10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

[For the transition period from                        to                      ]

Commission File No. 000-31157

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

(Exact name of registrant as specified in its charter)

PENNSYLVANIA	23-2507402
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
720 Pennsylvania Drive, Exton, Pennsylvania	19341
(Address of Principal Executive Offices)	(Zip Code)

(610) 646-9800

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	ISSC	Nasdaq Stock Market LLC

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒  No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

☐ Large accelerated filer	☐ Accelerated filer
☐ Non-accelerated filer	☒ Smaller reporting company
☐ Emerging growth company

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

As of July 31, 2023, there were 17,446,990 shares of the Registrant’s Common Stock, with par value of $.001 per share, outstanding.

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

FORM 10-Q June 30, 2023

INDEX

		Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets – June 30, 2023 (unaudited) and September 30, 2022	1
	Condensed Consolidated Statements of Operations – Three and Nine Months Ended June 30, 2023 and 2022 (unaudited)	2
	Condensed Consolidated Statements of Shareholders’ Equity – Three and Nine Months Ended June 30, 2023 and 2022 (unaudited)	3 - 4
	Condensed Consolidated Statements of Cash Flows – Nine Months Ended June 30, 2023 and 2022 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6 - 23
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24 - 32
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4.	Controls and Procedures	32
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	35
SIGNATURES		36

PART I—FINANCIAL INFORMATION

Item 1- Financial Statements

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,		September 30,
	2023		2022
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	2,572,233	$	17,250,546
Accounts receivables		5,944,015		4,297,457
Contract assets		252,162		162,742
Inventories		5,742,613		5,349,104
Prepaid inventory		10,036,160		—
Prepaid expenses and other current assets		1,390,034		1,142,470
Total current assets		25,937,217		28,202,319
Goodwill		4,608,041		—
Intangible assets, net		20,914,885		60,348
Property and equipment, net		10,046,444		6,292,189
Deferred income taxes		643,708		46,487
Other assets		198,333		103,980
Total assets	$	62,348,628	$	34,705,323
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Current portion of long-terrm debt	$	2,000,000	$	—
Accounts payable		767,096		708,845
Accrued expenses		5,275,041		2,972,275
Contract liability		102,953		259,183
Total current liabilities		8,145,090		3,940,303
Long-term debt		18,000,000		—
Other liabilities		420,949		15,065
Total liabilities		26,566,039		3,955,368
Commitments and contingencies (See Note 6)
Shareholders’ equity
Preferred stock, 10,000,000 shares authorized, $.001 par value, of which 200,000 shares are authorized as Class A Convertible stock. No shares issued and outstanding at June 30, 2023 and September 30, 2022		—		—
Common stock, $.001 par value: 75,000,000 shares authorized, 19,535,219 and 19,412,664 issued at June 30, 2023 and September 30, 2022		19,533		19,413
Additional paid-in capital		54,097,502		52,458,121
Retained Earnings (accumulated deficit)		3,034,091		(359,042)
Treasury stock, at cost, 2,096,451 shares at June 30, 2023 and September 30, 2022		(21,368,537)		(21,368,537)
Total shareholders’ equity		35,782,589		30,749,955
Total liabilities and shareholders’ equity	$	62,348,628	$	34,705,323

The accompanying notes are an integral part of these statements.

1

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Net Sales:
Product	$	7,893,625	$	6,935,976	$	21,383,435	$	20,279,371
Engineering development contracts		65,583		—		432,482		198,203
Total net sales		7,959,208		6,935,976		21,815,917		20,477,574
Cost of sales:
Product		3,202,870		2,879,462		8,538,219		8,253,981
Engineering development contracts		21,692		—		79,098		16,748
Total cost of sales		3,224,562		2,879,462		8,617,317		8,270,729
Gross profit		4,734,646		4,056,514		13,198,600		12,206,845
Operating expenses:
Research and development		851,296		676,381		2,387,939		2,062,937
Selling, general and administrative		2,395,714		1,694,233		7,104,212		5,226,015
Total operating expenses		3,247,010		2,370,614		9,492,151		7,288,952
Operating income		1,487,636		1,685,900		3,706,449		4,917,893
Interest income		185,652		10,429		432,495		10,871
Other income		90,049		21,608		131,504		49,401
Income before income taxes		1,763,337		1,717,937		4,270,448		4,978,165
Income tax expense		339,958		358,763		877,315		1,056,363
Net income	$	1,423,379	$	1,359,174	$	3,393,133	$	3,921,802
Net income per common share:
Basic	$	0.08	$	0.08	$	0.19	$	0.23
Diluted	$	0.08	$	0.08	$	0.19	$	0.23
Weighted average shares outstanding:
Basic		17,576,969		17,261,349		17,415,358		17,253,822
Diluted		17,577,588		17,265,798		17,419,265		17,255,305

The accompanying notes are an integral part of these statements.

2

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(unaudited)

	Three Months Ended June 30, 2023 and 2022
					(Accumulated
			Additional		Deficit)				Total
	Common		Paid-In		Retained		Treasury		shareholders’
	Stock		Capital		Earnings		Stock		equity
Balance, March 31, 2023	$	19,518	$	53,883,433	$	1,610,712	$	(21,368,537)	$	34,145,126
Share-based compensation		15		214,069		—		—		214,084
Net income		—		—		1,423,379		—		1,423,379
Balance, June 30, 2023	$	19,533	$	54,097,502	$	3,034,091	$	(21,368,537)	$	35,782,589
Balance, March 31, 2022	$	19,368	$	52,067,250	$	(3,320,192)	$	(21,368,537)	$	27,397,889
Share-based compensation		2		58,417		—		—		58,419
Exercise of stock options		3		17,151		—		—		17,154
Net income		—		—		1,359,174		—		1,359,174
Balance, June 30, 2022	$	19,373	$	52,142,818	$	(1,961,018)	$	(21,368,537)	$	28,832,636

The accompanying notes are an integral part of these statements.

3

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(unaudited)

	Nine Months Ended June 30, 2023 and 2022
					(Accumulated
			Additional		Deficit)				Total
	Common		Paid-In		Retained		Treasury		shareholders’
	Stock		Capital		Earnings		Stock		equity
Balance, September 30, 2022	$	19,413	$	52,458,121	$	(359,042)	$	(21,368,537)	$	30,749,955
Share-based compensation		63		1,230,592		—		—		1,230,655
Exercise of stock options		57		408,789		—		—		408,846
Net income		—		—		3,393,133		—		3,393,133
Balance, June 30, 2023	$	19,533	$	54,097,502	$	3,034,091	$	(21,368,537)	$	35,782,589
Balance, September 30, 2021	$	19,343	$	51,817,095	$	(5,882,820)	$	(21,368,537)	$	24,585,081
Share-based compensation		27		308,572		—		—		308,599
Exercise of stock options		3		17,151		—		—		17,154
Net income		—		—		3,921,802		—		3,921,802
Balance, June 30, 2022	$	19,373	$	52,142,818	$	(1,961,018)	$	(21,368,537)	$	28,832,636

The accompanying notes are an integral part of these statements.

4

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the Nine Months Ended June 30,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,393,133	$	3,921,802
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		258,892		278,164
Share-based compensation expense
Stock options		646,172		135,273
Stock awards		584,483		173,326
Impairment of long-lived assets		44,400		—
Loss on disposal of property and equipment		—		357
Deferred income taxes		(597,221)		785,737
(Increase) decrease in:
Accounts receivables		(1,646,558)		1,042,975
Contract asset		(89,420)		—
Inventories		(393,509)		(264,789)
Prepaid expenses and other assets		(71,679)		69,344
Other non-current assets		(104,626)		—
Increase (decrease) in:
Accounts payables		58,251		128,859
Accrued expenses		(854,793)		357,566
Income taxes payable/receivable		(133,370)		(119,855)
Contract liability		(156,230)		(88,388)
Net cash provided by operating activities		937,925		6,420,371
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(165,084)		(161,230)
Acquisition of a business		(35,860,000)		—
Net cash used in investing activities		(36,025,084)		(161,230)
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt proceeds		20,000,000		—
Proceeds from exercise of stock options		408,846		17,154
Net cash provided by financing activities		20,408,846		17,154
Net (decrease) increase in cash and cash equivalents		(14,678,313)		6,276,295
Cash and cash equivalents, beginning of period		17,250,546		8,265,606
Cash and cash equivalents, end of period	$	2,572,233	$	14,541,901
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes	$	1,608,506	$	390,481

The accompanying notes are an integral part of these statements.

5

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Summary of Significant Accounting Policies

Description of the Company

Innovative Solutions and Support, Inc. (the “Company,” “IS&S,” “we” or “us”) was incorporated in Pennsylvania on February 12, 1988. The Company 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 (“ISU”), ISU with Autothrottle and advanced Global Positioning System (“GPS”) receivers that enable reduced carbon footprint navigation.

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

On June 30, 2023 (the “Acquisition Date”), the Company entered into an Asset Purchase and License Agreement with Honeywell International, Inc. (“Honeywell”) whereby Honeywell sold, certain assets and granted perpetual license rights to manufacture and sell licensed products related to its inertial, communication and navigation product lines (the “Product Lines”) to the Company (the “Transaction”). The Transaction involves a sale of certain inventory, equipment and customer-related documents; an assignment of certain customer 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. See Note, “Acquisition” in the Supplemental Balance Sheet Disclosures section below for more details.

Basis of Presentation

The accompanying unaudited consolidated financial statements are presented pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) in accordance with the disclosure requirements for the quarterly report on Form 10-Q and, therefore, do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete annual financial statements. In the opinion of Company management, the unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the results for the interim periods presented. The consolidated balance sheet as of September 30, 2022 is derived from the audited financial statements of the Company. Operating results for the three-and nine-month periods ended June 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2023 which cannot be determined at this time. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

Reclassification

The Company presented intangible assets, net separately in the consolidated balance sheet as of June 30, 2023. In order to conform to the presentation of the consolidated balance sheet as of June 30, 2023, the Company reclassified $60,348 from other assets to intangible assets, net in the consolidated balance sheet as of September 30, 2022. This reclassification has no impact on the Company’s net income for the three months ended June 30, 2023 and 2022 and the nine months ended June 30, 2023 and 2022.

Principles of Consolidation

The Company’s consolidated financial statements include the accounts of its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

6

Use of Estimates

The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Estimates are used in accounting for, among other items, valuation of tangible and intangible assets acquired, long term contracts, evaluation of allowances for doubtful accounts, product warranty cost liabilities, income taxes, engineering and material costs on Engineering Development Contract (“EDC”) programs, percentage of completion on EDC contracts, the useful lives of long-lived assets for depreciation and amortization, the recoverability of long-lived assets, evaluation of goodwill impairment, and contingencies. Estimates and assumptions are reviewed periodically and the effects of changes, if any, are reflected in the consolidated statements of operations in the period they are determined.

Acquisitions

The Company evaluates each of its acquisitions in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”), to determine whether the transaction is a business combination or an asset acquisition. In determining whether an acquisition should be accounted for as a business combination or an asset acquisition, the Company first performs a screen test to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this is the case, the acquired set is not deemed to be a business and is instead accounted for as an asset acquisition. If this is not the case, the Company then further evaluates whether the acquired set includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. If so, the Company concludes that the acquired set is a business.

The Company accounts for business acquisitions using the acquisition method of accounting. Under this method of accounting, assets acquired and liabilities assumed are recorded at their respective fair values at the date of the acquisition. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions. The Company’s estimates of fair value are based upon assumptions believed to be reasonable, but are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Any excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill.

During the measurement period, which may be up to one year from the acquisition date, the Company adjusts the provisional amounts of assets acquired and liabilities assumed with the corresponding offset to goodwill to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded within the Company’s consolidated statements of operations.

Intangible Assets

The Company’s identifiable intangible assets primarily consist of license agreement and customer relationships. Intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods deemed appropriate for the type of intangible asset acquired and are reported separately from any goodwill recognized.

Intangible assets with a finite life are amortized over their estimated useful life and are reported net of accumulated amortization. They are assessed for impairment in accordance with the Company’s policy on assessing long-lived assets for impairment described below.

Indefinite-lived intangible assets are not amortized, but are subject to an annual impairment test, or when events or circumstances dictate, more frequently. The impairment review for indefinite-lived intangible assets can be performed using a qualitative or quantitative impairment assessment. The quantitative assessment consists of a comparison of the fair value of the indefinite-lived intangible asset with its carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If the fair value exceeds its carrying amount, the indefinite-lived intangible asset is not considered impaired.

Goodwill

Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The recorded amounts of goodwill from business combinations are based on management’s best estimates of the fair values of assets acquired and liabilities assumed at the date of acquisition. Goodwill is assigned to the reporting units that are expected to benefit from the synergies of the business combination that generated the goodwill. The Company’s goodwill impairment

7

test is performed at the reporting unit level. Reporting units are determined based on an evaluation of the Company’s operating segments and the components making up those operating segments.

Goodwill is tested for impairment annually or in an interim period if certain changes in circumstances indicate a possibility that an impairment may exist. Factors to consider that may indicate an impairment may exist are: the macroeconomic conditions, industry and market considerations such as a significant adverse change in the business climate, cost factors, overall financial performance such as current-period operating results or cash flow declines combined with a history of operating results or cash flow declines or a projection/forecast that demonstrates continuing declines in the cash flow or the inability to improve the operations to forecasted levels, and any entity-specific events.

If the Company determines that it is more likely than not that the fair value of the reporting unit is below the carrying amount as part of its qualitative assessment, a quantitative assessment of goodwill is required. In the quantitative evaluation, the fair value of the reporting unit is determined and compared to the carrying value. If the fair value is greater than the carrying value, then the goodwill is deemed not to be impaired and no further action is required. If the fair value is less than the carrying value, goodwill is considered impaired and a charge is reported as impairment of goodwill in the consolidated statements of operations.

Cash and Cash Equivalents

Highly liquid investments, purchased with an original maturity of three months or less, are classified as cash equivalents. Cash equivalents at June 30, 2023 and September 30, 2022 consist of cash on deposit and cash invested in money market funds with financial institutions.

Inventory Valuation

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

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using an accelerated method over the estimated useful lives of the assets (the lesser of three to seven years or over the lease term), except for the manufacturing facility and the corporate airplane, which are depreciated using the straight-line method over their estimated useful lives of thirty-nine years and ten years, respectively. Costs are considered construction in progress when the property and equipment are not ready for their intended use. Major additions and improvements are capitalized, while maintenance and repairs that do not improve or extend the life of assets are charged to expense as incurred.

Long-Lived Assets

The Company assesses the impairment of long-lived assets in accordance with FASB ASC Topic 360-10, “Property, Plant and Equipment.” This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In addition, long-lived assets to be disposed of should be reported at the lower of the carrying amount or fair value less cost to sell. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to estimated future cash flows expected to result from use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows.

Fair Value of Financial Instruments

The net carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximate their fair value because of the short-term nature of these instruments. For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value as follows:

Level 1 — Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

8

Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

● Quoted prices for similar assets or liabilities in active markets;

● Quoted prices for identical or similar assets in non-active markets;

● Inputs other than quoted prices that are observable for the asset or liability; and

● Inputs that are derived principally from or corroborated by other observable market data.

Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2023 and September 30, 2022, according to the valuation techniques the Company used to determine their fair values.

	Fair Value Measurement on June 30, 2023
	Quoted Price in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets
Cash and cash equivalents:
Money market funds	$	2,545,241	$	—	$	—
	Fair Value Measurement on September 30, 2022
	Quoted Price in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets
Cash and cash equivalents:
Money market funds	$	16,083,571	$	—	$	—

Revenue Recognition

The Company enters into sales arrangements with customers that, in general, provide for the Company to design, develop, manufacture and deliver large flat-panel display systems, flight information computers, autothrottles and advanced monitoring systems that measure and display critical flight information, including data relative to aircraft separation, airspeed, altitude, and engine and fuel data measurements.

Revenue from Contracts with Customers

The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 is that an entity recognizes revenue when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services. To achieve this core principle, the Company applies the following five steps:

1) Identify the contract with a customer

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

9

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. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

2) Identify the performance obligations in the contract

Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. Most of our revenue is derived from purchases under which we provide a specific product or service and, as a result, there is only one performance obligation. In the event that a contract includes multiple promised goods or services, such as an EDC contract which includes both engineering services and a resulting product shipment, the Company must apply judgment to determine whether promised goods or services are capable of being distinct in the context of the contract. In these cases, the Company considers whether the customer could, on its own, or together with other resources that are readily available from third parties, produce the physical product using only the output resulting from the Company’s completion of engineering services. If the customer cannot produce the physical product, then the promised goods or services are accounted for as a combined performance obligation.

3) Determine the transaction price

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.

4) Allocate the transaction price to performance obligations in the contract

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price by taking into account available information such as market conditions as well as the cost of the goods or services and the Company’s normal margins for similar performance obligations.

5) Recognize revenue when or as the Company satisfies a performance obligation

The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer. Historically, the Company has also recognized revenue from EDC contracts and is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Contract costs include material, components and third-party avionics purchased from suppliers, direct labor, and overhead costs.

Contract Estimates

Accounting for performance obligations in long-term contracts that are satisfied over time involves the use of various techniques to estimate progress towards satisfaction of the performance obligation. The Company typically measures progress based on costs incurred compared to estimated total contract costs. Contract cost estimates are based on various assumptions to project the outcome of future events that often span more than a single year. These assumptions include the amount of labor and labor costs, the quantity and cost of raw materials used in the completion of the performance obligation, and the complexity of the work to be performed.

As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified.

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Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter in which it is identified.

The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates did not change our revenue and operating earnings (and diluted earnings per share) for the three-and nine-month periods ended June 30, 2023 and 2022, respectively.

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. The following table reflects the Company’s contract assets and contract liabilities:

	Contract		Contract
	Assets		Liabilities
September 30, 2022	$	162,742	$	259,183
Amount transferred to receivables from contract assets		—		—
Contract asset additions		89,420		—
Performance obligations satisfied during the period that were included in the contract liability balance at the beginning of the period		—		(240,944)
Increases due to invoicing prior to satisfaction of performance obligations		—		84,714
June 30, 2023	$	252,162	$	102,953

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 sales and product cost of sales, respectively, on the accompanying consolidated statements of operations. The Company’s customer service revenue and cost of sales for the three-and nine-month periods ended June 30, 2023 and 2022 respectively are as follows:

	For the Three Months Ended June 30,				For the Nine Months Ended June 30,
	2023		2022		2023		2022
Customer Service Sales	$	1,318,214	$	1,338,893	$	3,774,666	$	3,784,493
Customer Service Cost of Sales		371,359		369,562		716,655		1,112,298
Gross Profit	$	946,855	$	969,331	$	3,058,011	$	2,672,195

Lease Recognition

The Company accounts for leases in accordance with ASU 2016-02, Leases (Topic 842). At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and short-term and long-term lease liabilities, as applicable. The Company does not have any financing leases that are material in nature.

Income Taxes

Income taxes are recorded in accordance with ASC Topic 740, “Income Taxes” (“ASC Topic 740”), which utilizes a balance sheet approach to provide for income taxes. Under this method, the Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets, liabilities, and expected benefits of utilizing NOLs and tax credit carryforwards. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and are reflected in the consolidated financial statements in the period of enactment. At the end of each interim reporting period, the Company prepares an estimate of the annual effective income tax rate and applies that annual effective income tax rate to ordinary year-to-date pre-tax income for the interim period. Specific tax items discrete to a particular quarter are recorded in income tax expense for that quarter. The estimated annual effective tax rate used in providing for income taxes on a year-to-date basis may change in subsequent periods.

