Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Objective
The following discussion provides an analysis of the Company’s financial condition, cash flows and results of operations from management’s perspective and should be read in conjunction with “Selected Consolidated Financial Data” and the consolidated financial statements and related notes included in this Annual Report on Form 10-K. Our objective is to also provide discussion of events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or of future financial condition and to offer information that provides understanding of our financial condition, cash flows and results of operations.
Overview
The Company 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 OEMs. The Company supplies integrated FMS, FPDS, FPDS with autothrottle, air data equipment, integrated standby units, integrated standby units with autothrottle and advanced GPS receivers that enable reduced carbon footprint navigation, communication and navigation products and inertial reference units.
The Company has continued to position itself as a system integrator, which provides the Company with the capability and potential to generate more substantive orders over a broader product base. This strategy, as both a manufacturer and integrator, has positioned the company to deliver cost-effective solutions for the general aviation, commercial air transport, the DoD/governmental and foreign military markets. This approach, combined with the Company’s deep industry experience across OEMs and platforms is designed to enable the Company to develop high-quality products and systems, to reduce product time to market and to achieve cost advantages over products offered by its competitors.
The Company sells to both the OEM and the retrofit markets. Customers include various OEMs, commercial air transport carriers and corporate/general aviation companies, the DoD and its commercial contractors, aircraft operators, aircraft modification centers, government agencies and foreign militaries. Occasionally, the Company sells its products directly to the DoD; however, the Company sells its products primarily to commercial customers for end use in DoD programs. Sales to defense contractors are generally made on commercial terms, although some of the termination and other provisions of government contracts are applicable to these contracts. The Company’s retrofit projects are generally pursuant to either a direct contract with a customer or a subcontract with a general contractor to a customer (including government agencies).
In June 2023, the Company entered into an agreement with Honeywell (“The June 2023 Honeywell Agreement”) pursuant to which Honeywell sold, assigned or licensed certain assets related to its inertial, communication and navigation product lines, including a sale of certain inventory, equipment and customer-related documents, an assignment of certain contracts and a grant of exclusive and non-exclusive licenses to use certain Honeywell intellectual property related to its inertial, communication and navigation product lines to repair, overhaul, manufacture sell, import, export and distribute certain products to the Company for cash consideration of $35.9 million.
In July 2024, the Company entered into an exclusive license agreement and acquired additional key assets for certain communication and navigation product lines from Honeywell (the “July 2024 Honeywell Asset Acquisition”). This transaction complemented the previous Honeywell license and asset acquisition completed in June 2023. Total consideration was $4.2 million in cash.
On September 27, 2024, the Company entered into a further agreement with Honeywell (the “September 2024 Honeywell Agreement”), pursuant to which Honeywell sold, assigned or licensed certain assets related to its various generations of military display generators and flight control computers, including a sale of certain inventory, equipment and customer-related documents; an assignment of certain contracts; and a grant of exclusive and non-exclusive licenses to use certain Honeywell intellectual property related to its various generations of military display generators and flight control computers to repair, overhaul, manufacture sell, import, export and distribute certain products to the Company for consideration of $14.2 million in cash.
Following the acquisition of Honeywell’s military display generators and flight control computers business, Honeywell has continued to manufacture these products and maintain related inventory at its facilities under the September 2024 Honeywell Agreement. Revenue, and costs from this production are attributed to and reported by the Company; however, the Company relies on Honeywell
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for access to the operational and financial data needed to prepare its financial statements. The Company has limited ability to oversee the operations or verify the data received from Honeywell, making it difficult to predict revenues and gross margins. Over the coming months, the production of the military display generators and flight control computers business will cease at Honeywell facilities and transition to the Company’s facilities. During this transition process, production will be temporarily halted while the Company ramps up its production and inventory at its facilities. In anticipation of the transition, Honeywell is expected to accelerate its production of these products in the short term. We anticipate this will lead to a spike in revenues in the short term followed by a temporary dip in revenues before revenues are normalized.
