What changed in this filing

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Item 1. Financial Statements

2023-08-11 compared with 2023-05-08 · 256 added, 105 removed, 382 unchanged (49% of the section changed)

1 unchanged sentence

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONSOLIDATED BALANCE SHEETS

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30,

3 unchanged sentences

Contract assets

Prepaid inventory

Prepaid expenses and other current assets

Total current assets

Intangible assets, net

Property and equipment, net

2 unchanged sentences

Current liabilities

Current portion of long-terrm debt

Accounts payable

2 unchanged sentences

Total current liabilities

Long-term debt

Other liabilities

3 unchanged sentences

Preferred stock, 10,000,000 shares authorized, $ .001 par value, of which 200,000 shares are authorized as Class A Convertible stock.

No shares issued and outstanding at March 31, 2023 and September 30, 2022

No shares issued and outstanding at June 30, 2023 and September 30, 2022

Common stock, $ .001 par value:

75,000,000 shares authorized, 19,520,259 and 19,412,664 issued at March 31, 2023 and September 30, 2022

75,000,000 shares authorized, 19,535,219 and 19,412,664 issued at June 30, 2023 and September 30, 2022

Additional paid-in capital

Retained Earnings (accumulated deficit)

Treasury stock, at cost, 2,096,451 shares at March 31, 2023 and September 30, 2022

Treasury stock, at cost, 2,096,451 shares at June 30, 2023 and September 30, 2022

( 21,368,537 )

4 unchanged sentences

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended March 31,

Six Months Ended March 31,

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended June 30,

Nine Months Ended June 30,

Engineering development contracts

15 unchanged sentences

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Six Months Ended March 31, 2023

Balance, September 30, 2022

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Three Months Ended June 30, 2023 and 2022

shareholders’

Balance, March 31, 2023

( 21,368,537 )

Share-based compensation

Exercise of stock options

Balance, December 31, 2022

Balance, June 30, 2023

( 21,368,537 )

Share-based compensation

Balance, March 31, 2022

( 3,320,192 )

( 21,368,537 )

Share-based compensation

Exercise of stock options

Balance, June 30, 2022

( 1,961,018 )

( 21,368,537 )

The accompanying notes are an integral part of these statements.

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Six Months Ended March 31, 2022

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Nine Months Ended June 30, 2023 and 2022

shareholders’

Balance, September 30, 2022

( 21,368,537 )

Share-based compensation

Balance, December 31, 2021

Exercise of stock options

Balance, June 30, 2023

( 21,368,537 )

Balance, September 30, 2021

( 5,882,820 )

( 21,368,537 )

Share-based compensation

Balance, March 31, 2022

Exercise of stock options

Balance, June 30, 2022

( 1,961,018 )

2 unchanged sentences

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended March 31,

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended June 30,

CASH FLOWS FROM OPERATING ACTIVITIES:

3 unchanged sentences

Stock options

Impairment of long-lived assets

Loss on disposal of property and equipment

Deferred income taxes

1 unchanged sentence

Accounts receivables

( 1,646,558 )

Contract asset

Prepaid expenses and other assets

8 unchanged sentences

Purchases of property and equipment

Acquisition of a business

( 35,860,000 )

Net cash used in investing activities

( 36,025,084 )

CASH FLOWS FROM FINANCING ACTIVITIES:

Debt proceeds

Proceeds from exercise of stock options

Net cash provided by financing activities

Net increase in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

( 14,678,313 )

Cash and cash equivalents, beginning of period

4 unchanged sentences

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies

7 unchanged sentences

This approach, combined with the Company’s industry experience, is designed to enable IS&S to develop high-quality products and systems, to reduce product time to market, and to achieve cost advantages over products offered by its competitors.

On June 30, 2023 (the “Acquisition Date”), the Company entered into an Asset Purchase and License Agreement with Honeywell International, Inc.

(“Honeywell”) whereby Honeywell sold, certain assets and granted perpetual license rights to manufacture and sell licensed products related to its inertial, communication and navigation product lines (the “Product Lines”) to the Company (the “Transaction”).

The Transaction involves a sale of certain inventory, equipment and customer-related documents;

an assignment of certain customer 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.

See Note, “Acquisition” in the Supplemental Balance Sheet Disclosures section below for more details.

Basis of Presentation

2 unchanged sentences

The consolidated balance sheet as of September 30, 2022 is derived from the audited financial statements of the Company.

Operating results for the three-and six-month periods ended March 31, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2023, including in terms of the impact of the coronavirus pandemic (the “COVID-19 pandemic”), which cannot be determined at this time.

Operating results for the three-and nine-month periods ended June 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2023 which cannot be determined at this time.

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

Reclassification

The Company presented intangible assets, net separately in the consolidated balance sheet as of June 30, 2023.

In order to conform to the presentation of the consolidated balance sheet as of June 30, 2023, the Company reclassified $ 60,348 from other assets to intangible assets, net in the consolidated balance sheet as of September 30, 2022.

This reclassification has no impact on the Company’s net income for the three months ended June 30, 2023 and 2022 and the nine months ended June 30, 2023 and 2022.