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Deferred tax assets are reduced by a valuation allowance if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be verified objectively, and significant management judgment is required in determining any valuation allowance recorded against net deferred tax assets. The Company evaluates deferred income taxes on a quarterly basis to determine if a valuation allowance is required by considering available evidence. Deferred tax assets are recognized when expected future taxable income is sufficient to allow the related tax benefits to reduce taxes that would otherwise be payable. The sources of taxable income that may be available to realize the benefit of deferred tax assets are future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and credit carryforwards, taxable income in carry-back years, and tax planning strategies which are both prudent and feasible. The Company will continue to assess all available evidence during future periods to evaluate any changes to the realization of its deferred tax assets. If the Company were to determine that it would be able to realize additional state deferred tax assets in the future, it would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

The accounting for uncertainty in income taxes requires a more likely than not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company records a liability for the difference between the (i) benefit recognized and measured for financial statement purposes and (ii) the tax position taken or expected to be taken on the Company’s tax return. To the extent that the Company’s assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The Company has elected to record any interest or penalties associated with uncertain tax positions as income tax expense.

The Company files a consolidated U.S. federal income tax return. The Company prepares and files tax returns based on the interpretation of tax laws and regulations, and records estimates based on these judgments and interpretations. In the normal course of business, the tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities, and the Company records a liability when it is probable that there will be an assessment. The Company adjusts the estimates periodically as a result of ongoing examinations by and settlements with the various taxing authorities, and changes in tax laws, regulations and precedent. The consolidated tax provision of any given year includes adjustments to prior years’ income tax accruals that are considered appropriate, and any related estimated interest. Management believes that it has made adequate accruals for income taxes. Differences between estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material effect on the Company’s consolidated financial position but could possibly be material to its consolidated results of operations or cash flow of any one period.

Engineering Development

The Company invests a significant percentage of its sales on engineering development, both Research & Development (“R&D”) and EDC. At June 30, 2023, approximately 23% of the Company’s employees were engineers engaged in various engineering development projects. Total engineering development expense comprises both internally funded R&D and product development and design charges related to specific customer contracts. Engineering development expense consists primarily of payroll-related expenses of employees engaged in EDC projects, engineering related product materials and equipment, and subcontracting costs. R&D charges incurred for product design, product enhancements, and future product development are expensed as incurred. Product development and design charges related to specific customer contracts are charged to cost of sales-EDC based on the method of contract accounting (either percentage-of-completion or completed contract) applicable to such contracts.

Treasury Stock

We account for treasury stock purchased under the cost method and include treasury stock as a component of shareholders’ equity. Treasury stock purchased with intent to retire (whether or not the retirement is actually accomplished) is charged to common stock.

Share-Based Compensation

The Company accounts for share-based compensation under ASC Topic 718, “Stock Compensation” (“ASC Topic 718”), which requires the Company to measure the cost of employee or non-employee director services received in exchange for an award of equity instruments based on the grant-date fair value of the award using an option pricing model. The Company recognizes such cost over the period during which an employee or non-employee director is required to provide service in exchange for the award. Our policy is to recognize forfeitures as incurred.

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Accordingly, adoption of ASC Topic 718’s fair value method results in recording compensation costs under the Company’s stock-based compensation plans. The Company determined the fair value of its stock option awards at the date of grant using the Black-Scholes option pricing model. Option pricing models and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of its awards. These assumptions and judgments include estimating future volatility of the Company’s stock price, expected dividend yield, future employee turnover rates, and future employee stock option exercise behaviors. Changes in these assumptions can materially affect fair value estimates. The Company does not believe that a reasonable likelihood exists that there will be a material change in future estimates or assumptions used to determine share-based compensation expense. However, if actual results are not consistent with the Company’s estimates or assumptions, the Company would adjust its estimates. Such adjustments could have a material impact on the Company’s financial position.

Warranty Reserves

The Company offers warranties on some products of various lengths, however the standard warranty period is twenty-four months. At the time of shipment, the Company establishes a reserve for estimated costs of warranties based on its best estimate of the amounts necessary to settle future and existing claims using historical data on products sold as of the balance sheet date. The length of the warranty period, the product’s failure rates, and the customer’s usage affect warranty cost. If actual warranty costs differ from the Company’s estimated amounts, future results of operations could be affected adversely. Warranty cost is recorded as cost of sales, and the reserve balance recorded as an accrued expense. While the Company maintains product quality programs and processes, its warranty obligation is affected by product failure rates and the related corrective costs. If actual product failure rates and/or corrective costs differ from the estimates, the Company revises the estimated warranty liability accordingly.

Self-Insurance Reserves

Since January 1, 2014, the Company has self-insured a significant portion of its employee medical insurance. The Company maintains a stop-loss insurance policy that limits its losses both on a per employee basis and an aggregate basis. Liabilities associated with the risks that are retained by the Company are estimated based upon actuarial assumptions such as historical claims experience and demographic factors. The Company estimated the total medical claims incurred but not reported and the Company believes that it has adequate reserves for these claims at June 30, 2023 and September 30, 2022, respectively. However, the actual value of such claims could be significantly affected if future occurrences and claims differ from these assumptions. At June 30, 2023 and September 30, 2022, the estimated liability for medical claims incurred but not reported was $53,419 and $51,590, respectively. The Company has recorded the excess of funded premiums over estimated claims incurred but not reported of $432,703 and $424,155 as a current asset in the accompanying consolidated balance sheets as of June 30, 2023 and September 30, 2022, respectively.

Concentrations

Major Customers and Products

In the three-month period ended June 30, 2023, three customers, Pilatus Aircraft Ltd (“Pilatus”), Air Transport Services Group (“ATSG”) and Textron Aviation, Inc. (“Textron”), accounted for 25%, 24% and 10% of net sales, respectively. In the nine-month period ended June 30, 2023, three customers, Pilatus, ATSG and Textron, accounted for 27%, 18% and 10% of net sales, respectively.

In the three-month period ended June 30, 2022, three customers, Pilatus, Textron and Cargojet Inc., accounted for 27%, 16% and 14% of net sales, respectively. In the nine-month period ended June 30, 2022, three customers, Pilatus, Textron and ATSG, accounted for 27%, 11% and 10% of net sales, respectively.

Major Suppliers

The Company buys several of its components from sole source suppliers. Although there are a limited number of suppliers of particular components, management believes other suppliers could provide similar components on comparable terms.

For the three- and nine-month periods ended June 30, 2023, the Company had four suppliers, respectively, that were individually responsible for greater than 10% of the Company’s total inventory related purchases.

For the three- and nine-month periods ended June 30, 2022, the Company had zero and two suppliers, respectively, that were individually responsible for greater than 10% of the Company’s total inventory related purchases.

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Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash balances and accounts receivable. The Company invests its excess cash where preservation of principal is the major consideration. Cash balances are maintained with two major banks. Balances on deposit with certain money market accounts and operating accounts may exceed the Federal Deposit Insurance Corporation limits. The Company’s customer base consists principally of companies within the aviation industry. The Company requests advance payments and/or letters of credit from customers that it considers to be credit risks.

Recent Accounting Pronouncements

In June 2016, 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 consolidated financial statements or related disclosures.

2. Supplemental Balance Sheet Disclosures

Acquisition

On June 30, 2023, the Company entered into an Asset Purchase and License Agreement with Honeywell whereby Honeywell sold certain assets and granted perpetual license rights to manufacture and sell licensed products related to its inertial, communication and navigation product lines to the Company. The Transaction involves a sale of certain inventory, equipment and customer-related documents; an assignment of certain customer 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. The Transaction allows the Company to diversify its product offerings in the aerospace industry. The Company determined that the Transaction met the definition of a business under ASC 805; therefore, the Company accounted for the Transaction as a business combination and applied the acquisition method of accounting.

In connection with the Transaction, the Company entered into a term loan with PNC Bank, National Association for $20.0 million to fund a portion of the Transaction (the “Term Loan”) – refer to Note 9, “Loan Agreement” for further details. The preliminary purchase consideration transferred at the Acquisition Date was $35.9 million, which was entirely cash.

The allocation of the purchase price is based upon certain preliminary valuations and other analyses that have not been finalized as of the date of this filing. Specifically, the purchase price amount for the Transaction and the allocation of the purchase consideration for

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prepaid inventory, equipment, construction in progress, intangible assets, and goodwill are preliminary estimates, which may be subject to change within the measurement period.

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

Cash consideration	$	35,860,000
Total consideration	$	35,860,000
Prepaid inventory	$	10,036,160
Equipment		2,609,000
Construction in progress		1,238,000
Intangible assets (a)		20,900,000
Goodwill (b)		4,608,041
Assets acquired		39,391,201
Accrued expenses		(3,531,201)
Liabilities assumed		(3,531,201)
Net assets acquired	$	35,860,000

(a) Intangible assets consist of license agreements related to the license rights to use certain Honeywell intellectual property and customer relationships and are recorded at provisional estimated fair values. The provisional estimated fair value of the license agreement is based on a variation of the income valuation approach and is determined using the relief from royalty method. The provisional estimated fair value of the customer relationships is based on a variation of the income valuation approach known as the multi-period excess earnings method. Refer to Note, “Intangible assets” for further details.

(b) Goodwill represents the excess of the preliminary purchase consideration over the provisional fair value of the assets acquired and liabilities assumed. The goodwill recognized is primarily attributable to the expected synergies from the Transaction. Goodwill resulting from the Transaction has been provisionally assigned to the Company’s one operating segment; the assignment of goodwill to reporting units is not complete. The goodwill is not expected to be deductible for income tax purposes. Further, the Company determined that the preliminary goodwill was not impaired as of June 30, 2023 and as such, no impairment charges have been recorded for the three-and nine-month periods ended June 30, 2023.

Transition services agreement

Concurrent with the Transaction, the Company entered into a transition services agreement (the “TSA”) with Honeywell, at no additional costs, to receive certain transitional services and technical support during the transition service period. The Company accounted for the TSA separate from business combination and have recognized $140,000 in prepaid expenses and other current assets within the consolidated balance sheets for the services to be received in the future from Honeywell. The prepaid expense related to the TSA was determined using the with and without method.

Acquisition and related costs

For the three and nine months ended June 30, 2023, the Company incurred acquisition costs of $262,099, which were expensed as incurred and included in selling, general and administrative expenses in the consolidated statements of operations; the debt issuance costs related to the Term Loan were not material.

Unaudited actual and pro forma information

Since the acquisition date of the Transaction was on June 30, 2023, the Company did not recognize any revenues and net income related to the Product Lines in the consolidated statements of operations.

The following unaudited pro forma summary presents consolidated information of the Company, including the Product Lines, as if the Transaction had occurred on October 1, 2021, the earliest period presented herein:

Three Months Ended June 30,		Nine Months Ended June 30,
2023	2022	2023	2022

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Net sales	$	11,865,707	$	12,071,221	$	36,118,352	$	37,553,854
Net income	$	2,661,132	$	2,690,013	$	7,439,335	$	8,444,970

These pro forma results are for illustrative purposes and are not indicative of the actual results of operations that would have been achieved nor are they indicative of future results of operations. The unaudited pro forma information for all periods presented was adjusted to give effect to pro forma events that are directly attributable to the Transaction and is factually supportable. The adjustments are based on information available to the Company at this time. Accordingly, the adjustments are subject to change, and the impact of such changes may be material. The unaudited pro forma results do not include any incremental cost savings that may result from the integration.

Significant adjustments to the pro forma information above include recognition of non-recurring direct incremental acquisition costs in the nine months ended June 30, 2022 and exclusion of those costs from all other periods presented; increase in interest expense related to the Term Loan; increase in amortization expense associated with the estimate of the acquired intangible assets; increase in depreciation expense related to the fair value adjustment of the acquired equipment; and increase in cost of sales related to the fair value adjustment of the acquired inventory.

Inventories

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

	June 30,		September 30,
	2023		2022
Raw materials	$	5,115,987	$	4,451,045
Work-in-process		570,487		795,723
Finished goods		56,139		102,336
	$	5,742,613	$	5,349,104

Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

	June 30,		September 30,
	2023		2022
Prepaid insurance	$	614,700	$	777,311
Other		775,334		365,159
	$	1,390,034	$	1,142,470

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Intangible assets

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

	As of June 30, 2023
	Gross Carrying		Accumulated		Accumulated		Net Carrying
	Value		Impairment			Amortization	Value
License agreement acquired from the Transaction (a)	$	7,870,000	$	—	$	—	$	7,870,000
Customer relationships acquired from the Transaction (a)		13,030,000		—		—		13,030,000
Licensing and certification rights (b)		696,506		(44,400)		(637,221)		14,885
Total	$	21,596,506	$	(44,400)	$	(637,221)	$	20,914,885

	As of September 30, 2022
	Gross Carrying		Accumulated		Accumulated		Net Carrying
	Value		Impairment		Amortization		Value
Licensing and certification rights (b)	$	696,506	$	—	$	(636,158)	$	60,348
Total	$	696,506	$	—	$	(636,158)	$	60,348

(a) As part of the Transaction, the Company acquired intangible assets related to the license agreement for the license rights to use certain Honeywell intellectual property, and customer relationships. The gross carrying values are preliminary estimates and may be subject to change within the measurement period – refer to Note, “Acquisition” for further details. The license agreement has an indefinite life and is not subject to amortization; the customer relationships have an estimated weighted average life of ten years. The Company determined that the preliminary intangible assets were not impaired as of June 30, 2023 and as such, no impairment charges have been recorded for the three-and nine-month periods ended June 30, 2023.

(b) The licensing and certification rights are amortized over a defined number of units. An impairment charge of $44,400 was recorded during the three-and nine-month periods ended June 30, 2023. No impairment charges were recorded during the three-and nine-month periods ended June 30, 2022.

Intangible asset amortization expense was $1,063 and $0 for the three-month periods ended June 30, 2023 and 2022, respectively. Intangible asset amortization expense was $1,063 and $1,063 for the nine-month periods ended June 30, 2023 and 2022, respectively.

The timing of future amortization expense is not determinable for the licensing and certification rights because they are amortized over a defined number of units. The expected future amortization expense related to the customer relationships as of June 30, 2023 is as follows:

2023 (three months remaining)	$	325,750
2024		1,303,000
2025		1,303,000
2026		1,303,000
2027		1,303,000
Thereafter		7,492,250
Total	$	13,030,000

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Property and equipment

Property and equipment, net consists of the following:

	June 30,		September 30,
	2023		2022
Computer equipment	$	2,325,721	$	2,307,139
Corporate airplanes		2,406,468		2,406,468
Furniture and office equipment		976,993		976,993
Manufacturing facility		5,889,491		5,889,491
Equipment		8,292,277		5,624,966
Land		1,021,245		1,021,245
Construction in progress		1,238,000		—
		22,150,195		18,226,302
Less: accumulated depreciation and amortization		(12,103,751)		(11,934,113)
	$	10,046,444	$	6,292,189

Depreciation and amortization related to property and equipment was $86,439 and $89,072 for the three-month periods ended June 30, 2023 and 2022, respectively. The corporate airplane is utilized primarily in support of product development.

Depreciation and amortization related to property and equipment was approximately $257,829 and $269,567 for the nine-month periods ended June 30, 2023 and 2022, respectively.

Other assets

Other assets consist of the following:

	June 30,		September 30,
	2023		2022
Operating lease right-of-use asset	$	18,407	$	28,680
Other non-current assets		179,926		75,300
	$	198,333	$	103,980

Other non-current assets as of June 30, 2023 and September 30, 2022 include the security deposit for an airplane hangar, supplier credit from one of our suppliers and a deposit for medical claims required under the Company’s medical plan. In addition, other non-current assets as of June 30, 2023 and September 30, 2022 includes $56,855 and $0, respectively, of prepaid software licenses that will be earned upon the shipment of a certain product to a customer. Other non-current assets amortization expense was $2,601 and $2,021 for the three-month periods ended June 30, 2023 and 2022, respectively. Other non-current assets amortization expense was $2,601 and $7,534 for the nine-month periods ended June 30, 2023 and 2022, respectively.

Accrued expenses

Accrued expenses consist of the following:

	June 30,		September 30,
	2023		2022
Warranty	$	589,048	$	607,001
Salary, benefits and payroll taxes		746,576		1,030,628
Professional fees		119,129		364,794
Operating lease		13,125		13,615
Supplier purchase orders		3,531,201		—
Other		275,962		956,237
	$	5,275,041	$	2,972,275

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Warranty cost and accrual information for the three-and nine-month periods ended June 30, 2023 is highlighted below:

	Three Months Ending		Nine Months Ending
	June 30, 2023		June 30, 2023
Warranty accrual, beginning of period	$	587,650	$	607,001
Accrued expense		29,119		63,495
Warranty cost		(27,721)		(81,448)
Warranty accrual, end of period	$	589,048	$	589,048

3. Income Taxes

The Company will continue to assess all available evidence during future periods to evaluate any changes to the realization of its deferred tax assets. If the Company were to determine that it would be able to realize additional state deferred tax assets in the future, it would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

As a result of the 2017 Tax Cuts and Jobs Act, the Company must amortize amounts paid or incurred for specified research and development expenditures, including software development expenses, ratably over 60 months, beginning at the mid-point of the tax year in which the expenditures are paid or incurred.

The effective tax rate for the three-month and nine-month periods ended June 30, 2023 was 19.3% and 20.5%, respectively, 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 and nine -month periods ended June 30, 2022 was 20.9% and 21.2%, respectively. and differs from the statutory tax rate primarily due to permanent items and state taxes.

4. Shareholders’ Equity and Share-Based Payments

At June 30, 2023, the Company’s Amended and Restated Articles of Incorporation provides the Company authority to issue 75,000,000 shares of common stock and 10,000,000 shares of preferred stock.

Share-Based compensation

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

2019 Stock-Based Incentive Compensation Plan

The 2019 Plan was approved by the Company’s shareholders at the Company’s Annual Meeting of Shareholders held on April 2, 2019. The 2019 Plan authorizes the grant of stock appreciation rights, restricted stock, options and other equity-based awards. Options granted under the 2019 Plan may be either “incentive stock options” as defined in section 422 of the Code or nonqualified stock options, as determined by the Compensation Committee.

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

If any award is forfeited, terminates or otherwise is settled for any reason without an actual distribution of shares to the participant, the related shares of common stock subject to such award will again be available for future grant. Any shares tendered by a participant in payment of the exercise price of an option or the tax liability with respect to an award (including, in any case, shares withheld from any such award) will not be available for future grant under the 2019 Plan. If there is any change in the Company’s corporate capitalization, the Compensation Committee must proportionately and equitably adjust the number and kind of shares of common stock which may be issued in connection with future awards, the number and kind of shares of common stock covered by awards then outstanding under the 2019 Plan, the aggregate number and kind of shares of common stock available under the 2019 Plan, any

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applicable individual limits on the number of shares of common stock available for awards under the 2019 Plan, the exercise or grant price of any award, or if deemed appropriate, make provision for a cash payment with respect to any outstanding award. In addition, the Compensation Committee may make adjustments in the terms and conditions of any awards, including any performance goals, in recognition of unusual or nonrecurring events affecting the Company or any subsidiary, or in response to changes in applicable laws, regulations, or accounting principles.

The compensation expense related to stock options and awards issued to employees under the 2019 Plan was $164,342 and $954,140 for the three- and nine-month periods ended June 30, 2023, respectively. The compensation expense related to stock options and awards issued to employees under the 2019 Plan was $45,088 and $135,273 for the three- and nine-month periods ended June 30, 2022, respectively.

The compensation expense under the 2019 Plan related to stock awards issued to non-employee members of the Board was $49,742 and $276,515 for the three- and nine-month periods ended June 30, 2023, respectively. The compensation expense under the 2019 Plan related to stock awards issued to non-employee members of the Board was $13,331 and $173,326 for the three- and nine-month periods ended June 30, 2022, respectively.