As a result, the Company anticipates revenues related to the September 2024 Honeywell Agreement will continue to fluctuate significantly over the next few quarters. The transition from Honeywell to Company facilities will involve certain risks that may impact operational performance and reported results. While the Company cannot assure that the transition will not adversely affect operations and reported results, it is committed to closely monitoring the integration process. The Company remains confident in the long-term benefits of the Honeywell acquisitions.
Cost of sales related to product and service sales comprises materials, components and third-party avionics purchased from suppliers, direct labor and overhead costs. Many of the components are standard, although certain parts are manufactured to meet the Company’s specifications. The overhead portion of Cost of sales are primarily comprised of salaries and benefits, building occupancy costs, supplies and outside service costs related to production, purchasing, material control and quality control. Cost of sales also includes warranty costs.
Cost of sales related to EDC sales comprises engineering labor, consulting services and other costs associated with specific design and development projects. These costs are incurred pursuant to contractual arrangements and are accounted for typically as contract costs within Cost of sales, with reimbursement accounted for as a sale in accordance with the percentage-of-completion method or completed contract method of accounting. Company funded R&D expenditures relate to internally funded efforts for the development of new products and the improvement of existing products. These costs are expensed as incurred and reported as R&D expenses. The Company intends to continue investing in the development of new products that complement current product offerings and to expense associated R&D costs as they are incurred.
Selling, general and administrative (“SG&A”) expenses consist of sales, marketing, business development, professional services, salaries and benefits for executive and administrative personnel, facility costs, recruiting, legal, accounting and other general corporate expenses.
The Company sells its products to agencies of the United States and foreign governments, aircraft operators, aircraft modification centers and OEMs. Customers have been and may continue to be affected by changes in economic conditions both in the United States and abroad. Such changes may cause customers to curtail or delay their spending on both new and existing aircraft. Factors that can impact general economic conditions and the level of spending by customers include, but are not limited to, general levels of consumer spending, increases in fuel and energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence, inflation, public health crises and pandemics and other macroeconomic factors that affect spending behavior. Furthermore, spending by government agencies may be reduced in the future. If customers curtail or delay their spending or are forced to declare bankruptcy or liquidate their operations because of adverse economic conditions, the Company’s revenues and results of operations would be affected adversely. For example, in the fiscal year ended September 30, 2025, changes in U.S. administrative tariff policy, have led to increases in tariffs for imported goods. Thus far, the impact to Company has been nominal.
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Results of Operations
The following table sets forth statements of operations data expressed as a percentage of total Net sales for the fiscal years indicated:
Twelve Months Ending September 30,
2025
2024
2023
Net sales:
Product
64.2
%
51.4
%
64.9
%
Services
35.8
%
48.6
%
35.1
%
Total net sales
100.0
%
100.0
%
100.0
%
Cost of sales:
Product
32.6
%
22.4
%
27.9
%
Services
19.3
%
22.6
%
10.9
%
Total cost of sales
51.9
%
45.0
%
38.7
%
Gross profit
48.1
%
55.0
%
61.3
%
Operating expenses:
Research and development
4.7
%
8.8
%
9.0
%
Selling, general and administrative
19.4
%
25.6
%
31.1
%
Total operating expenses
24.1
%
34.4
%
40.1
%
Operating income
24.0
%
20.6
%
21.2
%
Interest expense
(2.0)
%
(2.0)
%
(1.1)
%
Interest income
0.0
%
0.3
%
1.5
%
Other income
1.9
%
—
%
0.4
%
Income before income taxes
23.8
%
18.9
%
22.0
%
Income tax expense
5.1
%
9.2
%
4.6
%
Net income
18.7
%
9.7
%
17.4
%
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Fiscal Year Ended September 30, 2025 Compared to Fiscal Year Ended September 30, 2024
Historically, the Company presented Customer service and Engineering and development contracts Net Sales and Cost of sales separately on the Consolidated Statements of Operations. For the fiscal year ended September 30, 2024, the Company has aggregated these items into one category, “Services” and reclassified Customer service and Engineering and development contracts revenues as well as Cost of sales to conform the presentation of the Consolidated Statements of Operations for fiscal year ended September 30, 2023. Consequently, Services revenues and cost of sales primarily comprise Customer Service, EDC and Royalties. See Footnote 3. Summary of Significant Accounting Policies, (“Reclassifications ”) for additional information.
