What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-02-14 compared with 2023-08-11 · 112 added, 111 removed, 154 unchanged (59% of the section changed)

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and its consolidated subsidiaries.

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

Many of the factors that will determine the Company’s future results are beyond the ability of management to control or predict.

The forward-looking statements in this report are only predictions and actual events or results may differ materially.

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● the availability of government funding;

● the availability and efficacy of vaccines (including vaccine boosters) and their global deployment in response to the COVID-19 pandemic (including as a result of the impact of any newer variants or strains of SARS-CoV-2);

● the impact of general economic trends (such as rising interest rates and recent bank failures in the United States) on the Company’s business and operations;

● disruptions in the Company’s supply chain, customer base and workforce, including as a result of the COVID-19 pandemic;

● the ability to gain regulatory approval of products in a timely manner;

● the impact of general economic trends on the Company’s business;

● disruptions in the Company’s supply chain, customer base and workforce;

● the ability to gain, drive and sustain regulatory approval, including domestic and international certifications, of products in a timely manner;

● delays in receiving components from third-party suppliers;

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

Except as expressly required by the federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise after the date of this report.

operations in any past period should not be considered indicative of the results to be expected for future periods.

Fluctuations in operating results may result in fluctuations in the price of the Company’s common stock.

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.

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”).

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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Innovative Solutions and Support, Inc.

(the “Company,” “IS&S,” “we” or “us”) was incorporated in Pennsylvania on February 12, 1988.

was incorporated in Pennsylvania on February 12, 1988.

The Company operates in one business segment as a systems integrator that designs, develops, manufactures, sells and services air data equipment, engine display systems, standby equipment, primary flight guidance, autothrottles and cockpit display systems for retrofit applications and original equipment manufacturers (“OEMs”).

The Company supplies integrated Flight Management Systems (“FMS”), Flat Panel Display Systems (“FPDS”), FPDS with Autothrottle, air data equipment, Integrated Standby Units (“ISU”), ISU with Autothrottle and advanced GPS receivers that enable reduced carbon footprint navigation.

The Company supplies integrated flight management systems (“FMS”), flat panel display systems (“FPDS”), FPDS with autothrottle, air data equipment, integrated standby units, integrated standby units with autothrottle and advanced GPS receivers that enable reduced carbon footprint navigation, communication and navigation products and inertial reference units.

The Company has continued to position itself as a system integrator, which capability provides the Company with the potential to generate more substantive orders over a broader product base.

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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.

For several years the Company has been working with advances in technology to provide pilots with more information to enhance both the safety and efficiency of flying, and has developed its COCKPIT/IP® Cockpit Information Portal (“CIP”) product line, that incorporates proprietary technology, low cost, reduced power consumption, decreased weight, and increased functionality.

The Company has been working with advances in technology to provide pilots with more information to enhance both the safety and efficiency of flying, and has developed its COCKPIT/IP® Cockpit Information Portal (“CIP”) product line, that incorporates proprietary technology, low cost, reduced power consumption, decreased weight and increased functionality.

The Company has incorporated Electronic Flight Bag (“EFB”) functionality, such as charting and mapping systems, into its FPDS product line.

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The Company’s FMS/FPDS product line is designed for new production and retrofit applications into general aviation, commercial air transport and military transport aircraft.

In addition, the Company offers what we believe to be a state-of-the-art ISU, integrating the full functionality of the primary and navigation displays into a small backup-powered unit.

This ISU builds on the Company’s legacy air data computer to form a complete next-generation cockpit display and navigation upgrade offering to the commercial and military markets.

In addition, the Company offers what we believe to be state-of-the-art integrated standby units, integrating the full functionality of the primary and navigation displays into a small backup-powered unit.

These integrated standby units builds on the Company’s legacy air data computer to form a complete next-generation cockpit display and navigation upgrade offering to the commercial and military markets.

The Company has developed and received certification from the FAA on its NextGen Flight Deck featuring its ThrustSense® Integrated PT6 Autothrottle (“ThrustSense® Autothrottle”) for retrofit in the Pilatus PC-12.