Total compensation expense associated with the 2019 Plan was $214,084 and $58,419 for the three-month periods ended June 30, 2023 and 2022, respectively. Total compensation expense associated with the 2019 Plan was $1,230,655 and $308,599 for the nine-month periods ended June 30, 2023 and 2022, respectively.

At June 30, 2023, unrecognized compensation expense of approximately $260,398, net of forfeitures, related to non-vested stock options under the 2019 Plan, will be recognized.

5. Earnings Per Share

	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Numerator:
Net income	$	1,423,379	$	1,359,174	$	3,393,133	$	3,921,802
Denominator:
Basic weighted average shares		17,576,969		17,261,349		17,415,358		17,253,822
Dilutive effect of share-based awards		619		4,449		3,907		1,483
Diluted weighted average shares		17,577,588		17,265,798		17,419,265		17,255,305
Earnings per common share:
Basic EPS	$	0.08	$	0.08	$	0.19	$	0.23
Diluted EPS	$	0.08	$	0.08	$	0.19	$	0.23

Net income per share is calculated pursuant to ASC Topic 260, “Earnings per Share” (“ASC Topic 260”). Basic earnings per share (“EPS”) excludes potentially dilutive securities and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed assuming the conversion or exercise of all dilutive securities such as employee stock options and restricted stock units (“RSUs”).

The number of incremental shares from the assumed exercise of stock options and RSUs is calculated by using the treasury stock method. As of June 30, 2023 and 2022, there were 128,815 and 100,000 options to purchase common stock outstanding, respectively, and 76,636 and 0 shares subject to vesting of restricted stock units outstanding, respectively. The average outstanding diluted shares calculation excludes options with an exercise price that exceeds the average market price of shares during the period.

For the three-month periods ended June 30, 2023 and 2022, respectively, 312,210 and 0 diluted weighted-average shares outstanding were excluded from the computation of diluted EPS because the effect would be anti-dilutive.

For the nine-month periods ended June 30, 2023 and 2022, respectively, 196,577 and 66,667 diluted weighted-average shares outstanding were excluded from the computation of diluted EPS because the effect would be anti-dilutive.

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6. Contingencies

In the ordinary course of business, the Company is at times subject to various legal proceedings and claims. The Company does not believe any such matters that are currently pending will, individually or in aggregate, have a material effect on the results of operations or financial position.

7. Related Party Transactions

In recent years, the Company has had sales to AML Global Eclipse, LLC, (“Eclipse”), whose principal shareholder is also a principal shareholder in the Company. Eclipse is a new related party for fiscal year 2022 due to their president acquiring more that 10% in shares of the company. Prior balances are disclosed below for comparability.

Sales to Eclipse amounted to approximately $155,000 and $57,000 for the three-month periods ended June 30, 2023 and 2022, respectively. Sales to Eclipse amounted to approximately $231,000 and $574,000 for the nine-month periods ended June 30, 2023 and 2022, respectively. As of June 30, 2023 and September 30, 2022, contract liability to Eclipse was approximately $25,000 and $123,000, respectively.

8. Leases

The Company accounts for leases in accordance with ASU 2016-02 and records “right-of-use” assets and corresponding lease liabilities on the balance sheet for most leases with an initial term of greater than one year. Consistent with previous accounting guidance, we will recognize payments for leases with a term of less than one year in the statement of operations on a straight-line basis over the lease term.

We lease real estate and equipment under various operating leases. A lease exists when a contract or part of a contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In determining whether a lease exists, we consider whether a contract provides us with both: (a) the right to obtain substantially all of the economic benefits from the use of the identified asset and (b) the right to direct the use of the identified asset.

Some of our leases include base rental periods coupled with options to renew or terminate the lease, generally at our discretion. In evaluating the lease term, we consider whether we are reasonably certain to exercise such options. To the extent a significant economic incentive exists to exercise an option, that option is included within the lease term. However, based on the nature of our lease arrangements, options generally do not provide us with a significant economic incentive and are therefore excluded from the lease term for the majority of our arrangements.

Our leases typically include a combination of fixed and variable payments. Fixed payments are generally included when measuring the right-of-use asset and lease liability. Variable payments, which primarily represent payments based on usage of the underlying asset, are generally excluded from such measurement and expensed as incurred. In addition, certain of our lease arrangements may contain a lease coupled with an arrangement to provide other services, such as maintenance, or may require us to make other payments on behalf of the lessor related to the leased asset, such as payments for taxes or insurance. As permitted by ASU 2016-02, we have elected to account for these non-lease components together with the associated lease component if included in the lease payments. This election has been made for each of our asset classes.

The measurement of “right-of-use” assets and lease liabilities requires us to estimate appropriate discount rates. To the extent the rate implicit in the lease is readily determinable, such rate is utilized. However, based on information available at lease commencement for our leases, the rate implicit in the lease is not known. In these instances, we utilize an incremental borrowing rate, which represents the rate of interest that we would pay to borrow on a collateralized basis over a similar term.

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The following table presents the lease-related assets and liabilities reported in the Consolidated Balance Sheet as of June 30, 2023:

Classification on the Consolidated Balance Sheet on June 30, 2023
Assets
Operating leases	Other assets	$	18,407
Liabilities
Operating leases- current	Accrued expenses	$	13,125
Operating leases – noncurrent	Other liabilities	$	5,282
Total lease liabilities		$	18,407

Rent expense and cash paid for various operating leases in aggregate are $3,669 and $11,007 for the three- and nine-month periods ended June 30, 2023. The weighted average remaining lease term is 1.4 years and the weighted average discount rate is 5.0% as of June 30, 2023.

Future minimum lease payments under operating leases are as follows at June 30, 2023:

	Twelve Months
	Ending	Operating
	June 30,	Leases
	2024	$	14,676
	2025		6,115
Total minimum lease payments		$	20,791
Amount representing interest			(2,384)
Present value of minimum lease payments			18,407
Current portion			(13,125)
Long-term portion of lease obligations		$	5,282

9. Loan Agreement

On June 28, 2023, the Company and one of its subsidiaries entered into an Amendment to Loan Documents (the “Loan Amendment”) with PNC Bank, National Association (the “PNC”), which amends certain terms of that certain Loan Agreement entered into by the parties on May 11, 2023 (the “Loan Agreement” and, as amended, the “Amended Loan Agreement”) and (ii) a corresponding Term Note in favor of PNC (the “Term Note”), which together provide for a senior secured term loan in an aggregate principal amount of $20.0 million, with a maturity date of June 28, 2028. Availability of funds under the Term Loan was conditioned upon the closing of the transactions contemplated by the Amended Loan Agreement and was used to fund a portion of the Transaction. Under the agreement, the Company has the right to prepay any amounts outstanding at any time and from time to time, whole or in part; subject to payment of any break funding indemnification amounts.

Future interest payments on the Term Loan, based on current interest rates, are expected to approximate $0.4 million for the remainder of fiscal 2023, $1.5 million in fiscal 2024, $1.3 million in fiscal 2025, $1.1 million in fiscal 2026, and $1.6 million thereafter. The interest rate applicable to loans outstanding under the Term Loan is a floating interest rate equal to the sum of (A) the Term SOFR Rate (as defined in the Term Note) plus (B) an unadjusted spread of the Applicable SOFR Margin plus (C) a SOFR adjustment of ten basis points. The Applicable SOFR Margin ranges from 1.5% to 2.5% depending on the Company’s funded debt to EBITDA ratio. Commencing on June 30, 2023, the Term Loan will consist of sixty equal monthly principal installments, over a period of ten years, with the balance payable on the maturity date of the Term Loan.

In addition to providing for the Term Loan, the Loan Agreement, together with a corresponding Revolving Line of Credit Note in favor of PNC, executed May 11, 2023 (“Line of Credit Note”), provides for a senior secured revolving line of credit in an aggregate principal amount of $10,000,000, with an expiration date of May 11, 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 Line of Credit Note) plus (B) an unadjusted spread of 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. The Company will pay an annual commitment fee of 0.15% on the amount available for borrowing under the revolving credit facility.

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The Company was in compliance with all applicable covenants throughout and at June 30, 2023. As of June 30, 2023, the term loan balance amounted to $20,000,000. There was no balance drawn on the Revolving Line of Credit as of June 30, 2023.

Fixed mandatory principal repayments due on the outstanding Term Loan are as follows:

Twelve Months
Ending
June 30,
2024	2,000,000
2025	2,000,000
2026	2,000,000
2027	2,000,000
2028	12,000,000
	20,000,000

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are based largely on current expectations and projections about future events and trends affecting the business, are not guarantees of future performance, and involve a number of risks, uncertainties and assumptions that are difficult to predict. In this report, the words “anticipates,” “believes,” “may,” “will,” “estimates,” “continues,” “anticipates,” “intends,” “forecasts,” “expects,” “plans,” “could,” “should,” “would,” “is likely”, “projected”, “might”, “potential”, “preliminary”, “provisionally” and similar expressions, as they relate to the business or to its management, are intended to identify forward-looking statements, but they are not exclusive means of identifying them. Unless the context otherwise requires, all references herein to “IS&S,” the “Registrant,” the “Company,” “we,” “us” or “our” are to Innovative Solutions and Support, Inc. and its consolidated subsidiaries.

The forward-looking statements in this report are only predictions, and actual events or results may differ materially. In evaluating such statements, a number of risks, uncertainties and other factors could cause actual results, performance, financial condition, cash flows, prospects and opportunities to differ materially from those expressed in, or implied by, the forward-looking statements. These risks, uncertainties and other factors include those set forth in Item 1A (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 and in Item 1A (Risk Factors) to Part II of this Quarterly Report on Form 10-Q, as well as the following factors:

● market acceptance of the Company’s ThrustSense® full-regime Autothrottle, Vmc_a Mitigation, FPDS, NextGen Flight Deck and COCKPIT/IP® or other planned products or product enhancements;

● continued market acceptance of the Company’s air data systems and products;

● the competitive environment and new product offerings from competitors;

● difficulties in developing, producing or improving the Company’s planned products or product enhancements;

● the deferral or termination of programs or contracts for convenience by customers;

● the ability to service the international market;

● the availability of government funding;

● the availability and efficacy of vaccines (including vaccine boosters) and their global deployment in response to the COVID-19 pandemic (including as a result of the impact of any newer variants or strains of SARS-CoV-2);

● the impact of general economic trends (such as rising interest rates and recent bank failures in the United States) on the Company’s business and operations;

● disruptions in the Company’s supply chain, customer base and workforce, including as a result of the COVID-19 pandemic;

● the ability to gain regulatory approval of products in a timely manner;

● delays in receiving components from third-party suppliers;

● the bankruptcy or insolvency of one or more key customers;

● protection of intellectual property rights;

● the ability to respond to technological change;

● failure to retain/recruit key personnel;

● risks related to succession planning;

● a cyber security incident;

● risks related to our self-insurance program;

● ability to successfully manage and integrate key acquisitions, mergers, and other transactions, such as the recent asset acquisition of certain Inertial, Communication and Navigation product lines from Honeywell International, Inc., as well as the failure to realize expected synergies and benefits anticipated when we make an acquisition;

● potential future acquisitions or dispositions;

● the costs of compliance with present and future laws and regulations;

● changes in law, including changes to corporate tax laws in the United States and the availability of certain tax credits; and

● other factors disclosed from time to time in the Company’s filings with the United States Securities and Exchange Commission (the “SEC”).

Except as expressly required by the federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise after the date of this report. Results of

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operations in any past period should not be considered indicative of the results to be expected for future periods. Fluctuations in operating results may result in fluctuations in the price of the Company’s common stock.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. 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. 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. Accordingly, shareholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. 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.

Company Overview

Innovative Solutions and Support, Inc. (the “Company,” “IS&S,” “we” or “us”) 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 (“ISU”), ISU with Autothrottle and advanced GPS receivers that enable reduced carbon footprint navigation.

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

For several years the Company has been working with advances in technology to provide pilots with more information to enhance both the safety and efficiency of flying, and has developed its COCKPIT/IP® Cockpit Information Portal (“CIP”) product line, that incorporates proprietary technology, low cost, reduced power consumption, decreased weight, and increased functionality. The Company has incorporated Electronic Flight Bag (“EFB”) functionality, such as charting and mapping systems, into its FPDS product line.

The Company has developed an FMS that combines the savings long associated with in-flight fuel optimization in enroute flight management combined with the precision of satellite-based navigation required to comply with the regulatory environments of both domestic and international markets. The Company believes that the FMS, alongside its FPDS and CIP product lines, is well suited to address market demand driven by certain regulatory mandates, new technologies, and the high cost of maintaining aging and obsolete equipment on aircraft that will be in service for up to fifty years. The 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 into general aviation, commercial air transport and military transport aircraft. In addition, the Company offers what we believe to be a state-of-the-art ISU, integrating the full functionality of the primary and navigation displays into a small backup-powered unit. This ISU 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.

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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 ISUs, as well as an Integrated FMS and EFB System. The innovative avionics suite includes dual flight management systems, autothrottles, synthetic vision and enhanced vision. The NextGen enhanced avionics suite is available for integration into other business aircraft with Non-FADEC and FADEC engines.

The Company has developed, its FAA-certified ThrustSense® Autothrottle for retrofit in the King Air, dual turbo prop PT6 powered aircraft. The autothrottle is designed to automate the power management for speed and power control including go-around. ThrustSense® also ensures aircraft envelope protection and engine protection during all phases of flight thereby reducing pilot workload and increasing safety. The Company has signed a multi-year agreement with Textron to supply ThrustSense® on the King Air 360 and King Air 260. ThrustSense® is also available for retrofit on King Airs aircraft through Textron service centers and third-party service centers. The Company has also developed an FAA-certified safety mode feature for its King Airs aircraft ThrustSense® Autothrottle, LifeGuard™, which provides critical Vmca protection that proportionally reduces engine power to maintain directional control during an engine-out condition.

We believe the ThrustSense® Autothrottle is innovative in that it is the first autothrottle developed for a turbo prop that allows a pilot to automatically control the power setting of the engine. The autothrottle computes and controls appropriate power levels thereby reducing overall pilot workload. The system computes thrust, holds selected speed/torque, and implements appropriate speed and engine limit protection. When engaged by the pilot, the autothrottle system adjusts the throttles automatically to achieve and hold the selected airspeed guarded by a torque/temperature limit mode. The autothrottle system takes full advantage of the integrated cockpit and utilizes weight and balance information to determine optimal control settings and enable safety functions like a turbulence control mode.

The Company sells to both the OEM and the retrofit markets. 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; however, the Company sells its products primarily to commercial customers for end use in DoD programs. Sales to defense contractors are generally made on commercial terms, although some of the termination and other provisions of government contracts are applicable to these contracts. 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).

On the other hand, the Company believes that in adverse economic conditions, customers that may have otherwise elected to purchase newly manufactured aircraft may be interested instead in retrofitting existing aircraft as a cost-effective alternative, thereby creating a market opportunity for IS&S.

Cost of sales related to product sales comprises material, components and third-party avionics purchased from suppliers, direct labor, and overhead costs. Many of the components are standard, although certain parts are manufactured to meet IS&S specifications. The overhead portion of cost of sales primarily comprises salaries and benefits, building occupancy costs, supplies, and outside service costs related to production, purchasing, material control, and quality control. Cost of sales includes warranty costs.

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. 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.

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. The

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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 estimates are those related to revenue recognition, valuation of tangible and intangible assets acquired, long term contracts, the useful lives of long-lived assets for depreciation and amortization, the recoverability of long-lived assets, evaluation of goodwill impairment and contingencies. On an ongoing basis, IS&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.

The Company believes that its critical accounting policies affect its more significant estimates and judgments used in the preparation of its consolidated financial statements. The Annual Report on Form 10-K for the fiscal year ended September 30, 2022 contains a discussion of these critical accounting policies. There have been no significant changes in the Company’s critical accounting policies since September 30, 2022, except new critical accounting policies in acquisition, intangible assets and goodwill. See also Note 1 to the unaudited consolidated financial statements for the three-and nine-month periods ended June 30, 2023 as set forth herein.

Acquisitions

The Company accounts for business acquisitions using the acquisition method of accounting. Under this method of accounting, assets acquired and liabilities assumed are recorded at their respective fair values at the date of the acquisition. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions. The Company’s estimates of fair value are based upon assumptions believed to be reasonable, but are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Any excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill. The Company also uses best estimates and assumptions to determine the useful lives of those acquired intangible assets with a finite life.

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

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

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

● estimated replacement costs for equipment acquired;

● obsolescence rate applied to finished goods and raw materials acquired; and

● discount rates.

Intangible Assets

Intangible assets consist of customer relationship, license agreements, and licensing and certification rights, and these assets are carried at cost less accumulated amortization and any impairment charge.

Intangible assets with a finite life are amortized over their estimated useful life and are reported net of accumulated amortization. An impairment assessment for intangible assets with a finite life is only required when an event or change in circumstances indicates that the carrying amount of the asset may not be recoverable. Determining the useful life of an intangible asset with a finite life also requires judgment.

Indefinite-lived intangible assets are not amortized, but are subject to an annual impairment test, or when events or circumstances dictate, more frequently. The impairment review for indefinite-lived intangible assets can be performed using a qualitative or quantitative impairment assessment. The quantitative assessment consists of a comparison of the fair value of the indefinite-lived intangible asset with its carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If the fair value exceeds its carrying amount, the indefinite-lived intangible asset is not considered impaired.

Impairment of Goodwill

The Company evaluates the carrying amount of goodwill annually or more frequently if events or circumstances indicate that the goodwill may be impaired. Factors that could trigger an impairment review include significant underperformance relative to historical or forecasted operating results, a significant decrease in the market value of an asset or significant negative industry or economic trends. Assumptions used in the impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with

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internal projections and operating plans. The Company believes these estimates and assumptions are reasonable and comparable to those that would be used by other marketplace participants.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED

JUNE 30, 2023 AND 2022

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,
	2023		2022		2023		2022
Net sales:
Product	99.2	%	100.0	%	98.0	%	99.0	%
Engineering development contracts	0.8	%	0.0	%	2.0	%	1.0	%
Total net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales:
Product	40.2	%	41.5	%	39.1	%	40.3	%
Engineering development contracts	0.3	%	0.0	%	0.4	%	0.1	%
Total cost of sales	40.5	%	41.5	%	39.5	%	40.4	%
Gross profit	59.5	%	58.5	%	60.5	%	59.6	%
Operating expenses:
Research and development	10.7	%	9.8	%	10.9	%	10.1	%
Selling, general and administrative	30.1	%	24.4	%	32.6	%	25.5	%
Total operating expenses	40.8	%	34.2	%	43.5	%	35.6	%
Operating income	18.7	%	24.3	%	17.0	%	24.0	%
Interest income	2.3	%	0.2	%	2.0	%	0.1	%
Other income	1.1	%	0.3	%	0.6	%	0.2	%
Income before income taxes	22.2	%	24.8	%	19.6	%	24.3	%
Income tax expense	4.3	%	5.2	%	4.0	%	5.2	%
Net income	17.9	%	19.6	%	15.6	%	19.2	%

Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022

Net sales. Net sales were $8.0 million for the three months ended June 30, 2023 compared to $6.9 million for the three months ended June 30, 2022, an increase of 14.8%. Product sales increased $1.0 million and customer service sales remained flat compared to the year ago quarter. This increase in product sales for the three months ended June 30, 2023 was primarily the result of additional shipments of displays for retrofit programs to commercial air transport customers. The increase was also due to increase of shipments of OEM sales to Boeing under the KC-46A platform.

