What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-12-30 compared with 2024-01-12 · 126 added, 122 removed, 158 unchanged (61% of the section changed)

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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”).

The exclusive licensing of these product lines from Honeywell is a unique opportunity for the Company that enhances its current offerings in the air transport, military and business aviation markets.

In June 2023, the Company entered into the June 2023 Honeywell Agreement with 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.

In July 2024, the Company entered into the July 2024 Honeywell Asset Acquisition, an exclusive license agreement and acquired additional key assets for certain communication and navigation product lines from Honeywell.

This transaction complements the previous Honeywell license and asset acquisition completed in June 2023.

Total consideration was $4.2 million in cash.

On September 27, 2024, the Company entered into the September 2024 Honeywell Agreement with Honeywell, pursuant to which Honeywell sold, assigned or licensed certain assets related to its various generations of military display generators and flight control computers, 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 various generations of military display generators and flight control computers to repair, overhaul, manufacture sell, import, export and distribute certain products to the Company for consideration of $14.2 million in cash.

The exclusive licensing of these product lines from Honeywell is a unique opportunity for the Company to enhance its current offerings in the air transport, military and business aviation markets.

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

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

The Company believes that each of the June 2023 Honeywell Agreement, the July 2024 Honeywell Asset Acquisition and the September 2024 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 product and service solutions.

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

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Cost of sales related to 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.

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

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

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Twelve Months Ending September 30,

Customer service

Engineering development contracts

Total net sales

Cost of sales:

Customer service

Engineering development contracts

Total cost of sales

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Income before income taxes

Income tax expense (benefit)

Income tax expense

Fiscal Year Ended September 30, 2024 Compared to Fiscal Year Ended September 30, 2023

Net sales in fiscal 2023 increased $7.1 million, or 25.5%, to $34.8 million from $27.7 million in fiscal 2022.

Product sales in fiscal 2023 increased $0.2 million compared to fiscal 2022.

EDC sales increased $0.7 million, or 146.8% compared to fiscal 2022, reflecting increased EDC business.

Customer service sales increased $6.2 million, or 127.2% from fiscal 2022.

The increase in customer service sales primarily reflects customer service sales of $5.8 million due to the Honeywell Agreement.

The increase in product sales primarily reflects increased shipments of displays to general aviation customers and commercial transport customers of $0.7 million and $0.6 million, respectively.

Military product sales decreased $1.1 million due to reduced business volume.

Historically, the Company presented Customer service and Engineering and development contracts Net Sales and Cost of sales separately on the Consolidated Statements of Operations.

For the fiscal year ended September 30, 2024, the Company has aggregated these items into one category, “Services” and reclassified Customer service and Engineering and development contracts revenues as well as Cost of sales to conform the presentation of the Consolidated Statements of Operations for fiscal years ended September 30, 2023, and 2022.

See Footnote 3.

Summary of Significant Accounting Policies, (“Reclassifications ”) for additional information.

Net sales in fiscal year 2024 increased $12.4 million, or 36.0%, to $47.2 million from $34.8 million in fiscal year 2023.

The increase in Net sales was driven by a 7% increase or $1.7 million in product sales.

The increase in product sales was related to increases in business aviation sales of $1.5 million and an increase of $0.5 million in defense sales, offset by a decline in commercial air transport sales of $0.3 million.

The increase in business aviation sales was driven by increase in demand to support aircraft production.

The increase in defense sales was primarily driven by increased market demand for our products.

The decrease in commercial air transport was primarily due to the decline that occurred during the first half of fiscal year 2024.

We began to experience a recovery in commercial air transport demand during the second half of 2024.

Services sales in fiscal year 2024 increased $10.7 million, or 87.6%, compared to fiscal year 2023.

The increase in service sales primarily reflects customer service sales of $9.7 million due to sales from the product lines acquired from Honeywell, which included a $1.7 million true-up payment from Honeywell for services performed by third parties, primarily offset by a $0.3 million decrease in legacy customer service.

