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Item 1. Financial Statements

2024-05-14 compared with 2024-02-14 · 123 added, 196 removed, 453 unchanged (41% of the section changed)

27 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 December 31, 2023 and September 30, 2023

No shares issued and outstanding at March 31, 2024 and September 30, 2023

Common stock, $ .001 par value:

75,000,000 shares authorized, 19,550,184 and 19,543,441 issued at December 31, 2023 and September 30, 2023, respectively

75,000,000 shares authorized, 19,556,434 and 19,543,441 issued at March 31, 2024 and September 30, 2023, respectively

Additional paid-in capital

Retained earnings (accumulated deficit)

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

Retained earnings

Treasury stock, at cost, 2,096,451 shares at March 31, 2024 and at September 30, 2023

( 21,368,537 )

5 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended December 31,

Three Months Ended March 31,

Six Months Ended March 31,

Customer service

13 unchanged sentences

Income before income taxes

Income tax expense (benefit)

Income tax expense

Net income per common share:

3 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Three Months Ended December 31, 2023

shareholders’

4 unchanged sentences

( 21,368,537 )

Share-based compensation

Balance, March 31, 2024

( 21,368,537 )

The accompanying notes are an integral part of these statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Three Months Ended December 31, 2022

shareholders’

5 unchanged sentences

( 21,368,537 )

Share-based compensation

Balance, March 31, 2023

( 21,368,537 )

The accompanying notes are an integral part of these statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended December 31,

For the Six Months Ended March 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

33 unchanged sentences

Cash and cash equivalents, beginning of year

Cash and cash equivalents and restricted cash, end of year

Cash and cash equivalents, end of year

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid for income taxes

SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION

Transfer from prepaid inventory to purchases of property and equipment

Transfer from prepaid inventory to inventory

The accompanying notes are an integral part of these statements.

2 unchanged sentences

Summary of Significant Accounting Policies

Certain of Innovative Solutions and Support, Inc.’s (the “Company,” “IS&S,” “we” or “us”) significant accounting policies are described below.

All of the Company’s significant accounting policies are disclosed in the notes to the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023.

Description of the Company

Innovative Solutions and Support, Inc.

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

The Company 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”).

10 unchanged sentences

Basis of Presentation

The accompanying unaudited consolidated financial statements are presented pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) in accordance with the disclosure requirements for the quarterly report on Form 10-Q and, therefore, do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete annual financial statements.

In the opinion of Company management, the unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the results for the interim periods presented.

The consolidated balance sheet as of September 30, 2023 is derived from the audited financial statements of the Company.

Operating results for the three-month period ended December 31, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2024 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, 2023.

The accompanying unaudited condensed consolidated financial statements are presented pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) in accordance with the disclosure requirements for the quarterly report on Form 10-Q and, therefore, do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete annual financial statements.

In the opinion of Company management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the results for the interim periods presented.

The condensed consolidated balance sheet as of September 30, 2023 is derived from the audited financial statements of the Company.

Operating results for the three- and six-month periods ended March 31, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2024 which cannot be determined at this time.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023.

Principles of Consolidation

The Company’s consolidated financial statements include the accounts of its wholly-owned subsidiaries.

The Company’s condensed consolidated financial statements include the accounts of its wholly-owned subsidiaries.

All intercompany balances and transactions have been eliminated in consolidation.

2 unchanged sentences

Actual results could differ from those estimates.

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.

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, inventory obsolescence, 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 condensed consolidated statements of operations in the period they are determined.

Principles of Acquisitions

10 unchanged sentences

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

2 unchanged sentences

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.

They are assessed for impairment in accordance with the Company’s policy on assessing long-lived assets for impairment described in the notes of the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023.

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

5 unchanged sentences

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.

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.

11 unchanged sentences

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 December 31, 2023 and September 30, 2023 consist of cash on deposit and cash invested in money market funds with financial institutions.

Inventory Valuation

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

Assets Held for Sale

Assets to be disposed of by sale (“disposal groups”) are reclassified into “assets held for sale” if their carrying amounts are principally expected to be recovered through a sale transaction rather than through continuing use.

The reclassification occurs when the disposal group is available for immediate sale and the sale is probable.