Cost of sales. Cost of sales increased by $345,000, or 12.0%, to $3.2 million, or 40.5% of net sales, in the three months ended June 30, 2023, compared to $2.9 million or 41.5% of net sales, in the three months ended June 30, 2022. The increase in cost of sales was primarily the result of an increase in product sales volume for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The Company’s overall gross margin was 59.5% and 58.5% for the three months ended June 30, 2023 and 2022, respectively. The increase in gross margin percentage for the three months ended June 30, 2023 is attributable to favorable leveraging of fixed costs resulting from the increased sales and production volume and a favorable sales mix.

Research and development. R&D expense increased $175,000 or 25.9% in the three months ended June 30, 2023 from $676,000 in the three months ended June 30, 2022. As a percentage of net sales, R&D expense increased to 10.7% of net sales in the three months

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ended June 30, 2023 from 9.8% of net sales in the three months ended June 30, 2022 reflecting the hiring of engineers, related product development and increased R&D projects.

Selling, general and administrative. Selling, general and administrative expense increased by $632,000 or 37.3% to $2.3 million in the three months ended June 30, 2023 from $1.7 million in the three months ended June 30, 2022. As a percentage of net sales, selling, general and administrative expenses was 30.1% in the three months ended June 30, 2023 compared to 24.4% for the prior year period. The overall increase in selling, general and administrative expense in the quarter was primarily the result of increased sales and marketing costs, legal and professional fees incurred as part of the Honeywell asset acquisition, as well as non-cash executive stock awards.

Interest income. Interest income increased by $175,000 to $186,000 in the three months ended June 30, 2023 from $10,000 in the three months ended June 30, 2022, mainly a result of increased cash balance and higher interest rates earned during the current year period compared to the same period in the prior year.

Other income. Other income is mainly composed of royalties earned and increased by $68,000 to $90,000 in the three months ended June 30, 2023 compared to the same period in the prior year.

Income tax expense. The income tax expense for the three months ended June 30, 2023 was $340,000 as compared to $359,000 for the three months ended June 30, 2022.

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 permanent items and state taxes.

Net income. The Company reported net income for the three months ended June 30, 2023 of $1.4 million and remained flat compared to net income of $1.4 for the three months ended June 30, 2022. On a diluted basis, the net income per share was $0.08 for the three months ended June 30, 2023 and remained flat compared to net income per share of $0.08 for the three months ended June 30, 2022.

Nine Months Ended June 30, 2023 Compared to the Nine Months Ended June 30, 2022

Net sales. Net sales were $21.8 million for the nine months ended June 30, 2023 compared to $20.5 million for the nine months ended June 30, 2022, an increase of 6.5%. Product sales increased $1.1 million, customer service was flat, and EDC sales doubled to $234,000 in the nine months ended June 30, 2023 compared to the same period in the prior year.This increase in product sales for the nine months ended June 30, 2023 primarily resulted from increased sales to our OEM customers, which include Pilatus, Textron and Boeing. Sales increases were also seen in our new auto-throttle installations.

Cost of sales. Cost of sales increased $347,000, or 4.2%, to $8.6 million, or 39.5% of net sales, in the nine months ended June 30, 2023, compared to $8.3 million or 40.4% of net sales, in the nine months ended June 30, 2022. The increase in cost of sales was primarily the result of an increase in product sales volume for the nine months ended June 30, 2023 compared to the nine months ended June 30, 2022. The Company’s overall gross margin was 60.5% and 59.6% for the nine months ended June 30, 2023 and 2022, respectively. The increase in gross margin percentage for the nine months ended June 30, 2023 is attributable to favorable leveraging of fixed costs resulting from the increased sales and production volume and a favorable sales mix.

Research and development. R&D expense increased $325,000, or 15.8%, to $2.4 million in the nine months ended June 30, 2023 from $2.1 million in the nine months ended June 30, 2022. As a percentage of net sales, R&D expense increased to 10.9% of net sales in the nine months ended June 30, 2023 from 10.1% of net sales in the nine months ended June 30, 2022 reflecting an increase in hiring engineers and working on product development and related programs/internal projects.

Selling, general and administrative. Selling, general and administrative expenses increased by $1.8 million to $7.0 million in the nine months ended June 30, 2023 from $5.2 million in the nine months ended June 30, 2022. As a percentage of net sales, selling, general and administrative expenses increased to 32.6% of net sales in the nine months ended June 30, 2023 from 25.5% of net sales in the nine months ended June 30, 2022. The increase in selling, general and administrative expense in the period was primarily the result of personnel additions in sales and marketing, legal and business development related to the acquisition, investor relations and investor facing activities and non-cash long-term compensations post COVID.

29

Interest income. Interest income increased by $422,000 to $432,000 in the nine months ended June 30, 2023 from $11,000 in the nine months ended June 30, 2022, mainly a result of increased cash on hand and higher interest rates compared to the same period in the prior year.

Other income. Other income is mainly composed of royalties earned and increased by $82,000 to $132,000 in the nine months ended June 30, 2023 compared to the same period in the prior year.

Income tax expense. The income tax expense for the nine months ended June 30, 2023 was $877,000 as compared to $1.1 million the nine months ended June 30, 2021.

The effective tax rate for the nine-month period ended June 30, 2022 was 20.5% and differs from the statutory tax rate primarily due to permanent items and state taxes.

Net income. The Company reported net income for the nine months ended June 30, 2023 of $3.4 million compared to net income of $3.9 million for the nine months ended June 30, 2022. On a diluted basis, the net income per share was $0.19 for the nine months ended June 30, 2023 compared to net income per share of $0.23 for the nine months ended June 30, 2022.

Liquidity and Capital Resources

The following table highlights key financial measurements of the Company:

	June 30,		September 30,
	2023		2022
Cash and cash equivalents	$	2,572,233	$	17,250,546
Accounts receivable		5,944,015		4,297,457
Current assets		25,937,217		28,202,319
Current liabilities		8,145,090		3,940,303
Contract liability		102,953		259,183
Other non-current liabilities (1)		18,420,949		15,065
Quick ratio (2)		1.05		5.47
Current ratio (3)		3.18		7.16

	Nine Months Ended June 30,
	2023		2022
Cash flow activities:
Net cash provided by operating activities	$	937,925	$	6,420,371
Net cash used in investing activities		(36,025,084)		(161,230)
Net cash provided by financing activities		20,408,846		17,154

(1) Excludes contract liability

(2) Calculated as: the sum of cash and cash equivalents plus accounts receivable, net, divided by current liabilities

(3) Calculated as: 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.

30

Operating activities

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 of $6.4 million for the nine-month period ended June 30, 2022 resulted primarily from funding from net income of $3.9 million, a decrease in accounts receivables of $1.0 million and a decrease in deferred income taxes of $0.8 million.

Investing activities

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

Net cash used in investing activities was $0.2 million for the nine-month period ended June 30, 2022 and consisted primarily of the purchase of laboratory test equipment and computer hardware.

Financing activities

Net cash provided by financing activities was $20.4 million for the nine-month period ended June 30, 2023 and consisted of proceeds from a new credit facility of $20.0 million and the exercise of stock options.

Net cash provided by financing activities was $0.02 million for the nine-month period ended June 30, 2022 and consisted of proceeds from the exercise of stock options.

Summary

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. IS&S has experienced increases in expenditures since its inception and anticipates that 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 insufficient funds are available, the Company may not be able to introduce new products or compete effectively.

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.

We are committed to recruiting, motivating and developing a diversity of talent. We are an equal opportunity employer and a Vietnam Era Veterans’ Readjustment Assistance Act federal contractor. All qualified applicants receive consideration for employment without regard to race, color, religion, sex, sexual orientation, gender identity, national origin, disability status, protected veteran status, or any other characteristic protected by law.

The nature of our business also supports long-term sustainability. Historically, a majority of the Company’s sales have come from the retrofit market, in which the Company, by making upgrades to improve the functionality and safety of existing machinery, facilitates the re-use and recycling of aircraft and equipment that might otherwise be scrapped as obsolete. The Company’s GPS receivers also facilitate reduced carbon footprint navigation. The Company also plans to enhance its focus on the environmental impact of its operations.

31

Backlog

Backlog represents the value of contracts and purchase orders, less the revenue recognized to date on those contracts and purchase orders. Backlog activity for the three- and nine-month periods ended June 30, 2023:

	Three Months Ended		Six Months Ended
	June 30, 2023
Backlog, beginning of period	$	14,780,588	$	11,778,988
Bookings, net		6,942,680		23,800,989
Recognized in revenue		(7,959,208)		(21,815,917)
Backlog, end of period	$	13,764,060	$	13,764,060

At June 30, 2023, 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.

Off-Balance Sheet Arrangements

The Company has no relationships with unconsolidated entities or financial partnerships, such as Special Purpose Entities or Variable Interest Entities, established for the purpose of facilitating off-balance sheet arrangements or other limited purposes.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s operations are exposed to market risks primarily as a result of changes in interest rates. The Company does not use derivative financial instruments for speculative or trading purposes. The Company’s exposure to market risk for changes in interest rates relates to its cash equivalents. The Company’s cash equivalents consist of funds invested in money market accounts, which bear interest at a variable rate. The Company does not participate in interest rate hedging. Cash balances are maintained with two major banks. Balances on deposit with certain money market accounts and operating accounts may exceed the Federal Deposit Insurance Corporation limits. A change in interest rates earned on the cash equivalents would impact interest income and cash flows but would not impact the fair market value of the related underlying instruments. Assuming that the balances during the nine-month period ended June 30, 2023 were to remain constant and the Company did not act to alter the existing interest rate sensitivity, a hypothetical 1% increase in variable interest rates would have affected interest income by approximately $23,600 and $70,000 with a resulting impact on cash flows of approximately $23,600 and $70,000 for the three- and nine-month periods ended June 30, 2023, respectively.

Item 4. Controls and Procedures

(a) We carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act of 1934. Based on that evaluation, our chief executive officer and chief financial officer concluded that these controls and procedures were effective as of June 30, 2023 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission and accumulated and communicated to our management including our chief executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.

(b) There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of such controls that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II–OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of business, the Company is at times subject to various legal proceedings and claims. The Company does not believe any such matters that are currently pending will, individually or in the aggregate, have a material effect on the results of operations or financial position.

Item 1A. Risk Factors

Except as set forth below, there have been no material changes to our principal risks that we believe are material to our business, results of operations and financial condition, from the risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended September 30, 2022 (the “2022 Form 10-K”). The information set forth in this report should be read in conjunction with the risk factors described under Item 1A of the Company’s 2022 Form 10-K and in our other filings with the Securities and Exchange Commission. Such risks are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial could materially and adversely affect the Company’s business, operating results, financial condition, cash flows, prospects, and the value of an investment in IS&S common stock.

We may pursue strategic acquisitions, investments, strategic partnerships or other ventures, and our business could be materially harmed if we fail to successfully identify, evaluate, complete, and integrate such transactions. Acquisitions involve inherent risks that may adversely affect our operating results and financial condition.

Our growth strategy includes evaluating acquisition opportunities and opportunities to make investments in complementary businesses, technologies, services or products, or to enter into strategic partnerships with parties who can provide access to those assets, additional product or services offerings, additional distribution or marketing synergies or additional industry expertise. One example is the recent asset acquisition of certain Inertial, Communication and Navigation product lines from Honeywell International, Inc. We may not be able to identify suitable acquisition, investment or strategic partnership candidates, or if we do identify suitable candidates in the future, we may not be able to complete those transactions on commercially favorable terms, or at all.

Acquisitions involve various inherent risks, such as: our ability to assess accurately the value, strengths, weaknesses, internal controls, contingent and other liabilities and potential profitability of acquisition candidates; difficulties in integrating acquired businesses, including the potential loss of key personnel from an acquired business, our potential inability to achieve identified financial, operating and other synergies anticipated to result from an acquisition, and integration issues associated with internal controls of acquired businesses; the diversion of management’s attention from our existing businesses; the potential impairment of assets; potential unknown liabilities associated with a business that we acquire or in which we invest, including environmental liabilities; new and proposed regulations limiting the enforcement of noncompetition and nonsolicitation agreements; and production delays associated with consolidating acquired facilities and manufacturing operations. Any past or future acquisition could also result in such risks. Due diligence performed prior to closing acquisitions may not uncover certain risks or liabilities that could materially impact our business and financial results. We may not successfully integrate business, operational, and financial activities such as internal controls, Sarbanes-Oxley Act of 2002 compliance, cyber security measures, the GDPR and other corporate governance and regulatory matters, operations, personnel or products related to acquisitions we may make in the future. If we fail to successfully integrate such transactions, our business could be materially harmed. In connection with our acquisitions, including those acquisitions that we do not complete, we may incur significant transaction costs. We are required to expense such transaction costs as incurred, which may have a material adverse impact on our financial results.

There are risks associated with our outstanding and future indebtedness.

On June 28, 2023, the Company and one of its subsidiaries entered into an Amendment to Loan Documents (the “Loan Amendment”) with PNC Bank, National Association (the “PNC”), which amends certain terms of that certain Loan Agreement entered into by the parties on May 11, 2023 (the “Loan Agreement” and, as amended, the “Amended Loan Agreement”) and (ii) a corresponding Term Note in favor of PNC (the “Term Note”), which together provide for a senior secured term loan in an aggregate principal amount of $20.0 million, with a maturity date of June 28, 2028 (the “Term Loan”). In addition to providing for the Term Loan, the Loan Agreement, together with a corresponding Revolving Line of Credit Note in favor of PNC, executed May 11, 2023 (“Line of Credit Note”), provides for a senior secured revolving line of credit in an aggregate principal amount of $10.0 million, with an expiration

33

date of May 11, 2028 (the “Revolving Line of Credit”). As of June 30, 2023, the balance of the Term Loan amounted to $20.0 million. There was no balance drawn on the Revolving Line of Credit as of June 30, 2023.

We may incur additional indebtedness in the future under these existing credit facilities and/or enter into new financing arrangements. We may fail to pay these or additional future obligations, as and when required. Specifically, if we are unable to generate sufficient cash flows from operations or to borrow sufficient funds in the future to service or refinance our debt, our business, operating results, financial condition and cash flows will be harmed. Any downgrades from credit rating agencies such as Moody’s Investors Service or Standard & Poor’s Rating Services may adversely impact our ability to obtain additional financing or the terms of such financing and reduce the market capacity for our commercial paper. Furthermore, if prevailing interest rates or other factors result in higher interest rates upon any potential future financing, then interest expense related to the refinance indebtedness would increase.

In addition, all the agreements governing our indebtedness subject us to continued compliance with certain financial and negative covenants. The Company was in compliance with all applicable covenants throughout and at June 30, 2023. If we are unable to meet our debt service obligations or should we fail to comply with our financial and other negative covenants contained in the agreements governing our indebtedness, we may be required to refinance all or part of our debt, sell strategic assets at unfavorable prices, incur additional indebtedness or issue common stock or other equity securities. We may not be able to, at any given time, refinance our debt, sell assets, incur additional indebtedness or issue equity securities on terms acceptable to us, in amounts sufficient to meet our needs. If we are able to raise additional funds through the issuance of equity securities, such issuance would also result in dilution to our stockholders. Our inability to service our obligations or refinance our debt could have a material and adverse effect on our business, financial condition or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None.

34

Item 6. Exhibits

(a) Exhibits

2.1	Asset Purchase and License Agreement, dated June 30, 2023, by and between Innovative Solutions and Support, Inc. and Honeywell International Inc.
3.3	Articles of Amendment, filed April 17, 2023, to the Articles of Incorporation of Innovative Solutions and Support, Inc.
10.1	Loan Agreement, dated May 11, 2023, by and among Innovative Solutions and Support, Inc., Innovative Solutions and Support, LLC, and PNC Bank, National Association
10.2	Amendment to Loan Documents, dated June 28, 2023, by and among Innovative Solutions and Support, Inc., Innovative Solutions and Support, LLC, and PNC Bank, National Association
10.3	Term Note, executed June 28, 2023, by Innovative Solutions and Support, Inc. and Innovative Solutions and Support, LLC
10.4	Revolving Line of Credit Note, executed May 11, 2023, by Innovative Solutions and Support, Inc. and Innovative Solutions and Support, LLC
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) (1)
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) (1)
32.1	Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2)
101.INS	XBRL Instance Document (1)
101.SCH	XBRL Taxonomy Extension Scheme Document (1)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB	XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (1)
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

(1) Filed herewith

(2) Furnished herewith

35

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	INNOVATIVE SOLUTIONS AND SUPPORT, INC.
Date: August 11, 2023	By:	/s/ MICHAEL LINACRE
		MICHAEL LINACRE
		CHIEF FINANCIAL OFFICER

36

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Shahram Askarpour, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Innovative Solutions and Support, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	By:	/s/ SHAHRAM ASKARPOUR
Date: August 11, 2023		SHAHRAM ASKARPOUR
		CHIEF EXECUTIVE OFFICER

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Michael Linacre, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Innovative Solutions and Support, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	By:	/s/ MICHAEL LINACRE
Date: August 11, 2023		MICHAEL LINACRE
		CHIEF FINANCIAL OFFICER

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Innovative Solutions and Support, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

By:	/s/ SHAHRAM ASKARPOUR
	SHAHRAM ASKARPOUR
	CHIEF EXECUTIVE OFFICER
	August 11, 2023
	/s/ MICHAEL LINACRE MICHAEL LINACRE
	CHIEF FINANCIAL OFFICER
	August 11, 2023

XML

Document and Entity Information - shares	9 Months Ended
	Jun. 30, 2023	Jul. 31, 2023
Cover
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Jun. 30, 2023
Document Transition Report	false
Entity File Number	000-31157
Entity Registrant Name	INNOVATIVE SOLUTIONS AND SUPPORT, INC.
Entity Incorporation, State or Country Code	PA
Entity Tax Identification Number	23-2507402
Entity Address, Address Line One	720 Pennsylvania Drive
Entity Address, City or Town	Exton
Entity Address, State or Province	PA
Entity Address, Postal Zip Code	19341
City Area Code	610
Local Phone Number	646-9800
Title of 12(b) Security	Common Stock, par value $0.001 per share
Trading Symbol	ISSC
Security Exchange Name	NASDAQ
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		17,446,990
Entity Central Index Key	0000836690
Current Fiscal Year End Date	--09-30
Document Fiscal Year Focus	2023
Document Fiscal Period Focus	Q3
Amendment Flag	false

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)	Jun. 30, 2023	Sep. 30, 2022
Current assets
Cash and cash equivalents	$ 2,572,233	$ 17,250,546
Accounts receivables	5,944,015	4,297,457
Contract assets	252,162	162,742
Inventories	5,742,613	5,349,104
Prepaid inventory	10,036,160
Prepaid expenses and other current assets	1,390,034	1,142,470
Total current assets	25,937,217	28,202,319
Goodwill	4,608,041
Intangible assets, net	20,914,885	60,348
Property and equipment, net	10,046,444	6,292,189
Deferred income taxes	643,708	46,487
Other assets	198,333	103,980
Total assets	62,348,628	34,705,323
Current liabilities
Current portion long-term debt	2,000,000
Accounts payable	767,096	708,845
Accrued expenses	5,275,041	2,972,275
Contract liability	102,953	259,183
Total current liabilities	8,145,090	3,940,303
Long-term debt	18,000,000
Other liabilities	420,949	15,065
Total liabilities	26,566,039	3,955,368
Commitments and contingencies
Shareholders' equity
Preferred stock, 10,000,000 shares authorized, $.001 par value, of which 200,000 shares are authorized as Class A Convertible stock. No shares issued and outstanding at June 30, 2023 and September 30, 2022
Common stock, $.001 par value: 75,000,000 shares authorized, 19,535,219 and 19,412,664 issued at June 30, 2023 and September 30, 2022	19,533	19,413
Additional paid-in capital	54,097,502	52,458,121
Retained Earnings (accumulated deficit)	3,034,091	(359,042)
Treasury stock, at cost, 2,096,451 shares at June 30, 2023 and September 30, 2022	(21,368,537)	(21,368,537)
Total shareholders' equity	35,782,589	30,749,955
Total liabilities and shareholders' equity	$ 62,348,628	$ 34,705,323