Net sales . Net sales in fiscal year 2025 increased $37.1 million, or 78.6%, to $84.3 million from $47.2 million in fiscal year 2024. Net sales of $84.3 million for fiscal year 2025 comprised $53.3 million in organic Net sales and $31.0 million in Net sales related to the September 2024 Honeywell Agreement. The increase in Net sales was driven primarily by a $29.8 million, or 122.7 %, increase in Product sales derived from the September 2024 Honeywell Agreement, an increase in commercial air transport sales of $10.5 million, partially offset by a decrease of $3.7 million in sales in business aviation. Services sales for fiscal year 2025 increased $7.3 million, or 31.8%, compared to Services sales for fiscal year 2024 of $22.9 million. The increase in Services sales primarily reflects increases in engineering development services of $3.4 million and an increase in customer service sales from the product lines acquired from Honeywell of $1.4 million, partially offset by a decrease in legacy customer service revenue of $0.6 million.
Cost of sales . Cost of sales was $43.8 million, or 51.9 % of Net sales, for fiscal year 2025 compared to $21.2 million, or 45.0 % of Net sales, for fiscal year 2024. The increase in Cost of sales was primarily the result of a significant increase in overall sales volume. The Company’s overall gross margin for fiscal year 2025 was 48.1 % compared to 55.0% for fiscal year 2024. The decrease in overall gross margin percentage for fiscal year 2025 compared to fiscal year 2024, was primarily the result of unfavorable changes in product mix, increased depreciation and cost inefficiencies due to hiring and training of additional personnel and other integration costs associated with the September 2024 Honeywell Agreement. The factors that have affected and will continue to affect the Company’s gross margin include depreciation resulting from recent product line acquisitions and the increased proportion of military sales in the Company’s sales mix.
Research and development . R&D expense decreased $0.1 million, or 3.5 %, to $4.0 million for fiscal year 2025 from $4.1 million for fiscal year 2024. As a percentage of net sales, R&D expenses decreased to 4.7% of net sales for fiscal year 2025 from 8.8% of net sales for fiscal year, 2024. The decrease in R&D expenses as a percentage of revenues in the quarter was primarily the result of additional revenues for fiscal year 2025 compared to the same period last year. In fiscal 2025 $2.6 million of R&D expense was recharacterized as Cost of sales related to the EDC sales as compared to $1.3 million in fiscal year 2024, which was offset by $1.2 million in additional engineering staffing to support the Company’s development programs.
Selling, general, and administrative.
SG&A expenses increased $4.3 million or 35.8 %, to $16.4 million for fiscal year 2025 from $12.1 million for fiscal year 2024. The increase in SG&A expense for fiscal year 2025 was primarily the result of increases in professional services fees and other related fees of $0.8 million primarily due to corporate initiatives. In addition, the Company incurred increased depreciation and amortization expenses of $1.1 million related to the customer relationships and intangible assets resulting from the combined acquisitions and $2.0 million due to employee related expenses and benefits resulting from increased headcount, and $0.4 million increase in other operating expenses. As a percentage of Net sales, SG&A expenses were 19.4% for fiscal year 2025 compared to 25.6% for fiscal year 2024.
Interest income. Interest income was $0.1 million for fiscal year 2025 and fiscal 2024.
Other income. Other income was $1.5 million in fiscal year 2025, which was primarily from monies received of $1.9 million with respect to the Employee Retention Tax Credits (“ERTC”), offset by a $0.4 million one-time ERTC related settlement fee. The Company did not have any other income for fiscal year 2024.