Cost of sales .

Cost of sales was $13.5 million, or 38.8% of net sales, in fiscal 2023 compared to $11.1 million, or 39.9% of net sales, in fiscal 2022.

The increase in cost of sales was primarily the result of an increase in customer service sales volume.

The Company’s overall gross margin in fiscal 2023 was 61.2% compared to 60.1% in fiscal 2022.

The fiscal 2023 gross margin percentage increase was primarily attributable to increased customer service sales that typically generate higher gross margins than manufactured products.

Cost of sales was $21.3 million, or 45.0% of Net sales, in fiscal year 2024 compared to $13.5 million, or 38.7% of Net sales, in fiscal year 2023.

The increase in Cost of sales was primarily the result of an increase in Services sales volume.

The Company’s overall gross margin in fiscal year 2024 was 55.0% compared to 61.3% in fiscal year 2023.

The decrease in overall gross margin percentage for fiscal year 2024 is primarily the result of changes in product mix, increased depreciation and cost inefficiencies due to hiring and training of additional personnel and other integration costs.

Research and development .

R&D expenses were $3.1 million in fiscal 2023 and $2.7 million in fiscal 2022.

R&D expense decreased to 9.0% of net sales in fiscal 2023 compared to 9.8% of net sales in fiscal 2022.

The increase in R&D expense resulted primarily from increased personnel and related benefits, offset by the increase of EDC contract activity whose costs are reflected in cost of sales rather than R&D expense.

R&D expenses were $4.1 million in fiscal year 2024 and $3.1 million in fiscal year 2023.

The 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 slightly to 8.8% of Net sales for fiscal year 2024 compared to 9.0% for fiscal year 2023.

Selling, general, and administrative.

SG&A expenses increased $4.0 million or 60.2%, to $10.8 million from $6.8 million in fiscal 2022.

SG&A expenses in fiscal 2022 were reduced by inclusion of a gain of $1.2 million from the sale of the PC-12 aircraft.

The increase in SG&A expense in fiscal 2023 was primarily the result of increased stock compensation expense and legal fees, professional fees, audit fees and amortization expense primarily related to the Transaction and increased board director fees.

SG&A expenses increased $1.3 million or 11.9%, to $12.1 million from $10.8 million in fiscal year 2023.

The increase in SG&A expense in fiscal year 2024 was primarily the result of increases in consulting and legal fees of $0.9 million primarily due to acquisition related expenses and increased costs of $0.6 million as a result of the recruitment of a new CFO and other corporate initiatives.

In addition, the Company incurred amortization expense of $1,191,361 related to the customer relationships intangible asset resulting from the combined acquisitions.

These increases were partially offset by a $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 25.6% in fiscal year 2024 compared to 31.1% for fiscal year 2023.

Interest income.

Interest income of $0.5 million in fiscal 2023 increased by $0.4 million as compared to interest income in fiscal 2022 of $0.1 million.

The increase in interest income was primarily the result of the increase in the average cash balance in fiscal 2023 and a general increase in interest rates as compared to fiscal 2022.

Interest income of $0.1 million in fiscal year 2024 decreased by $0.4 million as compared to interest income in fiscal year 2023 of $0.5 million.

The decrease in interest income was primarily the result of the decrease in the average cash balance in fiscal year 2024 and a general decrease in interest rates as compared to fiscal year 2023.

Other income.

Other income was $0.2 million in fiscal 2023, an increase of $.01 million in fiscal 2022.

Other income was $0.2 million in fiscal year 2023.

The Company did not have any other income for fiscal year 2024.

Income taxes.

Income tax expense was $1.6 million in fiscal 2023 as compared to income tax expense of $1.8 million in fiscal 2022.

The effective tax rate in fiscal 2023 was 21.1% as compared to 24.8% in fiscal 2022.

The higher tax and effective tax rate in fiscal 2022 as compared to fiscal 2023 primarily reflects higher state tax due to tax on the gain from the sale of the PC-12 aircraft.