Principles of Consolidation

4 unchanged sentences

Actual results could differ from those estimates.

Estimates are used in accounting for, among other items, long term contracts, allowances for doubtful accounts, inventory obsolescence, product warranty cost liabilities, income taxes, engineering and material costs on Engineering Development Contract (“EDC”) programs, percentage of completion on EDC contracts, recoverability of long-lived assets and contingencies.

Estimates are used in accounting for, among other items, valuation of tangible and intangible assets acquired, long term contracts, evaluation of allowances for doubtful accounts, product warranty cost liabilities, income taxes, engineering and material costs on Engineering Development Contract (“EDC”) programs, percentage of completion on EDC contracts, the useful lives of long-lived assets for depreciation and amortization, the recoverability of long-lived assets, evaluation of goodwill impairment, and contingencies.

Estimates and assumptions are reviewed periodically and the effects of changes, if any, are reflected in the consolidated statements of operations in the period they are determined.

The Company evaluates each of its acquisitions in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”), to determine whether the transaction is a business combination or an asset acquisition.

In determining whether an acquisition should be accounted for as a business combination or an asset acquisition, the Company first performs a screen test to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets.

If this is the case, the acquired set is not deemed to be a business and is instead accounted for as an asset acquisition.

If this is not the case, the Company then further evaluates whether the acquired set includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs.

If so, the Company concludes that the acquired set is a business.

The Company accounts for business acquisitions using the acquisition method of accounting.

Under this method of accounting, assets acquired and liabilities assumed are recorded at their respective fair values at the date of the acquisition.

When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions.

The Company’s estimates of fair value are based upon assumptions believed to be reasonable, but are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

Any excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill.

During the measurement period, which may be up to one year from the acquisition date, the Company adjusts the provisional amounts of assets acquired and liabilities assumed with the corresponding offset to goodwill to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.

Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded within the Company’s consolidated statements of operations.

Intangible Assets

The Company’s identifiable intangible assets primarily consist of license agreement and customer relationships.

Intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods deemed appropriate for the type of intangible asset acquired and are reported separately from any goodwill recognized.

Intangible assets with a finite life are amortized over their estimated useful life and are reported net of accumulated amortization.

They are assessed for impairment in accordance with the Company’s policy on assessing long-lived assets for impairment described below.

Indefinite-lived intangible assets are not amortized, but are subject to an annual impairment test, or when events or circumstances dictate, more frequently.

The impairment review for indefinite-lived intangible assets can be performed using a qualitative or quantitative impairment assessment.

The quantitative assessment consists of a comparison of the fair value of the indefinite-lived intangible asset with its carrying amount.

If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

If the fair value exceeds its carrying amount, the indefinite-lived intangible asset is not considered impaired.

Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized.

The recorded amounts of goodwill from business combinations are based on management’s best estimates of the fair values of assets acquired and liabilities assumed at the date of acquisition.

Goodwill is assigned to the reporting units that are expected to benefit from the synergies of the business combination that generated the goodwill.

The Company’s goodwill impairment

test is performed at the reporting unit level.

Reporting units are determined based on an evaluation of the Company’s operating segments and the components making up those operating segments.

Goodwill is tested for impairment annually or in an interim period if certain changes in circumstances indicate a possibility that an impairment may exist.

Factors to consider that may indicate an impairment may exist are:

the macroeconomic conditions, industry and market considerations such as a significant adverse change in the business climate, cost factors, overall financial performance such as current-period operating results or cash flow declines combined with a history of operating results or cash flow declines or a projection/forecast that demonstrates continuing declines in the cash flow or the inability to improve the operations to forecasted levels, and any entity-specific events.

If the Company determines that it is more likely than not that the fair value of the reporting unit is below the carrying amount as part of its qualitative assessment, a quantitative assessment of goodwill is required.

In the quantitative evaluation, the fair value of the reporting unit is determined and compared to the carrying value.

If the fair value is greater than the carrying value, then the goodwill is deemed not to be impaired and no further action is required.

If the fair value is less than the carrying value, goodwill is considered impaired and a charge is reported as impairment of goodwill in the consolidated statements of operations.

Cash and Cash Equivalents

Highly liquid investments, purchased with an original maturity of three months or less, are classified as cash equivalents.

Cash equivalents at March 31, 2023 and September 30, 2022 consist of cash on deposit and cash invested in money market funds with financial institutions.

Cash equivalents at June 30, 2023 and September 30, 2022 consist of cash on deposit and cash invested in money market funds with financial institutions.

Inventory Valuation

1 unchanged sentence

Property and Equipment

Property and equipment are stated at cost.

Depreciation is provided using an accelerated method over the estimated useful lives of the assets (the lesser of three to seven years or over the lease term), except for the manufacturing facility and the corporate airplane, which are depreciated using the straight-line method over their estimated useful lives of thirty-nine years and ten years , respectively.

Property and equipment are stated at cost less accumulated depreciation and amortization.