Income taxes. Income tax expense was $4.3 million in fiscal year 2025 as compared to income tax expense of $1.9 million in fiscal year 2024. The effective tax rate in fiscal year 2025 was 21.7% as compared to 20.9% in fiscal year 2024. The increase in income tax expense was primarily due to an increase in earnings in fiscal year 2025.
Net income. As a result of the factors described above, the Company’s net income in fiscal year 2025 was $15.6 million compared to net income of $7.0 million in fiscal year 2024. On a fully diluted basis, net income per share was $0.88 in fiscal year 2025, compared to a net income of $0.40 per share in fiscal year 2024.
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Fiscal Year Ended September 30, 2024 Compared to Fiscal Year Ended September 30, 2023
Net sales . Net sales in fiscal year 2024 increased $12.4 million, or 36.0%, to $47.2 million from $34.8 million in fiscal year 2023. The increase in Net sales was driven by a 7% increase or $1.7 million in product sales. The increase in product sales was related to increases in business aviation sales of $1.5 million and an increase of $0.5 million in defense sales, offset by a decline in commercial air transport sales of $0.3 million. The increase in business aviation sales was driven by increase in demand to support aircraft production. The increase in defense sales was primarily driven by increased market demand for our products. The decrease in commercial air transport was primarily due to the decline that occurred during the first half of fiscal year 2024. We began to experience a recovery in commercial air transport demand during the second half of 2024. Services sales in fiscal year 2024 increased $10.7 million, or 87.6%, compared to fiscal year 2023. The increase in service sales primarily reflects customer service sales of $9.7 million due to sales from the product lines acquired from Honeywell, which included a $1.7 million true-up payment from Honeywell for services performed by third parties, primarily offset by a $0.3 million decrease in legacy customer service.
Cost of sales . Cost of sales was $21.3 million, or 45.0% of Net sales, in fiscal year 2024 compared to $13.5 million, or 38.7% of Net sales, in fiscal year 2023. The increase in Cost of sales was primarily the result of an increase in Services sales volume. The Company’s overall gross margin in fiscal year 2024 was 55.0% compared to 61.3% in fiscal year 2023. The decrease in overall gross margin percentage for fiscal year 2024 is primarily the result of changes in product mix, increased depreciation and cost inefficiencies due to hiring and training of additional personnel and other integration costs.
Research and development . R&D expenses were $4.1 million in fiscal year 2024 and $3.1 million in fiscal year 2023. The increase in R&D expense was due to higher salaries and benefits due to higher headcount. As a percentage of Net sales, R&D expense decreased slightly to 8.8% of Net sales for fiscal year 2024 compared to 9.0% for fiscal year 2023.
Selling, general, and administrative. SG&A expenses increased $1.3 million or 11.9%, to $12.1 million from $10.8 million in fiscal year 2023. The increase in SG&A expense in fiscal year 2024 was primarily the result of increases in consulting and legal fees of $0.9 million primarily due to acquisition related expenses and increased costs of $0.6 million as a result of the recruitment of a new CFO and other corporate initiatives. In addition, the Company incurred amortization expense of $1.2 million related to the customer relationships intangible asset resulting from the combined acquisitions. These increases were partially offset by a $0.2 million gain from the sale of the Company’s King Air aircraft. As a percentage of Net sales, selling, general and administrative expenses were 25.6% in fiscal year 2024 compared to 31.1% for fiscal year 2023.
Interest income. Interest income of $0.1 million in fiscal year 2024 decreased by $0.4 million as compared to interest income in fiscal year 2023 of $0.5 million. The decrease in interest income was primarily the result of the decrease in the average cash balance in fiscal year 2024 and a general decrease in interest rates as compared to fiscal year 2023.
Other income. The Company did not have any other income for fiscal year 2024. Other income was $0.2 million in fiscal year 2023.
