What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-14 compared with 2024-05-14 · 100 added, 99 removed, 178 unchanged (53% of the section changed)

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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.

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

This strategy, as both a manufacturer and integrator, is designed to leverage the latest technologies developed for the computer and telecommunications industries into advanced and cost-effective solutions for the general aviation, commercial air transport, United States Department of Defense (“DoD”)/governmental and foreign military markets.

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.

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, which incorporates proprietary technology, lower cost relative to the competition, 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.

The Company has developed an FMS that combines the savings long associated with in-flight fuel optimization in enroute flight management combined with the precision of satellite-based navigation required to comply with the regulatory environments of both domestic and international markets.

The Company believes that the FMS, alongside its FPDS and CIP product lines, is well suited to address market demand driven by certain regulatory mandates, new technologies and the high cost of maintaining aging and obsolete equipment on aircraft that will be in service for up to fifty years.

The Company has developed an FMS that combines the savings long associated with in-flight fuel optimization in enroute flight management with the precision of satellite-based navigation required to comply with the regulatory environments of both domestic and international markets.

The Company believes that its FMS, alongside its FPDS and CIP product lines, is well suited to address market demand driven by certain regulatory mandates, new technologies and the high cost of maintaining aging and obsolete equipment on aircraft that may be in service for up to fifty years.

The shift in the regulatory and technological environment is illustrated by the dramatic increase in the number of Space Based Augmentation System (“SBAS”) or Wide Area Augmentation System (“WAAS”) approach qualified airports, particularly as realized through Localizer Performance with Vertical guidance (“LPV”) navigation procedures.

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IS&S believes this will further increase the demand for the Company’s products.

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

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

This integrated standby unit 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.

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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 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.

ThrustSense® also ensures aircraft envelope protection and engine protection during all phases of flight, thereby reducing pilot workload and increasing safety.

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 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.

Flight Deck 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, dual turbo prop PT6 powered aircraft.

The ThrustSense® Autothrottle is designed to automate power management for speed and power control including go-around.

ThrustSense® Autothrottle also ensures aircraft envelope protection and engine protection during all phases of flight, thereby reducing pilot workload and increasing safety.

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

ThrustSense® Autothrottle 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 Air ThrustSense® Autothrottle, LifeGuard™, which provides critical Vmca protection that proportionally reduces engine power to maintain directional control during an engine-out condition.

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

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The Company’s retrofit projects are generally pursuant to either a direct contract with a customer or a subcontract with a general contractor to a customer (including government agencies).

In June 2023, the Company entered into 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”).

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

On July 22, 2024, the Company entered into Amendment No.

3 to the Honeywell Agreement (the “Amendment”).

Pursuant to the Amendment, Honeywell sold, assigned or licensed to the Company certain additional assets related to its communication and navigation product lines, including a sale of certain inventory 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 communication and navigation product lines to manufacture, upgrade and repair certain additional products for consideration of $4.2 million in cash.

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

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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.

Cost of sales related to product and service sales comprises materials, 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.

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

Cost of sales includes warranty costs.

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.

Cost of sales also includes warranty costs.

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

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.

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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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.

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

Furthermore, spending by government agencies may be reduced in the future.

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

For example, in the 2020 fiscal year, certain of the Company’s customers temporarily suspended product deliveries as a result of the COVID-19 pandemic, and while these

deliveries subsequently resumed, there is a possibility that the COVID-19 or similar pandemics will result in other suspensions, delays or order cancellations by the Company’s customers or suppliers.

For example, in the 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 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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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.

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

There have been no material 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 nine-month periods ended June 30, 2024 as set forth herein.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED

JUNE 30, 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 March 31,

Six Months Ended March 31,

Three Months Ended June 30,

Nine Months Ended June 30,

Customer service

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

Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023

Net sales were $11,765,635 for the three months ended June 30, 2024 compared to $7,959,208 for the three months ended June 30, 2023, an increase of 47.8%.

Product sales decreased $1,448,355, or 22.0%, and customer service sales increased $5,090,747, or 386.2% in the three months ended June 30, 2024, as compared to the prior year quarter.