Depreciation and amortization are provided using an accelerated method over the estimated useful lives of the assets (the lesser of three to seven years or over the lease term), except for the manufacturing facility and the corporate airplane, which are depreciated using the straight-line method over their estimated useful lives of thirty-nine years and ten years , respectively.

Costs are considered construction in progress when the property and equipment are not ready for their intended use.

Major additions and improvements are capitalized, while maintenance and repairs that do not improve or extend the life of assets are charged to expense as incurred.

Long-Lived Assets

The Company assesses the impairment of long-lived assets in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360-10, “ Property, Plant and Equipment.” This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.

The Company assesses the impairment of long-lived assets in accordance with FASB ASC Topic 360-10, “ Property, Plant and Equipment.” This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.

In addition, long-lived assets to be disposed of should be reported at the lower of the carrying amount or fair value less cost to sell.

2 unchanged sentences

The estimation of fair value is generally measured by discounting expected future cash flows.

No impairment charges were recorded during the three-and six-month periods ended March 31, 2023 or 2022.

Fair Value of Financial Instruments

10 unchanged sentences

These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2023 and September 30, 2022, according to the valuation techniques the Company used to determine their fair values.

Fair Value Measurement on March 31, 2023

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2023 and September 30, 2022, according to the valuation techniques the Company used to determine their fair values.

Fair Value Measurement on June 30, 2023

Quoted Price in

20 unchanged sentences

The Company’s contract with its customers typically is the form of a purchase order issued to the Company by its customers and, to a lesser degree, in the form of a purchase order issued in connection with a formal contract executed with a customer.

For the purpose of accounting for revenue under ASC 606, a contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.

related to these goods or services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.

The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

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.

26 unchanged sentences

The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue.

The aggregate impact of adjustments in contract estimates did not change our revenue and operating earnings (and diluted earnings per share) for the three-and six-month periods ended March 31, 2023 and 2022, respectively.

The aggregate impact of adjustments in contract estimates did not change our revenue and operating earnings (and diluted earnings per share) for the three-and nine-month periods ended June 30, 2023 and 2022, respectively.

Contract Balances

7 unchanged sentences

Increases due to invoicing prior to satisfaction of performance obligations

March 31, 2023

June 30, 2023

Customer Service Revenue

1 unchanged sentence

The Company’s customer service revenue and cost of sales are included in product sales and product cost of sales, respectively, on the accompanying consolidated statements of operations.

The Company’s customer service revenue and cost of sales for the three-and six-month periods ended March 31, 2023 and 2022 respectively are as follows:

For the Three Months Ended March 31,

For the Six Months Ended March 31,

The Company’s customer service revenue and cost of sales for the three-and nine-month periods ended June 30, 2023 and 2022 respectively are as follows:

For the Three Months Ended June 30,

For the Nine Months Ended June 30,

Customer Service Sales

15 unchanged sentences

Deferred tax assets are recognized when expected future taxable income is sufficient to allow the related tax benefits to reduce taxes that would otherwise be payable.

The sources of taxable income that may be available to realize the benefit of deferred tax assets are future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and credit carryforwards, taxable income in carry-back years, and tax planning strategies which are

both prudent and feasible.

The Company will continue to assess all available evidence during future periods to evaluate any changes to the realization of its deferred tax assets.If the Company were to determine that it would be able to realize additional state deferred tax assets in the future, it would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

The Company will continue to assess all available evidence during future periods to evaluate any changes to the realization of its deferred tax assets.

If the Company were to determine that it would be able to realize additional state deferred tax assets in the future, it would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

The accounting for uncertainty in income taxes requires a more likely than not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return.

13 unchanged sentences

The Company invests a significant percentage of its sales on engineering development, both Research & Development (“R&D”) and EDC.

At March 31, 2023, approximately 22 % of the Company’s employees were engineers engaged in various engineering development projects.

At June 30, 2023, approximately 23 % of the Company’s employees were engineers engaged in various engineering development projects.

Total engineering development expense comprises both internally funded R&D and product development and design charges related to specific customer contracts.

5 unchanged sentences

Treasury stock purchased with intent to retire (whether or not the retirement is actually accomplished) is charged to common stock.

Comprehensive Income

Pursuant to FASB ASC Topic 220, “Comprehensive Income,” the Company is required to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of its consolidated balance sheets.

For the three-and six-month periods ended March 31, 2023 and 2022, comprehensive income consisted of net income only, and there were no items of other comprehensive income for any of the periods presented.

Share-Based Compensation

22 unchanged sentences

Liabilities associated with the risks that are retained by the Company are estimated based upon actuarial assumptions such as historical claims experience and demographic factors.

The Company estimated the total medical claims incurred but not reported and the Company believes that it has adequate reserves for these claims at March 31, 2023 and September 30, 2022, respectively.

The Company estimated the total medical claims incurred but not reported and the Company believes that it has adequate reserves for these claims at June 30, 2023 and September 30, 2022, respectively.

However, the actual value of such claims could be significantly affected if future occurrences and claims differ from these assumptions.

At March 31, 2023 and September 30, 2022, the estimated liability for medical claims incurred but not reported was $ 45,632 and $ 51,590 , respectively.