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Jun. 30, 2023	Sep. 30, 2022
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	75,000,000	75,000,000
Common stock, shares issued	19,535,219	19,412,664
Treasury stock, shares	2,096,451	2,096,451
Class A Convertible stock
Preferred stock, shares authorized	200,000	200,000

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CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)	3 Months Ended		9 Months Ended
	Jun. 30, 2023	Jun. 30, 2022	Jun. 30, 2023	Jun. 30, 2022
Net Sales:
Total net sales	$ 7,959,208	$ 6,935,976	$ 21,815,917	$ 20,477,574
Cost of sales:
Total cost of sales	3,224,562	2,879,462	8,617,317	8,270,729
Gross profit	4,734,646	4,056,514	13,198,600	12,206,845
Operating expenses:
Research and development	851,296	676,381	2,387,939	2,062,937
Selling, general and administrative	2,395,714	1,694,233	7,104,212	5,226,015
Total operating expenses	3,247,010	2,370,614	9,492,151	7,288,952
Operating income	1,487,636	1,685,900	3,706,449	4,917,893
Interest income	185,652	10,429	432,495	10,871
Other income	90,049	21,608	131,504	49,401
Income before income taxes	1,763,337	1,717,937	4,270,448	4,978,165
Income tax expense	339,958	358,763	877,315	1,056,363
Net income	$ 1,423,379	$ 1,359,174	$ 3,393,133	$ 3,921,802
Net income per common share:
Basic	$ 0.08	$ 0.08	$ 0.19	$ 0.23
Diluted	$ 0.08	$ 0.08	$ 0.19	$ 0.23
Weighted average shares outstanding:
Basic	17,576,969	17,261,349	17,415,358	17,253,822
Diluted	17,577,588	17,265,798	17,419,265	17,255,305
Product
Net Sales:
Total net sales	$ 7,893,625	$ 6,935,976	$ 21,383,435	$ 20,279,371
Cost of sales:
Total cost of sales	3,202,870	$ 2,879,462	8,538,219	8,253,981
Engineering development contracts
Net Sales:
Total net sales	65,583		432,482	198,203
Cost of sales:
Total cost of sales	$ 21,692		$ 79,098	$ 16,748

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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY - USD ($)	Common Stock	Additional Paid-in Capital	(Accumulated Deficit) Retained Earnings	Treasury Stock	Total
Balance, beginning at Sep. 30, 2021	$ 19,343	$ 51,817,095	$ (5,882,820)	$ (21,368,537)	$ 24,585,081
Increase (Decrease) in Stockholders' Equity
Share-based compensation	27	308,572			308,599
Exercise of stock options	3	17,151			17,154
Net income			3,921,802		3,921,802
Balance, ending at Jun. 30, 2022	19,373	52,142,818	(1,961,018)	(21,368,537)	28,832,636
Balance, beginning at Mar. 31, 2022	19,368	52,067,250	(3,320,192)	(21,368,537)	27,397,889
Increase (Decrease) in Stockholders' Equity
Share-based compensation	2	58,417			58,419
Exercise of stock options	3	17,151			17,154
Net income			1,359,174		1,359,174
Balance, ending at Jun. 30, 2022	19,373	52,142,818	(1,961,018)	(21,368,537)	28,832,636
Balance, beginning at Sep. 30, 2022	19,413	52,458,121	(359,042)	(21,368,537)	30,749,955
Increase (Decrease) in Stockholders' Equity
Share-based compensation	63	1,230,592			1,230,655
Exercise of stock options	57	408,789			408,846
Net income			3,393,133		3,393,133
Balance, ending at Jun. 30, 2023	19,533	54,097,502	3,034,091	(21,368,537)	35,782,589
Balance, beginning at Mar. 31, 2023	19,518	53,883,433	1,610,712	(21,368,537)	34,145,126
Increase (Decrease) in Stockholders' Equity
Share-based compensation	15	214,069			214,084
Net income			1,423,379		1,423,379
Balance, ending at Jun. 30, 2023	$ 19,533	$ 54,097,502	$ 3,034,091	$ (21,368,537)	$ 35,782,589

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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)	9 Months Ended
	Jun. 30, 2023	Jun. 30, 2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 3,393,133	$ 3,921,802
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	258,892	278,164
Share-based compensation expense
Stock options	646,172	135,273
Stock awards	584,483	173,326
Impairment of long-lived assets	44,400
Loss on disposal of property and equipment		357
Deferred income taxes	(597,221)	785,737
(Increase) decrease in:
Accounts receivables	(1,646,558)	1,042,975
Contract asset	(89,420)
Inventories	(393,509)	(264,789)
Prepaid expenses and other assets	(71,679)	69,344
Other non-current assets	(104,626)
Increase (decrease) in:
Accounts payables	58,251	128,859
Accrued expenses	(854,793)	357,566
Income taxes payable/receivable	(133,370)	(119,855)
Contract liability	(156,230)	(88,388)
Net cash provided by operating activities	937,925	6,420,371
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(165,084)	(161,230)
Acquisition of a business	(35,860,000)
Net cash used in investing activities	(36,025,084)	(161,230)
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt proceeds	20,000,000
Proceeds from exercise of stock options	408,846	17,154
Net cash provided by financing activities	20,408,846	17,154
Net (decrease) increase in cash and cash equivalents	(14,678,313)	6,276,295
Cash and cash equivalents, beginning of period	17,250,546	8,265,606
Cash and cash equivalents, end of period	2,572,233	14,541,901
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes	$ 1,608,506	$ 390,481

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Summary of Significant Accounting Policies

9 Months Ended

Jun. 30, 2023

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

1. Summary of Significant Accounting Policies

Description of the Company

Innovative Solutions and Support, Inc. (the “Company,” “IS&S,” “we” or “us”) was incorporated in Pennsylvania on February 12, 1988. The Company 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 (“ISU”), ISU with Autothrottle and advanced Global Positioning System (“GPS”) receivers that enable reduced carbon footprint navigation.

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

On June 30, 2023 (the “Acquisition Date”), the Company entered into an Asset Purchase and License Agreement with Honeywell International, Inc. (“Honeywell”) whereby Honeywell sold, certain assets and granted perpetual license rights to manufacture and sell licensed products related to its inertial, communication and navigation product lines (the “Product Lines”) to the Company (the “Transaction”). The Transaction involves a sale of certain inventory, equipment and customer-related documents; an assignment of certain customer 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. See Note, “Acquisition” in the Supplemental Balance Sheet Disclosures section below for more details.

Basis of Presentation

The accompanying unaudited consolidated financial statements are presented pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) in accordance with the disclosure requirements for the quarterly report on Form 10-Q and, therefore, do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete annual financial statements. In the opinion of Company management, the unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the results for the interim periods presented. The consolidated balance sheet as of September 30, 2022 is derived from the audited financial statements of the Company. Operating results for the three-and nine-month periods ended June 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2023 which cannot be determined at this time. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

Reclassification

The Company presented intangible assets, net separately in the consolidated balance sheet as of June 30, 2023. In order to conform to the presentation of the consolidated balance sheet as of June 30, 2023, the Company reclassified $60,348 from other assets to intangible assets, net in the consolidated balance sheet as of September 30, 2022. This reclassification has no impact on the Company’s net income for the three months ended June 30, 2023 and 2022 and the nine months ended June 30, 2023 and 2022.

Principles of Consolidation

The Company’s consolidated financial statements include the accounts of its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Estimates are used in accounting for, among other items, valuation of tangible and intangible assets acquired, long term contracts, evaluation of allowances for doubtful accounts, product warranty cost liabilities, income taxes, engineering and material costs on Engineering Development Contract (“EDC”) programs, percentage of completion on EDC contracts, the useful lives of long-lived assets for depreciation and amortization, the recoverability of long-lived assets, evaluation of goodwill impairment, and contingencies. Estimates and assumptions are reviewed periodically and the effects of changes, if any, are reflected in the consolidated statements of operations in the period they are determined.

Acquisitions

The Company evaluates each of its acquisitions in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”), to determine whether the transaction is a business combination or an asset acquisition. In determining whether an acquisition should be accounted for as a business combination or an asset acquisition, the Company first performs a screen test to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this is the case, the acquired set is not deemed to be a business and is instead accounted for as an asset acquisition. If this is not the case, the Company then further evaluates whether the acquired set includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. If so, the Company concludes that the acquired set is a business.

The Company accounts for business acquisitions using the acquisition method of accounting. Under this method of accounting, assets acquired and liabilities assumed are recorded at their respective fair values at the date of the acquisition. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions. The Company’s estimates of fair value are based upon assumptions believed to be reasonable, but are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Any excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill.

During the measurement period, which may be up to one year from the acquisition date, the Company adjusts the provisional amounts of assets acquired and liabilities assumed with the corresponding offset to goodwill to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded within the Company’s consolidated statements of operations.

Intangible Assets

The Company’s identifiable intangible assets primarily consist of license agreement and customer relationships. Intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods deemed appropriate for the type of intangible asset acquired and are reported separately from any goodwill recognized.

Intangible assets with a finite life are amortized over their estimated useful life and are reported net of accumulated amortization. They are assessed for impairment in accordance with the Company’s policy on assessing long-lived assets for impairment described below.

Indefinite-lived intangible assets are not amortized, but are subject to an annual impairment test, or when events or circumstances dictate, more frequently. The impairment review for indefinite-lived intangible assets can be performed using a qualitative or quantitative impairment assessment. The quantitative assessment consists of a comparison of the fair value of the indefinite-lived intangible asset with its carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If the fair value exceeds its carrying amount, the indefinite-lived intangible asset is not considered impaired.

Goodwill

Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The recorded amounts of goodwill from business combinations are based on management’s best estimates of the fair values of assets acquired and liabilities assumed at the date of acquisition. Goodwill is assigned to the reporting units that are expected to benefit from the synergies of the business combination that generated the goodwill. The Company’s goodwill impairment

test is performed at the reporting unit level. Reporting units are determined based on an evaluation of the Company’s operating segments and the components making up those operating segments.

Goodwill is tested for impairment annually or in an interim period if certain changes in circumstances indicate a possibility that an impairment may exist. Factors to consider that may indicate an impairment may exist are: the macroeconomic conditions, industry and market considerations such as a significant adverse change in the business climate, cost factors, overall financial performance such as current-period operating results or cash flow declines combined with a history of operating results or cash flow declines or a projection/forecast that demonstrates continuing declines in the cash flow or the inability to improve the operations to forecasted levels, and any entity-specific events.

If the Company determines that it is more likely than not that the fair value of the reporting unit is below the carrying amount as part of its qualitative assessment, a quantitative assessment of goodwill is required. In the quantitative evaluation, the fair value of the reporting unit is determined and compared to the carrying value. If the fair value is greater than the carrying value, then the goodwill is deemed not to be impaired and no further action is required. If the fair value is less than the carrying value, goodwill is considered impaired and a charge is reported as impairment of goodwill in the consolidated statements of operations.

Cash and Cash Equivalents

Highly liquid investments, purchased with an original maturity of three months or less, are classified as cash equivalents. Cash equivalents at June 30, 2023 and September 30, 2022 consist of cash on deposit and cash invested in money market funds with financial institutions.

Inventory Valuation

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

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using an accelerated method over the estimated useful lives of the assets (the lesser of three to seven years or over the lease term), except for the manufacturing facility and the corporate airplane, which are depreciated using the straight-line method over their estimated useful lives of thirty-nine years and ten years, respectively. Costs are considered construction in progress when the property and equipment are not ready for their intended use. Major additions and improvements are capitalized, while maintenance and repairs that do not improve or extend the life of assets are charged to expense as incurred.

Long-Lived Assets

The Company assesses the impairment of long-lived assets in accordance with FASB ASC Topic 360-10, “Property, Plant and Equipment.” This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In addition, long-lived assets to be disposed of should be reported at the lower of the carrying amount or fair value less cost to sell. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to estimated future cash flows expected to result from use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows.

Fair Value of Financial Instruments

The net carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximate their fair value because of the short-term nature of these instruments. For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value as follows:

Level 1 — Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

● Quoted prices for similar assets or liabilities in active markets;

● Quoted prices for identical or similar assets in non-active markets;

● Inputs other than quoted prices that are observable for the asset or liability; and

● Inputs that are derived principally from or corroborated by other observable market data.

Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2023 and September 30, 2022, according to the valuation techniques the Company used to determine their fair values.

	Fair Value Measurement on June 30, 2023
	Quoted Price in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets
Cash and cash equivalents:
Money market funds	$	2,545,241	$	—	$	—
	Fair Value Measurement on September 30, 2022
	Quoted Price in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets
Cash and cash equivalents:
Money market funds	$	16,083,571	$	—	$	—

Revenue Recognition

The Company enters into sales arrangements with customers that, in general, provide for the Company to design, develop, manufacture and deliver large flat-panel display systems, flight information computers, autothrottles and advanced monitoring systems that measure and display critical flight information, including data relative to aircraft separation, airspeed, altitude, and engine and fuel data measurements.

Revenue from Contracts with Customers

The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 is that an entity recognizes revenue when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services. To achieve this core principle, the Company applies the following five steps:

1) Identify the contract with a customer

The Company’s contract with its customers typically is the form of a purchase order issued to the Company by its customers and, to a lesser degree, in the form of a purchase order issued in connection with a formal contract executed with a customer. 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. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

2) Identify the performance obligations in the contract

Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. Most of our revenue is derived from purchases under which we provide a specific product or service and, as a result, there is only one performance obligation. In the event that a contract includes multiple promised goods or services, such as an EDC contract which includes both engineering services and a resulting product shipment, the Company must apply judgment to determine whether promised goods or services are capable of being distinct in the context of the contract. In these cases, the Company considers whether the customer could, on its own, or together with other resources that are readily available from third parties, produce the physical product using only the output resulting from the Company’s completion of engineering services. If the customer cannot produce the physical product, then the promised goods or services are accounted for as a combined performance obligation.

3) Determine the transaction price

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.

4) Allocate the transaction price to performance obligations in the contract

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price by taking into account available information such as market conditions as well as the cost of the goods or services and the Company’s normal margins for similar performance obligations.

5) Recognize revenue when or as the Company satisfies a performance obligation

The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer. Historically, the Company has also recognized revenue from EDC contracts and is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Contract costs include material, components and third-party avionics purchased from suppliers, direct labor, and overhead costs.

Contract Estimates

Accounting for performance obligations in long-term contracts that are satisfied over time involves the use of various techniques to estimate progress towards satisfaction of the performance obligation. The Company typically measures progress based on costs incurred compared to estimated total contract costs. Contract cost estimates are based on various assumptions to project the outcome of future events that often span more than a single year. These assumptions include the amount of labor and labor costs, the quantity and cost of raw materials used in the completion of the performance obligation, and the complexity of the work to be performed.

As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified.

Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter in which it is identified.

The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates did not change our revenue and operating earnings (and diluted earnings per share) for the three-and nine-month periods ended June 30, 2023 and 2022, respectively.

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. The following table reflects the Company’s contract assets and contract liabilities:

	Contract		Contract
	Assets		Liabilities
September 30, 2022	$	162,742	$	259,183
Amount transferred to receivables from contract assets		—		—
Contract asset additions		89,420		—
Performance obligations satisfied during the period that were included in the contract liability balance at the beginning of the period		—		(240,944)
Increases due to invoicing prior to satisfaction of performance obligations		—		84,714
June 30, 2023	$	252,162	$	102,953

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 sales and product cost of sales, respectively, on the accompanying consolidated statements of operations. The Company’s customer service revenue and cost of sales for the three-and nine-month periods ended June 30, 2023 and 2022 respectively are as follows:

	For the Three Months Ended June 30,				For the Nine Months Ended June 30,
	2023		2022		2023		2022
Customer Service Sales	$	1,318,214	$	1,338,893	$	3,774,666	$	3,784,493
Customer Service Cost of Sales		371,359		369,562		716,655		1,112,298
Gross Profit	$	946,855	$	969,331	$	3,058,011	$	2,672,195

Lease Recognition

The Company accounts for leases in accordance with ASU 2016-02, Leases (Topic 842). At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and short-term and long-term lease liabilities, as applicable. The Company does not have any financing leases that are material in nature.

Income Taxes

Income taxes are recorded in accordance with ASC Topic 740, “Income Taxes” (“ASC Topic 740”), which utilizes a balance sheet approach to provide for income taxes. Under this method, the Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets, liabilities, and expected benefits of utilizing NOLs and tax credit carryforwards. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and are reflected in the consolidated financial statements in the period of enactment. At the end of each interim reporting period, the Company prepares an estimate of the annual effective income tax rate and applies that annual effective income tax rate to ordinary year-to-date pre-tax income for the interim period. Specific tax items discrete to a particular quarter are recorded in income tax expense for that quarter. The estimated annual effective tax rate used in providing for income taxes on a year-to-date basis may change in subsequent periods.

Deferred tax assets are reduced by a valuation allowance if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be verified objectively, and significant management judgment is required in determining any valuation allowance recorded against net deferred tax assets. The Company evaluates deferred income taxes on a quarterly basis to determine if a valuation allowance is required by considering available evidence. Deferred tax assets are recognized when expected future taxable income is sufficient to allow the related tax benefits to reduce taxes that would otherwise be payable. The sources of taxable income that may be available to realize the benefit of deferred tax assets are future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and credit carryforwards, taxable income in carry-back years, and tax planning strategies which are both prudent and feasible. The Company will continue to assess all available evidence during future periods to evaluate any changes to the realization of its deferred tax assets. If the Company were to determine that it would be able to realize additional state deferred tax assets in the future, it would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

The accounting for uncertainty in income taxes requires a more likely than not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company records a liability for the difference between the (i) benefit recognized and measured for financial statement purposes and (ii) the tax position taken or expected to be taken on the Company’s tax return. To the extent that the Company’s assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The Company has elected to record any interest or penalties associated with uncertain tax positions as income tax expense.

The Company files a consolidated U.S. federal income tax return. The Company prepares and files tax returns based on the interpretation of tax laws and regulations, and records estimates based on these judgments and interpretations. In the normal course of business, the tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities, and the Company records a liability when it is probable that there will be an assessment. The Company adjusts the estimates periodically as a result of ongoing examinations by and settlements with the various taxing authorities, and changes in tax laws, regulations and precedent. The consolidated tax provision of any given year includes adjustments to prior years’ income tax accruals that are considered appropriate, and any related estimated interest. Management believes that it has made adequate accruals for income taxes. Differences between estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material effect on the Company’s consolidated financial position but could possibly be material to its consolidated results of operations or cash flow of any one period.

Engineering Development

The Company invests a significant percentage of its sales on engineering development, both Research & Development (“R&D”) and EDC. At June 30, 2023, approximately 23% of the Company’s employees were engineers engaged in various engineering development projects. Total engineering development expense comprises both internally funded R&D and product development and design charges related to specific customer contracts. Engineering development expense consists primarily of payroll-related expenses of employees engaged in EDC projects, engineering related product materials and equipment, and subcontracting costs. R&D charges incurred for product design, product enhancements, and future product development are expensed as incurred. Product development and design charges related to specific customer contracts are charged to cost of sales-EDC based on the method of contract accounting (either percentage-of-completion or completed contract) applicable to such contracts.