As a result of the factors described above, the Company’s net income in fiscal 2023 was $6.0 million compared to net income of $5.5 million in fiscal 2022.

On a fully diluted basis, net income per share was $0.35 in fiscal 2023, compared to a net income of $0.32 per share in fiscal 2022.

Income tax expense was $1.9.

million in fiscal year 2024 as compared to income tax expense of $1.6 million in fiscal year 2023.

The effective tax rate in fiscal year 2024 was 20.9% as compared to 21.1% in fiscal year 2023.

The increase in income tax expense was primarily due to an increase in earnings in fiscal year 2024.

As a result of the factors described above, the Company’s net income in fiscal year 2024 was $7.0 million compared to net income of $6.0 million in fiscal year 2023.

On a fully diluted basis, net income per share was $0.40 in fiscal year 2024, compared to a net income of $0.35 per share in fiscal year 2023.

Fiscal Year Ended September 30, 2023 Compared to Fiscal Year Ended September 30, 2022

Net sales for fiscal 2022 increased $4.7 million, or 20.4%, to $27.7 million from $23.0 million for fiscal 2021.

For fiscal 2022, product sales increased $3.7 million, or 19.6% and customer service sales increased $0.8 million, or 21.0%, from fiscal 2021.

This increase in product sales primarily reflects increased shipments of aftermarket retrofit displays to commercial customers.

OEM sales to general aviation customers were relatively flat compared to fiscal 2021 at $10.4 million.

Military sales were up slightly from fiscal 2021 at $2.8 million, which was up $0.3 million, or a 13.5% increase.

The increase in customer service revenue was mainly due to increases in repair work for the Department of Defense.

Net sales in fiscal year 2023 increased $7.1 million, or 25.5%, to $34.8 million from $27.7 million in fiscal year 2022.

Product sales in fiscal year 2023 increased $0.2 million compared to fiscal year 2022.

Services sales in fiscal year 2023 increased $6.9 million, or 128.8%, compared to fiscal year 2022.

EDC sales increased $0.7 million, or 146.8% compared to fiscal year 2022, reflecting increased EDC business.

Customer service sales increased $6.2 million, or 127.2% from fiscal year 2022.

The increase in customer service sales primarily reflects customer service sales of $5.8 million due to the Honeywell Agreement.

The increase in product sales primarily reflects increased shipments of displays to general aviation customers and commercial transport customers of $0.7 million and $0.6 million, respectively.

Military product sales decreased $1.1 million due to reduced business volume.

Cost of sales.

Cost of sales was $11.1million, or 39.9% of net sales, for fiscal 2022 compared to $10.3 million, or 44.5% of net sales, in fiscal 2021.

The increase in cost of sales was primarily the result of an increase in product sales volume.

The Company’s overall gross margin in fiscal 2021 was 60.1% compared to 55.5% in fiscal 2021.

The fiscal 2022 gross margin percentage increase was attributable to operating leverage achieved due to increased sales that resulted in increased cost absorption, as well as a favorable product mix.

Cost of sales was $13.5 million, or 38.7% of Net sales, in fiscal year 2023 compared to $11.1 million, or 39.9% of Net sales, in fiscal year 2022.

The increase in Cost of sales was primarily the result of an increase in customer service sales volume.

The Company’s overall gross margin in fiscal year 2023 was 61.3% compared to 60.1% in fiscal year 2022.

The fiscal year 2023 gross margin percentage increase was primarily attributable to increased customer service sales that typically generate higher gross margins than manufactured products.

Research and development .

R&D expense was $2.7 million for fiscal 2022 and $2.6 million for fiscal 2021.

R&D expense decreased to 9.8% of net sales in fiscal 2022 compared to 11.4% of net sales in fiscal 2021.

This decrease in R&D expense as a percent of net

sales was due to lower salaries and benefits due to lower headcount, along with fewer R&D related projects, including STC certifications.