The Company has recorded the excess of funded premiums over estimated claims incurred but not reported of $ 464,373 and $ 424,155 as a current asset in the accompanying consolidated balance sheets as of March 31, 2023 and September 30, 2022, respectively.

At June 30, 2023 and September 30, 2022, the estimated liability for medical claims incurred but not reported was $ 53,419 and $ 51,590 , respectively.

The Company has recorded the excess of funded premiums over estimated claims incurred but not reported of $ 432,703 and $ 424,155 as a current asset in the accompanying consolidated balance sheets as of June 30, 2023 and September 30, 2022, respectively.

Concentrations

Major Customers and Products

In the three-month period ended March 31, 2023, four customers, Pilatus Aircraft Ltd (“Pilatus”), Challenge Airlines, Air Transport Services Group and Textron Aviation, Inc.

In the three-month period ended June 30, 2023, three customers, Pilatus Aircraft Ltd (“Pilatus”), Air Transport Services Group (“ATSG”) and Textron Aviation, Inc.

(“Textron”), accounted for 25 %, 24 % and 10 % of net sales, respectively.

In the six-month period ended March 31, 2023, four customers, Pilatus, Air Transport Services Group, Textron and Challenge Airlines, accounted for 29 %, 15 %, 11 % and 10 % of net sales, respectively.

In the three-month period ended March 31, 2022, three customers, Pilatus, Amazon.com and Textron, accounted for 29 %, 11 % and 10 % of net sales, respectively.

In the six-month period ended March 31, 2022, two customers, Pilatus, and Air Transport Services Group, accounted for 26 %, and 13 % of net sales, respectively.

In the nine-month period ended June 30, 2023, three customers, Pilatus, ATSG and Textron, accounted for 27 %, 18 % and 10 % of net sales, respectively.

In the three-month period ended June 30, 2022, three customers, Pilatus, Textron and Cargojet Inc., accounted for 27 %, 16 % and 14 % of net sales, respectively.

In the nine-month period ended June 30, 2022, three customers, Pilatus, Textron and ATSG, accounted for 27 %, 11 % and 10 % of net sales, respectively.

Major Suppliers

1 unchanged sentence

Although there are a limited number of suppliers of particular components, management believes other suppliers could provide similar components on comparable terms.

For the three- and six-month periods ended March 31, 2023, the Company had three and four suppliers, respectively that were individually responsible for greater than 10% of the Company’s total inventory related purchases.

For the three- and six-month periods ended March 31, 2022, the Company had three suppliers that were individually responsible for greater than 10% of the Company’s total inventory related purchases.

For the three- and nine-month periods ended June 30, 2023, the Company had four suppliers, respectively, that were individually responsible for greater than 10% of the Company’s total inventory related purchases.

For the three- and nine-month periods ended June 30, 2022, the Company had zero and two suppliers, respectively, that were individually responsible for greater than 10% of the Company’s total inventory related purchases.

Concentration of Credit Risk

13 unchanged sentences

Supplemental Balance Sheet Disclosures

On June 30, 2023, the Company entered into an Asset Purchase and License Agreement with Honeywell whereby Honeywell sold certain assets and granted perpetual license rights to manufacture and sell licensed products related to its inertial, communication and navigation product lines to the Company.

The Transaction involves a sale of certain inventory, equipment and customer-related documents;

an assignment of certain customer contracts;

The Transaction allows the Company to diversify its product offerings in the aerospace industry.

The Company determined that the Transaction met the definition of a business under ASC 805;

therefore, the Company accounted for the Transaction as a business combination and applied the acquisition method of accounting.

In connection with the Transaction, the Company entered into a term loan with PNC Bank, National Association for $ 20.0 million to fund a portion of the Transaction (the “Term Loan”) – refer to Note 9, “Loan Agreement” for further details.

The preliminary purchase consideration transferred at the Acquisition Date was $ 35.9 million, which was entirely cash.

The allocation of the purchase price is based upon certain preliminary valuations and other analyses that have not been finalized as of the date of this filing.

Specifically, the purchase price amount for the Transaction and the allocation of the purchase consideration for

prepaid inventory, equipment, construction in progress, intangible assets, and goodwill are preliminary estimates, which may be subject to change within the measurement period.

The preliminary allocation of the purchase consideration as of the Acquisition Date is as follows:

Cash consideration

Total consideration

Prepaid inventory

Construction in progress

Intangible assets (a)

Assets acquired

Accrued expenses

( 3,531,201 )

Liabilities assumed

( 3,531,201 )

Net assets acquired

(a) Intangible assets consist of license agreements related to the license rights to use certain Honeywell intellectual property and customer relationships and are recorded at provisional estimated fair values.

The provisional estimated fair value of the license agreement is based on a variation of the income valuation approach and is determined using the relief from royalty method.

The provisional estimated fair value of the customer relationships is based on a variation of the income valuation approach known as the multi-period excess earnings method.

Refer to Note, “Intangible assets” for further details.

(b) Goodwill represents the excess of the preliminary purchase consideration over the provisional fair value of the assets acquired and liabilities assumed.