Treasury Stock

We account for treasury stock purchased under the cost method and include treasury stock as a component of shareholders’ equity. Treasury stock purchased with intent to retire (whether or not the retirement is actually accomplished) is charged to common stock.

Share-Based Compensation

The Company accounts for share-based compensation under ASC Topic 718, “Stock Compensation” (“ASC Topic 718”), which requires the Company to measure the cost of employee or non-employee director services received in exchange for an award of equity instruments based on the grant-date fair value of the award using an option pricing model. The Company recognizes such cost over the period during which an employee or non-employee director is required to provide service in exchange for the award. Our policy is to recognize forfeitures as incurred.

Accordingly, adoption of ASC Topic 718’s fair value method results in recording compensation costs under the Company’s stock-based compensation plans. The Company determined the fair value of its stock option awards at the date of grant using the Black-Scholes option pricing model. Option pricing models and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of its awards. These assumptions and judgments include estimating future volatility of the Company’s stock price, expected dividend yield, future employee turnover rates, and future employee stock option exercise behaviors. Changes in these assumptions can materially affect fair value estimates. The Company does not believe that a reasonable likelihood exists that there will be a material change in future estimates or assumptions used to determine share-based compensation expense. However, if actual results are not consistent with the Company’s estimates or assumptions, the Company would adjust its estimates. Such adjustments could have a material impact on the Company’s financial position.

Warranty Reserves

The Company offers warranties on some products of various lengths, however the standard warranty period is twenty-four months. At the time of shipment, the Company establishes a reserve for estimated costs of warranties based on its best estimate of the amounts necessary to settle future and existing claims using historical data on products sold as of the balance sheet date. The length of the warranty period, the product’s failure rates, and the customer’s usage affect warranty cost. If actual warranty costs differ from the Company’s estimated amounts, future results of operations could be affected adversely. Warranty cost is recorded as cost of sales, and the reserve balance recorded as an accrued expense. While the Company maintains product quality programs and processes, its warranty obligation is affected by product failure rates and the related corrective costs. If actual product failure rates and/or corrective costs differ from the estimates, the Company revises the estimated warranty liability accordingly.

Self-Insurance Reserves

Since January 1, 2014, the Company has self-insured a significant portion of its employee medical insurance. The Company maintains a stop-loss insurance policy that limits its losses both on a per employee basis and an aggregate basis. Liabilities associated with the risks that are retained by the Company are estimated based upon actuarial assumptions such as historical claims experience and demographic factors. The Company estimated the total medical claims incurred but not reported and the Company believes that it has adequate reserves for these claims at June 30, 2023 and September 30, 2022, respectively. However, the actual value of such claims could be significantly affected if future occurrences and claims differ from these assumptions. At June 30, 2023 and September 30, 2022, the estimated liability for medical claims incurred but not reported was $53,419 and $51,590, respectively. The Company has recorded the excess of funded premiums over estimated claims incurred but not reported of $432,703 and $424,155 as a current asset in the accompanying consolidated balance sheets as of June 30, 2023 and September 30, 2022, respectively.

Concentrations

Major Customers and Products

In the three-month period ended June 30, 2023, three customers, Pilatus Aircraft Ltd (“Pilatus”), Air Transport Services Group (“ATSG”) and Textron Aviation, Inc. (“Textron”), accounted for 25%, 24% and 10% of net sales, respectively. In the nine-month period ended June 30, 2023, three customers, Pilatus, ATSG and Textron, accounted for 27%, 18% and 10% of net sales, respectively.

In the three-month period ended June 30, 2022, three customers, Pilatus, Textron and Cargojet Inc., accounted for 27%, 16% and 14% of net sales, respectively. In the nine-month period ended June 30, 2022, three customers, Pilatus, Textron and ATSG, accounted for 27%, 11% and 10% of net sales, respectively.

Major Suppliers

The Company buys several of its components from sole source suppliers. Although there are a limited number of suppliers of particular components, management believes other suppliers could provide similar components on comparable terms.

For the three- and nine-month periods ended June 30, 2023, the Company had four suppliers, respectively, that were individually responsible for greater than 10% of the Company’s total inventory related purchases.

For the three- and nine-month periods ended June 30, 2022, the Company had zero and two suppliers, respectively, that were individually responsible for greater than 10% of the Company’s total inventory related purchases.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash balances and accounts receivable. The Company invests its excess cash where preservation of principal is the major consideration. Cash balances are maintained with two major banks. Balances on deposit with certain money market accounts and operating accounts may exceed the Federal Deposit Insurance Corporation limits. The Company’s customer base consists principally of companies within the aviation industry. The Company requests advance payments and/or letters of credit from customers that it considers to be credit risks.

Recent Accounting Pronouncements

In June 2016, 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 consolidated financial statements or related disclosures.

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Supplemental Balance Sheet Disclosures

9 Months Ended

Jun. 30, 2023

Supplemental Balance Sheet Disclosures

Supplemental Balance Sheet Disclosures

2. Supplemental Balance Sheet Disclosures

Acquisition

On June 30, 2023, the Company entered into an Asset Purchase and License Agreement with Honeywell whereby Honeywell sold certain assets and granted perpetual license rights to manufacture and sell licensed products related to its inertial, communication and navigation product lines to the Company. The Transaction involves a sale of certain inventory, equipment and customer-related documents; an assignment of certain customer 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. The Transaction allows the Company to diversify its product offerings in the aerospace industry. The Company determined that the Transaction met the definition of a business under ASC 805; therefore, the Company accounted for the Transaction as a business combination and applied the acquisition method of accounting.

In connection with the Transaction, the Company entered into a term loan with PNC Bank, National Association for $20.0 million to fund a portion of the Transaction (the “Term Loan”) – refer to Note 9, “Loan Agreement” for further details. The preliminary purchase consideration transferred at the Acquisition Date was $35.9 million, which was entirely cash.

The allocation of the purchase price is based upon certain preliminary valuations and other analyses that have not been finalized as of the date of this filing. Specifically, the purchase price amount for the Transaction and the allocation of the purchase consideration for

prepaid inventory, equipment, construction in progress, intangible assets, and goodwill are preliminary estimates, which may be subject to change within the measurement period.

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

Cash consideration	$	35,860,000
Total consideration	$	35,860,000
Prepaid inventory	$	10,036,160
Equipment		2,609,000
Construction in progress		1,238,000
Intangible assets (a)		20,900,000
Goodwill (b)		4,608,041
Assets acquired		39,391,201
Accrued expenses		(3,531,201)
Liabilities assumed		(3,531,201)
Net assets acquired	$	35,860,000

(a) Intangible assets consist of license agreements related to the license rights to use certain Honeywell intellectual property and customer relationships and are recorded at provisional estimated fair values. The provisional estimated fair value of the license agreement is based on a variation of the income valuation approach and is determined using the relief from royalty method. The provisional estimated fair value of the customer relationships is based on a variation of the income valuation approach known as the multi-period excess earnings method. Refer to Note, “Intangible assets” for further details.

(b) Goodwill represents the excess of the preliminary purchase consideration over the provisional fair value of the assets acquired and liabilities assumed. The goodwill recognized is primarily attributable to the expected synergies from the Transaction. Goodwill resulting from the Transaction has been provisionally assigned to the Company’s one operating segment; the assignment of goodwill to reporting units is not complete. The goodwill is not expected to be deductible for income tax purposes. Further, the Company determined that the preliminary goodwill was not impaired as of June 30, 2023 and as such, no impairment charges have been recorded for the three-and nine-month periods ended June 30, 2023.

Transition services agreement

Concurrent with the Transaction, the Company entered into a transition services agreement (the “TSA”) with Honeywell, at no additional costs, to receive certain transitional services and technical support during the transition service period. The Company accounted for the TSA separate from business combination and have recognized $140,000 in prepaid expenses and other current assets within the consolidated balance sheets for the services to be received in the future from Honeywell. The prepaid expense related to the TSA was determined using the with and without method.

Acquisition and related costs

For the three and nine months ended June 30, 2023, the Company incurred acquisition costs of $262,099, which were expensed as incurred and included in selling, general and administrative expenses in the consolidated statements of operations; the debt issuance costs related to the Term Loan were not material.

Unaudited actual and pro forma information

Since the acquisition date of the Transaction was on June 30, 2023, the Company did not recognize any revenues and net income related to the Product Lines in the consolidated statements of operations.

The following unaudited pro forma summary presents consolidated information of the Company, including the Product Lines, as if the Transaction had occurred on October 1, 2021, the earliest period presented herein:

Three Months Ended June 30,		Nine Months Ended June 30,
2023	2022	2023	2022

Net sales	$	11,865,707	$	12,071,221	$	36,118,352	$	37,553,854
Net income	$	2,661,132	$	2,690,013	$	7,439,335	$	8,444,970

These pro forma results are for illustrative purposes and are not indicative of the actual results of operations that would have been achieved nor are they indicative of future results of operations. The unaudited pro forma information for all periods presented was adjusted to give effect to pro forma events that are directly attributable to the Transaction and is factually supportable. The adjustments are based on information available to the Company at this time. Accordingly, the adjustments are subject to change, and the impact of such changes may be material. The unaudited pro forma results do not include any incremental cost savings that may result from the integration.

Significant adjustments to the pro forma information above include recognition of non-recurring direct incremental acquisition costs in the nine months ended June 30, 2022 and exclusion of those costs from all other periods presented; increase in interest expense related to the Term Loan; increase in amortization expense associated with the estimate of the acquired intangible assets; increase in depreciation expense related to the fair value adjustment of the acquired equipment; and increase in cost of sales related to the fair value adjustment of the acquired inventory.

Inventories

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

	June 30,		September 30,
	2023		2022
Raw materials	$	5,115,987	$	4,451,045
Work-in-process		570,487		795,723
Finished goods		56,139		102,336
	$	5,742,613	$	5,349,104

Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

	June 30,		September 30,
	2023		2022
Prepaid insurance	$	614,700	$	777,311
Other		775,334		365,159
	$	1,390,034	$	1,142,470

Intangible assets

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

	As of June 30, 2023
	Gross Carrying		Accumulated		Accumulated		Net Carrying
	Value		Impairment			Amortization	Value
License agreement acquired from the Transaction (a)	$	7,870,000	$	—	$	—	$	7,870,000
Customer relationships acquired from the Transaction (a)		13,030,000		—		—		13,030,000
Licensing and certification rights (b)		696,506		(44,400)		(637,221)		14,885
Total	$	21,596,506	$	(44,400)	$	(637,221)	$	20,914,885

	As of September 30, 2022
	Gross Carrying		Accumulated		Accumulated		Net Carrying
	Value		Impairment		Amortization		Value
Licensing and certification rights (b)	$	696,506	$	—	$	(636,158)	$	60,348
Total	$	696,506	$	—	$	(636,158)	$	60,348

(a) As part of the Transaction, the Company acquired intangible assets related to the license agreement for the license rights to use certain Honeywell intellectual property, and customer relationships. The gross carrying values are preliminary estimates and may be subject to change within the measurement period – refer to Note, “Acquisition” for further details. The license agreement has an indefinite life and is not subject to amortization; the customer relationships have an estimated weighted average life of ten years. The Company determined that the preliminary intangible assets were not impaired as of June 30, 2023 and as such, no impairment charges have been recorded for the three-and nine-month periods ended June 30, 2023.

(b) The licensing and certification rights are amortized over a defined number of units. An impairment charge of $44,400 was recorded during the three-and nine-month periods ended June 30, 2023. No impairment charges were recorded during the three-and nine-month periods ended June 30, 2022.

Intangible asset amortization expense was $1,063 and $0 for the three-month periods ended June 30, 2023 and 2022, respectively. Intangible asset amortization expense was $1,063 and $1,063 for the nine-month periods ended June 30, 2023 and 2022, respectively.

The timing of future amortization expense is not determinable for the licensing and certification rights because they are amortized over a defined number of units. The expected future amortization expense related to the customer relationships as of June 30, 2023 is as follows:

2023 (three months remaining)	$	325,750
2024		1,303,000
2025		1,303,000
2026		1,303,000
2027		1,303,000
Thereafter		7,492,250
Total	$	13,030,000

Property and equipment

Property and equipment, net consists of the following:

	June 30,		September 30,
	2023		2022
Computer equipment	$	2,325,721	$	2,307,139
Corporate airplanes		2,406,468		2,406,468
Furniture and office equipment		976,993		976,993
Manufacturing facility		5,889,491		5,889,491
Equipment		8,292,277		5,624,966
Land		1,021,245		1,021,245
Construction in progress		1,238,000		—
		22,150,195		18,226,302
Less: accumulated depreciation and amortization		(12,103,751)		(11,934,113)
	$	10,046,444	$	6,292,189

Depreciation and amortization related to property and equipment was $86,439 and $89,072 for the three-month periods ended June 30, 2023 and 2022, respectively. The corporate airplane is utilized primarily in support of product development.

Depreciation and amortization related to property and equipment was approximately $257,829 and $269,567 for the nine-month periods ended June 30, 2023 and 2022, respectively.

Other assets

Other assets consist of the following:

	June 30,		September 30,
	2023		2022
Operating lease right-of-use asset	$	18,407	$	28,680
Other non-current assets		179,926		75,300
	$	198,333	$	103,980

Other non-current assets as of June 30, 2023 and September 30, 2022 include the security deposit for an airplane hangar, supplier credit from one of our suppliers and a deposit for medical claims required under the Company’s medical plan. In addition, other non-current assets as of June 30, 2023 and September 30, 2022 includes $56,855 and $0, respectively, of prepaid software licenses that will be earned upon the shipment of a certain product to a customer. Other non-current assets amortization expense was $2,601 and $2,021 for the three-month periods ended June 30, 2023 and 2022, respectively. Other non-current assets amortization expense was $2,601 and $7,534 for the nine-month periods ended June 30, 2023 and 2022, respectively.

Accrued expenses

Accrued expenses consist of the following:

	June 30,		September 30,
	2023		2022
Warranty	$	589,048	$	607,001
Salary, benefits and payroll taxes		746,576		1,030,628
Professional fees		119,129		364,794
Operating lease		13,125		13,615
Supplier purchase orders		3,531,201		—
Other		275,962		956,237
	$	5,275,041	$	2,972,275

Warranty cost and accrual information for the three-and nine-month periods ended June 30, 2023 is highlighted below:

	Three Months Ending		Nine Months Ending
	June 30, 2023		June 30, 2023
Warranty accrual, beginning of period	$	587,650	$	607,001
Accrued expense		29,119		63,495
Warranty cost		(27,721)		(81,448)
Warranty accrual, end of period	$	589,048	$	589,048

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Income Taxes

9 Months Ended

Jun. 30, 2023

Income Taxes

Income Taxes

3. Income Taxes

The Company will continue to assess all available evidence during future periods to evaluate any changes to the realization of its deferred tax assets. If the Company were to determine that it would be able to realize additional state deferred tax assets in the future, it would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

As a result of the 2017 Tax Cuts and Jobs Act, the Company must amortize amounts paid or incurred for specified research and development expenditures, including software development expenses, ratably over 60 months, beginning at the mid-point of the tax year in which the expenditures are paid or incurred.

The effective tax rate for the three-month and nine-month periods ended June 30, 2023 was 19.3% and 20.5%, respectively, 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 and nine -month periods ended June 30, 2022 was 20.9% and 21.2%, respectively. and differs from the statutory tax rate primarily due to permanent items and state taxes.

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Shareholders' Equity and Share-Based Payments

9 Months Ended

Jun. 30, 2023

Shareholders' Equity and Share-Based Payments

Shareholders' Equity and Share-Based Payments

4. Shareholders’ Equity and Share-Based Payments

At June 30, 2023, the Company’s Amended and Restated Articles of Incorporation provides the Company authority to issue 75,000,000 shares of common stock and 10,000,000 shares of preferred stock.

Share-Based compensation

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

2019 Stock-Based Incentive Compensation Plan

The 2019 Plan was approved by the Company’s shareholders at the Company’s Annual Meeting of Shareholders held on April 2, 2019. The 2019 Plan authorizes the grant of stock appreciation rights, restricted stock, options and other equity-based awards. Options granted under the 2019 Plan may be either “incentive stock options” as defined in section 422 of the Code or nonqualified stock options, as determined by the Compensation Committee.

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

If any award is forfeited, terminates or otherwise is settled for any reason without an actual distribution of shares to the participant, the related shares of common stock subject to such award will again be available for future grant. Any shares tendered by a participant in payment of the exercise price of an option or the tax liability with respect to an award (including, in any case, shares withheld from any such award) will not be available for future grant under the 2019 Plan. If there is any change in the Company’s corporate capitalization, the Compensation Committee must proportionately and equitably adjust the number and kind of shares of common stock which may be issued in connection with future awards, the number and kind of shares of common stock covered by awards then outstanding under the 2019 Plan, the aggregate number and kind of shares of common stock available under the 2019 Plan, any

applicable individual limits on the number of shares of common stock available for awards under the 2019 Plan, the exercise or grant price of any award, or if deemed appropriate, make provision for a cash payment with respect to any outstanding award. In addition, the Compensation Committee may make adjustments in the terms and conditions of any awards, including any performance goals, in recognition of unusual or nonrecurring events affecting the Company or any subsidiary, or in response to changes in applicable laws, regulations, or accounting principles.

The compensation expense related to stock options and awards issued to employees under the 2019 Plan was $164,342 and $954,140 for the three- and nine-month periods ended June 30, 2023, respectively. The compensation expense related to stock options and awards issued to employees under the 2019 Plan was $45,088 and $135,273 for the three- and nine-month periods ended June 30, 2022, respectively.

The compensation expense under the 2019 Plan related to stock awards issued to non-employee members of the Board was $49,742 and $276,515 for the three- and nine-month periods ended June 30, 2023, respectively. The compensation expense under the 2019 Plan related to stock awards issued to non-employee members of the Board was $13,331 and $173,326 for the three- and nine-month periods ended June 30, 2022, respectively.

Total compensation expense associated with the 2019 Plan was $214,084 and $58,419 for the three-month periods ended June 30, 2023 and 2022, respectively. Total compensation expense associated with the 2019 Plan was $1,230,655 and $308,599 for the nine-month periods ended June 30, 2023 and 2022, respectively.

At June 30, 2023, unrecognized compensation expense of approximately $260,398, net of forfeitures, related to non-vested stock options under the 2019 Plan, will be recognized.

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Earnings Per Share

9 Months Ended

Jun. 30, 2023

Earnings Per Share

Earnings Per Share

5. Earnings Per Share

	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Numerator:
Net income	$	1,423,379	$	1,359,174	$	3,393,133	$	3,921,802
Denominator:
Basic weighted average shares		17,576,969		17,261,349		17,415,358		17,253,822
Dilutive effect of share-based awards		619		4,449		3,907		1,483
Diluted weighted average shares		17,577,588		17,265,798		17,419,265		17,255,305
Earnings per common share:
Basic EPS	$	0.08	$	0.08	$	0.19	$	0.23
Diluted EPS	$	0.08	$	0.08	$	0.19	$	0.23

Net income per share is calculated pursuant to ASC Topic 260, “Earnings per Share” (“ASC Topic 260”). Basic earnings per share (“EPS”) excludes potentially dilutive securities and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed assuming the conversion or exercise of all dilutive securities such as employee stock options and restricted stock units (“RSUs”).

The number of incremental shares from the assumed exercise of stock options and RSUs is calculated by using the treasury stock method. As of June 30, 2023 and 2022, there were 128,815 and 100,000 options to purchase common stock outstanding, respectively, and 76,636 and 0 shares subject to vesting of restricted stock units outstanding, respectively. The average outstanding diluted shares calculation excludes options with an exercise price that exceeds the average market price of shares during the period.

For the three-month periods ended June 30, 2023 and 2022, respectively, 312,210 and 0 diluted weighted-average shares outstanding were excluded from the computation of diluted EPS because the effect would be anti-dilutive.