R&D expenses were $3.1 million in fiscal year 2023 and $2.7 million in fiscal year 2022.

R&D expense decreased to 9.0% of Net sales in fiscal year 2023 compared to 9.8% of net sales in fiscal year 2022.

Selling, general , and administrative .

SG&A expense increased $0.5 million or 7.9% to $6.8 million from $6.3 million in fiscal 2021.

The increase in SG&A expense was primarily the result of increased legal, and professional fees, with an offset due to a gain on the sale of a PC-12 aircraft.

SG&A expenses increased $4.0 million or 60.2%, to $10.8 million from $6.8 million in fiscal year 2022.

SG&A expenses in fiscal year 2022 were reduced by inclusion of a gain of $1.2 million from the sale of the PC-12 aircraft.

The increase in SG&A expense in fiscal year 2023 was primarily the result of increased stock-based compensation expense and legal fees, professional fees, audit fees and amortization expense primarily related to the June 2023 Honeywell Agreement and increased board of director fees.

Interest income .

Interest income of $61,051 in fiscal 2022 increased by $59,817 as compared to fiscal 2021 interest income of $1,234.

The increase in interest income was primarily the result of the increase in the cash balance in fiscal 2022 and a general increase in interest rates as compared to fiscal 2021.

Interest income of $0.5 million in fiscal year 2023 increased by $0.4 million as compared to interest income in fiscal year 2022 of $0.1 million.

The increase in interest income was primarily the result of the increase in the average cash balance in fiscal year 2023 and a general increase in interest rates as compared to fiscal year 2022.

Other income.

Other income was flat at $0.1 million for both fiscal 2022 and fiscal 2021.

Other income was $0.2 million in fiscal year 2023, an increase of $0.1 million from fiscal year 2022.

Income taxes.

Income tax expense was $1.8 million for fiscal 2022 as compared to an income tax benefit of $1.1 million in fiscal 2021.

The effective tax rate benefit for fiscal 2021 was 27.4% and differs from the statutory rate primarily due to the release of the valuation allowance for all federal and state deferred tax assets.

This release both increased the deferred tax asset and removed the valuation allowance.

Fiscal 2022 income tax expense of $1.8 million represents income taxes due based on an effective tax rate of 24.7% with no related allowances.

As a result of the factors described above, the Company’s net income for fiscal 2022 was $5.5 million compared to net income of $5.1 million for fiscal 2021.

On a fully diluted basis, net income per share was $0.32 for fiscal 2022, compared to a net income of $0.29 per share for fiscal 2021.

Income tax expense was $1.6 million in fiscal year 2023 as compared to income tax expense of $1.8 million in fiscal year 2022.

The effective tax rate in fiscal year 2023 was 21.1% as compared to 24.8% in fiscal year 2022.

The higher tax and effective tax rate in fiscal year 2022 as compared to fiscal year 2023 primarily reflects higher state tax due to tax on the gain from the sale of the PC-12 aircraft.

As a result of the factors described above, the Company’s net income for fiscal year 2023 was $6.0 million compared to net income of $5.5 million for fiscal year 2022.

On a fully diluted basis, net income per share was $0.35 for fiscal year 2023, compared to a net income of $0.32 per share for fiscal year 2022.

Liquidity and Capital Resources

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Net cash (used in) provided by investing activities

Net cash provided by (used in) financing activities

Net cash provided by financing activities

(1) Calculated as:

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current assets divided by current liabilities

The Company’s principal source of liquidity for operations has been cash flows from current year operations and cash accumulated from prior years’ operations.

Cash is used principally to finance inventory, accounts receivable, contract assets, and payroll, as well as the Company’s known contractual and other commitments (including those described in Note 19, “Lease Recognition.”

The Company’s principal source of liquidity has been cash flows from current year operations and cash accumulated from prior years’ operations, supplemented with our revolving credit facility.

Cash is used principally to finance inventory, accounts receivable, contract assets, payroll, debt service and acquisitions, as well as the Company’s known contractual and other commitments (including those described in Note 19, “Leases”).