Income taxes. Income tax expense was $1.9. million in fiscal year 2024 as compared to income tax expense of $1.6 million in fiscal year 2023. The effective tax rate in fiscal year 2024 was 20.9% as compared to 21.1% in fiscal year 2023. The increase in income tax expense was primarily due to an increase in earnings in fiscal year 2024.
Net income. As a result of the factors described above, the Company’s net income in fiscal year 2024 was $7.0 million compared to net income of $6.0 million in fiscal year 2023. On a fully diluted basis, net income per share was $0.40 in fiscal year 2024, compared to a net income of $0.35 per share in fiscal year 2023.
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Liquidity and Capital Resources
Sources of Liquidity
The following table highlights key financial measurements of the Company:
As of
As of
September 30,
September 30,
2025
2024
Cash and cash equivalents
$
2,693,595
$
538,977
Accounts receivable
$
12,956,476
$
12,612,482
Current assets
$
50,727,300
$
34,685,698
Current liabilities
$
16,661,109
$
7,265,254
Contract liability
$
2,481,929
$
340,481
Other non-current liabilities
$
22,096,502
$
28,478,352
Quick ratio (1)
0.94
1.81
Current ratio (2)
3.04
4.77
Twelve Months Ended September 30,
2025
2024
2023
Cash flow activities:
Net cash provided by operating activities
$
13,303,318
$
5,796,222
$
2,096,174
Net cash (used in) investing activities
(6,512,106)
(16,881,440)
(36,158,373)
Net cash (used in) provided by financing activities
(4,636,594)
8,527,002
19,908,846
(1) Calculated as: the sum of cash and cash equivalents plus accounts receivable, net, divided by current liabilities
(2) Calculated as: current assets divided by current liabilities
The Company’s principal source of liquidity has been cash flows from current year operations and cash accumulated from prior years’ operations, supplemented with our revolving credit facility. Cash is used principally to finance inventory, accounts receivable, contract assets, payroll, debt service and acquisitions, as well as the Company’s known contractual and other commitments (including those described in footnote 19, “ Lease Recognition ” to the financial statements contained in this Annual Report on Form 10-K. The Company’s existing cash balances and anticipated cash flows from operations, together with borrowings under our revolving credit facility, are expected to be adequate to satisfy the Company’s liquidity needs for at least the next 12 months. Apart from what has been disclosed in this Management’s Discussion and Analysis, management is not aware of any trends, events or uncertainties that have had or are likely to have a material impact on our liquidity, financial condition and capital resources.
The declaration and payment of any dividend in the future will be at the discretion of the Company’s Board of Directors.
2025 Credit Agreement
On July 18, 2025, the Company, its wholly-owned subsidiary Innovative Solutions and Support, LLC (“Borrower”) and certain domestic subsidiaries entered into a Credit Agreement (the “2025 Credit Agreement”) with J.P. Morgan Chase Bank, N.A. (the “Bank”) and the other lender parties thereto, which Credit Agreement provides for the Bank to extend to the Borrower credit facilities in an aggregate principal amount of up to $100.0 million (the “JPM Facility”), consisting of the following:
1) a $25,000,000 initial term loan facility (the “Initial Term Loan”);
2) a $30,000,000 revolving credit facility (the “Revolving Facility”); and
3) a $45,000,000 delayed draw term loan facility (the “Delayed Draw Term Loan”).
The JPM Facility replaced the A&R Revolving Line of Credit with PNC described below under the heading “Prior Debt Facility.”
See footnote 20. Loan Agreement, for additional disclosures related the 2025 Credit Agreement.