For the nine-month periods ended June 30, 2023 and 2022, respectively, 196,577 and 66,667 diluted weighted-average shares outstanding were excluded from the computation of diluted EPS because the effect would be anti-dilutive.

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Contingencies

9 Months Ended

Jun. 30, 2023

Contingencies

Contingencies

6. Contingencies

In the ordinary course of business, the Company is at times subject to various legal proceedings and claims. The Company does not believe any such matters that are currently pending will, individually or in aggregate, have a material effect on the results of operations or financial position.

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Related Party Transactions

9 Months Ended

Jun. 30, 2023

Related Party Transactions

Related Party Transactions

7. Related Party Transactions

In recent years, the Company has had sales to AML Global Eclipse, LLC, (“Eclipse”), whose principal shareholder is also a principal shareholder in the Company. Eclipse is a new related party for fiscal year 2022 due to their president acquiring more that 10% in shares of the company. Prior balances are disclosed below for comparability.

Sales to Eclipse amounted to approximately $155,000 and $57,000 for the three-month periods ended June 30, 2023 and 2022, respectively. Sales to Eclipse amounted to approximately $231,000 and $574,000 for the nine-month periods ended June 30, 2023 and 2022, respectively. As of June 30, 2023 and September 30, 2022, contract liability to Eclipse was approximately $25,000 and $123,000, respectively.

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Leases

9 Months Ended

Jun. 30, 2023

Leases

Leases

8. Leases

The Company accounts for leases in accordance with ASU 2016-02 and records “right-of-use” assets and corresponding lease liabilities on the balance sheet for most leases with an initial term of greater than one year. Consistent with previous accounting guidance, we will recognize payments for leases with a term of less than one year in the statement of operations on a straight-line basis over the lease term.

We lease real estate and equipment under various operating leases. A lease exists when a contract or part of a contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In determining whether a lease exists, we consider whether a contract provides us with both: (a) the right to obtain substantially all of the economic benefits from the use of the identified asset and (b) the right to direct the use of the identified asset.

Some of our leases include base rental periods coupled with options to renew or terminate the lease, generally at our discretion. In evaluating the lease term, we consider whether we are reasonably certain to exercise such options. To the extent a significant economic incentive exists to exercise an option, that option is included within the lease term. However, based on the nature of our lease arrangements, options generally do not provide us with a significant economic incentive and are therefore excluded from the lease term for the majority of our arrangements.

Our leases typically include a combination of fixed and variable payments. Fixed payments are generally included when measuring the right-of-use asset and lease liability. Variable payments, which primarily represent payments based on usage of the underlying asset, are generally excluded from such measurement and expensed as incurred. In addition, certain of our lease arrangements may contain a lease coupled with an arrangement to provide other services, such as maintenance, or may require us to make other payments on behalf of the lessor related to the leased asset, such as payments for taxes or insurance. As permitted by ASU 2016-02, we have elected to account for these non-lease components together with the associated lease component if included in the lease payments. This election has been made for each of our asset classes.

The measurement of “right-of-use” assets and lease liabilities requires us to estimate appropriate discount rates. To the extent the rate implicit in the lease is readily determinable, such rate is utilized. However, based on information available at lease commencement for our leases, the rate implicit in the lease is not known. In these instances, we utilize an incremental borrowing rate, which represents the rate of interest that we would pay to borrow on a collateralized basis over a similar term.

The following table presents the lease-related assets and liabilities reported in the Consolidated Balance Sheet as of June 30, 2023:

Classification on the Consolidated Balance Sheet on June 30, 2023
Assets
Operating leases	Other assets	$	18,407
Liabilities
Operating leases- current	Accrued expenses	$	13,125
Operating leases – noncurrent	Other liabilities	$	5,282
Total lease liabilities		$	18,407

Rent expense and cash paid for various operating leases in aggregate are $3,669 and $11,007 for the three- and nine-month periods ended June 30, 2023. The weighted average remaining lease term is 1.4 years and the weighted average discount rate is 5.0% as of June 30, 2023.

Future minimum lease payments under operating leases are as follows at June 30, 2023:

	Twelve Months
	Ending	Operating
	June 30,	Leases
	2024	$	14,676
	2025		6,115
Total minimum lease payments		$	20,791
Amount representing interest			(2,384)
Present value of minimum lease payments			18,407
Current portion			(13,125)
Long-term portion of lease obligations		$	5,282

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Loan Agreement

9 Months Ended

Jun. 30, 2023

Loan Agreement

Loan Agreement

9. Loan Agreement

On June 28, 2023, the Company and one of its subsidiaries entered into an Amendment to Loan Documents (the “Loan Amendment”) with PNC Bank, National Association (the “PNC”), which amends certain terms of that certain Loan Agreement entered into by the parties on May 11, 2023 (the “Loan Agreement” and, as amended, the “Amended Loan Agreement”) and (ii) a corresponding Term Note in favor of PNC (the “Term Note”), which together provide for a senior secured term loan in an aggregate principal amount of $20.0 million, with a maturity date of June 28, 2028. Availability of funds under the Term Loan was conditioned upon the closing of the transactions contemplated by the Amended Loan Agreement and was used to fund a portion of the Transaction. Under the agreement, the Company has the right to prepay any amounts outstanding at any time and from time to time, whole or in part; subject to payment of any break funding indemnification amounts.

Future interest payments on the Term Loan, based on current interest rates, are expected to approximate $0.4 million for the remainder of fiscal 2023, $1.5 million in fiscal 2024, $1.3 million in fiscal 2025, $1.1 million in fiscal 2026, and $1.6 million thereafter. The interest rate applicable to loans outstanding under the Term Loan is a floating interest rate equal to the sum of (A) the Term SOFR Rate (as defined in the Term Note) plus (B) an unadjusted spread of the Applicable SOFR Margin plus (C) a SOFR adjustment of ten basis points. The Applicable SOFR Margin ranges from 1.5% to 2.5% depending on the Company’s funded debt to EBITDA ratio. Commencing on June 30, 2023, the Term Loan will consist of sixty equal monthly principal installments, over a period of ten years, with the balance payable on the maturity date of the Term Loan.

In addition to providing for the Term Loan, the Loan Agreement, together with a corresponding Revolving Line of Credit Note in favor of PNC, executed May 11, 2023 (“Line of Credit Note”), provides for a senior secured revolving line of credit in an aggregate principal amount of $10,000,000, with an expiration date of May 11, 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 Line of Credit Note) plus (B) an unadjusted spread of 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. The Company will pay an annual commitment fee of 0.15% on the amount available for borrowing under the revolving credit facility.

The Company was in compliance with all applicable covenants throughout and at June 30, 2023. As of June 30, 2023, the term loan balance amounted to $20,000,000. There was no balance drawn on the Revolving Line of Credit as of June 30, 2023.

Fixed mandatory principal repayments due on the outstanding Term Loan are as follows:

Twelve Months
Ending
June 30,
2024	2,000,000
2025	2,000,000
2026	2,000,000
2027	2,000,000
2028	12,000,000
	20,000,000

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

12 Months Ended

Jun. 30, 2023

Sep. 30, 2023

Summary of Significant Accounting Policies

Basis of Presentation

Basis of Presentation

The accompanying unaudited consolidated financial statements are presented pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) in accordance with the disclosure requirements for the quarterly report on Form 10-Q and, therefore, do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete annual financial statements. In the opinion of Company management, the unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the results for the interim periods presented. The consolidated balance sheet as of September 30, 2022 is derived from the audited financial statements of the Company. Operating results for the three-and nine-month periods ended June 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2023 which cannot be determined at this time. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes of the Company included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

Reclassification

Reclassification

The Company presented intangible assets, net separately in the consolidated balance sheet as of June 30, 2023. In order to conform to the presentation of the consolidated balance sheet as of June 30, 2023, the Company reclassified $60,348 from other assets to intangible assets, net in the consolidated balance sheet as of September 30, 2022. This reclassification has no impact on the Company’s net income for the three months ended June 30, 2023 and 2022 and the nine months ended June 30, 2023 and 2022.

Principles of Consolidation

Principles of Consolidation

The Company’s consolidated financial statements include the accounts of its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

Use of Estimates

The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Estimates are used in accounting for, among other items, valuation of tangible and intangible assets acquired, long term contracts, evaluation of allowances for doubtful accounts, product warranty cost liabilities, income taxes, engineering and material costs on Engineering Development Contract (“EDC”) programs, percentage of completion on EDC contracts, the useful lives of long-lived assets for depreciation and amortization, the recoverability of long-lived assets, evaluation of goodwill impairment, and contingencies. Estimates and assumptions are reviewed periodically and the effects of changes, if any, are reflected in the consolidated statements of operations in the period they are determined.

Acquisitions

Acquisitions

The Company evaluates each of its acquisitions in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”), to determine whether the transaction is a business combination or an asset acquisition. In determining whether an acquisition should be accounted for as a business combination or an asset acquisition, the Company first performs a screen test to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this is the case, the acquired set is not deemed to be a business and is instead accounted for as an asset acquisition. If this is not the case, the Company then further evaluates whether the acquired set includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. If so, the Company concludes that the acquired set is a business.

The Company accounts for business acquisitions using the acquisition method of accounting. Under this method of accounting, assets acquired and liabilities assumed are recorded at their respective fair values at the date of the acquisition. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions. The Company’s estimates of fair value are based upon assumptions believed to be reasonable, but are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Any excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill.

During the measurement period, which may be up to one year from the acquisition date, the Company adjusts the provisional amounts of assets acquired and liabilities assumed with the corresponding offset to goodwill to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded within the Company’s consolidated statements of operations.

Intangible Assets

Intangible Assets

The Company’s identifiable intangible assets primarily consist of license agreement and customer relationships. Intangible assets acquired in a business combination are recognized at fair value using generally accepted valuation methods deemed appropriate for the type of intangible asset acquired and are reported separately from any goodwill recognized.

Intangible assets with a finite life are amortized over their estimated useful life and are reported net of accumulated amortization. They are assessed for impairment in accordance with the Company’s policy on assessing long-lived assets for impairment described below.

Indefinite-lived intangible assets are not amortized, but are subject to an annual impairment test, or when events or circumstances dictate, more frequently. The impairment review for indefinite-lived intangible assets can be performed using a qualitative or quantitative impairment assessment. The quantitative assessment consists of a comparison of the fair value of the indefinite-lived intangible asset with its carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If the fair value exceeds its carrying amount, the indefinite-lived intangible asset is not considered impaired.

Goodwill

Goodwill

Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The recorded amounts of goodwill from business combinations are based on management’s best estimates of the fair values of assets acquired and liabilities assumed at the date of acquisition. Goodwill is assigned to the reporting units that are expected to benefit from the synergies of the business combination that generated the goodwill. The Company’s goodwill impairment

test is performed at the reporting unit level. Reporting units are determined based on an evaluation of the Company’s operating segments and the components making up those operating segments.

Goodwill is tested for impairment annually or in an interim period if certain changes in circumstances indicate a possibility that an impairment may exist. Factors to consider that may indicate an impairment may exist are: the macroeconomic conditions, industry and market considerations such as a significant adverse change in the business climate, cost factors, overall financial performance such as current-period operating results or cash flow declines combined with a history of operating results or cash flow declines or a projection/forecast that demonstrates continuing declines in the cash flow or the inability to improve the operations to forecasted levels, and any entity-specific events.

If the Company determines that it is more likely than not that the fair value of the reporting unit is below the carrying amount as part of its qualitative assessment, a quantitative assessment of goodwill is required. In the quantitative evaluation, the fair value of the reporting unit is determined and compared to the carrying value. If the fair value is greater than the carrying value, then the goodwill is deemed not to be impaired and no further action is required. If the fair value is less than the carrying value, goodwill is considered impaired and a charge is reported as impairment of goodwill in the consolidated statements of operations.

Cash and Cash Equivalents

Cash and Cash Equivalents

Highly liquid investments, purchased with an original maturity of three months or less, are classified as cash equivalents. Cash equivalents at June 30, 2023 and September 30, 2022 consist of cash on deposit and cash invested in money market funds with financial institutions.

Inventory Valuation

Inventory Valuation

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

Property and Equipment

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using an accelerated method over the estimated useful lives of the assets (the lesser of three to seven years or over the lease term), except for the manufacturing facility and the corporate airplane, which are depreciated using the straight-line method over their estimated useful lives of thirty-nine years and ten years, respectively. Costs are considered construction in progress when the property and equipment are not ready for their intended use. Major additions and improvements are capitalized, while maintenance and repairs that do not improve or extend the life of assets are charged to expense as incurred.

Long-Lived Assets

Long-Lived Assets

The Company assesses the impairment of long-lived assets in accordance with FASB ASC Topic 360-10, “Property, Plant and Equipment.” This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In addition, long-lived assets to be disposed of should be reported at the lower of the carrying amount or fair value less cost to sell. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to estimated future cash flows expected to result from use of the asset. If the carrying amount of the asset exceeds the estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

The net carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximate their fair value because of the short-term nature of these instruments. For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value as follows:

Level 1 — Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

● Quoted prices for similar assets or liabilities in active markets;

● Quoted prices for identical or similar assets in non-active markets;

● Inputs other than quoted prices that are observable for the asset or liability; and

● Inputs that are derived principally from or corroborated by other observable market data.

Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2023 and September 30, 2022, according to the valuation techniques the Company used to determine their fair values.

	Fair Value Measurement on June 30, 2023
	Quoted Price in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets
Cash and cash equivalents:
Money market funds	$	2,545,241	$	—	$	—
	Fair Value Measurement on September 30, 2022
	Quoted Price in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets
Cash and cash equivalents:
Money market funds	$	16,083,571	$	—	$	—

Revenue Recognition

Revenue Recognition

The Company enters into sales arrangements with customers that, in general, provide for the Company to design, develop, manufacture and deliver large flat-panel display systems, flight information computers, autothrottles and advanced monitoring systems that measure and display critical flight information, including data relative to aircraft separation, airspeed, altitude, and engine and fuel data measurements.

Revenue from Contracts with Customers

The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 is that an entity recognizes revenue when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services. To achieve this core principle, the Company applies the following five steps:

1) Identify the contract with a customer

The Company’s contract with its customers typically is the form of a purchase order issued to the Company by its customers and, to a lesser degree, in the form of a purchase order issued in connection with a formal contract executed with a customer. 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. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

2) Identify the performance obligations in the contract

Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. Most of our revenue is derived from purchases under which we provide a specific product or service and, as a result, there is only one performance obligation. In the event that a contract includes multiple promised goods or services, such as an EDC contract which includes both engineering services and a resulting product shipment, the Company must apply judgment to determine whether promised goods or services are capable of being distinct in the context of the contract. In these cases, the Company considers whether the customer could, on its own, or together with other resources that are readily available from third parties, produce the physical product using only the output resulting from the Company’s completion of engineering services. If the customer cannot produce the physical product, then the promised goods or services are accounted for as a combined performance obligation.

3) Determine the transaction price

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.

4) Allocate the transaction price to performance obligations in the contract

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price by taking into account available information such as market conditions as well as the cost of the goods or services and the Company’s normal margins for similar performance obligations.

5) Recognize revenue when or as the Company satisfies a performance obligation

The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer. Historically, the Company has also recognized revenue from EDC contracts and is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Contract costs include material, components and third-party avionics purchased from suppliers, direct labor, and overhead costs.

Contract Estimates

Accounting for performance obligations in long-term contracts that are satisfied over time involves the use of various techniques to estimate progress towards satisfaction of the performance obligation. The Company typically measures progress based on costs incurred compared to estimated total contract costs. Contract cost estimates are based on various assumptions to project the outcome of future events that often span more than a single year. These assumptions include the amount of labor and labor costs, the quantity and cost of raw materials used in the completion of the performance obligation, and the complexity of the work to be performed.

As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified.

Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter in which it is identified.

The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates did not change our revenue and operating earnings (and diluted earnings per share) for the three-and nine-month periods ended June 30, 2023 and 2022, respectively.

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. The following table reflects the Company’s contract assets and contract liabilities:

	Contract		Contract
	Assets		Liabilities
September 30, 2022	$	162,742	$	259,183
Amount transferred to receivables from contract assets		—		—
Contract asset additions		89,420		—
Performance obligations satisfied during the period that were included in the contract liability balance at the beginning of the period		—		(240,944)
Increases due to invoicing prior to satisfaction of performance obligations		—		84,714
June 30, 2023	$	252,162	$	102,953

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 sales and product cost of sales, respectively, on the accompanying consolidated statements of operations. The Company’s customer service revenue and cost of sales for the three-and nine-month periods ended June 30, 2023 and 2022 respectively are as follows:

	For the Three Months Ended June 30,				For the Nine Months Ended June 30,
	2023		2022		2023		2022
Customer Service Sales	$	1,318,214	$	1,338,893	$	3,774,666	$	3,784,493
Customer Service Cost of Sales		371,359		369,562		716,655		1,112,298
Gross Profit	$	946,855	$	969,331	$	3,058,011	$	2,672,195

Lease Recognition

Lease Recognition

The Company accounts for leases in accordance with ASU 2016-02, Leases (Topic 842). At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and short-term and long-term lease liabilities, as applicable. The Company does not have any financing leases that are material in nature.

Income Taxes

Income Taxes

Income taxes are recorded in accordance with ASC Topic 740, “Income Taxes” (“ASC Topic 740”), which utilizes a balance sheet approach to provide for income taxes. Under this method, the Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets, liabilities, and expected benefits of utilizing NOLs and tax credit carryforwards. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and are reflected in the consolidated financial statements in the period of enactment. At the end of each interim reporting period, the Company prepares an estimate of the annual effective income tax rate and applies that annual effective income tax rate to ordinary year-to-date pre-tax income for the interim period. Specific tax items discrete to a particular quarter are recorded in income tax expense for that quarter. The estimated annual effective tax rate used in providing for income taxes on a year-to-date basis may change in subsequent periods.

Deferred tax assets are reduced by a valuation allowance if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be verified objectively, and significant management judgment is required in determining any valuation allowance recorded against net deferred tax assets. The Company evaluates deferred income taxes on a quarterly basis to determine if a valuation allowance is required by considering available evidence. Deferred tax assets are recognized when expected future taxable income is sufficient to allow the related tax benefits to reduce taxes that would otherwise be payable. The sources of taxable income that may be available to realize the benefit of deferred tax assets are future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and credit carryforwards, taxable income in carry-back years, and tax planning strategies which are both prudent and feasible. The Company will continue to assess all available evidence during future periods to evaluate any changes to the realization of its deferred tax assets. If the Company were to determine that it would be able to realize additional state deferred tax assets in the future, it would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

The accounting for uncertainty in income taxes requires a more likely than not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company records a liability for the difference between the (i) benefit recognized and measured for financial statement purposes and (ii) the tax position taken or expected to be taken on the Company’s tax return. To the extent that the Company’s assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The Company has elected to record any interest or penalties associated with uncertain tax positions as income tax expense.

The Company files a consolidated U.S. federal income tax return. The Company prepares and files tax returns based on the interpretation of tax laws and regulations, and records estimates based on these judgments and interpretations. In the normal course of business, the tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities, and the Company records a liability when it is probable that there will be an assessment. The Company adjusts the estimates periodically as a result of ongoing examinations by and settlements with the various taxing authorities, and changes in tax laws, regulations and precedent. The consolidated tax provision of any given year includes adjustments to prior years’ income tax accruals that are considered appropriate, and any related estimated interest. Management believes that it has made adequate accruals for income taxes. Differences between estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material effect on the Company’s consolidated financial position but could possibly be material to its consolidated results of operations or cash flow of any one period.

