What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-02-14 compared with 2024-08-14 · 106 added, 151 removed, 127 unchanged (67% of the section changed)

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The Company does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report, or to reflect the occurrence of unanticipated events.

forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act of 1933, as amended (the “Securities Act”) and 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act of 1933, as amended (the “Securities Act”) and 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Investors should also be aware that while the Company, from time to time, communicates with securities analysts, it is against its policy to disclose any material non-public information or other confidential commercial information.

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Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.

The following discussion provides an analysis of the Company’s financial condition, cash flows and results of operations from management’s perspective and should be read in conjunction with “Selected Consolidated Financial Data” and the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K.

Our objective is to also provide discussion of events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or of future financial condition and to offer information that provides understanding of our financial condition, cash flows and results of operations.

Company Overview

Innovative Solutions and Support, Inc.

was incorporated in Pennsylvania on February 12, 1988.

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

The Company supplies integrated flight management systems (“FMS”), flat panel display systems (“FPDS”), FPDS with autothrottle, air data equipment, integrated standby units, 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 was incorporated in Pennsylvania on February 12, 1988.

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

The Company supplies integrated FMS, 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 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, 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 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.

Aircraft equipped with the Company’s FMS, FPDS and SBAS/WAAS/LPV enabled navigator, will be qualified to land at such airports and will comply with Federal Aviation Administration (“FAA”) mandates for Required Navigation Performance and Automatic Dependent Surveillance-Broadcast navigation.

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 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.

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

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

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.

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, the DoD/governmental and foreign military markets.

This approach, combined with the Company’s industry experience, is designed to enable the Company 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 sells to both the OEM and the retrofit markets.

Customers include various OEMs, commercial air transport carriers and corporate/general aviation companies, DoD and its commercial contractors, aircraft operators, aircraft modification centers, government agencies and foreign militaries.

Occasionally, IS&S sells its products directly to DoD;

Customers include various OEMs, commercial air transport carriers and corporate/general aviation companies, the DoD and its commercial contractors, aircraft operators, aircraft modification centers, government agencies and foreign militaries.

Occasionally, the Company sells its products directly to the DoD;

however, the Company sells its products primarily to commercial customers for end use in DoD programs.

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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 (as amended, 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.

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;

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 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.

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.

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

Many of the components are standard, although certain parts are manufactured to meet the Company’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 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.

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 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.

These costs are expensed as incurred and reported as R&D expenses.

The Company intends to continue investing in the development of new products that complement current product offerings and to expense associated R&D costs as they are incurred.

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

Selling, general and administrative (“SG&A”) expenses consist of sales, marketing, business development, professional services, salaries and benefits for executive and administrative personnel, facility costs, recruiting, legal, accounting and other general corporate expenses.

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

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

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

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

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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 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

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

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

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

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

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There have been no material changes in the Company’s critical accounting policies since September 30, 2024.

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

See also Note 1 to the unaudited condensed consolidated financial statements for the three months ended December 31, 2024 as set forth herein.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED

DECEMBER 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 June 30,

Nine Months Ended June 30,

Customer service

Engineering development contracts

Three Months Ended December 31,

Total net sales

Cost of sales:

Customer service

Engineering development contracts

Total cost of sales

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Income tax expense

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 $2,261,252, 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 $1,099,367, 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 $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 $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 $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 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 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.

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

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 three months ended December 31, 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 three months ended December 31, 2023.

For additional information, see Note 3, Summary of Significant Accounting Policies, (“Reclassifications ”) to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2024.

Net sales for the three months ended December 31, 2024 increased $6.7 million, or 71.6%, to $16.0 million from $9.3 million for the three months ended December 31, 2023.

The increase in Net sales was driven by a 125.7% increase or $5.6 million in product sales which was driven primarily by the recent acquired military product line of $6.0 million and an increase commercial air transport sales $1.1 million partially offset by $1.2 million reduced shipsets in business aviation.

Service sales for the three months ended December 31, 2024 increased $1.1 million, or 22.5%, compared to three months ended December 31, 2023.

The increase in service sales primarily reflects increases in engineering development services of $0.8 million and an increase in customer service sales from the product lines acquired from Honeywell of $0.8 million, partially offset by lower legacy customer service revenue of $0.5 million.

