What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-02-13 compared with 2025-08-14 · 100 added, 144 removed, 142 unchanged (63% of the section changed)

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the federal securities laws.

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

These forward-looking statements are based largely on current expectations and projections about future events and trends affecting the business, are not guarantees of future performance, and involve a number of risks, uncertainties and assumptions that are difficult to predict.

In this report, the words “anticipates,” “believes,” “may,” “will,” “estimates,” “continues,” “anticipates,” “intends,” “forecasts,” “expects,” “plans,” “could,” “should,” “would,” “is likely”,” “ projected,” “might,” “potential,” “preliminary,” “provisionally,” and similar expressions, as they relate to the business or to its management, are intended to identify forward-looking statements, but they are not exclusive means of identifying them.

Unless the context otherwise requires, all references herein to “IS&S,” the “Registrant,” the “Company,” “we,” “us” or “our” are to Innovative Solutions and Support, Inc.

Unless the context otherwise requires, all references herein to “IA,” the “Registrant,” the “Company,” “we,” “us” or “our” are to Innovative Solutions and Support, Inc.

and its consolidated subsidiaries.

ThrustSense® and COCKPIT/IP®, among others, are trademarks of the Company.

All other trademarks appearing herein are held by their respective owners.

Subsequent use of the Company’s trademarks in this report may occur without the applicable superscript symbol (® or TM) in order to facilitate the readability of this report and are not a waiver of rights that may be associated with the relevant trademarks.

All forward-looking statements are based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company.

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In evaluating such statements, a number of risks, uncertainties and other factors could cause actual results, performance, financial condition, cash flows, prospects and opportunities to differ materially from those expressed in, or implied by, the forward-looking statements.

These risks, uncertainties and other factors include those set forth in Item 1A (Risk Factors) of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2024 and in Item 1A (Risk Factors) to Part II of this Quarterly Report on Form 10-Q, as well as the following factors:

● market acceptance of the Company’s ThrustSense® full-regime Autothrottle, Vmc a Mitigation, FPDS, NextGen Flight Deck and COCKPIT/IP® or other planned products or product enhancements;

● market acceptance of the Company’s ThrustSense® Autothrottle, Vmc a Mitigation, flight panel display systems, NextGen Flight Deck and COCKPIT/IP® or other planned products or product enhancements;

● continued market acceptance of the Company’s air data systems and products;

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● the bankruptcy or insolvency of one or more key customers;

● protection of intellectual property rights;

● protection of intellectual property rights, including via securing patents;

● the ability to respond to technological change;

● failure to retain/recruit key personnel;

● failure to recruit and retain key personnel;

● risks related to succession planning;

● a cyber security incident;

● a cybersecurity incident;

● risks related to our self-insurance program;

● ability to successfully manage and integrate key acquisitions, mergers and other transactions, such as the recent asset acquisition of certain Inertial, Communication and Navigation product lines from Honeywell International, Inc., as well as the failure to realize expected synergies and benefits anticipated when we make an acquisition;

● potential future acquisitions or dispositions;

● potential future acquisitions and integration of prior and potential future acquisitions;

● the costs of compliance with present and future laws and regulations;

● changes in law, including changes to corporate tax laws in the United States and the availability of certain tax credits;

● other factors disclosed from time to time in the Company’s filings with the United States Securities and Exchange Commission (the “SEC”).

● other factors disclosed from time to time in the Company’s filings with the U.S.

Securities and Exchange Commission (the “SEC”).

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.

The Company does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report, or to reflect the occurrence of unanticipated events.

forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act of 1933, as amended (the “Securities Act”) and 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act of 1933, as amended (the “Securities Act”) and 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Investors should also be aware that while the Company, from time to time, communicates with securities analysts, it is against its policy to disclose any material non-public information or other confidential commercial information.

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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 supplies integrated flight management systems, flat panel display systems, flat panel display systems 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, 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, the DoD/governmental and foreign military markets.

This approach, combined with the Company’s industry experience, 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.

This strategy, as both a manufacturer and integrator, has positioned the company to deliver cost-effective solutions for the general aviation, commercial air transport, and the DoD and 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.

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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 the June 2023 Honeywell Agreement with Honeywell 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 the July 2024 Honeywell Asset Acquisition, an exclusive license agreement and acquired additional key assets for certain communication and navigation product lines from Honeywell.

This transaction complements the previous Honeywell license and asset acquisition completed in June 2023.