The goodwill recognized is primarily attributable to the expected synergies from the Transaction.

Goodwill resulting from the Transaction has been provisionally assigned to the Company’s one operating segment;

the assignment of goodwill to reporting units is not complete.

The goodwill is not expected to be deductible for income tax purposes.

Further, the Company determined that the preliminary goodwill was not impaired as of June 30, 2023 and as such, no impairment charges have been recorded for the three-and nine-month periods ended June 30, 2023.

Transition services agreement

Concurrent with the Transaction, the Company entered into a transition services agreement (the “TSA”) with Honeywell, at no additional costs, to receive certain transitional services and technical support during the transition service period.

The Company accounted for the TSA separate from business combination and have recognized $ 140,000 in prepaid expenses and other current assets within the consolidated balance sheets for the services to be received in the future from Honeywell.

The prepaid expense related to the TSA was determined using the with and without method.

Acquisition and related costs

For the three and nine months ended June 30, 2023, the Company incurred acquisition costs of $ 262,099 , which were expensed as incurred and included in selling, general and administrative expenses in the consolidated statements of operations;

the debt issuance costs related to the Term Loan were not material.

Unaudited actual and pro forma information

Since the acquisition date of the Transaction was on June 30, 2023, the Company did not recognize any revenues and net income related to the Product Lines in the consolidated statements of operations.

The following unaudited pro forma summary presents consolidated information of the Company, including the Product Lines, as if the Transaction had occurred on October 1, 2021, the earliest period presented herein:

Three Months Ended June 30,

Nine Months Ended June 30,

These pro forma results are for illustrative purposes and are not indicative of the actual results of operations that would have been achieved nor are they indicative of future results of operations.

The unaudited pro forma information for all periods presented was adjusted to give effect to pro forma events that are directly attributable to the Transaction and is factually supportable.

The adjustments are based on information available to the Company at this time.

Accordingly, the adjustments are subject to change, and the impact of such changes may be material.

The unaudited pro forma results do not include any incremental cost savings that may result from the integration.

Significant adjustments to the pro forma information above include recognition of non-recurring direct incremental acquisition costs in the nine months ended June 30, 2022 and exclusion of those costs from all other periods presented;

increase in interest expense related to the Term Loan;

increase in amortization expense associated with the estimate of the acquired intangible assets;

increase in depreciation expense related to the fair value adjustment of the acquired equipment;

and increase in cost of sales related to the fair value adjustment of the acquired inventory.

Inventories are stated at the lower of cost (first-in, first-out) or net realizable value, net of write-downs for excess and obsolete inventory, and consist of the following:

7 unchanged sentences

Prepaid insurance

Intangible assets

The Company’s intangible assets other than goodwill are as follows:

As of June 30, 2023

Gross Carrying

License agreement acquired from the Transaction (a)

Customer relationships acquired from the Transaction (a)

Licensing and certification rights (b)

As of September 30, 2022

Gross Carrying

Licensing and certification rights (b)

As part of the Transaction, the Company acquired intangible assets related to the license agreement for the license rights to use certain Honeywell intellectual property, and customer relationships.

The gross carrying values are preliminary estimates and may be subject to change within the measurement period – refer to Note, “Acquisition” for further details.

The license agreement has an indefinite life and is not subject to amortization;

the customer relationships have an estimated weighted average life of ten years .

The Company determined that the preliminary intangible assets were not impaired as of June 30, 2023 and as such, no impairment charges have been recorded for the three-and nine-month periods ended June 30, 2023.

The licensing and certification rights are amortized over a defined number of units.

An impairment charge of $ 44,400 was recorded during the three-and nine-month periods ended June 30, 2023.

No impairment charges were recorded during the three-and nine-month periods ended June 30, 2022.

Intangible asset amortization expense was $ 1,063 and $ 0 for the three-month periods ended June 30, 2023 and 2022, respectively.

Intangible asset amortization expense was $ 1,063 and $ 1,063 for the nine-month periods ended June 30, 2023 and 2022, respectively.

The timing of future amortization expense is not determinable for the licensing and certification rights because they are amortized over a defined number of units.

The expected future amortization expense related to the customer relationships as of June 30, 2023 is as follows:

2023 (three months remaining)

Property and equipment

2 unchanged sentences

Computer equipment

Corporate airplane

Corporate airplanes

Furniture and office equipment

Manufacturing facility

Construction in progress

accumulated depreciation and amortization

1 unchanged sentence

( 11,934,113 )

Depreciation and amortization related to property and equipment was $ 85,981 and $ 88,122 for the three-month periods ended March 31, 2023 and 2022, respectively.

Depreciation and amortization related to property and equipment was $ 86,439 and $ 89,072 for the three-month periods ended June 30, 2023 and 2022, respectively.

The corporate airplane is utilized primarily in support of product development.

Depreciation and amortization related to property and equipment was approximately $ 171,390 and $ 180,494 for the six-month periods ended March 31, 2023 and 2022, respectively.

Depreciation and amortization related to property and equipment was approximately $ 257,829 and $ 269,567 for the nine-month periods ended June 30, 2023 and 2022, respectively.