These criteria are generally met when an agreement to sell exists, or management has committed to a plan to sell the assets within one year.

Disposal groups are measured at the lower of carrying amount or fair value less costs to sell and are not depreciated or amortized.

When the net realizable value of a disposal group increases during a period, a gain can be recognized to the extent that it does not increase the value of the disposal group beyond its original carrying value when the disposal group was reclassified as held for sale.

The fair value of a disposal group, less any costs to sell, is assessed each reporting period it remains classified as held for sale and any remeasurement to the lower of carrying value or fair value less costs to sell is reported as an adjustment to the carrying value of the disposal group.

Property and Equipment

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 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.

The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to estimated future cash flows expected to result from use of the asset.

If the carrying amount of the asset exceeds the estimated expected undiscounted future cash

flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset to its fair value.

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

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

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 condensed consolidated statements of operations.

Fair Value of Financial Instruments

11 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 December 31, 2023 and September 30, 2023, according to the valuation techniques the Company used to determine their fair values.

Fair Value Measurement on December 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 March 31, 2024 and September 30, 2023, according to the valuation techniques the Company used to determine their fair values.

Fair Value Measurement on March 31, 2024

Quoted Price in

11 unchanged sentences

Money market funds

The December 31, 2023 money market funds balance differs from the cash and cash equivalents balance on the consolidated balance sheet due to the timing of sweep transactions within the PNC cash investment accounts.

The March 31, 2024 money market funds balance differs from the cash and cash equivalents balance on the condensed consolidated balance sheet due to the timing of sweep transactions within the PNC cash investment accounts.

Revenue Recognition

6 unchanged sentences

Identify the contract with a customer

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.

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

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.

2 unchanged sentences

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.

Most of our revenue is

derived from purchases under which we provide a specific product or service and, as a result, there is only one performance obligation.

In the event that a contract includes multiple promised goods or services, such as an EDC contract which includes both engineering services and a resulting product shipment, the Company must apply judgment to determine whether promised goods or services are capable of being distinct in the context of the contract.

25 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-month periods ended December 31, 2023 and 2022.

Therefore, no adjustment on any contract was material to our consolidated financial statements for the three-month periods ended December 31, 2023 and 2022.

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, 2024 and 2023.

Therefore, no adjustment on any contract was material to our condensed consolidated financial statements for the three- and six-month periods ended March 31, 2024 and 2023.

Contract Balances

7 unchanged sentences

Increases due to invoicing prior to satisfaction of performance obligations

December 31, 2023

Lease Recognition

The Company accounts for leases in accordance with ASU 2016-02, “ Leases” (Topic 842).

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement.

Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and short-term and long-term lease liabilities, as applicable.

The Company does not have any financing leases that are material in nature.

Income taxes are recorded in accordance with ASC Topic 740, “ Income Taxes ” (“ASC Topic 740”), which utilizes a balance sheet approach to provide for income taxes.

Under this method, the Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets, liabilities and expected benefits of

utilizing NOLs and tax credit carryforwards.

The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and are reflected in the consolidated financial statements in the period of enactment.

At the end of each interim reporting period, the Company prepares an estimate of the annual effective income tax rate and applies that annual effective income tax rate to ordinary year-to-date pre-tax income for the interim period.

Specific tax items discrete to a particular quarter are recorded in income tax expense for that quarter.

The estimated annual effective tax rate used in providing for income taxes on a year-to-date basis may change in subsequent periods.

Deferred tax assets are reduced by a valuation allowance if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized.

Significant weight is given to evidence that can be verified objectively and significant management judgment is required in determining any valuation allowance recorded against net deferred tax assets.

The Company evaluates deferred income taxes on a quarterly basis to determine if a valuation allowance is required by considering available evidence.

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

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

The Company 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.

The Company records a liability for the difference between the (i) benefit recognized and measured for financial statement purposes and (ii) the tax position taken or expected to be taken on the Company’s tax return.

To the extent that the Company’s assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made.

The Company has elected to record any interest or penalties associated with uncertain tax positions as income tax expense.

The Company files a consolidated U.S.

federal income tax return.

