000 75,000,000
Preferred stock, shares authorized | shares10,000,000 10,000,000
Share-based compensation expense $ 45,591 $ 0
Number of share-based compensation plans maintained by the company | plan2
2009 Plan
Share-Based compensation
Share-based compensation expense $ 0 0
Number of shares of common stock reserved for awards | shares1,200,000
Unrecognized compensation cost, related to non-vested stock options0
2009 Plan | Employee
Share-Based compensation
Share-based compensation expense0 0
2009 Plan | Non-employee director
Share-Based compensation
Share-based compensation expense $ 0 0
2009 Plan | Performance-based Award | Employee
Share-Based compensation
Number of shares of common stock reserved for awards | shares300,000
2019 Plan
Share-Based compensation
Common stock, shares authorized | shares139,691
Share-based compensation expense $ 45,591 0
Number of share-based compensation plans maintained by the company716,635
Number of shares of common stock reserved for awards | shares750,000
Unrecognized compensation cost, related to non-vested stock options $ 299,772
2019 Plan | Employee
Share-Based compensation
Share-based compensation expense $ 45,591 0
Number of shares of common stock reserved for awards | shares300,000
2019 Plan | Chief Financial Officer
Share-Based compensation
Number of shares of common stock available for awards under the plan | shares100,000
2019 Plan | Non-employee director
Share-Based compensation
Share-based compensation expense $ 0 $ 0

Earnings Per Share (Details)

Earnings Per Share (Details) - USD ($)3 Months Ended
Dec. 31, 2020Dec. 31, 2019
Numerator:
Net income $ 240,145 $ 327,908
Denominator:
Basic weighted average shares17,214,384 16,909,036
Dilutive effect of share-based awards1,903 172,542
Diluted weighted average shares17,216,287 17,081,578
Earnings per common share:
Basic EPS (in dollars per share) $ 0.01 $ 0.02
Diluted EPS (in dollars per share) $ 0.01 $ 0.02
Options to purchase common stock outstanding (in shares)104,500 550,834
Diluted weighted-average shares outstanding excluded from computation of diluted EPS (in shares)100,000 0

Lease - (Details)

Lease - (Details) - USD ($)3 Months Ended
Dec. 31, 2020Sep. 30, 2020
Lease
Operating lease right-of-use assets $ 24,307 $ 45,126
Operating lease liabilities24,307 $ 45,126
Operating lease liabilities non-current0
Total lease liabilities $ 24,307
Operating Lease, Right-of-Use Asset, Statement of Financial Position [Extensible List]Other Assets, Noncurrent
Operating Lease, Liability, Current, Statement of Financial Position [Extensible List]Accrued Liabilities, Current
Operating Lease, Liability, Noncurrent, Statement of Financial Position [Extensible List]us-gaap:OtherLiabilitiesNoncurrent
Operating leases expenses $ 21,952
Operating Lease, Payments $ 21,430
Weighted average remaining lease term4 months 24 days
Weighted average discount rate5.00%

Lease - Future minimum lease pa

Lease - Future minimum lease payments (Details) - USD ($)Dec. 31, 2020Sep. 30, 2020
Future minimum lease payments under operating leases
2021 $ 23,590
Total minimum lease payments23,590
Amount representing interest718
Total lease liabilities24,307
Current portion(24,307) $ (45,126)
Long-term portion of lease obligations $ 0