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”).

Total consideration was $4.2 million in cash.

On September 27, 2024, the Company entered into the September 2024 Honeywell Agreement with Honeywell, 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;

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;

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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, but the Company relies on Honeywell for access to the operational and financial data needed to prepare its financial statements.

Revenue and costs from this production are attributed to and reported by the Company;

however, the Company relies on Honeywell 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.

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In anticipation of the transition, Honeywell is expected to accelerate its production of these products in the short term.

This will likely lead to a spike in revenues in the short term followed by a temporary dip in revenues before revenues are normalized.

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 and providing updates as necessary.

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.

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Many of the components are standard, although certain parts are manufactured to meet the Company’s specifications.

The overhead portion of Cost of sales primarily comprises salaries and benefits, building occupancy costs, supplies and outside service costs related to production, purchasing, material control and quality control.

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 Engineering Development Contracts (“EDC”) sales comprises engineering labor, consulting services and other costs associated with specific design and development projects.

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.

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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 2020 fiscal year, certain of the Company’s customers temporarily suspended product deliveries as a result of the COVID-19 pandemic, and while these deliveries subsequently resumed, there is a possibility that the COVID-19 or similar pandemics will result in other suspensions, delays or order cancellations by the Company’s customers or suppliers.

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.

Environmental, Social and Governance Considerations

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The Annual Report on Form 10-K for the fiscal year ended September 30, 2025 contains a discussion of these critical accounting policies.

See also Note 1 to the unaudited condensed consolidated financial statements for the three and nine months ended June 30, 2025 as set forth herein.

In connection with June 2023 Honeywell Agreement, during the 18 month period following closing, which ended December 31, 2024, the Company received various components of PP&E.

Rotables are parts that are not designed to be discarded after a certain period of use but rather are intended to be restored to a serviceable condition and reused.

The Company had historically depreciated rotables PP&E on a straightline basis, over 5 years.

During the second quarter of 2025, the Company updated its analysis of the economic lives of various owned rotable assets.

As a result of this update, to better reflect the revised estimate of physical lives of rotable assets, the Company changed its useful lives estimate of rotable assets from 5 years to 10 years, effective as of January 1, 2025.

ASC 250, specifically ASC 250-10-45-17 states that, “ changes in accounting estimates should not be accounted for by restating or retrospectively adjusting the amounts reported in prior period financial statements or by reporting pro forma amounts.

Instead, a change in accounting estimate should be accounted for in the period of change and prospective periods .”

Adhering to the guidance found in ASC 250, the Company recognized the change in depreciation expense of Rotable assets prospectively as of January 1, 2025.

The change in accounting estimate decreased depreciation expense $0.4 million, or $0.02 per diluted share, and $0.7 million, or $0.04 for the three and nine months ended June 30, 2025, respectively.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED

JUNE 30, 2025 AND 2024

See also Note 1 to the unaudited condensed consolidated financial statements for the three months ended December 31, 2025 included in this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED

DECEMBER 31, 2025 AND 2024

The following table sets forth the statements of operations data expressed as a percentage of total net sales for the periods indicated (some items may not add due to rounding):

Three Months Ended June 30,

Nine Months Ended June 30,

Three Months Ended December 31,

Total net sales

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Income tax expense

Three Months Ended June 30, 2025 Compared to the Three Months Ended June 30, 2024

Historically, the Company presented Net Sales and Cost of Sales related to each of Customer service and Engineering and development contracts separately on the Consolidated Statements of Operations.

For the three and nine months ended June 30, 2025, 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 the three and nine months ended June 30, 2024.

For additional information, see Note 3, Summary of Significant Accounting Policies, (“Reclassifications ”) to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2024.

Net sales for the three months ended June 30, 2025 increased $12.4 million, or 105.2%, to $24.1 million from $11.8 million for the three months ended June 30, 2024.

Net sales of $24.1 million for the three months ended June 30, 2025 comprised $11.6 million in organic Net sales and $12.5 million in Net sales related to the September 2024 Honeywell Agreement.

The increase in Net sales was driven primarily by a $11.4 million, or 223.8%, increase in Product sales of which $11.5 million were derived from Honeywell military products.

This quarter’s Net sales benefitted from an acceleration of the production and sales of Honeywell’s military product line in anticipation of Honeywell ceasing production at its own facilities and transitioning that production to the Company’s facilities.