The NextGen Flight Deck features Primary Flight and Multi-Function Displays and ISUs, as well as an Integrated FMS and EFB System.

The NextGen Flight Deck features Primary Flight and Multi-Function Displays and integrated standby units, as well as an Integrated FMS and EFB System.

The innovative avionics suite includes dual flight management systems, autothrottles, synthetic vision and enhanced vision.

The NextGen enhanced avionics suite is available for integration into other business aircraft with Non-FADEC and FADEC engines.

The Company has developed, its FAA-certified ThrustSense® Autothrottle for retrofit in the King Air, dual turbo prop PT6 powered aircraft.

The NextGen enhanced avionics suite is available for integration into other business aircraft with full-authority digital engine control (“FADEC”) and non-FADEC engines.

The Company has developed its FAA-certified ThrustSense® Autothrottle for retrofit in the King Air and dual turbo prop PT6 powered aircraft.

The autothrottle is designed to automate the power management for speed and power control including go-around.

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The Company has signed a multi-year agreement with Textron to supply ThrustSense® on the King Air 360 and King Air 260.

ThrustSense® is also available for retrofit on King Airs aircraft through Textron service centers and third-party service centers.

ThrustSense® is also available for retrofit on King Air aircraft through Textron service centers and third-party service centers.

The Company has also developed an FAA-certified safety mode feature for its King Airs aircraft ThrustSense® Autothrottle, LifeGuard™, which provides critical Vmca protection that proportionally reduces engine power to maintain directional control during an engine-out condition.

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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).

On the other hand, the Company believes that in adverse economic conditions, customers that may have otherwise elected to purchase newly manufactured aircraft may be interested instead in retrofitting existing aircraft as a cost-effective alternative, thereby creating a market opportunity for IS&S.

Cost of sales related to product sales comprises material, components and third-party avionics purchased from suppliers, direct labor, and overhead costs.

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

(“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 (the “Transaction”).

The exclusive licensing of these product lines from Honeywell enhances the Company’s current offerings in the air transport, military and business aviation markets.

In addition, there are potential cost synergies from better utilization of the Company’s skilled engineering team and its existing operational capacity.

The Company believes the Honeywell Agreement will help to accelerate the Company’s growth and enhance its global reputation for delivering some of the industry’s best price-for-performance value propositions.

Costs related to product sales comprises material, components and third-party avionics purchased from suppliers, direct labor and overhead costs.

Many of the components are standard, although certain parts are manufactured to meet IS&S specifications.

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Cost of sales 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.

These costs are incurred pursuant to contractual arrangements and are accounted for typically as contract costs within cost of sales, with the reimbursement accounted for as a sale in accordance with the percentage-of-completion method or completed contract method of accounting.

Costs related to Engineering Development Contracts (“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 as contract costs within cost of sales, with the reimbursement accounted for as a sale in accordance with the percentage-of-completion method or completed contract method of accounting.

Company funded research and development (“R&D”) expenditures relate to internally-funded efforts for the development of new products and the improvement of existing products.

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Selling, general and administrative expenses consist of sales, marketing, business development, professional services, salaries and benefits for executive and administrative personnel, facility costs, recruiting, legal, accounting and other general corporate expenses.

The Company sells its products to agencies of the United States and foreign governments, aircraft operators, aircraft modification centers and OEMs.

Customers have been and may continue to be affected by changes in economic conditions both in the United States and abroad.

Such changes may cause customers to curtail or delay their spending on both new and existing aircraft.

Factors that can impact general economic conditions and the level of spending by customers include, but are not limited to, general levels of consumer spending, increases in fuel and energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence, inflation, public health crises and pandemics, including the COVID-19 pandemic 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.

Environmental, Social and Governance Considerations

In recent years, environmental, social and governance (“ESG”) issues have become an increasing area of focus for some of our shareholders, customers and suppliers.