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Stifel Sales Agreement
On September 22, 2023, the Company entered into an at-the-market equity offering Sales Agreement (the “ATM Sales Agreement”) with Stifel, Nicolaus & Company, Incorporated (the “Sales Agent”), pursuant to which the Company may offer and sell from time to time through the Sales Agent up to $40 million of shares of its common stock. The shares will be offered and sold pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-267595), which was declared effective by the SEC on October 14, 2022. The Company filed a prospectus supplement, dated September 22, 2023, with the SEC in connection with the offer and sale of the shares. Subject to the terms and conditions of the ATM Sales Agreement, the Sales Agent will use commercially reasonable efforts to sell shares of the Company’s common stock from time to time, based upon the Company’s instructions. The Company is not obligated to sell any shares under the ATM Sales Agreement, and the Company or the Sales Agent may at any time suspend solicitation and offers under the ATM Sales Agreement or terminate the ATM Sales Agreement. The Company has provided the Sales Agent with customary indemnification rights, and the Sales Agent will be entitled to compensation for its services of up to 3.0% of the gross sales price per share of the shares of the Company’s common stock sold through the Sales Agent. Sales of the shares of the Company’s common stock, if any, under the ATM Sales Agreement may be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act, including sales made directly on or through Nasdaq or any other existing trading market for the Company’s common stock, in negotiated transactions at market prices prevailing at the time of sale or at prices related to such prevailing market prices and/or any other method permitted by law.
During the fiscal years ended September 30, 2024 and September 30,2025, we did not sell any shares of common stock under the ATM Sales Agreement.
Prior Debt Facility
In connection with the June 2023 Honeywell Agreement, the Company entered into a term loan with PNC Bank for $20.0 million to fund a portion of the June 2023 Honeywell Agreement. In addition to providing for the Term Loan, the Loan Agreement, together with a corresponding Line of Credit Note in favor of PNC, executed on May 11, 2023, provided for a senior secured Revolving Line of Credit in an aggregate principal amount of $10,000,000, with an expiration date of May 11, 2028.
On December 19, 2023, the Company and PNC entered into the Restated Loan Amendment and the corresponding Restated Line of Credit Note and Restated Rider, to increase the aggregate principal amount available under the Company’s senior secured revolving line of credit from $10 million to $30 million and extend the maturity date until December 19, 2028. The proceeds of the Restated Line of Credit Note was used for working capital and other general corporate purposes, for acquisitions as permitted under the Restated Loan Amendments and to pay off and close the loan evidenced by that certain Term Note executed in favor of PNC, dated June 28, 2023, which provided for a senior secured term loan in aggregate principal amount of $20 million, with a maturity date of June 28, 2028.
On September 30, 2024, in connection with the July 2024 Honeywell Asset Acquisition and the September 2024 Honeywell Agreement, the Company entered into the Loan 2024 Amendment with PNC, which amended certain terms of the Loan Agreement to increase the line of credit with PNC. Concurrently with the Loan 2024 Amendment, the Company entered into (i) A&R Revolving Line of Credit Note, and (ii) A&R Rider. The A&R Revolving Line of Credit Note provided for a senior secured revolving line of credit in an aggregate principal amount of $35 million, with an expiration date of December 19, 2028 (the “Revolving Line of Credit”). The interest rate applicable to loans outstanding under the Revolving Line of Credit was a rate per annum equal to the sum of (A) Daily SOFR (as defined in the A&R Revolving Line of Credit Note) plus (B) an unadjusted spread of the Applicable SOFR Margin plus (C) a SOFR adjustment of ten basis points. The Applicable SOFR Margin ranges from 1.5% to 2.5% depending on the Company’s funded debt to EBITDA ratio, as defined in the A&R Revolving Line of Credit Note. The A&R Rider provided for how PNC will make advances to the Company under the Revolving Line of Credit.
On July 18th, 2025, the outstanding balance drawn on the A&R Revolving Line of Credit of $25,342,529 was fully paid.
Future Funding Requirements
The Company’s existing cash balances, anticipated cash flows from operations and current banking facility are expected to be adequate to satisfy the Company’s liquidity needs for at least the next 12 months.
Apart from what has been disclosed above, management is not aware of any trends, events or uncertainties that have had or are likely to have a material impact on our liquidity, financial condition and capital resources.
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The Company did not pay cash dividends in fiscal years 2023, 2024 or 2025. The Company intends to retain future earnings, if any, to finance the development and growth of its business and does not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of any dividend in the future will be at the discretion of the Company’s Board of Directors and will depend on then-existing conditions, including our operating results, financial condition, business prospects and other factors the Board may deem relevant.