The Company’s existing cash balances and anticipated cash flows from operations, together with borrowings under our revolving credit facility, are expected to be adequate to satisfy the Company’s liquidity needs for at least the next 12 months.

Apart from what has been disclosed in this Management’s Discussion and Analysis, management is not aware of any trends, events or uncertainties that have had or are likely to have a material impact on our liquidity, financial condition and capital resources.

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

Debt Facility

In connection with the Transaction, the Company entered into the Term Loan with PNC for $20.0 million to fund a portion of the Transaction (see Note 20, “Loan Agreement” for further details).

In connection with the June 2023 Honeywell Agreement, the Company entered into a term loan with PNC Bank, National Association for $20.0 million to fund a portion of the June 2023 Honeywell Agreement.

Refer to Note 20, “Loan Agreement” for further details.

In addition to providing for the Term Loan, The Loan Agreement, together with a corresponding Line of Credit Note in favor of PNC, executed on May 11, 2023, provides for the senior secured Revolving Line of Credit in an aggregate principal amount of $10,000,000, with an expiration date of May 11, 2028.

On December 19, 2023, the Company and PNC entered into an Amendment to Loan Documents and a corresponding Amended and Restated Revolving Line of Credit Note and Amended and Restated Line of Credit and Investment Sweep Rider.

See Note 21, “Subsequent Events”.

On December 19, 2023, the Company and PNC entered into an Amendment to the Loan (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 Amendments 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 aggregate principal amount of $20,000,000, with a maturity date of June 28, 2028.

On September 30, 2024, in connection with the July 2024 Honeywell Asset Acquisition and the September 2024 Honeywell Agreement, the Company and one of its subsidiaries, Innovative Solutions and Support, LLC, entered into an Amendment to Loan Documents (the “2024 Loan Amendment”) with PNC, which amends certain terms of the Loan Agreement to increase the line of credit with PNC.

Concurrently with the 2024 Loan Amendment, the Company entered into (i) an Amended and Restated Revolving Line of Credit Note in favor of PNC (the “A&R Revolving Line of Credit Note”), and (ii) an Amended and Restated Line of Credit and Investment Sweep Rider with PNC (the “A&R Rider”).

The A&R Revolving Line of Credit Note provides for a senior secured revolving line of credit in an aggregate principal amount of $35,000,000, with an expiration date of December 19, 2028 (the “Revolving Line of Credit”).

The interest rate applicable to loans outstanding under the Revolving Line of Credit is a rate per annum equal to the sum of (A) Daily SOFR (as defined in the A&R Revolving Line of Credit Note) plus (B) an unadjusted spread of the Applicable SOFR Margin plus (C) a SOFR adjustment of ten basis points.

The Applicable SOFR Margin ranges from 1.5% to 2.5% depending on the Company’s funded debt to EBITDA ratio, as defined in the A&R Revolving Line of Credit Note.

The A&R Rider provides for how PNC will make advances to the Company under the Revolving Line of Credit.

Stifel Sales Agreement

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

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.

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 fiscal year ended September 30, 2024, we did not sell any shares of common stock under the ATM Sales Agreement.

Future Funding Requirements

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Apart from what has been disclosed above, management is not aware of any trends, events or uncertainties that have had or are likely to have a material impact on our liquidity, financial condition and capital resources.

The Board previously declared special cash dividends in the amount of $0.65 per share in fiscal 2020 and $0.50 per share in fiscal 2021.

The Company did not pay cash dividends in fiscal 2022 or 2023.

The Company did not pay cash dividends in fiscal years 2023 or 2024.

The Company intends to retain future earnings, if any, to finance the development and growth of its business and does not anticipate paying any cash dividends in the foreseeable future.

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Operating Activities

The Company generated $2.1 million of cash from operating activities during fiscal 2023, as compared to cash generated of $6.1 million during fiscal 2022.