The Company prepares and files tax returns based on the interpretation of tax laws and regulations and records estimates based on these judgments and interpretations.

In the normal course of business, the tax returns are subject to examination by various taxing authorities.

Such examinations may result in future tax and interest assessments by these taxing authorities and the Company records a liability when it is probable that there will be an assessment.

The Company adjusts the estimates periodically as a result of ongoing examinations by and settlements with the various taxing authorities and changes in tax laws, regulations and precedent.

The consolidated tax provision of any given year includes adjustments to prior years’ income tax accruals that are considered appropriate and any related estimated interest.

Management believes that it has made adequate accruals for income taxes.

Differences between estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material effect on the Company’s consolidated financial position but could possibly be material to its consolidated results of operations or cash flow of any one period.

Engineering Development

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

Engineering development expense consists primarily of payroll-related expenses of employees engaged in EDC projects, engineering related product materials and equipment and subcontracting costs.

R&D charges incurred for product design, product enhancements and future product development are expensed as incurred.

Product development and design charges related to specific customer contracts are charged to cost of sales-EDC based on the method of contract accounting (either percentage-of-completion or completed contract) applicable to such contracts.

Treasury Stock

We account for treasury stock purchased under the cost method and include treasury stock as a component of shareholders’ equity.

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

Share-Based Compensation

The Company accounts for share-based compensation under ASC Topic 718, “Stock Compensation” (“ASC Topic 718”), which requires the Company to measure the cost of employee or non-employee director services received in exchange for an award of equity

instruments based on the grant-date fair value of the award using an option pricing model.

The Company recognizes such cost over the period during which an employee or non-employee director is required to provide service in exchange for the award.

Our policy is to recognize forfeitures as incurred.

Accordingly, adoption of ASC Topic 718’s fair value method results in recording compensation costs under the Company’s stock-based compensation plans.

The Company determined the fair value of its stock option awards at the date of grant using the Black-Scholes option pricing model.

Option pricing models and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of its awards.

These assumptions and judgments include estimating future volatility of the Company’s stock price, expected dividend yield, future employee turnover rates and future employee stock option exercise behaviors.

Changes in these assumptions can materially affect fair value estimates.

The Company does not believe that a reasonable likelihood exists that there will be a material change in future estimates or assumptions used to determine share-based compensation expense.

However, if actual results are not consistent with the Company’s estimates or assumptions, the Company would adjust its estimates.

Such adjustments could have a material impact on the Company’s financial position.

Warranty Reserves

The Company offers warranties on some products of various lengths, however the standard warranty period is twenty-four months .

At the time of shipment, the Company establishes a reserve for estimated costs of warranties based on its best estimate of the amounts necessary to settle future and existing claims using historical data on products sold as of the balance sheet date.

The length of the warranty period, the product’s failure rates and the customer’s usage affect warranty cost.

If actual warranty costs differ from the Company’s estimated amounts, future results of operations could be affected adversely.

Warranty cost is recorded as cost of sales and the reserve balance recorded as an accrued expense.

While the Company maintains product quality programs and processes, its warranty obligation is affected by product failure rates and the related corrective costs.

If actual product failure rates and/or corrective costs differ from the estimates, the Company revises the estimated warranty liability accordingly.

Self-Insurance Reserves

Since January 1, 2014, the Company has self-insured a significant portion of its employee medical insurance.

The Company maintains a stop-loss insurance policy that limits its losses both on a per employee basis and an aggregate basis.

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

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

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

At December 31, 2023 and September 30, 2023, the estimated liability for medical claims incurred but not reported was $ 75,000 and $ 62,300 , respectively.

The Company has recorded the excess of funded premiums over estimated claims incurred but not reported of $ 205,000 and $ 382,000 as a current asset in the accompanying consolidated balance sheets as of December 31, 2023 and September 30, 2023, respectively.

March 31, 2024

Concentrations

Major Customers and Products

In the three-month period ended December 31, 2023, one customer, Pilatus Aircraft Ltd (“Pilatus”) accounted for 29 % of net sales.

In the three-month period ended December 31, 2022, three customers, Pilatus, Air Transport Services Group and Textron Aviation, Inc.