Operating Activities
The Company generated $13.3 million of cash from operating activities during fiscal year 2025, as compared to cash generated of $5.8 million during fiscal year 2024. The cash generated by operating activities for the year ended September 30, 2025 was primarily generated by net income of $15.6 million, including $1.5 million of net ERTC funds received in fiscal year 2025, non-cash compensation expenses for traditional and market-based stock options and traditional and market-based stock awards of $0.3 million and $2.0 million, respectively, and depreciation and amortization expense of $3.8 million. Changes in certain other working capital accounts drove the remainder of the increase for fiscal year 2025.
The Company generated $5.8 million of cash from operating activities during fiscal year 2024, as compared to cash generated of $2.1 million during fiscal year 2023. The cash generated by operating activities for the year ended September 30, 2024 was primarily generated by net income of $7.0 million, an increase in non-cash compensation expenses for stock options and stock awards of $0.3 million and $0.7 million, respectively, and depreciation and amortization expense of $2.1 million. Changes in certain other working capital accounts drove the remainder of the increase for fiscal year 2024.
Investing Activities
Cash used in investing activities was $6.5 million for the fiscal year ended September 30, 2025 and was primarily due to expenditures related to additions and improvements in the Company’s facilities, purchases of equipment and computer software investment related to the Company’s ERP (“Enterprise Resource Planning”) implementation.
Cash used in investing activities was $16.8 million for the fiscal year ended September 30, 2024 and was primarily due to the $14.2 million acquisition of various generations of military display generators and flight control computers in September 2024 and the $4.2 million acquisitions of certain additional assets related to the Company’s communication and navigation product lines in July of 2024. In addition, the Company spent $0.7 million for the purchases of property and equipment, partially offset by proceeds of $2.2 million from the sale of the Company’s King Air aircraft. The Company plans to continue investing in capital equipment to support engineering development efforts and operations.
Financing Activities
Net cash used in financing activities was $4.6 million for the fiscal year ended September 30, 2025 and primarily consisted of approximately $27.0 million in borrowings against the 2025 Initial term loan, partially offset by the payoff of the previous revolving line of credit under the PNC Facility of approximately $25.3 million, the payoff of $2.0 million under the Revolving facility, a $0.6 million principal payment on the Initial Term Loan and the payment of approximately $1.0 million in initial borrowing fees.
Net cash provided by financing activities was $8.5 million for the fiscal year ended September 30, 2024 and consisted of $43.8 million in payments against the Company’s line of credit offset by $52.3 million in additional borrowings used to fund the Company’s fiscal year ended September 30, 2024 acquisitions.
Summary
Future capital requirements depend upon numerous factors, including market acceptance of the Company’s products, the timing and rate of expansion of business, acquisitions, joint ventures and other factors. IA has experienced increases in expenditures since its inception and anticipates that increases in expenditures will continue in the foreseeable future. The Company believes that its cash and cash equivalents will provide sufficient capital to fund operations for at least the next twelve months. However, the Company may need to develop and introduce new or enhanced products, respond to competitive pressures, invest in or acquire businesses or technologies, or respond to unanticipated requirements or developments. If sufficient funds are not available, the Company may not be able to introduce new products or compete effectively.
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Inflation
The Company does not believe inflation had a material effect on its financial position or results of operations during the past three years; however, it cannot predict the future effects of inflation, if any.
Environmental, Social and Governance Considerations
We are committed to recruiting, motivating and developing a diversity of talent. We are an equal opportunity employer and a Vietnam Era Veterans’ Readjustment Assistance Act federal contractor. All qualified applicants receive consideration for employment without regard to race, color, religion, sex, sexual orientation, gender identity, national origin, disability status, protected veteran status or any other characteristic protected by law.