The cash generated by operating activities for the year ended September 30, 2023 was primarily generated by net income of $6.0 million, increase in non-cash compensation expenses for stock options and stock awards of $0.8 million and $0.7 million, respectively, and depreciation and amortization expense of $0.7 million, partially offset by increases to accounts receivable of $5.4 million and an increase in inventories of $0.8 million.

The Company generated $6.1 million of cash in operating activities during fiscal 2022, as compared to cash generated of $4.6 million during fiscal 2021.

The cash generated by operating activities for the year ended September 30, 2022 was primarily generated by net income of $5.5 million, increase in accrued expenses of $1.3 million and a decrease in deferred income tax assets of $1.0 million, partially offset by the gain on sale of the Company’s Pilatus PC-12 airplane of $1.2 million and an increase in inventories of $0.7 million.

The Company generated $5.8 million of cash from operating activities during fiscal year 2024, as compared to cash generated of $2.1 million during fiscal year 2023.

The cash generated by operating activities for the year ended September 30, 2024 was primarily generated by net income of $7.0 million, an increase in non-cash compensation expenses for stock options and stock awards of $0.3 million and $0.7 million, respectively, and depreciation and amortization expense of $2.1 million.

Changes is certain other working capital accounts drove the remainder of the increase for fiscal year 2024.

The Company generated $2.1 million of cash in operating activities during fiscal year 2023, as compared to cash generated of $6.1 million during fiscal year 2022.

Investing Activities

Cash used in investing activities was $16.8 million for fiscal year 2024 and was primarily due to the $14.2 million acquisition of various generations of military display generators and flight control computers in September 2024 and the $4.2 million acquisitions of certain additional assets related to the Company’s communication and navigation product lines in July of 2024.

In addition, the Company spent $0.7 million for the purchases of property and equipment, partially offset by proceeds of $2.2 million from the sale of the Company’s King Air aircraft.

The Company plans to continue investing in capital equipment to support engineering development efforts and operations.

Cash used in investing activities was $36.2 million for fiscal year 2023.

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In addition, the Company spent $0.3 million for the purchase of test equipment and computer hardware.

The Company plans to continue investing in capital equipment to support engineering development efforts and operations.

In connection with the Transaction, the Company entered into the Term Loan with PNC for $20.0 million to fund a portion of the Transaction (see Note 20, “Loan Agreement” for further details).

The preliminary purchase consideration was $35.9 million in cash.

Cash provided by investing activities was $2.6 million for fiscal year 2022 and consisted primarily of proceeds from the sale of the Company’s Pilatus PC-12 airplane offset by spending of $0.2 million primarily for quality test equipment and computer hardware.

The Company plans to continue investing in capital equipment to support engineering development efforts and operations.

Financing Activities

Cash provided by financing activities was $19.9 million for fiscal year 2023 and primarily consisted of proceeds from the Term Loan with PNC for $20.0 million to fund a portion of the Honeywell Agreement with Honeywell, proceeds from the exercise of stock options for $0.4 million and the paydown of the Term Loan for $0.5 million.

Cash provided by financing activities was $0.3 million for fiscal year 2022 and consisted of proceeds from employees’ exercise of stock options.

Net cash provided by financing activities was $8.5 million for the fiscal year 2024 and consisted of $43.8 million in payments against the Company’s line of credit offset by $52.3 million in additional borrowings used to fund the Company’s fiscal year 2024 acquisitions.

Cash provided by financing activities was $19.9 million for fiscal year 2023 and primarily consisted of proceeds from the Term Loan with PNC for $20.0 million to fund a portion of the June 2023 Honeywell Agreement, proceeds from the exercise of stock options for $0.4 million and the paydown of the Term Loan for $0.5 million.

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.

The Company has experienced increases in expenditures since its inception and anticipates that expenditures will remain relatively constant with the levels experienced in fiscal 2023 and fiscal 2022.

The Company believes that its cash and cash equivalents and current banking facility will provide sufficient capital to fund operations for at least the next twelve months.