Net sales also benefited from an increase in commercial air transport sales of $0.4 million partially offset by $0.4 million of reduced sales in business aviation.

Services sales for the three months ended June 30, 2025 increased $0.9 million, or 13.6%, compared to Services sales for the three months ended June 30, 2024.

The increase in Services sales primarily reflects increases in engineering development services of $0.9 million and an increase in customer service sales from the product lines acquired from Honeywell of $0.2 million, partially offset by a decrease in legacy customer service revenue of $0.1 million.

Cost of sales .

Cost of sales was $15.6 million, or 64.4% of Net sales, for the three months ended June 30, 2025 compared to $5.5 million, or 46.6% of Net sales, for the three months ended June 30, 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 the three months ended June 30, 2025 was 35.6 % compared to 53.4% for the three months ended June 30, 2024.

The decrease in overall gross margin percentage for the three months ended June 30, 2025 compared to the three months ended June 30, 2024 is primarily the result of unfavorable changes in product mix.

The factors that have affected and will continue to affect the Company’s gross margins 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 $0.2 million, or 16.6 %, to $0.9 million for the three months ended June 30, 2025 from $1.1 million for the three months ended June 30, 2024.

As a percentage of net sales, R&D expenses decreased to 3.8 % of net sales for the three months ended June 30, 2025 from 9.3% of net sales for the three months ended June 30, 2024.

The decrease in R&D expenses as a percentage of revenues in the quarter was primarily the result of additional revenues for the three months ended June 30, 2025 compared to the same period last year.

Selling, general, and administrative.

SG&A expense increased by $1.1 million or 32.1%, to $4.2 million from $3.1 million for the three months ended June 30, 2024.

The increase in SG&A expense for the three months ended June 30, 2025 was primarily the result of third party and other fees of $0.1 million, $0.2 million related to the amortization of customer relationships and intangible assets resulting from the combined acquisitions, $0.4 million due to employee related expenses and benefits resulting from increased headcount, and a $0.3 million increase in other operating expenses.

As a percentage of Net sales, SG&A expenses were 17.2% for the three months ended June 30, 2025 compared to 26.7% for the three months ended June 30, 2024.

Interest income.

Interest income was negligible for the three months ended June 30, 2025 and 2024, respectively.

Other income.

The Company had no material other income for the three months ended June 30, 2025 and 2024, respectively.

Income taxes.

Income tax expense was $0.7 million for the three months ended June 30, 2025 as compared to income tax expense of $0.3 million for the three months ended June 30, 2024.

The effective tax rate for the three months ended June 30, 2025 was 21.5% as compared to 17.6% for the three months ended June 30, 2024.

The increase in income tax expense was primarily due to higher taxable earnings for the three months ended June 30, 2025, compared to the same period last year.

As a result of the factors described above, the Company’s net income for the three months ended June 30, 2025 was $2.4 million compared to net income of $1.6 million for the three months ended June 30, 2024.

On a fully diluted basis, net income per

share was $0.14 for the three months ended June 30, 2025, compared to a net income of $0.09 per share for the three months ended June 30, 2024.

Nine Months Ended June 30, 2025 Compared to the Nine Months Ended June 30, 2024

Net sales for the nine months ended June 30, 2025 increased by $30.2 million, or 95.0%, to $62.0 million from $31.8 million for the nine months ended June 30, 2024.

Net sales of $62.0 million for the nine months ended June 30, 2025 comprised $32.7 million in organic Net sales and $29.3 million in Net sales related to the September 2024 Honeywell Agreement.

The increase in Net sales was driven primarily by a $25.3 million, or 175.3%, increase in Product sales derived from the September 2024 Honeywell Agreement, an increase in commercial air transport sales of $0.3 million, an increase of $1.3 million in sales in business aviation.

Service sales for the nine months ended June 30, 2025 increased $5.4 million, or 28.3%, compared to Services sales for the nine months ended June 30, 2024.

The increase in Service sales primarily reflects increases in engineering development services of $2.0 million and an increase in customer service sales from the product lines acquired from Honeywell of $3.8 million, partially offset by lower legacy customer service revenue of $0.5 million.

Three Months Ended December 31, 2025 Compared to the Three Months Ended December 31, 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.” Consequently, Services revenues and cost of sales primarily comprise Customer Service, EDC and Royalties.

Net sales for the three months ended December 31, 2025, increased by 36.5% to $21.8 million, up from net sales of $16.0 million for the three months ended December 31, 2024.