In the three-month period ended March 31, 2024, two customers, Pilatus Aircraft Ltd (“Pilatus”) and Textron Aviation, Inc.

(“Textron”), accounted for 28 % and 17 % of net sales, respectively.

In the six-month period ended Mach 31, 2024, one customer, Pilatus accounted for 29 % of net sales.

In the three-month period ended March 31, 2023, four customers, Pilatus, Challenge Airlines, Air Transport Services Group and Textron, accounted for 21 %, 18 %, 16 % 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.

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-month period ended December 31, 2023, the Company had three suppliers that were individually responsible for greater than 10% of the Company’s total inventory related purchases.

For the three-month period ended December 31, 2022, the Company had two suppliers 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, 2024, the Company had one and two 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, 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.

Concentration of Credit Risk

11 unchanged sentences

ASU 2016-13 is effective for SEC small business filers for fiscal years beginning after December 15, 2022.

The adoption of this standard did not have a material impact on our consolidated financial statements or related disclosures.

The adoption of this standard did not have a material impact on our condensed consolidated financial statements or related disclosures.

Supplemental Balance Sheet Disclosures

11 unchanged sentences

The transfer of the prepaid inventory, equipment and construction in progress is expected to occur within the measurement period.

As a result, the purchase price

amount for the Transaction and the allocation of the preliminary purchase consideration for prepaid inventory, equipment, construction in progress and goodwill are preliminary estimates, which may be subject to change within the measurement period.

As a result, the purchase price amount for the Transaction and the allocation of the preliminary purchase consideration for prepaid inventory, equipment, construction in progress and goodwill are preliminary estimates, may be subject to change within the measurement period.

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

20 unchanged sentences

The fair value of raw materials was estimated to equal the replacement cost.

The fair value of finished goods was determined based on the estimated selling price, net of selling costs and a margin on the selling activities, which resulted in a step-up in the value of the finished goods.

value of finished goods was determined based on the estimated selling price, net of selling costs and a margin on the selling activities, which resulted in a step-up in the value of the finished goods.

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

6 unchanged sentences

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 December 31, 2023 and as such, no impairment charges have been recorded for the three months ended December 31, 2023;

Further, the Company determined that the preliminary goodwill was not impaired as of March 31, 2024 and as such, no impairment charges have been recorded for the three- and six-month periods ended March 31, 2024;

the Company also determined that the preliminary goodwill was not impaired as of September 30, 2023.

2 unchanged sentences

The adjustments resulted in an overall increase to goodwill of $ 2.5 million.

Additionally, the change to the preliminary fair value estimates did not have a material impact to the consolidated statement of operations.

Additionally, the change to the preliminary fair value estimates did not have a material impact to the condensed consolidated statement of operations.

During the fourth quarter of 2023, the Company identified measurement period adjustments related to the preliminary fair value estimates for accrued expenses.

2 unchanged sentences

The adjustments resulted in an overall decrease to goodwill of $ 3.5 million;

the adjustments have no impact to the consolidated statement of operations.

the adjustments have no impact to the condensed consolidated statement of operations.

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 at September 30, 2023 within the consolidated balance sheets for the services to be received in the future from Honeywell.

The Company accounted for the TSA separate from business combination and have recognized $ 140,000 in prepaid expenses and other current assets at September 30, 2023 within the condensed 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

In connection with the Transaction, the Company incurred acquisition costs of $ 408,961 , which were expensed as incurred and included in selling, general and administrative expenses in the consolidated statement of operations for the year ended September 30, 2023;

In connection with the Transaction, the Company incurred acquisition costs of $ 408,961 , which were expensed as incurred and included in selling, general and administrative expenses in the condensed consolidated statement of operations for the year ended September 30, 2023;

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

For the three months ended December 31, 2023, the Company incurred no acquisition costs.

For the three- and six-month periods ended March 31, 2024, the Company incurred no acquisition costs.

Unaudited actual and pro forma information

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:

Three Months Ended December 31,

Three Months Ended

Six Months Ended

March 31, 2023

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.

14 unchanged sentences

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

As of December 31, 2023

As of March 31, 2024

Gross Carrying

9 unchanged sentences

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 Acquisition within Note 2, “Supplemental Balance Sheet Disclosures” for further details.