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

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

IS&S has experienced increases in expenditures since its inception and anticipates that increases in expenditures will continue in the foreseeable future.

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.

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

The Company does not believe inflation had a material effect on its financial position or results of operations during the past three years;

however, it cannot predict future effects of inflation.

however, it cannot predict the future effects of inflation, if any.

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.

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

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

Actual results may differ from these estimates.

We prepare our consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”).

See Part II, Item 8, “Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements,” Note 1, “Significant Accounting and Reporting Policies,” for additional information about our significant accounting and reporting policies that require us to make certain judgments and estimates in reporting our operating results and our assets and liabilities.

The following paragraphs describe the accounting policies that require significant judgment and estimates due to inherent uncertainty or complexity.

Revenue recognition

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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.

In addition, the Company enters fixed-price contracts, in which the Company agrees to perform the specified work for a pre-determined price.

The contractual terms of the fixed-price contracts are usually long-term, however they often contain a termination for convenience clause that results in the Company treating these contracts as short-term under ASC 606.

To the extent our actual costs vary from the estimates upon which the price was negotiated, the Company will generate more or less profit or could incur a loss.

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.

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Contract costs include material, components and third-party avionics purchased from suppliers, direct labor and overhead costs.

Contract Balances

Contract assets consist of the right to consideration in exchange for product offerings that we have transferred to a customer under the contract.

Contract liabilities primarily relate to consideration received in advance of performance under the contract.

Customer Service Revenue

The Company enters into sales arrangements with customers for the repair or upgrade of its various products that are not under warranty.

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

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 that are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

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

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

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

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

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

● discount rates.

Inventory valuation

The Company values inventory at the lower of cost (first-in, first-out) or net realizable value.

Inventories are written down for estimated obsolescence equal to the difference between inventory cost and estimated net realizable value based on a combination of historical usage and assumptions based on expected usage related to estimated future customer and market demands.

The Company’s method of valuing inventory contains uncertainties because the calculation requires management to consider inventory aging, to make assumptions regarding expected usage and to apply judgments on forecasted future demand, market conditions and technological obsolescence.

If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-down may be required.

New Accounting Pronouncements

In June 2016, Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instrument (“ASU 2016-13”).

ASU 2016-13 replaces the incurred loss impairment methodology in current U.S.

GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

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

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

As new accounting pronouncements are issued, we will adopt those that are applicable.

Acquisitions and Investments, and Goodwill and Other Indefinite-Lived Intangible Assets

We allocate the purchase price of acquired entities to the underlying tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values, with any excess recorded as goodwill.

The valuations of the acquired assets and liabilities will impact the determination of future operating results.

Determining the fair value of assets we acquire and liabilities we assume requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items.

We determine the fair values of intangible assets acquired generally in consultation with third-party valuation advisors.

Fair value adjustments to the assets and liabilities are recognized and the results of operations of the acquired business are included in our consolidated financial statements from the effective date of the acquisition.

Intangible assets other than goodwill are recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed or exchanged, regardless of the Company’s intent to do so.

Goodwill and identifiable intangible assets are recorded at their estimated fair value on the date of acquisition and are reviewed at least annually for impairment based on cash flow projections and fair value estimates.

Inventories are stated at the lower of cost or net realizable value.

Write-downs for slow-moving and obsolete inventories are provided based on current assessments about future product demand, production requirements for expected usage and usage for the last 12 months.

Where we estimate that the net realizable value is below cost or have determined that future demand is lower than current inventory levels based on historical experience, current and projected market demand, current and projected volume trends and other relevant current and projected factors associated with the current economic conditions, a reduction in inventory cost to estimated net realizable value is recorded as a charge included in Cost of sales.

Management believes that our estimates of excess and obsolete inventory are reasonable and material changes in future estimates or assumptions used to calculate our estimates are unlikely.

However, actual results may differ materially from the estimates and additional provisions may be required in the future.

Business Segments

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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-K

Item 7. Management’s Discussion and Analysis