Cost of sales .

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.

Cost of sales was $9.4 million, or 58.6% of Net sales, for the three months ended December 31, 2024 compared to $3.8 million, or 40.7% of Net sales, for the three months ended December 31, 2023.

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

The Company’s overall gross margin for the three months ended December 31, 2024 was 41.4% compared to 59.3% for the three months ended December 31, 2023.

The decrease in overall gross margin percentage for the three months ended December 31, 2024, compared to the three months ended December 31, 2023 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.

There are several factors that have been impacting our gross margin capture in recent quarters, which continued during the first quarter and will remain a factor in the near-term.

These factors included incremental depreciation that has resulted from recent product line acquisitions and the shift in our sales mix, as military sales will be a higher percentage of sales.

More specifically, during the first quarter, the impact of the acquired Honeywell military product line volume with lower margins of approximately 30% gross margins, impacted the overall gross margin by approximately 5%, increased third party expenses from Honeywell with respect to their transition services of $0.2 million resulted in a 2% impact and higher depreciation from recent acquisitions of $0.5 million resulted in a 5% impact to overall margins.

Research and development .

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 9.5% of net sales for the nine months ended June 30, 2024 compared to 10.9% for the prior year period.

R&D expenses were $1.1 million for the three months ended December 31, 2024 and $0.9 million for the three months ended December 31, 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 to 7.0% of Net sales for the three months ended December 31, 2024 compared to 9.7% for the three months ended December 31, 2023.

Selling, general, and administrative.

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 $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.

SG&A expenses increased $1.2 million or 38.3%, to $4.2 million from $3.0 million for the three months ended December 31, 2023.

The increase in SG&A expense for the three months ended December 31, 2024 was primarily the result of increases in professional services fees of $0.2 million primarily due to acquisition related expenses and corporate initiatives.

In addition, the Company incurred increased depreciation and amortization expenses of $0.5 million related to the customer relationships and backlog intangible assets resulting from the combined acquisitions and $0.3 million was due to higher salaries and benefits due to increased headcount to support the growth of the business.

As a percentage of sales, selling, general and administrative expenses were 26.0% for the three months ended December 31, 2024 compared to 32.3% for the three months ended December 31, 2023.

Interest income.

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.

Interest income was negligible for the three months ended December 31, 2024 and decreased by $0.1 million as compared to the three months ended December 31, 2023.

The decrease in interest income was primarily the result of a general decrease in interest rates as compared to the three months ended December 31, 2023.

Other income.

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 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.

The Company had no material other income for the three months ended December 31, 2024 and 2023, respectively.

Income taxes.

Income tax expense was $0.2 million for the three months ended December 31, 2024 as compared to income tax expense of $0.3 million for the three months ended December 31, 2023.

The effective tax rate for the three months ended December

31, 2024 was 20.1% as compared to 21.8% for the three months ended December 31, 2023.

The decrease in income tax expense was primarily due to a decrease in earnings for the three months ended December 31, 2024, compared to the same period last year.

As a result of the factors described above, the Company’s net income for the three months ended December 31, 2024 was $0.7 million compared to net income of $1.1 million for the three months ended December 31, 2023.

On a fully diluted basis, net income per share was $0.04 for the three months ended December 31, 2024, compared to a net income of $0.06 per share for the three months ended December 31, 2023.

Liquidity and Capital Resources

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Current ratio (2)

Nine Months Ended June 30,

Three Months Ended December 31,

Cash flow activities:

Net cash provided by operating activities

Net cash provided by (used in) investing activities

Net cash (used in) provided by financing activities

Net cash (used in) provided by investing activities

Net cash (used in) financing activities

(1) Calculated as:

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current assets divided by current liabilities.

The Company’s principal source of liquidity has been cash flows from current year operations and cash accumulated from prior years’ operations, supplemented with borrowings under our term loan and 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 8, “Leases”).

The Company’s existing cash balances and anticipated cash flows from operations, together with borrowings under our term loan and 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.

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.

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.

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

Debt Facility

On December 19, 2023, the Company and PNC entered into an Amendment to Loan Documents (the “Restated Loan Amendment”) and a corresponding Amended and Restated Revolving Line of Credit Note (“Restated Line of Credit Note”) and Amended and Restated Line of Credit and Investment Sweep Rider (the “Restated Rider”), to increase the aggregate principal amount available under the Company’s senior secured revolving line of credit from $10,000,000 to $30,000,000 and extend the maturity date until December 19, 2028.