Other assets consist of the following:

September 30,

Intangible assets, net of accumulated amortization of $ 636,158 at March 31, 2023 and September 30, 2022

Operating lease right-of-use asset

Other non-current assets

Intangible assets consist of licensing and certification rights which are amortized over a defined number of units.

No impairment charges were recorded in the six-month periods ended March 31, 2023 and 2022.

Intangible asset amortization expense was $ 0 and $ 1,063 for the three-month periods ended March 31, 2023 and 2022, respectively.

Intangible asset amortization expense was $ 0 and $ 1,063 for the six-month periods ended March 31, 2023 and 2022, respectively.

The timing of future amortization expense is not determinable because the intangible assets are being amortized over a defined number of units.

Other non-current assets as of March 31, 2023 and September 30, 2022 include the security deposit for an airplane hangar, supplier credit from one of our suppliers and a deposit for medical claims required under the Company’s medical plan.

In addition, other non-current assets as of March 31, 2023 and September 30, 2022 includes $ 47,772 and $ 0 , respectively, of prepaid software licenses that will be earned upon the shipment of a certain product to a customer.

Other non-current assets amortization expense was $ 0 and $ 3,557 for the three-month periods ended March 31, 2023 and 2022, respectively.

Other non-current assets amortization expense was $ 0 and $ 6,577 for the six-month periods ended March 31, 2023 and 2022, respectively.

Other non-current assets as of June 30, 2023 and September 30, 2022 include the security deposit for an airplane hangar, supplier credit from one of our suppliers and a deposit for medical claims required under the Company’s medical plan.

In addition, other non-current assets as of June 30, 2023 and September 30, 2022 includes $ 56,855 and $ 0 , respectively, of prepaid software licenses that will be earned upon the shipment of a certain product to a customer.

Other non-current assets amortization expense was $ 2,601 and $ 2,021 for the three-month periods ended June 30, 2023 and 2022, respectively.

Other non-current assets amortization expense was $ 2,601 and $ 7,534 for the nine-month periods ended June 30, 2023 and 2022, respectively.

Accrued expenses

4 unchanged sentences

Operating lease

Warranty cost and accrual information for the three-and six-month periods ended March 31, 2023 is highlighted below:

Supplier purchase orders

Warranty cost and accrual information for the three-and nine-month periods ended June 30, 2023 is highlighted below:

Three Months Ending

Six Months Ending

March 31, 2023

Nine Months Ending

June 30, 2023

Warranty accrual, beginning of period

4 unchanged sentences

The 2017 Tax Cuts and Jobs Act amended §174 of the U.S.

Internal Revenue Code of 1986, as amended, to require that amounts paid or incurred for specified research or experimental expenditures, including software development expenses, be amortized ratably over 60 months for tax years beginning after 2021.

Under the law change, research and experimental expenditures may no longer be deducted.

The Company may no longer elect an amortization period 60 months or greater beginning when benefits are first realized.

The Company must now amortize these expenses beginning at the mid-point of the tax year in which the expenditures are paid or incurred.

The effective tax rate for the three-month period ended March 31, 2023 was 19.6 % and differs from the statutory tax rate primarily due to an increased R&D credit, as well as permanent items and state taxes.

The effective tax rate for the three-month period ended March 31, 2022 was 21.4 % and differs from the statutory tax rate primarily due to permanent items and state taxes.

The effective tax rate for the six-month period ended March 31, 2023 was 21.4 % and differs from the statutory tax rate primarily due to an increased R&D credit, as well as permanent items and state taxes.

The effective tax rate for the six-month period ended March 31, 2022 was 21.4 % and differs from the statutory tax rate primarily due to permanent items and state taxes.

As a result of the 2017 Tax Cuts and Jobs Act, the Company must amortize amounts paid or incurred for specified research and development expenditures, including software development expenses, ratably over 60 months, beginning at the mid-point of the tax year in which the expenditures are paid or incurred.

The effective tax rate for the three-month and nine-month periods ended June 30, 2023 was 19.3 % and 20.5 %, respectively, and differs from the statutory tax rate primarily due to an increased R&D credit, as well as permanent items and state taxes.

The effective tax rate for the three-month and nine -month periods ended June 30, 2022 was 20.9 % and 21.2 %, respectively.

and differs from the statutory tax rate primarily due to permanent items and state taxes.

Shareholders’ Equity and Share-Based Payments

At March 31, 2023, the Company’s Amended and Restated Articles of Incorporation provides the Company authority to issue 75,000,000 shares of common stock and 10,000,000 shares of preferred stock.

At June 30, 2023, the Company’s Amended and Restated Articles of Incorporation provides the Company authority to issue 75,000,000 shares of common stock and 10,000,000 shares of preferred stock.

Share-Based compensation

5 unchanged sentences

Subject to an adjustment necessary upon a stock dividend, recapitalization, forward split or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase or share exchange, extraordinary or unusual cash distribution, or similar corporate transaction or event, the maximum number of shares of common stock available for awards under the 2019 Plan is 750,000 , plus 139,691 shares of common stock that were authorized but unissued under the 2009 Plan as of the effective date of the 2019 Plan (i.e., April 2, 2019), all of which may be issued pursuant to awards of incentive stock options.