The nature of the Company’s business also supports long-term sustainability. Historically, a majority of the Company’s sales have been generated from the retrofit market, in which the Company upgrades existing aircraft and equipment to improve functionality, safety, and regulatory compliance. These retrofit activities extend the useful life of in-service assets and reduce the likelihood that aircraft and related equipment will be retired or scrapped, thereby supporting reuse and waste reduction within the aviation industry. In addition, the Company’s GPS receivers enable more efficient navigation practices that may reduce fuel consumption and associated carbon emissions.
The Company is committed to further advancing its sustainability efforts and intends to strengthen its focus on managing and reducing the environmental impact of its operations. This includes evaluating opportunities to improve energy efficiency, minimize waste, and adopt environmentally responsible practices across its manufacturing and administrative functions.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”). See Part II, Item 8, “Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements,” Note 3, “ Significant Accounting and Reporting Policies ,” for additional information about our significant accounting and reporting policies that require us to make certain judgments and estimates in reporting our operating results and our assets and liabilities. The following paragraphs describe the accounting policies that require significant judgment and estimates due to inherent uncertainty or complexity.
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 accounts for revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 is that an entity recognizes revenue 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:
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1) Identify the contract with a customer
The Company’s contract with its customers typically is in 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. In addition, the Company enters fixed-price contracts, in which the Company agrees to perform the specified work for a pre-determined price. The contractual terms of the fixed-price contracts are usually long-term, however they often contain a termination for convenience clause that results in the Company treating these contracts as short-term under ASC 606. To the extent our actual costs vary from the estimates upon which the price was negotiated, the Company will generate more or less profit or could incur a loss. 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. Payment terms are defined by when payment is typically due. 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) Identify the performance obligations in the contract
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) Determine the transaction price
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.
4) Allocate the transaction price to performance obligations in the contract
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. Historically, the Company has also recognized revenue 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.
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Acquisitions and Investments, and Goodwill and Other Indefinite-Lived Intangible Assets
We allocate the purchase price of acquired entities to the underlying tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values, with any excess recorded as goodwill. The valuations of the acquired assets and liabilities will impact the determination of future operating results. Determining the fair value of assets we acquire and liabilities we assume requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items. We determine the fair values of intangible assets acquired generally in consultation with third-party valuation advisors. Fair value adjustments to the assets and liabilities are recognized and the results of operations of the acquired business are included in our consolidated financial statements from the effective date of the acquisition.
Intangible assets other than goodwill are recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed or exchanged, regardless of the Company’s intent to do so. Goodwill and identifiable intangible assets are recorded at their estimated fair value on the date of acquisition and are reviewed at least annually for impairment based on cash flow projections and fair value estimates.
Inventories
Inventories are stated at the lower of cost or net realizable value. Write-downs for slow-moving and obsolete inventories are provided based on current assessments about future product demand, production requirements for expected usage and usage for the last 12 months. Where we estimate that the net realizable value is below cost or have determined that future demand is lower than current inventory levels based on historical experience, current and projected market demand, current and projected volume trends and other relevant current and projected factors associated with the current economic conditions, a reduction in inventory cost to estimated net realizable value is recorded as a charge included in Cost of sales. Management believes that our estimates of excess and obsolete inventory are reasonable and material changes in future estimates or assumptions used to calculate our estimates are unlikely. However, actual results may differ materially from the estimates and additional provisions may be required in the future.
Business Segments
The Company operates in one business segment as a systems integrator that designs, develops, manufactures, sells and services flight guidance and cockpit display systems for OEMs and retrofit applications. Customers include various OEMs, commercial air transport carriers and corporate/general aviation companies, the DoD and its commercial contractors, aircraft operators, aircraft modification centers, government agencies and foreign militaries. The Company currently derives the majority of its revenues from the sale and service of this equipment and related EDC services. Most of the Company’s sales, operating results and identifiable assets are generated in the United States. In fiscal years ended September 30, 2025, 2024 and 2023 Net sales outside the United States amounted to $16.4 million, $22.8 million and $15.5 million, respectively.