The decrease in product sales for the three months ended June 30, 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 sales primarily reflects customer service sales of the product lines acquired from Honeywell.

EDC sales increased $164,035 in the three months ended June 30, 2024 compared to the year-ago quarter, reflecting increased EDC business.

Cost of sales.

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.

Cost of sales increased by $2,261,252, or 70.1%, to $5,485,814, or 46.6% of net sales, in the three months ended June 30, 2024, compared to $3,224,562, or 40.5% of net sales, in the three months ended June 30, 2023.

The increase in cost of sales was primarily the result of an increase in customer service sales volume for the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

The Company’s overall gross margin was 53.4% and 59.5% for the three months ended June 30, 2024 and 2023, respectively.

This decrease in overall gross margin percentage for the three months ended June 30, 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.

Research and development.

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.

R&D expenses were $1,099,367, an increase of $248,071, or 29.1%, in the three months ended June 30, 2024 from $851,296 in the three months ended June 30, 2023.

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

As a percentage of net sales, R&D expenses decreased to 9.3% of net sales for the three months ended June 30, 2024 from 10.7% of net sales for the three months ended June 30, 2023.

Selling, general and administrative.

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.

Selling, general and administrative expenses were $3,143,334, an increase of $747,620, or 31.2%, in the three months ended June 30, 2024 from $2,395,714 in the three months ended June 30, 2023.

The overall increase in selling, general and administrative expense in the quarter ended June 30, 2024, was primarily the result of increases in consulting and legal fees of $175,278 primarily due to the Transaction and increased costs of $233,678 as a result of the recruitment of a new CFO.

In addition, the Company incurred amortization expense of $611,125 related to the customer relationships intangible asset resulting from the Transaction.

As a percentage of net sales, selling, general and administrative expenses were 26.7% in the three months ended June 30, 2024 compared to 30.1% for the prior year period.

Interest expense.

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 expense was $172,784 for the three months ended June 30, 2024 resulting from borrowings under the Company’s debt facility with PNC.

There was no interest expense for the three months ended June 30, 2023 as the Company had no debt during the period.

Interest income.

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.

Interest income decreased by $179,826 to $5,826 in the three months ended June 30, 2024 from $185,652 in the three months ended June 30, 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 March 31, 2024 compared to the same period in the prior year.

Other income decreased by $77,180 to $12,869 in the three months ended June 30, 2024 from $90,049 in the three months ended June 30,2023 and is mainly composed of royalties earned.

Income tax expense.

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.

The income tax expense for the three months ended June 30, 2024 was $330,511 as compared to an income tax expense of $339,958 for the three months ended June 30, 2023.

The effective tax rate for the three-month period ended June 30, 2024 was 17.6% and differs from the statutory tax rate primarily due to an increased R&D credit, as well as permanent items and state taxes.

The effective tax rate for the three-month period ended June 30, 2023 was 19.3% 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 June 30, 2024 of $1,552,520 as compared to net income of $1,423,379 for the three months ended June 30, 2023.

On a diluted basis, the net income per share was $0.09 for the three months ended June 30, 2024 compared to net income per share of $0.08 for the three months ended June 30, 2023.

Nine Months Ended June 30, 2024 Compared to the Nine Months Ended June 30, 2023

Net sales were $31,813,214 for the nine months ended June 30, 2024 compared to $21,815,917 for the nine months ended June 30, 2023, an increase of 45.8%.

Product sales decreased $3,162,016 or 18.0% and customer service sales increased $11,959,764 or 316.8% for the nine months ended June 30, 2024, as compared to the year ago period.

The decrease in product sales for the nine months ended June 30, 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 sales for the nine months ended June 30, 2024 primarily reflects customer service sales of the product lines acquired from Honeywell.

EDC sales increased $1,199,549, or 277.4% for the nine months ended June 30, 2024, 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.

Cost of sales increased by $5,810,551, or 67.4%, to $14,427,868, or 45.4% of net sales, in the nine months ended June 30, 2024, compared to $8,617,317 or 39.5% of net sales, in the nine months ended June 30, 2023.