Management and the Company’s Board of Directors are committed to identifying, assessing and understanding the potential impact of ESG issues and related risks on the Company’s business model, as well as potential areas of improvement.

We are committed to recruiting, motivating and developing a diversity of talent.

We are an equal opportunity employer and a Vietnam Era Veterans’ Readjustment Assistance Act federal contractor.

All qualified applicants receive consideration for employment without regard to race, color, religion, sex, sexual orientation, gender identity, national origin, disability status, protected veteran status, or any other characteristic protected by law.

The nature of our business also supports long-term sustainability.

Historically, a majority of the Company’s sales have come from the retrofit market, in which the Company, by making upgrades to improve the functionality and safety of existing machinery, facilitates the re-use and recycling of aircraft and equipment that might otherwise be scrapped as obsolete.

The Company’s GPS receivers also facilitate reduced carbon footprint navigation.

The Company also plans to enhance its focus on the environmental impact of its operations.

Critical Accounting Policies and Estimates

The discussion and analysis of financial condition and consolidated results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States.

preparation of these consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities.

Management has determined that the most critical accounting estimates are those related to revenue recognition, valuation of tangible and intangible assets acquired, long term contracts, the useful lives of long-lived assets for depreciation and amortization, the recoverability of long-lived assets, evaluation of goodwill impairment and contingencies.

On an ongoing basis, IS&S management evaluates its estimates based upon historical experience and various other assumptions that it believes to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

The preparation of these consolidated financial statements requires estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses and related disclosure of contingent assets and liabilities.

Management has determined that the most critical accounting policies and estimates are those related to revenue recognition, inventory valuation and valuation of tangible and intangible assets acquired.

On an ongoing basis, the Company’s management evaluates its estimates based upon historical experience and various other assumptions that it believes to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates.

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There have been no significant changes in the Company’s critical accounting policies since September 30, 2023, except new critical accounting policies in acquisition, intangible assets and goodwill.

See also Note 1 to the unaudited consolidated financial statements for the three-and nine-month periods ended June 30, 2023 as set forth herein.

See also Note 1 to the unaudited condensed consolidated financial statements for the three-month period ended December 31, 2023 as set forth herein.

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

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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.

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

The Company also uses best estimates and assumptions to determine the useful lives of those acquired intangible assets with a finite life.

Critical estimates in valuing certain of the intangible assets and goodwill acquired include:

● future expected cash flows from customer contracts and license agreements;

● future expected cash flows from customer contracts and license agreement;

● historical and expected customer attrition rates and anticipated growth in revenue from acquired customers;

● estimated replacement costs for equipment acquired;

● obsolescence rate applied to finished goods and raw materials acquired;

● discount rates.

Intangible Assets

Intangible assets consist of customer relationship, license agreements, and licensing and certification rights, and these assets are carried at cost less accumulated amortization and any impairment charge.

Intangible assets consist of customer relationship, license agreement, licensing and certification rights and these assets are carried at cost less accumulated amortization and any impairment charge.

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

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Impairment of Goodwill

The Company evaluates the carrying amount of goodwill annually or more frequently if events or circumstances indicate that the goodwill may be impaired.

The Company evaluates the carrying amount of goodwill at fiscal year-end September 30 or more frequently if events or circumstances indicate that the goodwill may be impaired.

Factors that could trigger an impairment review include significant underperformance relative to historical or forecasted operating results, a significant decrease in the market value of an asset or significant negative industry or economic trends.

Assumptions used in the impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with

internal projections and operating plans.

Assumptions used in the impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with internal projections and operating plans.

The Company believes these estimates and assumptions are reasonable and comparable to those that would be used by other marketplace participants.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED

JUNE 30, 2023 AND 2022

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED

DECEMBER 31, 2023 AND 2022

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,

Customer service

Engineering development contracts

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Cost of sales:

Customer service

Engineering development contracts

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Operating income

Interest expense

Interest income

Income before income taxes

Income tax expense

Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022

Net sales were $8.0 million for the three months ended June 30, 2023 compared to $6.9 million for the three months ended June 30, 2022, an increase of 14.8%.