The gross carrying values are preliminary estimates

and may be subject to change within the measurement period – refer to Acquisition within this Note 2, “Supplemental Balance Sheet Disclosures” 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 nine years and six months.

The Company determined that the preliminary intangible assets were not impaired as of December 31, 2023 and September 30, 2023;

no impairment charges have been recorded for the three months ended December 31, 2023.

the customer relationships have an estimated weighted average life of nine years and three months.

The Company determined that the preliminary intangible assets were not impaired as of March 31, 2024 and September 30, 2023;

no impairment charges have been recorded for the three- and six-month periods ended March 31, 2024.

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

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

Intangible asset amortization expense was $ 268,500 and $ 0 for the three-month periods ended December 31, 2023 and 2022, respectively.

No impairment charges were recorded during the three- and six-month periods ended March 31, 2024 and 2023.

Intangible asset amortization expense was $ 268,500 and $ 0 for the three-month periods ended March 31, 2024 and 2023, respectively.

Intangible asset amortization expense was charged to selling, general and administrative expense.

Intangible asset amortization expense was $ 537,000 and $ 0 for the six-month periods ended March 31, 2024 and 2023, respectively.

Intangible asset amortization expense was charged to selling, general and administrative expense.

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 December 31, 2023 is as follows:

2024 (nine months remaining)

The expected future amortization expense related to the customer relationships as of March 31, 2024 is as follows:

2024 (six months remaining)

Assets Held for Sale

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During the fourth quarter 2023, management of the Company implemented a plan to sell a Company-owned aircraft and commenced efforts to locate a buyer for the aircraft.

On November 20, 2023, the Company sold its

assets held for sale, the King Air aircraft, for $ 2.3 million.

On November 20, 2023, the Company sold its assets held for sale, the King Air aircraft, for $ 2.3 million.

The resultant gain on the sale of $ 162,000 is a reduction to selling, general and administrative expense in the quarter ended December 31, 2023.

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Computer equipment

Corporate airplane

Furniture and office equipment

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( 11,923,825 )

Depreciation and amortization related to property and equipment was $ 142,921 and $ 85,409 for the three-month periods ended December 31, 2023 and 2022, respectively.

Depreciation and amortization related to property and equipment was $ 146,156 and $ 85,981 for the three-month periods ended March 31, 2024 and 2023, respectively.

Depreciation and amortization related to property and equipment was approximately $ 289,077 and $ 171,390 for the six-month periods ended March 31, 2024 and 2023, respectively.

Other assets consist of the following:

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Other non-current assets

Other non-current assets as of December 31, 2023 includes a deposit for medical claims required under the Company’s medical plan.

Other non-current assets as of September 30, 2023 includes a deposit for medical claims required under the Company’s medical plan and an airplane hanger deposit.

In addition, other non-current assets as of December 31, 2023 and September 30, 2023 includes $ 140,657 and $ 101,357 , 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 $ 39,300 and zero for the three-month periods ended December 31, 2023 and 2022, respectively.

Other non-current assets as of March 31, 2024 includes deferred ERP implementation costs, a supplier credit from one of our suppliers and a deposit for medical claims required under the Company’s medical plan.

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

In addition, other non-current assets as of March 31, 2024 and September 30, 2023 includes $ 44,072 and $ 53,585 , 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 $ 4,905 and $ 0 for the three-month periods ended March 31, 2024 and 2023, respectively.

Other non-current assets amortization expense was $ 9,513 and $ 0 for the six-month periods ended March 31, 2024 and 2023, respectively.

Accrued expenses

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Income tax payable

Warranty cost and accrual information for the three-month period ended December 31, 2023 is highlighted below:

Warranty cost and accrual information for the three- and six-month periods ended March 31, 2024 is highlighted below:

Three Months Ending

December 31, 2023

Six Months Ended

March 31, 2024

Warranty accrual, beginning of period

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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 period ended December 31, 2023 was 21.8 % and differs from the statutory tax rate primarily due to higher state taxes due 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 effective tax rate for the three-month period ended March 31, 2024 was 21.2 % and differs from the statutory tax rate primarily due to higher state taxes due to a taxable gain from the sale of the Company’s King Air aircraft.