The increase in net sales principally reflects an increase of $5.5 million in commercial aftermarket product sales, partially offset by a decrease of $1.5 million in military product sales, primarily due to the transition of the F-16 production into the Exton facility and a decrease of $0.5 million in business aviation.

Services sales for the three months ended December 31, 2025, increased $2.3 million, or 37.7%, compared to Services sales for the three months ended December 31, 2024, of $6.0 million.

The increase in Services sales primarily reflects growth in service volumes related to the IRUs and radio product lines acquired in 2023 and 2024 of $2.6 million, partially offset by a $0.3 million decrease in legacy customer service revenue.

Cost of sales .

Cost of sales was $35.6 million, or 57.3% of Net sales, for the nine months ended June 30, 2025 compared to $14.4 million, or 45.4% of Net sales, for the nine months ended June 30, 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 the nine months ended June 30, 2025 was 42.7% compared to 54.6% for the nine months ended June 30, 2024.

The decrease in overall gross margin percentage for the nine months ended June 30, 2025, compared to the nine months ended June 30, 2024, is 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 effect 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.

Cost of sales was $9.9 million, or 45.5% of Net sales, for the three months ended December 31, 2025 compared to $9.4 million, or 58.6 % of Net sales, for the three months ended December 31, 2024.

The increase in cost of sales for the three months ended December 31, 2025 compared to the three months ended December 31, 2024, principally reflects the previously mentioned net sales growth of $2.3 million within services product line and $5.5 million in commercial aftermarket sales while OEM and miliary net sales decreased by $2.0 million.

Gross profit was $11.9 million, or 54.5% of Net sales, for the three months ended December 31, 2025 compared to $6.6 million, or 41.4% of Net sales, for the three months ended December 31, 2024.

The increase in gross margin principally reflects the previously mentioned net sales growth, a more favorable product mix within our commercial aftermarket product line, and a higher mix of commercial aftermarket revenue, which by nature has higher gross margins as compared to military and OEM businesses.

Research and development .

R&D expense decreased $0.1 million, or 4.6%, to $2.9 million for the nine months ended June 30, 2025 from $3.0 million for the nine months ended June 30, 2024.

As a percentage of net sales, R&D expenses decreased to 4.8% of net sales for the nine months ended June 30, 2025 from 9.5% of net sales for the nine months ended June 30, 2024.

The decrease in R&D expenses as a percentage of revenues in the quarter was primarily the result of additional revenues for the nine months ended June 30, 2025 compared to the same period last year.

Selling, general, and administrative.

SG&A expenses increased $2.6 million or 29.4%, to $11.7 million from $9.1 million for the nine months ended June 30, 2024.

The increase in SG&A expense for the nine months ended June 30, 2025 was primarily the result of increases in professional services fees and other related fees of $0.3 million primarily due to acquisition related expenses and corporate initiatives.

In addition, the Company incurred increased depreciation and amortization expenses of $0.8 million related to the customer relationships and intangible assets resulting from the combined acquisitions and $1.2 million due to employee related expenses and benefits resulting from increased headcount, and $0.3 million increase in other operating expenses.

As a percentage of Net sales, SG&A expenses were 18.9% for the nine months ended June 30, 2025 compared to 28.5% for the nine months ended June 30, 2024.

R&D expense increased $0.2 million, or 19.9 %, to $1.3 million for the three months ended December 31, 2025 from $1.1 million for the three months ended December 31, 2024.

As a percentage of net sales, R&D expenses decreased to 6.1% of net sales for the three months ended December 31, 2025 from 7.0% of net sales for the three months ended December 31, 2024.

The decrease in R&D expenses as a percentage of revenues in the quarter was primarily the result of additional revenues for the three months ended December 31, 2025 compared to the same period last year.

For the three months ended December 31, 2025 and 2024, $0.5 million of R&D expense was recharacterized as Cost of sales related to the EDC sales, which was offset by $0.3 million in additional engineering staffing to support the Company’s development programs.

SG&A expenses increased $0.1 million or 2.5%, to $4.3 million for the three months ended December 31, 2025 from $4.2 million for the three months ended December 31, 2024.

The increase in SG&A expense for the three months ended December 31, 2025 was primarily the result of increases in employee-related costs of $0.5 million, offset by lower professional services fees and other related fees of $0.4 million.

As a percentage of Net sales, SG&A expenses were 19.5% for the three months ended December 31, 2025 compared to 26.0% for the three months ended December 31, 2024.