Product sales increased $1.0 million and customer service sales remained flat compared to the year ago quarter.

This increase in product sales for the three months ended June 30, 2023 was primarily the result of additional shipments of displays for retrofit programs to commercial air transport customers.

The increase was also due to increase of shipments of OEM sales to Boeing under the KC-46A platform.

Cost of sales.

Cost of sales increased by $345,000, or 12.0%, to $3.2 million, or 40.5% of net sales, in the three months ended June 30, 2023, compared to $2.9 million or 41.5% of net sales, in the three months ended June 30, 2022.

The increase in cost of sales was primarily the result of an increase in product sales volume for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

The Company’s overall gross margin was 59.5% and 58.5% for the three months ended June 30, 2023 and 2022, respectively.

The increase in gross margin percentage for the three months ended June 30, 2023 is attributable to favorable leveraging of fixed costs resulting from the increased sales and production volume and a favorable sales mix.

Research and development.

R&D expense increased $175,000 or 25.9% in the three months ended June 30, 2023 from $676,000 in the three months ended June 30, 2022.

As a percentage of net sales, R&D expense increased to 10.7% of net sales in the three months

ended June 30, 2023 from 9.8% of net sales in the three months ended June 30, 2022 reflecting the hiring of engineers, related product development and increased R&D projects.

Selling, general and administrative.

Selling, general and administrative expense increased by $632,000 or 37.3% to $2.3 million in the three months ended June 30, 2023 from $1.7 million in the three months ended June 30, 2022.

As a percentage of net sales, selling, general and administrative expenses was 30.1% in the three months ended June 30, 2023 compared to 24.4% for the prior year period.

The overall increase in selling, general and administrative expense in the quarter was primarily the result of increased sales and marketing costs, legal and professional fees incurred as part of the Honeywell asset acquisition, as well as non-cash executive stock awards.

Interest income.

Interest income increased by $175,000 to $186,000 in the three months ended June 30, 2023 from $10,000 in the three months ended June 30, 2022, mainly a result of increased cash balance and higher interest rates earned during the current year period compared to the same period in the prior year.

Other income.

Other income is mainly composed of royalties earned and increased by $68,000 to $90,000 in the three months ended June 30, 2023 compared to the same period in the prior year.

Income tax expense.

The income tax expense for the three months ended June 30, 2023 was $340,000 as compared to $359,000 for the three months ended June 30, 2022.

The effective tax rate for the three-month period ended June 30, 2023 was 19.3% and differs from the statutory tax rate primarily due to permanent items and state taxes.

The Company reported net income for the three months ended June 30, 2023 of $1.4 million and remained flat compared to net income of $1.4 for the three months ended June 30, 2022.

On a diluted basis, the net income per share was $0.08 for the three months ended June 30, 2023 and remained flat compared to net income per share of $0.08 for the three months ended June 30, 2022.

Nine Months Ended June 30, 2023 Compared to the Nine Months Ended June 30, 2022

Net sales were $21.8 million for the nine months ended June 30, 2023 compared to $20.5 million for the nine months ended June 30, 2022, an increase of 6.5%.

Product sales increased $1.1 million, customer service was flat, and EDC sales doubled to $234,000 in the nine months ended June 30, 2023 compared to the same period in the prior year.This increase in product sales for the nine months ended June 30, 2023 primarily resulted from increased sales to our OEM customers, which include Pilatus, Textron and Boeing.

Sales increases were also seen in our new auto-throttle installations.

Income tax expense (benefit)

Three Months Ended December 31, 2023 Compared to the Three Months Ended December 31, 2022

Net sales were $9,308,063 for the three months ended December 31, 2023 compared to $6,516,256 for the three months ended December 31, 2022, an increase of 42.8%.

Product sales decreased $664,100 or 13.1% and customer service sales increased $3,166,098 or 298.4% as compared to the year ago quarter.