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 six-month period ended March 31, 2024 was 21.5 % and differs from the statutory tax rate primarily due to higher state taxes due to a taxable gain from the sale of the Company’s King Air aircraft.

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.

Shareholders’ Equity and Share-Based Payments

At December 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 March 31, 2024, the Company’s Amended and Restated Articles of Incorporation provides the Company authority to issue 75,000,000 shares of common stock and 10,000,000 shares of preferred stock.

Share-Based Compensation

The Company accounts for share-based compensation under the provisions of ASC Topic 718 by using the fair value method for expensing stock options and stock awards.

2019 Stock-Based Incentive Compensation Plan

The 2019 Plan was approved by the Company’s shareholders at the Company’s Annual Meeting of Shareholders held on April 2, 2019.

The 2019 Plan authorizes the grant of stock appreciation rights, restricted stock, options and other equity-based awards.

Options granted under the 2019 Plan may be either “incentive stock options” as defined in section 422 of the Code or nonqualified stock options, as determined by the Compensation Committee.

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

Amended and Restated 2019 Stock-Based Incentive Compensation Plan

The Company’s Amended and Restated 2019 Stock-Based Incentive Compensation Plan was approved by the Company’s shareholders at the Company’s Annual Meeting of Shareholders held on April 18, 2024, which amended and restated the 2019 Stock-Based Incentive Compensation Plan approved by the Company’s shareholders on April 2, 2019 (as Amended, the “Amended and Restated 2019 Plan”).

The Amended and Restated 2019 Plan authorizes the grant of stock appreciation rights, restricted stock, options and other equity-based awards.

Options granted under the Amended and Restated 2019 Plan may be either “incentive stock options” as defined in section 422 of the Code or nonqualified stock options, as determined by the Compensation Committee.

Subject to an adjustment necessary upon a stock dividend, recapitalization, forward split or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase or share exchange, extraordinary or unusual cash distribution, or similar corporate transaction or event, the maximum number of shares of common stock available for awards under the Amended and Restated 2019 Plan is 1,950,000 , plus the shares that were authorized to be granted but have not been issued under the Company’s 2009 Stock-Based Incentive Compensation Plan as of the effective date of the Amended and Restated 2019 Plan (i.e., April 18, 2024).

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.

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.

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 Amended and Restated 2019 Plan, the aggregate number and kind of shares of common stock available under the Amended and Restated 2019 Plan, any applicable individual limits on the number of shares of common stock available for awards under the Amended and Restated 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 $ 155,581 for the three-month period ended December 31, 2023.

The compensation expense related to stock options and awards issued to employees under the 2019 Plan was $ 233,125 for the three-month period ended December 31, 2022.

The compensation expense under the 2019 Plan related to stock awards issued to non-employee members of the Board was $ 50,135 for the three-month period ended December 31, 2023.

The compensation expense under the 2019 Plan related to stock awards issued to non-employee members of the Board was $ 50,070 for the three-month period ended December 31, 2022.

Total compensation expense associated with the 2019 Plan was $ 205,716 and $ 283,195 for the three-month periods ended December 31, 2023 and 2022, respectively.

At December 31, 2023, unrecognized compensation expense of approximately $ 554,185 , 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 Amended and Restated 2019 Plan was $ 219,748 and $ 375,328 for the three- and six-month periods ended March 31, 2024, respectively.

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

The compensation expense under the Amended and Restated 2019 Plan related to stock awards issued to non-employee members of the Board was $ 49,590 and $ 99,726 for the three- and six-month periods ended March 31, 2024, respectively.

The compensation expense under the Amended and Restated 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.

Total compensation expense associated with the Amended and Restated 2019 Plan was $ 269,338 and $ 733,376 for the three-month periods ended March 31, 2024 and 2023, respectively.

Total compensation expense associated with the Amended and Restated 2019 Plan was $ 475,055 and $ 1,016,571 for the six-month periods ended March 31, 2024 and 2023, respectively.

At March 31, 2024, unrecognized compensation expense of approximately $ 1,425,821 , net of forfeitures, related to non-vested stock options under the Amended and Restated 2019 Plan, will be recognized.