The proceeds of the Restated Line of Credit Note will be used for working capital and other general corporate purposes, for acquisitions as permitted under the Restated Loan Amendment and to pay off and close the loan evidenced by that certain Term Note executed in favor of PNC, dated June 28, 2023, which 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 “Term Note”).

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

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

Stifel Sales Agreement

On September 22, 2023, the Company entered into an at-the-market equity offering Sales Agreement (the “ATM Sales Agreement”) with Stifel, Nicolaus & Company, Incorporated (the “Sales Agent”), pursuant to which the Company may offer and sell from time to time through the Sales Agent up to $40 million of shares of its common stock.

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

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

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

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

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

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

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

During the year ended September 30, 2023 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.

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

Refer to the Company’s 2024 10K, 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 the Restated Loan Amendment and the corresponding Restated Line of Credit Note and 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 entered into the Loan 2024 Amendment with PNC, which amends certain terms of the Loan Agreement to increase the line of credit with PNC.

Concurrently with the Loan 2024 Amendment, the Company entered into (i) A&R Revolving Line of Credit Note, and (ii) 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.

Future Funding Requirements

The Company’s existing cash balances, anticipated cash flows from operations and current banking 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 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 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.

The declaration and payment of any dividend in the future will be at the discretion of the Board and will depend on then-existing conditions, including our operating results, financial condition, business prospects and other factors the Board may deem relevant.

Operating activities

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.

Net cash provided by operating activities was $1.8 million for the three months ended December 31, 2024 and consisted primarily of funding from net income of $0.7 million and changes in working capital.

Investing activities

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.

Net cash used in investing activities was $0.3 million for the three months ended December 31, 2024 and consisted of expenditures related to additions and improvements in the Company’s facilities and purchases of equipment and computer hardware.

Financing activities

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.

Net cash used in financing activities was $1.5 million for the three months ended December 31, 2024 and consisted of payments against the Company’s line of credit.

Future capital requirements depend upon numerous factors, including market acceptance of the Company’s products, the timing and rate of expansion of business, acquisitions, joint ventures and other factors.

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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 nine-month period ended June 30, 2024:

Three Months Ended

Nine Months Ended

June 30, 2024

December 31, 2024

Backlog, beginning of period

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Backlog, end of period

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.

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

The backlog excludes potential future sole-source production orders from products developed under the Company’s engineering development contracts (“EDC”) programs, including the Pilatus PC-24, the KC-46A and the Textron King Air 360 and King Air 260 ThrustSense® Autothrottle programs.

Although the Company believes that the orders included in backlog are firm, most of the backlog involves orders that can be modified or terminated by the customer.

At December 31, 2024, our backlog was $80.8 million compared with $89.2 million at September 30, 2024.

Backlog at December 31, 2024 included $74.3 million of acquired backlog as a result of the September 27, 2024 acquisition.

Backlog is converted into sales in future periods as work is performed or deliveries are made.

We expect to recognize approximately 65% of our backlog over the next 12 months and approximately 98% over the next 24 months as revenue, with the remainder recognized thereafter.

During fiscal 2024, we made important progress on our commercial growth strategy highlighted by several key awards and contract wins across our commercial, military and business aviation markets.

In October 2024, we announced our ThrustSense® Autothrottle system was selected by the US Army to be installed on their C-12 (B200) aircraft equipped with ProLine21 avionics suites®.

Deliveries of the IS&S ThrustSense Autothrottle system for this application began in September 2024, with ongoing installations anticipated.

In August 2024, we received a multi-million dollar production contract from a major aerospace company to supply our 19” Multifunction Display (MFD) with Integrated Mission Computer.

This order marks our latest OEM contract and builds on existing programs with Pilatus Aircraft (“Pilatus”) for the PC-24, Textron Aviation (“Textron”) for the King Air 260/360 and The Boeing Company (“Boeing”) for the KC-46A, KC-767 and the T-7A.

Off-Balance Sheet Arrangements

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Item 2. Management’s Discussion and Analysis