In addition, the 2019 Plan provides that no more than 300,000 shares may be awarded in any calendar year to any employee.

As of March 31, 2023, there were 307,905 shares of common stock available for awards under the 2019 Plan.

If any award is forfeited, terminates or otherwise is settled for any reason without an actual distribution of shares to the participant, the related shares of common stock subject to such award will again be available for future grant.

Any shares tendered by a participant in payment of the exercise price of an option or the tax liability with respect to an award (including, in any case, shares withheld from any such award) will not be available for future grant under the 2019 Plan.

If there is any change in the Company’s corporate capitalization, the Compensation Committee must proportionately and equitably adjust the number and kind of shares of common stock which may be issued in connection with future awards, the number and kind of shares of common stock covered by awards then outstanding under the 2019 Plan, the aggregate number and kind of shares of common stock available under the 2019 Plan, any applicable individual limits on the number of shares of common stock available for awards under the 2019 Plan, the exercise or grant price of any award, or if deemed appropriate, make provision for a cash payment with respect to any outstanding award.

applicable individual limits on the number of shares of common stock available for awards under the 2019 Plan, the exercise or grant price of any award, or if deemed appropriate, make provision for a cash payment with respect to any outstanding award.

In addition, the Compensation Committee may make adjustments in the terms and conditions of any awards, including any performance goals, in recognition of unusual or nonrecurring events affecting the Company or any subsidiary, or in response to changes in applicable laws, regulations, or accounting principles.

The compensation expense related to stock options and awards issued to employees under the 2019 Plan was $ 556,673 and $ 789,798 for the three- and six- month periods ended March 31, 2023, respectively.

The compensation expense related to stock options and awards issued to employees under the 2019 Plan was $ 44,594 and $ 90,185 for the three- and six- month periods ended March 31, 2022, respectively.

The compensation expense under the 2019 Plan related to stock awards issued to non-employee members of the Board was $ 176,703 and $ 226,773 for the three- and six-month periods ended March 31, 2023, respectively.

The compensation expense under the 2019 Plan related to stock awards issued to non-employee members of the Board was $ 159,995 for each of the three- and six-month periods ended March 31, 2022, respectively.

Total compensation expense associated with the 2019 Plan was $ 733,376 and $ 204,589 for the three-month periods ended March 31, 2023 and 2022, respectively.

Total compensation expense associated with the 2019 Plan was $ 1,016,571 and $ 250,180 for the six-month periods ended March 31, 2023 and 2022, respectively.

At March 31, 2023, unrecognized compensation expense of approximately $ 370,427 , net of forfeitures, related to non-vested stock options under the 2019 Plan, will be recognized.

The compensation expense related to stock options and awards issued to employees under the 2019 Plan was $ 164,342 and $ 954,140 for the three- and nine-month periods ended June 30, 2023, respectively.

The compensation expense related to stock options and awards issued to employees under the 2019 Plan was $ 45,088 and $ 135,273 for the three- and nine-month periods ended June 30, 2022, respectively.

The compensation expense under the 2019 Plan related to stock awards issued to non-employee members of the Board was $ 49,742 and $ 276,515 for the three- and nine-month periods ended June 30, 2023, respectively.

The compensation expense under the 2019 Plan related to stock awards issued to non-employee members of the Board was $ 13,331 and $ 173,326 for the three- and nine-month periods ended June 30, 2022, respectively.

Total compensation expense associated with the 2019 Plan was $ 214,084 and $ 58,419 for the three-month periods ended June 30, 2023 and 2022, respectively.

Total compensation expense associated with the 2019 Plan was $ 1,230,655 and $ 308,599 for the nine-month periods ended June 30, 2023 and 2022, respectively.

At June 30, 2023, unrecognized compensation expense of approximately $ 260,398 , net of forfeitures, related to non-vested stock options under the 2019 Plan, will be recognized.

Earnings Per Share

Three Months Ended March 31,

Six Months Ended March 31,

Three Months Ended June 30,

Nine Months Ended June 30,

Basic weighted average shares

6 unchanged sentences

The number of incremental shares from the assumed exercise of stock options and RSUs is calculated by using the treasury stock method.

As of March 31, 2023 and 2022, there were 25,000 and 100,000 options to purchase common stock outstanding, respectively, and 82,886 and 0 shares subject to vesting of restricted stock units outstanding, respectively.

As of June 30, 2023 and 2022, there were 128,815 and 100,000 options to purchase common stock outstanding, respectively, and 76,636 and 0 shares subject to vesting of restricted stock units outstanding, respectively.

The average outstanding diluted shares calculation excludes options with an exercise price that exceeds the average market price of shares during the period.

For the three-month periods ended March 31, 2023 and 2022, respectively, 277,520 and 100,000 diluted weighted-average shares outstanding were excluded from the computation of diluted EPS because the effect would be anti-dilutive.

For the six-month periods ended March 31, 2023 and 2022, respectively, 138,760 and 100,000 diluted weighted-average shares outstanding were excluded from the computation of diluted EPS because the effect would be anti-dilutive.