The decrease in product sales for the three months ended December 31, 2023 was primarily the result of reduced shipments of displays for retrofit programs to commercial air transport customers and reduced shipments of displays to general aviation customers.

The decrease was partially offset by an increase of shipments to military customers.

The increase in customer service primarily reflects customer service sales of the product lines acquired from Honeywell.

EDC sales increased $289,809, or 79%, compared to the year-ago quarter reflecting increased EDC business.

Cost of sales.

Cost of sales increased $347,000, or 4.2%, to $8.6 million, or 39.5% of net sales, in the nine months ended June 30, 2023, compared to $8.3 million or 40.4% of net sales, in the nine months ended June 30, 2022.

The increase in cost of sales was primarily the result of an increase in product sales volume for the nine months ended June 30, 2023 compared to the nine months ended June 30, 2022.

The Company’s overall gross margin was 60.5% and 59.6% for the nine months ended June 30, 2023 and 2022, respectively.

The increase in gross margin percentage for the nine months ended June 30, 2023 is attributable to favorable leveraging of fixed costs resulting from the increased sales and production volume and a favorable sales mix.

Cost of sales increased by $992,449, or 12.0%, to $3,784,901, or 40.7% of net sales, in the three months ended December 31, 2023, compared to $2,792,452 or 42.9% of net sales, in the three months ended December 31, 2022.

The increase in cost of sales was primarily the result of an increase in customer service sales volume for the three months ended December 31, 2023 compared to the three months ended December 31, 2022.

The Company’s overall gross margin was 59.3% and 57.1% for the three months ended December 31, 2023 and 2022, respectively.

This increase in overall gross margin percentage for the three months ended December 31, 2023 is attributable to more favorable absorption of fixed costs resulting from the increased sales volume.

service gross margin percentage declined for the three month period ended December 31, 2023 from the year ago quarter due to increased material costs for the repair of product lines acquired from Honeywell.

Research and development.

R&D expense increased $325,000, or 15.8%, to $2.4 million in the nine months ended June 30, 2023 from $2.1 million in the nine months ended June 30, 2022.

As a percentage of net sales, R&D expense increased to 10.9% of net sales in the nine months ended June 30, 2023 from 10.1% of net sales in the nine months ended June 30, 2022 reflecting an increase in hiring engineers and working on product development and related programs/internal projects.

R&D expense was $901,144 an increase of $230,699, or 34.4%, in the three months ended December 31, 2023 from $670,445 in the three months ended December 31, 2022.

This increase in R&D expense was due to higher salaries and benefits due to higher headcount.

As a percentage of net sales, R&D expense decreased to 9.7% of net sales for the three months ended December 31, 2023.

Selling, general and administrative.

Selling, general and administrative expenses increased by $1.8 million to $7.0 million in the nine months ended June 30, 2023 from $5.2 million in the nine months ended June 30, 2022.

As a percentage of net sales, selling, general and administrative expenses increased to 32.6% of net sales in the nine months ended June 30, 2023 from 25.5% of net sales in the nine months ended June 30, 2022.

The increase in selling, general and administrative expense in the period was primarily the result of personnel additions in sales and marketing, legal and business development related to the acquisition, investor relations and investor facing activities and non-cash long-term compensations post COVID.

Selling, general and administrative expenses were $3,006,819, an increase of $744,956, or 32.9%, in the three months ended December 31, 2023 from $2,261,863 in the three months ended December 31, 2022.

The overall increase in selling, general and administrative expense in the quarter ended December 31, 2023 was primarily the result of increased sales and marketing costs which included the amortization expense of the customer relationships intangible asset resulting from the Transaction and professional and consulting fees.

These increases were partially offset by the $162,000 gain from the sale of the Company’s asset held for sale, the King Air aircraft.

As a percentage of net sales, selling, general and administrative expenses, were 32.3% in the three months ended December 31, 2023 compared to 34.7% for the prior year period.

Interest expense.

Interest expense was $360,013 for the three months ended December 3, 2023 resulting from borrowings under the Company’s debt facility with PNC bank.

There was no interest expense in the three months ended December 31, 2022 as the Company had no debt agreements in place during the period.

Interest income.

Interest income increased by $422,000 to $432,000 in the nine months ended June 30, 2023 from $11,000 in the nine months ended June 30, 2022, mainly a result of increased cash on hand and higher interest rates compared to the same period in the prior year.

Interest income decreased by $36,413 to $79,479 in the three months ended December 31, 2023 from $115,892 in the three months ended December 31, 2022, mainly as a result of decreased cash balances during the current year period compared to the same period in the prior year.

Other income.

Other income is mainly composed of royalties earned and increased by $82,000 to $132,000 in the nine months ended June 30, 2023 compared to the same period in the prior year.

Other income is mainly composed of royalties earned and remained relatively unchanged in the three months ended December 31, 2023 compared to the same period in the prior year.

Income tax expense.

The income tax expense for the nine months ended June 30, 2023 was $877,000 as compared to $1.1 million the nine months ended June 30, 2021.

The effective tax rate for the nine-month period ended June 30, 2022 was 20.5% and differs from the statutory tax rate primarily due to permanent items and state taxes.

The Company reported net income for the nine months ended June 30, 2023 of $3.4 million compared to net income of $3.9 million for the nine months ended June 30, 2022.

On a diluted basis, the net income per share was $0.19 for the nine months ended June 30, 2023 compared to net income per share of $0.23 for the nine months ended June 30, 2022.

The effective tax rate for the three-month period ended December 31, 2023 was 21.8% and differs from the statutory tax rate primarily due to higher state taxes related to a taxable gain from the sale of the Company’s King Air aircraft.

The effective tax rate for the three-month period ended December 31, 2022 was 24.5% and differs from the statutory tax rate primarily due to permanent items, first quarter discrete adjustments related to stock compensation and state taxes.

The Company reported net income for the three months ended December 31, 2023 of $1,057,350 as compared to net income of $698,651 for the three months ended December 31, 2022.

On a diluted basis, the net income per share was $0.06 for the three months ended December 31, 2023 compared to net income per share of $0.04 for the three months ended December 31, 2022.

Liquidity and Capital Resources

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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 investing activities

Net cash provided by financing activities

(1) Excludes contract liability

Net cash provided by (used in) investing activities

Net cash (used in) provided by financing activities

(1) Calculated as:

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The declaration and payment of any dividend in the future will be at the discretion of the Company’s Board of Directors.

Debt Facility

On December 19, 2023, the Company and PNC entered into an Amendment to Loan Documents (the “Restated Loan Amendment”) and a corresponding Amended and Restated Revolving Line of Credit Note (“Restated Line of Credit Note”) and Amended and Restated Line of Credit and Investment Sweep Rider (the “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 Amendment and to pay off and close the loan evidenced by that certain Term Note executed in favor of PNC, dated June 28, 2023, which provides for a senior secured term loan in an aggregate principal amount of $20,000,000, with a maturity date of June 28, 2028.

The interest rate applicable to loans outstanding under the Restated Line of Credit was a rate per annum equal to the sum of (A) Daily SOFR (as defined in the Restated Line of Credit Note) plus (B) an unadjusted spread of Applicable SOFR Margin (as defined in the Restated Line of Credit Note) 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 Restated Line of Credit Note.

Stifel Sales Agreement

On September 22, 2023, the Company entered into an at-the-market equity offering Sales Agreement (the “ATM Sales Agreement”) with Stifel, Nicolaus & Company, Incorporated (the “Sales Agent”), pursuant to which the Company may offer and sell from time to

time through the Sales Agent up to $40 million of shares of its common stock.

The shares will be offered and sold pursuant to the Company’s shelf registration statement on Form S-3 (File No.

333-267595), which was declared effective by the SEC on October 14, 2022.

The Company filed a prospectus supplement, dated September 22, 2023, with the SEC in connection with the offer and sale of the shares.

Subject to the terms and conditions of the ATM Sales Agreement, the Sales Agent will use commercially reasonable efforts to sell shares of the Company’s common stock from time to time, based upon the Company’s instructions.

The Company is not obligated to sell any shares under the ATM Sales Agreement and the Company or the Sales Agent may at any time suspend solicitation and offers under the ATM Sales Agreement or terminate the ATM Sales Agreement.

The Company has provided the Sales Agent with customary indemnification rights and the Sales Agent will be entitled to compensation for its services of up to 3.0% of the gross sales price per share of the shares of the Company’s common stock sold through the Sales Agent.

Sales of the shares of the Company’s common stock, if any, under the ATM Sales Agreement may be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act, including sales made directly on or through Nasdaq or any other existing trading market for the Company’s common stock, in negotiated transactions at market prices prevailing at the time of sale or at prices related to such prevailing market prices and/or any other method permitted by law.

During the year ended September 30, 2023, we did not sell any shares of common stock under the ATM Sales Agreement.

Operating activities

Net cash provided by operating activities was $0.9 million for the nine-month period ended June 30, 2023 and consisted primarily of funding from net income of $3.4 million, offset by an increase in accounts receivable of $1.6 million and a decrease in accrued expenses of $0.9 million.

Net cash provided by operating activities of $6.4 million for the nine-month period ended June 30, 2022 resulted primarily from funding from net income of $3.9 million, a decrease in accounts receivables of $1.0 million and a decrease in deferred income taxes of $0.8 million.

Net cash provided by operating activities was $4.2 million for the three-month period ended December 31, 2023 and consisted primarily of funding from net income of $1.1 million, a decrease in accounts receivable of $4.2 million partially offset by an increase in inventory of $1.7 million.

Investing activities

Net cash used in investing activities was $36.0 million for the nine-month period ended June 30, 2023 and consisted primarily of the asset purchase acquisition of Honeywell.

Net cash used in investing activities was $0.2 million for the nine-month period ended June 30, 2022 and consisted primarily of the purchase of laboratory test equipment and computer hardware.

Net cash provided by investing activities was $2.0 million for the three-month period ended December 31, 2023 and consisted primarily of proceeds of $2.2 million from the sale of the Company’s King Air aircraft.

Financing activities

Net cash provided by financing activities was $20.4 million for the nine-month period ended June 30, 2023 and consisted of proceeds from a new credit facility of $20.0 million and the exercise of stock options.

Net cash provided by financing activities was $0.02 million for the nine-month period ended June 30, 2022 and consisted of proceeds from the exercise of stock options.

Net cash used in financing activities was $8.9 million for the three-month period ended December 31, 2023 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.

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

Environmental, Social and Governance Considerations

In recent years, environmental, social and governance (“ESG”) issues have become an increasing area of focus for some of our shareholders, customers and suppliers.

Management and the Company’s Board of Directors are committed to identifying, assessing, and understanding the potential impact of ESG issues and related risks on the Company’s business model, as well as potential areas of improvement.

We are committed to recruiting, motivating and developing a diversity of talent.

We are an equal opportunity employer and a Vietnam Era Veterans’ Readjustment Assistance Act federal contractor.

The nature of our business also supports long-term sustainability.

The Company’s GPS receivers also facilitate reduced carbon footprint navigation.

The Company also plans to enhance its focus on the environmental impact of its operations.

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

Backlog activity for the three- and nine-month periods ended June 30, 2023:

Backlog activity for the three-month period ended December 31, 2023:

Three Months Ended

Six Months Ended

June 30, 2023

December 31, 2023

Backlog, beginning of period

Bookings, net

Recognized in revenue

bookings during period, net

sales recognized during period

Backlog, end of period

At June 30, 2023, the majority of the Company’s backlog is expected to be filled within the next twelve months.

At December 31, 2023, the majority of the Company’s backlog is expected to be filled within the next twelve months.

To the extent new business orders do not continue to equal or exceed sales recognized in the future from the Company’s existing backlog, future operating results may be impacted negatively.

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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 2. Management’s Discussion and Analysis