Earnings Per Share

Three Months Ended December 31,

Three Months Ended March 31,

Six Months Ended March 31,

Basic weighted average shares

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

As of December 31, 2023 and 2022, there were 224,374 and 0 options to purchase common stock outstanding, respectively, and 101,968 and 7,886 shares subject to vesting of restricted stock units outstanding, respectively.

As of March 31, 2024 and 2023, there were 297,014 and 25,000 options to purchase common stock outstanding, respectively, and 173,555 and 82,886 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 December 31, 2023 and 2022, respectively, 213,409 and 0 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 March 31, 2024 and 2023, respectively, 243,749 and 277,520 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, 2024 and 2023, respectively, 228,579 and 138,760 diluted weighted-average shares outstanding were excluded from the computation of diluted EPS because the effect would be anti-dilutive.

Commitments and Contingencies

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In recent years, the Company has had sales to AML Global Eclipse, LLC (“Eclipse”), whose principal shareholder is also a principal shareholder in the Company.

Eclipse is a new related party beginning in fiscal year 2022 due to their president acquiring more than 10 % in shares of the company.

Prior balances are disclosed below for comparability.

Sales to Eclipse amounted to approximately $ 84,500 and $ 34,300 for the three-month periods ended December 31, 2023 and 2022, respectively.

A company in which Parizad Olver (Parchi), a member of the Board of Directors, is the managing partner and has an ownership interest, received a consulting fee of $ 72,990 in November 2023 for services provided in connection with the sale of the Company’s 2008 Super King Air B200GT SN BY-50.

Sales to Eclipse amounted to approximately $ 9,000 and $ 42,000 for the three-month periods ended March 31, 2024 and 2023, respectively.

Sales to Eclipse amounted to approximately $ 93,000 and $ 76,000 for the six-month periods ended March 31, 2024 and 2023, respectively.

A company in which Parizad Olver (Parchi), a former member of the Board of Directors, is the managing partner and has an ownership interest, received a consulting fee of $ 72,990 in November 2023 for services provided in connection with the sale of the Company’s 2008 Super King Air B200GT SN BY-50.

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 December 31, 2023:

Classification on the Consolidated Balance Sheet on December 31, 2023

The following table presents the lease-related assets and liabilities reported in the Condensed Consolidated Balance Sheet as of March 31, 2024:

Classification on the Consolidated Balance Sheet on March 31, 2024

Operating leases

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Total lease liabilities

Rent expense and cash paid for various operating leases in aggregate are $ 3,669 for the three-month period ended December 31, 2023.

The weighted average remaining lease term is 0.9 years and the weighted average discount rate is 5.0 % as of December 31, 2023.

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

Rent expense and cash paid for various operating leases in aggregate are $ 7,338 for the six-month period ended March 31, 2024.

The weighted average remaining lease term is 0.7 years and the weighted average discount rate is 5.0 % as of March 31, 2024.

Future minimum lease payments under operating leases are as follows at March 31, 2024:

Twelve Months

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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.

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 (“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.

1 unchanged sentence

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.

8 unchanged sentences

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 the Term Note.

The Interest rate applicable to loans outstanding under the Restated Line of Credit is 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.

The foregoing descriptions of the Restated Loan Amendment, Restated Line of Credit Note and Restated Rider do not purport to be complete and are qualified in their entirety by reference to the full text of the Restated Loan Amendment, Restated Line of Credit Note and Restated Rider, which are filed as Exhibit 10.1 , Exhibit 10.2 and Exhibit 10.3 , respectively, to the Current Report on Form 8-K filed December 22, 2023 and are incorporated herein by reference.

The Company was in compliance with all applicable covenants throughout the year and at December 31, 2023.

The outstanding balance drawn on the Line of Credit was $ 10,611,514 at December 31, 2023.

and Restated Rider, which are filed as Exhibit 10.1 , Exhibit 10.2 and Exhibit 10.3 , respectively, to the Current Report on Form 8-K filed December 22, 2023 and are incorporated herein by reference.

The Company was in compliance with all applicable covenants throughout the year and at March 31, 2024.

The outstanding balance drawn on the Line of Credit was $ 10,642,885 at March 31, 2024.

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