For the three-month periods ended June 30, 2023 and 2022, respectively, 312,210 and 0 diluted weighted-average shares outstanding were excluded from the computation of diluted EPS because the effect would be anti-dilutive.

For the nine-month periods ended June 30, 2023 and 2022, respectively, 196,577 and 66,667 diluted weighted-average shares outstanding were excluded from the computation of diluted EPS because the effect would be anti-dilutive.

Contingencies

5 unchanged sentences

Prior balances are disclosed below for comparability.

Sales to Eclipse amounted to $ 0.04 million and $ 0.22 million for the three-month periods ended March 31, 2023 and 2022, respectively.

Sales to Eclipse amounted to $ 0.08 million and $ 0.52 million for the six month periods ended March 31, 2023 and 2022, respectively.

As of March 31, 2023 and September 30, 2022, a contract liability to Eclipse was $ 0.05 million and $ 0.12 million, respectively.

Sales to Eclipse amounted to approximately $ 155,000 and $ 57,000 for the three-month periods ended June 30, 2023 and 2022, respectively.

Sales to Eclipse amounted to approximately $ 231,000 and $ 574,000 for the nine-month periods ended June 30, 2023 and 2022, respectively.

As of June 30, 2023 and September 30, 2022, contract liability to Eclipse was approximately $ 25,000 and $ 123,000 , respectively.

The Company accounts for leases in accordance with ASU 2016-02 and records “right-of-use” assets and corresponding lease liabilities on the balance sheet for most leases with an initial term of greater than one year.

18 unchanged sentences

In these instances, we utilize an incremental borrowing rate, which represents the rate of interest that we would pay to borrow on a collateralized basis over a similar term.

The following table presents the lease-related assets and liabilities reported in the Consolidated Balance Sheet as of March 31, 2023:

Classification on the Consolidated Balance Sheet on March 31, 2023

The following table presents the lease-related assets and liabilities reported in the Consolidated Balance Sheet as of June 30, 2023:

Classification on the Consolidated Balance Sheet on June 30, 2023

Operating leases

4 unchanged sentences

Total lease liabilities

Rent expense and cash paid for various operating leases in aggregate are $ 3,669 and $ 7,338 for the three- and six-month periods ended March 31, 2023.

The weighted average remaining lease term is 1.7 years and the weighted average discount rate is 5.0 % as of March 31, 2023.

Future minimum lease payments under operating leases are as follows at March 31, 2023:

Rent expense and cash paid for various operating leases in aggregate are $ 3,669 and $ 11,007 for the three- and nine-month periods ended June 30, 2023.

The weighted average remaining lease term is 1.4 years and the weighted average discount rate is 5.0 % as of June 30, 2023.

Future minimum lease payments under operating leases are as follows at June 30, 2023:

Twelve Months

4 unchanged sentences

Long-term portion of lease obligations

Loan Agreement

On June 28, 2023, the Company and one of its subsidiaries entered into an Amendment to Loan Documents (the “Loan Amendment”) with PNC Bank, National Association (the “PNC”), which amends certain terms of that certain Loan Agreement entered into by the parties on May 11, 2023 (the “Loan Agreement” and, as amended, the “Amended Loan Agreement”) and (ii) a corresponding Term Note in favor of PNC (the “Term Note”), which together provide for a senior secured term loan in an aggregate principal amount of $ 20.0 million, with a maturity date of June 28, 2028.

Availability of funds under the Term Loan was conditioned upon the closing of the transactions contemplated by the Amended Loan Agreement and was used to fund a portion of the Transaction.

Under the agreement, the Company has the right to prepay any amounts outstanding at any time and from time to time, whole or in part;

subject to payment of any break funding indemnification amounts.

Future interest payments on the Term Loan, based on current interest rates, are expected to approximate $ 0.4 million for the remainder of fiscal 2023, $ 1.5 million in fiscal 2024, $ 1.3 million in fiscal 2025, $ 1.1 million in fiscal 2026, and $ 1.6 million thereafter.

The interest rate applicable to loans outstanding under the Term Loan is a floating interest rate equal to the sum of (A) the Term SOFR Rate (as defined in the Term 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.

Commencing on June 30, 2023, the Term Loan will consist of sixty equal monthly principal installments, over a period of ten years , with the balance payable on the maturity date of the Term Loan.

In addition to providing for the Term Loan, the Loan Agreement, together with a corresponding Revolving Line of Credit Note in favor of PNC, executed May 11, 2023 (“Line of Credit Note”), provides 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 (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 Line of Credit Note) plus (B) an unadjusted spread of 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.

The Company will pay an annual commitment fee of 0.15 % on the amount available for borrowing under the revolving credit facility.

The Company was in compliance with all applicable covenants throughout and at June 30, 2023.

As of June 30, 2023, the term loan balance amounted to $ 20,000,000 .

There was no balance drawn on the Revolving Line of Credit as of June 30, 2023.

Fixed mandatory principal repayments due on the outstanding Term Loan are as follows:

Twelve Months

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements