What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-05-14 compared with 2024-02-14 · 87 added, 76 removed, 190 unchanged (46% of the section changed)

69 unchanged sentences

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.

We believe the ThrustSense® Autothrottle is innovative in that it is the first autothrottle developed for a turbo prop that allows a pilot to automatically control the power setting of the engine.

The autothrottle computes and controls appropriate power levels thereby reducing overall pilot workload.

The system computes thrust, holds selected speed/torque and implements appropriate speed and engine limit protection.

When engaged by the pilot, the autothrottle system adjusts the throttles automatically to achieve and hold the selected airspeed guarded by a torque/temperature limit mode.

The autothrottle system takes full advantage of the integrated cockpit and utilizes weight and balance information to determine optimal control settings and enable safety functions like a turbulence control mode.

The Company sells to both the OEM and the retrofit markets.

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If customers curtail or delay their spending or are forced to declare bankruptcy or liquidate their operations because of adverse economic conditions, the Company’s revenues and results of operations would be affected adversely.

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

For example, in the 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

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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 (“U.S.

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.

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

The preparation of these condensed 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.

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Actual results may differ from these estimates.

The Company believes that its critical accounting policies affect its more significant estimates and judgments used in the preparation of its consolidated financial statements.

The Company believes that its critical accounting policies affect its more significant estimates and judgments used in the preparation of its condensed consolidated financial statements.

The Annual Report on Form 10-K for the fiscal year ended September 30, 2023 contains a discussion of these critical accounting policies.

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 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.

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

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

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

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

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 agreement;

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

● discount rates.

Intangible Assets

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.

An impairment assessment for intangible assets with a finite life is only required when an event or change in circumstances indicates that the carrying amount of the asset may not be recoverable.

Determining the useful life of an intangible asset with a finite life also requires judgment.

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

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

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

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

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

Impairment of Goodwill

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.

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 MONTHS ENDED

DECEMBER 31, 2023 AND 2022

There have been no significant changes in the Company’s critical accounting policies since September 30, 2023.

See also Note 1 to the unaudited condensed consolidated financial statements for the three- and six-month periods ended March 31, 2024 as set forth herein.

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED

MARCH 31, 2024 AND 2023

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 December 31,

Three Months Ended March 31,

Six Months Ended March 31,

Customer service

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Income before income taxes

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.

Income tax expense

Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023

Net sales were $10,739,516 for the three months ended March 31, 2024 compared to $7,340,454 for the three months ended March 31, 2023, an increase of 46.3%.

Product sales decreased $1,049,562 or 17.7% and customer service sales increased $3,702,919 or 265.4% as compared to the prior year quarter.

The decrease in product sales for the three months ended March 31, 2024 compared to the prior year quarter was primarily the result of reduced shipments of displays for retrofit programs to commercial air transport customers, partially offset by an increase of shipments of displays to general aviation and 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.

EDC sales increased $745,705, compared to the year-ago quarter, reflecting increased EDC business.

Cost of sales.

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.

Cost of sales increased by $2,556,851 or 98.3%, to $5,157,154, or 48.0% of net sales, in the three months ended March 31, 2024, compared to $2,600,303 or 35.4% of net sales, in the three months ended March 31, 2023.

The increase in cost of sales was primarily the result of an increase in customer service sales volume for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

The Company’s overall gross margin was 52.0% and 64.6% for the three months ended March 31, 2024 and 2023, respectively.

This decrease in overall gross margin percentage for the three months ended March 31, 2024 is primarily the result of changes in product mix and higher unit manufacturing costs, which resulted principally from production inefficiencies

and lower manufacturing utilization due to new products in development and the Honeywell integration.

Customer service gross margin percentage declined for the three month period ended March 31, 2024 compared to the year ago quarter due to increased material costs for the repair of product lines acquired from Honeywell.

Research and development.

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.

R&D expenses were $1,031,119 an increase of $164,921, or 19.0%, in the three months ended March 31, 2024 from $866,198 in the three months ended March 31, 2023.

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

As a percentage of net sales, R&D expenses decreased to 9.6% of net sales for the three months ended March 31, 2024 from 11.8% of net sales for the three months ended March 31, 2023.

Selling, general and administrative.

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.

Selling, general and administrative expenses were $2,908,193, an increase of $461,558, or 18.9%, in the three months ended March 31, 2024 from $2,446,635 in the three months ended March 31, 2023.

The overall increase in selling, general and administrative expense in the quarter ended March 31, 2024 was primarily the result of increased sales and marketing costs which included the amortization expense of the customer relationships intangible asset resulting from the Honeywell Transaction of $268,500 and professional and consulting fees.

As a percentage of net sales, selling, general and administrative expenses were 27.1% in the three months ended March 31, 2024 compared to 33.3% 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 expense was $171,470 for the three months ended March 31, 2024 resulting from borrowings under the Company’s debt facility with PNC.

There was no interest expense for the three months ended March 31, 2023 as the Company had no debt during the period.

Interest income.

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.

Interest income decreased by $94,751 to $36,200 in the three months ended March 31, 2024 from $130,951 in the three months ended March 31, 2023, 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 remained relatively unchanged in the three months ended December 31, 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 March 31, 2024 compared to the same period in the prior year.

Income tax expense.

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.

The income tax expense for the three months ended March 31, 2024 was $325,936 as compared to an income tax expense of $310,424 for the three months ended March 31, 2023.

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 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 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 Company reported net income for the three months ended March 31, 2024 of $1,208,316 as compared to net income of $1,271,103 for the three months ended March 31, 2023.

On a diluted basis, the net income per share was $0.07 for the three months ended March 31, 2024 compared to net income per share of $0.07 for the three months ended March 31, 2023.

Six Months Ended March 31, 2024 Compared to the Six Months Ended March 31, 2023

Net sales were $20,047,579 for the six months ended March 31, 2024 compared to $13,856,709 for the six months ended March 31, 2023, an increase of 44.7%.

Product sales decreased $1,713,661 or 15.5% and customer service sales increased $6,869,017 or 279.6% as compared to the year ago period.

The decrease in product sales for the six months ended March 31, 2024 was primarily the result of reduced shipments of displays for retrofit programs to commercial air transport customers partially offset by an increase of shipments of displays to general aviation and military customers.

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

EDC sales increased $1,035,514, or 282.2%, compared to the year-ago period reflecting increased EDC business.

Cost of sales.

Cost of sales increased by $3,549,300, or 65.8%, to $8,942,055, or 44.6% of net sales, in the six months ended March 31, 2024, compared to $5,392,755 or 38.9% of net sales, in the six months ended March 31, 2023.

The increase in cost of sales was primarily the result of an increase in customer service sales volume for the six months ended March 31, 2024 compared to the six months ended March 31, 2023.

The Company’s overall gross margin was 55.4% and 61.1% for the six months ended March 31, 2024 and 2023, respectively.

This decrease in overall gross margin percentage for the six months ended March 31, 2024 is primarily the

result of changes in product mix and higher unit manufacturing costs, which resulted principally from production inefficiencies and lower manufacturing utilization due to new products in development and the Honeywell integration.

Customer service gross margin percentage declined for the six-month period ended March 31, 2024 compared to the year ago period due to increased material costs for the repair of product lines acquired from Honeywell.

Research and development.

R&D expenses were $1,932,263 an increase of $395,620, or 25.7%, in the six months ended March 31, 2024 from $1,536,643 in the six months ended March 31, 2023.

This increase in R&D expenses were due to higher salaries and benefits due to higher headcount.

As a percentage of net sales, R&D expense decreased to 9.6% of net sales for the six months ended March 31, 2024.

Selling, general and administrative.

Selling, general and administrative expenses were $5,915,012, an increase of $1,206,514, or 25.6%, in the six months ended March 31, 2024 from $4,708,498 in the six months ended March 31, 2023.

The overall increase in selling, general and administrative expense in the six months ended March 31, 2024 was primarily the result of increased sales and marketing costs which included the amortization expense of the customer relationships intangible asset resulting from the Honeywell Transaction and professional and consulting fees.

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

As a percentage of net sales, selling, general and administrative expenses were 29.5% in the six months ended March 31, 2024 compared to 34.0% for the prior year period.

Interest expense.

Interest expense was $531,483 for the six months ended March 31, 2024 resulting from borrowings under the Company’s debt facility with PNC.

There was no interest expense in the six months ended March 31, 2023 as the Company had no debt during the period.

Interest income.

Interest income decreased by $131,164 to $115,679 in the six months ended March 31, 2024 from $246,843 in the six months ended March 31, 2023, 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 remained relatively unchanged in the six months ended March 31, 2024 compared to the same period in the prior year.

Income tax expense.

The income tax expense for the six months ended March 31, 2024 was $620,950 as compared to an income tax expense of $537,357 for the six months ended March 31, 2023.

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 related 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 increased R&D tax credits, permanent items and state taxes.

The Company reported net income for the six months ended March 31, 2024 of $2,265,666 as compared to net income of $1,969,754 for the six months ended March 31, 2023.

On a diluted basis, the net income per share was $0.13 for the six months ended March 31, 2024 compared to net income per share of $0.11 for the six months ended March 31, 2023.

Liquidity and Capital Resources

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Current ratio (2)

Three Months Ended December 31,

Six Months Ended March 31,

Cash flow activities:

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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 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 provided 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 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.

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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.

During the year ended September 30, 2023 and the three- and six-month periods ended March 31, 2024, we did not sell any shares of common stock under the ATM Sales Agreement.

Operating activities

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.

Net cash provided by operating activities was $4.4 million for the six-month period ended March 31, 2024 and consisted primarily of funding from net income of $2.3 million and a decrease in accounts receivable of $3.7 million, partially offset by an increase in inventory of $2.2 million.

Net cash provided by operating activities was $2.2 million for the six-month period ended March 31, 2023 and consisted primarily of funding from net income of $2.0 million.

Investing activities

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.

Net cash provided by investing activities was $1.9 million for the six-month period ended March 31, 2024 and consisted primarily of proceeds of $2.2 million from the sale of the Company’s King Air aircraft.

Net cash used in investing activities was $0.1 million for the six-month period ended March 31, 2023 and consisted primarily of the purchase of laboratory test equipment and computer hardware.

Financing activities

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.

Net cash used in financing activities was $8.9 million for the six-month period ended March 31, 2024 and consisted of payments of $19.5 million to pay off and close the loan evidenced by the Term Note and repayments of $13.8 million against the Company’s line of credit, offset by proceeds from the Company’s line of credit of $24.5 million.

Net cash provided by financing activities was $0.4 million for the six-month period ended March 31, 2023 and consisted of proceeds from the exercise of stock options.

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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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-month period ended December 31, 2023:

Backlog activity for the six-month period ended March 31, 2024:

Three Months Ended

December 31, 2023

Six Months Ended

March 31, 2024

Backlog, beginning of period

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Backlog, end of period

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

At March 31, 2024, 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