Interest expense.

Interest expense was $0.5 million for the three months ended December 31, 2025, an increase of $0.1 million from $0.4 million for the three months ended December 31, 2024.

The change was due to a 50 basis point increase in the effective interest rate and approximately $53,000 in amortization of deferred financing fees.

Interest income.

Interest income was negligible for the nine months ended June 30, 2025 and decreased by $0.1 million as compared to the nine months ended June 30, 2024.

The decrease in interest income was primarily the result of a general decrease in interest rates as compared to the nine months ended June 30, 2024.

Interest income was negligible for the three months ended December 31, 2025 and 2024, respectively.

Other income.

The Company had no material other income for the nine months ended June 30, 2025 and 2024, respectively.

Other income was $64,000 for the three months ended December 31, 2025 which was the result of a reduction of a third-party consulting fee compared to $6,000 for the three months ended December 31, 2024.

Income taxes.

Income tax expense was $2.1 million for the nine months ended June 30, 2025 as compared to income tax expense of $1.0 million for the nine months ended June 30, 2024.

The effective tax rate for the nine months ended June 30, 2025 was 19.9%, in line with the effective tax rate for the nine months ended June 30, 2024.

As a result of the factors described above, the Company’s net income for the nine months ended June 30, 2025 was $8.5 million, compared to net income of $3.8 million for the nine months ended June 30, 2024.

On a fully diluted basis, net income per share was $0.48 for the nine months ended June 30, 2025, compared to a net income of $0.22 per share for the nine months ended June 30, 2024.

Income tax expense was $1.8 million for the three months ended December 31, 2025 as compared to income tax expense of $0.2 million for the three months ended December 31, 2024.

The effective tax rate for the three months ended December 31, 2025 was 30.8% as compared to 20.1% for the three months ended December 31, 2024.

The increase in income tax expense was primarily due to an increase in income before income taxes as well as the unfavorable effects of state income taxes, tax credits, temporary and permanent tax differences related to stock-based compensation and certain non-deductible expenses for the three months ended December 31, 2025, compared to the three months ended December 31, 2024.

As a result of the factors described above, the Company’s net income for the three months ended December 31, 2025 was $4.1 million compared to net income of $0.7 million for the three months ended December 31, 2024.

On a fully diluted basis, net income per share was $0.22 for the three months ended December 31, 2025, compared to a net income of $0.04 per for the three months ended December 31, 2024.

Liquidity and Capital Resources

The following table highlights key financial measurements of the Company:

The following table highlights key financial measures of the Company:

September 30,

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Current ratio (2)

Nine Months Ended June 30,

Three Months Ended December 31,

Cash flow activities:

Net cash provided by operating activities

Net cash (used in) provided by investing activities

Net cash used in financing activities

Net cash provided by (used in) investing activities

Net cash (used in) provided by financing activities

(1) Calculated as:

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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.

The Company’s principal source of liquidity has been cash flows from current period operations and cash accumulated from prior periods’ 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.

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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.

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.

Refer to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2024, Note 20, “ Loan Agreement ” for further details.

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, provides for the 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 $10,000,000 to $30,000,000 and extend the maturity date until December 19, 2028.

The proceeds of the Restated Line of Credit Note will be 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 $20,000,000, 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 amends 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 provides for a senior secured revolving line of credit in an aggregate principal amount of $35,000,000, 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 is 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 provides for how PNC will make advances to the Company under the Revolving Line of Credit.

As of June 30, 2025, the outstanding balance drawn on the A&R Revolving Line of Credit was $23,258,511 with an effective interest rate of 6.4 percent.

As of June 30, 2025, the Company had availability of $11,741,489 under the A&R Revolving Line of Credit.

2025 Credit Agreement

On July 18, 2025, the Company entered a new five-year, $100 million committed credit agreement (the "2025 Credit Agreement") with a lending syndicate led and arranged by JPMorgan Chase Bank, N.A..

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”);

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 8.

Subsequent Events , for additional disclosures related the July 18, 2025 Credit Agreement.

Loan Agreement to the unaudited condensed consolidated financial statements for the three months ended December 31, 2025 included in this Quarterly Report on Form 10-Q for additional disclosures related to the 2025 Credit Agreement.

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 are 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 and the accompanying prospectus supplement, dated September 22, 2023.

Subject to the terms and conditions of the ATM Sales Agreement, the Sales Agent is required to 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, and during the fiscal quarter ended December 31, 2025, we did not sell any shares of common stock under the ATM Sales Agreement.

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, which include funding requirements for working capital, construction in process related to progress payments in support of the Company’s facilities expansion as well as computer software integration associated with the Company’s ERP system.

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.

The Company did not pay cash dividends in fiscal years 2023 or 2024.

The Company did not pay cash dividends in fiscal years 2024 or 2025, or in the quarter ended December 31, 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 Board and will depend on then-existing conditions, including our operating results, financial condition, business prospects and other factors the Board may deem relevant.

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

Net cash provided by operating activities was $10.3 million for the nine months ended June 30, 2025 and consisted primarily of funding from net income of $8.5 million and changes in working capital.

Net cash provided by operating activities was $8.2 million for the three months ended December 31, 2025 and consisted primarily of funding from net income of $4.1 million and changes in working capital.

Net cash provided by operating activities was $1.8 million for the three months ended December 31, 2024 and consisted primarily of funding from net income of $0.7 million and changes in working capital.

Investing activities

Net cash used in investing activities was $5.5 million for the nine months ended June 30, 2025 and consisted of 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.

Net cash used in investing activities was $1.1 million for three months ended December 31, 2025 and consisted of expenditures related to additions and improvements in the Company’s facilities and the purchases of equipment.

Net cash used in investing activities was $0.3 million for the three months ended December 31, 2024 and consisted of expenditures related to additions and improvements in the Company’s facilities and purchases of equipment and computer hardware.

Financing activities

Net cash used in financing activities was $4.8 million for the nine months ended June 30, 2025 and consisted of payments against the Company’s line of credit.

Net cash used in financing activities was $1.5 million for the three months ended December 31, 2025 and consisted of payments against the Company’s line of credit and the tax payments of vested equity award shares withheld for taxes.

Net cash used in financing activities was $1.5 million for the three months ended December 31, 2024 and consisted of payments against the Company’s line of credit.

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.

IS&S has experienced increases in expenditures since its inception and anticipates that expenditures will continue in the foreseeable future.

IA has experienced increases in expenditures since its inception and anticipates that 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.

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 insufficient funds are available, the Company may not be able to introduce new products or compete effectively.

Three Months Ended

Nine Months Ended

June 30, 2025

Three months ended December 31,

Backlog, beginning of period

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Backlog represents the value of contracts and purchase orders, less the revenue recognized to date on those contracts and purchase orders.

The backlog excludes potential future sole-source production orders from products developed under the Company’s engineering development contracts (“EDC”) programs, including the Pilatus PC-24, the KC-46A and the Textron King Air 360 and King Air 260 ThrustSense® Autothrottle programs.

Although the Company believes that the orders included in backlog are firm, most of the backlog involves orders that can be modified or terminated by the customer.

At June 30, 2025, our backlog was $72.4 million compared with $89.2 million at September 30, 2024.

The backlog includes committed purchases and excludes potential future sole-source production orders from products developed under the Company’s engineering development contracts (“EDC”) programs, including the Pilatus PC-24, the KC-46A and the Textron King Air 360 and King Air 260 ThrustSense® Autothrottle programs.

At December 31, 2025, our backlog was $75.3 million compared with $80.8 million at December 31, 2024.

Backlog is converted into sales in future periods as work is performed or deliveries are made.

Our backlog does not include additional future orders that may be received under our current OEM contracts.

We expect to recognize approximately 51% of our backlog over the next 12 months and approximately 93% over the next 24 months as revenue, with the remainder recognized thereafter.

During fiscal 2024, we made important progress on our commercial growth strategy highlighted by several key awards and contract wins across our commercial, military and business aviation markets.

In October 2024, we announced our ThrustSense® Autothrottle system was selected by the US Army to be installed on their C-12 (B200) aircraft equipped with ProLine21 avionics suites®.

Deliveries of the IS&S ThrustSense Autothrottle system for this application began in September 2024, with ongoing installations anticipated.

In August 2024, we received a multi-million dollar production contract from a major aerospace company to supply our 19” Multifunction Display (MFD) with Integrated Mission Computer.

This order marks our latest OEM contract and builds on existing programs with Pilatus for the PC-24, Textron for the King Air 260/360 and Boeing for the KC-46A, KC-767 and the T-7A.

Off-Balance Sheet Arrangements

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What changed 10-Q

Item 2. Management’s Discussion and Analysis