The increase in cost of sales was primarily the result of an increase in customer service sales volume for the nine months ended June 30, 2024 compared to the nine months ended June 30, 2023.

The Company’s overall gross margin was 54.6% and 60.5% for the nine months ended June 30, 2024 and 2023, respectively.

This decrease in overall gross margin percentage for the nine months ended June 30, 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.

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.

R&D expenses were $3,031,630 an increase of $643,691, or 27.0%, in the nine months ended June 30, 2024 from $2,387,939 in the nine months ended June 30, 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.

As a percentage of net sales, R&D expense decreased to 9.5% of net sales for the nine months ended June 30, 2024 compared to 10.9% for the prior year period.

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.

Selling, general and administrative expenses were $9,058,347, an increase of $1,954,135, or 27.5%, in the nine months ended June 30, 2024 from 7,104,212 in the nine months ended June 30, 2023.

The overall increase in selling, general and administrative expense in the quarter ended June 30, 2024 was primarily the result of increases in consulting and legal fees of $517,352 primarily due to the Transaction and increased costs of $612,907 as a result of the recruitment of a new CFO and other corporate initiatives.

In addition, the Company incurred amortization expense of $1,437,232 related to the customer relationships intangible asset resulting from the Transaction 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 28.5% in the nine months ended June 30, 2024 compared to 32.6% 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 expense was $704,267 for the nine months ended June 30, 2024 resulting from borrowings under the Company’s debt facility with PNC.

There was no interest expense in the nine months ended June 30, 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.

Interest income decreased by $310,990 to $121,505 in the nine months ended June 30, 2024 from $432,495 in the nine months ended June 30, 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.

Other income decreased by $74,464 to $57,040 in the three months ended June 30, 2024 from $131,504 in the three months ended June 30, 2023 and is mainly composed of royalties earned.

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.

The income tax expense for the nine months ended June 30, 2024 was $951,461 as compared to an income tax expense of $877,315 for the nine months ended June 30, 2023.

The effective tax rate for the nine-month period ended June 30, 2024 was 19.9% 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 nine-month period ended June 30, 2023 was 20.5% 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 nine months ended June 30, 2024 of $3,818,186 as compared to net income of $3,393,133 for the nine months ended June 30, 2023.

On a diluted basis, the net income per share was $0.22 for the nine months ended June 30, 2024 compared to net income per share of $0.19 for the nine months ended June 30, 2023.

Liquidity and Capital Resources

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Current ratio (2)

Six Months Ended March 31,

Nine Months Ended June 30,

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 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.

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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.

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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 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.

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

Operating activities

Net cash provided by operating activities was $4.4 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.

Net cash provided by operating activities was $5.4 million for the nine-month period ended June 30, 2024 and consisted primarily of funding from net income of $3.8 million and changes in working capital.

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.

Investing activities

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.

Net cash provided by investing activities was $1.7 million for the nine-month period ended June 30, 2024 and consisted primarily of proceeds of $2.2 million from the sale of the Company’s King Air aircraft, offset by purchases of $0.5 million of equipment and computer hardware.

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

Financing activities

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.

Net cash used in financing activities was $9.6 million for the nine-month period ended June 30, 2024 and consisted of payments against the Company’s line of credit.

Net cash provided by financing activities was $20.4 million for the nine-month period ended June 30, 2023 and consisted of proceeds from the Term Note of $20.0 million and 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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The Company believes that its cash and cash equivalents will provide sufficient capital to fund operations for at least the next twelve months.

However, the Company may need to develop and introduce new or enhanced products, respond to competitive pressures, invest in or acquire businesses or technologies, or respond to unanticipated requirements or developments.

However, the Company may need to develop and introduce new or enhanced products, respond to competitive pressures, invest in or acquire businesses or technologies, or

respond to unanticipated requirements or developments.

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

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 six-month period ended March 31, 2024:

Backlog activity for the nine-month period ended June 30, 2024:

Three Months Ended

Six Months Ended

March 31, 2024

Nine Months Ended

June 30, 2024

Backlog, beginning of period

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Backlog, end of period

At March 31, 2024, the majority of the Company’s backlog is expected to be filled within the next twelve months.

At June 30, 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