Engineering Development

Engineering Development

The Company invests a significant percentage of its sales on engineering development, both Research & Development (“R&D”) and EDC. At June 30, 2023, approximately 23% of the Company’s employees were engineers engaged in various engineering development projects. Total engineering development expense comprises both internally funded R&D and product development and design charges related to specific customer contracts. Engineering development expense consists primarily of payroll-related expenses of employees engaged in EDC projects, engineering related product materials and equipment, and subcontracting costs. R&D charges incurred for product design, product enhancements, and future product development are expensed as incurred. Product development and design charges related to specific customer contracts are charged to cost of sales-EDC based on the method of contract accounting (either percentage-of-completion or completed contract) applicable to such contracts.

Treasury Stock

Treasury Stock

We account for treasury stock purchased under the cost method and include treasury stock as a component of shareholders’ equity. Treasury stock purchased with intent to retire (whether or not the retirement is actually accomplished) is charged to common stock.

Share-Based Compensation

Share-Based Compensation

The Company accounts for share-based compensation under ASC Topic 718, “Stock Compensation” (“ASC Topic 718”), which requires the Company to measure the cost of employee or non-employee director services received in exchange for an award of equity instruments based on the grant-date fair value of the award using an option pricing model. The Company recognizes such cost over the period during which an employee or non-employee director is required to provide service in exchange for the award. Our policy is to recognize forfeitures as incurred.

Accordingly, adoption of ASC Topic 718’s fair value method results in recording compensation costs under the Company’s stock-based compensation plans. The Company determined the fair value of its stock option awards at the date of grant using the Black-Scholes option pricing model. Option pricing models and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of its awards. These assumptions and judgments include estimating future volatility of the Company’s stock price, expected dividend yield, future employee turnover rates, and future employee stock option exercise behaviors. Changes in these assumptions can materially affect fair value estimates. The Company does not believe that a reasonable likelihood exists that there will be a material change in future estimates or assumptions used to determine share-based compensation expense. However, if actual results are not consistent with the Company’s estimates or assumptions, the Company would adjust its estimates. Such adjustments could have a material impact on the Company’s financial position.

Warranty Reserves

Warranty Reserves

The Company offers warranties on some products of various lengths, however the standard warranty period is twenty-four months. At the time of shipment, the Company establishes a reserve for estimated costs of warranties based on its best estimate of the amounts necessary to settle future and existing claims using historical data on products sold as of the balance sheet date. The length of the warranty period, the product’s failure rates, and the customer’s usage affect warranty cost. If actual warranty costs differ from the Company’s estimated amounts, future results of operations could be affected adversely. Warranty cost is recorded as cost of sales, and the reserve balance recorded as an accrued expense. While the Company maintains product quality programs and processes, its warranty obligation is affected by product failure rates and the related corrective costs. If actual product failure rates and/or corrective costs differ from the estimates, the Company revises the estimated warranty liability accordingly.

Self-Insurance Reserves

Self-Insurance Reserves

Since January 1, 2014, the Company has self-insured a significant portion of its employee medical insurance. The Company maintains a stop-loss insurance policy that limits its losses both on a per employee basis and an aggregate basis. Liabilities associated with the risks that are retained by the Company are estimated based upon actuarial assumptions such as historical claims experience and demographic factors. The Company estimated the total medical claims incurred but not reported and the Company believes that it has adequate reserves for these claims at June 30, 2023 and September 30, 2022, respectively. However, the actual value of such claims could be significantly affected if future occurrences and claims differ from these assumptions. At June 30, 2023 and September 30, 2022, the estimated liability for medical claims incurred but not reported was $53,419 and $51,590, respectively. The Company has recorded the excess of funded premiums over estimated claims incurred but not reported of $432,703 and $424,155 as a current asset in the accompanying consolidated balance sheets as of June 30, 2023 and September 30, 2022, respectively.

Concentrations

Concentrations

Major Customers and Products

In the three-month period ended June 30, 2023, three customers, Pilatus Aircraft Ltd (“Pilatus”), Air Transport Services Group (“ATSG”) and Textron Aviation, Inc. (“Textron”), accounted for 25%, 24% and 10% of net sales, respectively. In the nine-month period ended June 30, 2023, three customers, Pilatus, ATSG and Textron, accounted for 27%, 18% and 10% of net sales, respectively.

In the three-month period ended June 30, 2022, three customers, Pilatus, Textron and Cargojet Inc., accounted for 27%, 16% and 14% of net sales, respectively. In the nine-month period ended June 30, 2022, three customers, Pilatus, Textron and ATSG, accounted for 27%, 11% and 10% of net sales, respectively.

Major Suppliers

The Company buys several of its components from sole source suppliers. Although there are a limited number of suppliers of particular components, management believes other suppliers could provide similar components on comparable terms.

For the three- and nine-month periods ended June 30, 2023, the Company had four suppliers, respectively, that were individually responsible for greater than 10% of the Company’s total inventory related purchases.

For the three- and nine-month periods ended June 30, 2022, the Company had zero and two suppliers, respectively, that were individually responsible for greater than 10% of the Company’s total inventory related purchases.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash balances and accounts receivable. The Company invests its excess cash where preservation of principal is the major consideration. Cash balances are maintained with two major banks. Balances on deposit with certain money market accounts and operating accounts may exceed the Federal Deposit Insurance Corporation limits. The Company’s customer base consists principally of companies within the aviation industry. The Company requests advance payments and/or letters of credit from customers that it considers to be credit risks.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In June 2016, 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 consolidated financial statements or related disclosures.

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Summary of Significant Accounting Policies (Tables)

9 Months Ended

Jun. 30, 2023

Summary of Significant Accounting Policies

Schedule of financial assets and liabilities accounted for at fair value on a recurring basis

	Fair Value Measurement on June 30, 2023
	Quoted Price in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets
Cash and cash equivalents:
Money market funds	$	2,545,241	$	—	$	—
	Fair Value Measurement on September 30, 2022
	Quoted Price in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets
Cash and cash equivalents:
Money market funds	$	16,083,571	$	—	$	—

Summary of contract assets and contract liabilities balances

	Contract		Contract
	Assets		Liabilities
September 30, 2022	$	162,742	$	259,183
Amount transferred to receivables from contract assets		—		—
Contract asset additions		89,420		—
Performance obligations satisfied during the period that were included in the contract liability balance at the beginning of the period		—		(240,944)
Increases due to invoicing prior to satisfaction of performance obligations		—		84,714
June 30, 2023	$	252,162	$	102,953

Schedule of customer service revenue and cost of sales

	For the Three Months Ended June 30,				For the Nine Months Ended June 30,
	2023		2022		2023		2022
Customer Service Sales	$	1,318,214	$	1,338,893	$	3,774,666	$	3,784,493
Customer Service Cost of Sales		371,359		369,562		716,655		1,112,298
Gross Profit	$	946,855	$	969,331	$	3,058,011	$	2,672,195

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Supplemental Balance Sheet Disclosures (Tables)

9 Months Ended

Jun. 30, 2023

Supplemental Balance Sheet Disclosures

Schedule of preliminary allocation of the purchase consideration

Cash consideration	$	35,860,000
Total consideration	$	35,860,000
Prepaid inventory	$	10,036,160
Equipment		2,609,000
Construction in progress		1,238,000
Intangible assets (a)		20,900,000
Goodwill (b)		4,608,041
Assets acquired		39,391,201
Accrued expenses		(3,531,201)
Liabilities assumed		(3,531,201)
Net assets acquired	$	35,860,000

(a) Intangible assets consist of license agreements related to the license rights to use certain Honeywell intellectual property and customer relationships and are recorded at provisional estimated fair values. The provisional estimated fair value of the license agreement is based on a variation of the income valuation approach and is determined using the relief from royalty method. The provisional estimated fair value of the customer relationships is based on a variation of the income valuation approach known as the multi-period excess earnings method. Refer to Note, “Intangible assets” for further details.

(b) Goodwill represents the excess of the preliminary purchase consideration over the provisional fair value of the assets acquired and liabilities assumed. The goodwill recognized is primarily attributable to the expected synergies from the Transaction. Goodwill resulting from the Transaction has been provisionally assigned to the Company’s one operating segment; the assignment of goodwill to reporting units is not complete. The goodwill is not expected to be deductible for income tax purposes. Further, the Company determined that the preliminary goodwill was not impaired as of June 30, 2023 and as such, no impairment charges have been recorded for the three-and nine-month periods ended June 30, 2023.

Summary of unaudited pro forma consolidated information

Three Months Ended June 30,		Nine Months Ended June 30,
2023	2022	2023	2022

Net sales	$	11,865,707	$	12,071,221	$	36,118,352	$	37,553,854
Net income	$	2,661,132	$	2,690,013	$	7,439,335	$	8,444,970

Schedule of inventories

	June 30,		September 30,
	2023		2022
Raw materials	$	5,115,987	$	4,451,045
Work-in-process		570,487		795,723
Finished goods		56,139		102,336
	$	5,742,613	$	5,349,104

Schedule of prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

	June 30,		September 30,
	2023		2022
Prepaid insurance	$	614,700	$	777,311
Other		775,334		365,159
	$	1,390,034	$	1,142,470

Summary of intangible assets other than goodwill

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

	As of June 30, 2023
	Gross Carrying		Accumulated		Accumulated		Net Carrying
	Value		Impairment			Amortization	Value
License agreement acquired from the Transaction (a)	$	7,870,000	$	—	$	—	$	7,870,000
Customer relationships acquired from the Transaction (a)		13,030,000		—		—		13,030,000
Licensing and certification rights (b)		696,506		(44,400)		(637,221)		14,885
Total	$	21,596,506	$	(44,400)	$	(637,221)	$	20,914,885

	As of September 30, 2022
	Gross Carrying		Accumulated		Accumulated		Net Carrying
	Value		Impairment		Amortization		Value
Licensing and certification rights (b)	$	696,506	$	—	$	(636,158)	$	60,348
Total	$	696,506	$	—	$	(636,158)	$	60,348

(a) As part of the Transaction, the Company acquired intangible assets related to the license agreement for the license rights to use certain Honeywell intellectual property, and customer relationships. The gross carrying values are preliminary estimates and may be subject to change within the measurement period – refer to Note, “Acquisition” for further details. The license agreement has an indefinite life and is not subject to amortization; the customer relationships have an estimated weighted average life of ten years. The Company determined that the preliminary intangible assets were not impaired as of June 30, 2023 and as such, no impairment charges have been recorded for the three-and nine-month periods ended June 30, 2023.

(b) The licensing and certification rights are amortized over a defined number of units. An impairment charge of $44,400 was recorded during the three-and nine-month periods ended June 30, 2023. No impairment charges were recorded during the three-and nine-month periods ended June 30, 2022.

Summary of expected future amortization expense related to the customer relationships

2023 (three months remaining)	$	325,750
2024		1,303,000
2025		1,303,000
2026		1,303,000
2027		1,303,000
Thereafter		7,492,250
Total	$	13,030,000

Schedule of property and equipment, net

	June 30,		September 30,
	2023		2022
Computer equipment	$	2,325,721	$	2,307,139
Corporate airplanes		2,406,468		2,406,468
Furniture and office equipment		976,993		976,993
Manufacturing facility		5,889,491		5,889,491
Equipment		8,292,277		5,624,966
Land		1,021,245		1,021,245
Construction in progress		1,238,000		—
		22,150,195		18,226,302
Less: accumulated depreciation and amortization		(12,103,751)		(11,934,113)
	$	10,046,444	$	6,292,189

Schedule of other assets

	June 30,		September 30,
	2023		2022
Operating lease right-of-use asset	$	18,407	$	28,680
Other non-current assets		179,926		75,300
	$	198,333	$	103,980

Schedule of accrued expenses

	June 30,		September 30,
	2023		2022
Warranty	$	589,048	$	607,001
Salary, benefits and payroll taxes		746,576		1,030,628
Professional fees		119,129		364,794
Operating lease		13,125		13,615
Supplier purchase orders		3,531,201		—
Other		275,962		956,237
	$	5,275,041	$	2,972,275

Schedule of warranty cost and accrual information

	Three Months Ending		Nine Months Ending
	June 30, 2023		June 30, 2023
Warranty accrual, beginning of period	$	587,650	$	607,001
Accrued expense		29,119		63,495
Warranty cost		(27,721)		(81,448)
Warranty accrual, end of period	$	589,048	$	589,048

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Earnings Per Share (Tables)

9 Months Ended

Jun. 30, 2023

Earnings Per Share

Schedule of earnings per share

	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Numerator:
Net income	$	1,423,379	$	1,359,174	$	3,393,133	$	3,921,802
Denominator:
Basic weighted average shares		17,576,969		17,261,349		17,415,358		17,253,822
Dilutive effect of share-based awards		619		4,449		3,907		1,483
Diluted weighted average shares		17,577,588		17,265,798		17,419,265		17,255,305
Earnings per common share:
Basic EPS	$	0.08	$	0.08	$	0.19	$	0.23
Diluted EPS	$	0.08	$	0.08	$	0.19	$	0.23

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Leases (Tables)

9 Months Ended

Jun. 30, 2023

Leases

Schedule of lease-related assets and liabilities reported in the Consolidated Balance Sheet

Classification on the Consolidated Balance Sheet on June 30, 2023
Assets
Operating leases	Other assets	$	18,407
Liabilities
Operating leases- current	Accrued expenses	$	13,125
Operating leases – noncurrent	Other liabilities	$	5,282
Total lease liabilities		$	18,407

Schedule of future minimum lease payments under operating leases

Future minimum lease payments under operating leases are as follows at June 30, 2023:

	Twelve Months
	Ending	Operating
	June 30,	Leases
	2024	$	14,676
	2025		6,115
Total minimum lease payments		$	20,791
Amount representing interest			(2,384)
Present value of minimum lease payments			18,407
Current portion			(13,125)
Long-term portion of lease obligations		$	5,282

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Loan Agreement (Tables)

9 Months Ended

Jun. 30, 2023

Loan Agreement

Schedule of fixed mandatory principal repayments due on the outstanding Term Loan

Twelve Months
Ending
June 30,
2024	2,000,000
2025	2,000,000
2026	2,000,000
2027	2,000,000
2028	12,000,000
	20,000,000

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Summary of Significant Accounting Policies (Details)	3 Months Ended		9 Months Ended
	Jun. 30, 2023 USD ($)	Jun. 30, 2022 USD ($)	Jun. 30, 2023 USD ($) segment	Jun. 30, 2022 USD ($)	Sep. 30, 2022 USD ($)
Number of business segments
Number of business segments in which the entity operates | segment			1
Contract Balances
Balance at beginning of the period (Contract Assets)			$ 162,742
Balance at beginning of the period (Contract Liabilities)			259,183
Contract asset additions			89,420
Performance obligations satisfied during the period that were included in the contract liability balance at the beginning of the period (Contract Liabilities)			(240,944)
Increases due to invoicing prior to satisfaction of performance obligations (Contract Liabilities)			84,714
Balance at end of the period (Contract Assets)	$ 252,162		252,162
Balance at end of the period (Contract Liabilities)	102,953		102,953
Customer Service Revenue
Customer Service Cost of Sales	3,224,562	$ 2,879,462	8,617,317	$ 8,270,729
Gross profit	4,734,646	4,056,514	$ 13,198,600	12,206,845
Engineering Development
Percentage of employees who were engineers engaged in various engineering development projects			23.00%
Warranty
Standard warranty period			24 months
Self-Insurance Reserves
Estimated liability for medical claims incurred but not reported	53,419		$ 53,419		$ 51,590
Excess of funded premiums over estimated claims incurred but not reported	432,703		432,703		424,155
Reclassification of other intangible assets	0	0	0	0	$ 60,348
Customer Service
Customer Service Revenue
Customer Service Sales	1,318,214	1,338,893	3,774,666	3,784,493
Customer Service Cost of Sales	371,359	369,562	716,655	1,112,298
Gross profit	$ 946,855	$ 969,331	$ 3,058,011	$ 2,672,195
Property Plant and Equipment Other than Air Transportation Equipment and Manufacturing Facility | Minimum
Number of business segments
Estimated useful lives	3 years		3 years
Property Plant and Equipment Other than Air Transportation Equipment and Manufacturing Facility | Maximum
Number of business segments
Estimated useful lives	7 years		7 years
Manufacturing facility
Number of business segments
Estimated useful lives	39 years		39 years
Corporate airplane
Number of business segments
Estimated useful lives	10 years		10 years

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Summary of Significant Accounting Policies - Fair Value (Details) - USD ($)	Jun. 30, 2023	Sep. 30, 2022
Fair Value, Measurements, Recurring | Quoted Price in Active Markets for Identical Assets (Level 1) | Money Market Funds
Assets
Cash and cash equivalents	$ 2,545,241	$ 16,083,571

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Summary of Significant Accounting Policies - Revenue Recognition (Details)	9 Months Ended
	Jun. 30, 2023
Revenue Recognition.
Revenue, remaining performance obligation, optional exemption, performance obligation [true false]	true

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Summary of Significant Accounting Policies - Concentration Risk (Details)	3 Months Ended		9 Months Ended
	Jun. 30, 2023 item customer	Jun. 30, 2022 customer	Jun. 30, 2023 customer item	Jun. 30, 2022 item customer
Concentration of Credit Risk
Number of banks for maintenance of cash balances	2		2
Revenues Net | Customer Concentration Risk
Concentrations
Number of major customers | customer	3	3	3	3
Revenues Net | Customer Concentration Risk | Pilatus Aircraft Ltd ("Pilatus")
Concentrations
Concentration of risk (as a percent)	25.00%	27.00%	27.00%	27.00%
Revenues Net | Customer Concentration Risk | Air Transport Services Group
Concentrations
Concentration of risk (as a percent)	24.00%		18.00%	10.00%
Revenues Net | Customer Concentration Risk | Textron Aviation, Inc
Concentrations
Concentration of risk (as a percent)	10.00%	16.00%	10.00%	11.00%
Revenues Net | Customer Concentration Risk | Cargojet Inc. ("Cargojet")
Concentrations
Concentration of risk (as a percent)		14.00%
Inventory | Supplier Concentration Risk
Concentrations
Number of major suppliers	0			2

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Supplemental Balance Sheet Disclosures - Acquisition (Details) - Honeywell International, Inc		9 Months Ended
	Jun. 30, 2023 USD ($)	Jun. 30, 2023 USD ($)
Business Acquisition [Line Items]
Preliminary purchase consideration transferred	$ 35,860,000
Asset Purchase and License Agreement
Business Acquisition [Line Items]
Preliminary purchase consideration transferred		$ 35,900,000
Incurred acquisition costs	262,099	262,099
Asset Purchase and License Agreement | PNC Bank [Member] | Term loan
Business Acquisition [Line Items]
Debt instrument face amount	20,000,000.0	20,000,000.0
Transition services agreement
Business Acquisition [Line Items]
Business combination recognized prepaid expenses and other current assets	$ 140,000	$ 140,000

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Supplemental Balance Sheet Disclosures - Preliminary allocation of the purchase consideration (Details)		9 Months Ended
	Jun. 30, 2023 USD ($)	Jun. 30, 2023 USD ($)
Business Acquisition [Line Items]
Goodwill	$ 4,608,041	$ 4,608,041
Honeywell International, Inc
Business Acquisition [Line Items]
Cash consideration	35,860,000
Total consideration	35,860,000
Prepaid inventory	10,036,160	10,036,160
Equipment	2,609,000	2,609,000
Intangible assets	20,900,000	20,900,000
Goodwill	4,608,041	4,608,041
Assets acquired	39,391,201	39,391,201
Accrued expenses	(3,531,201)	(3,531,201)
Liabilities assumed	(3,531,201)	(3,531,201)
Net assets acquired	35,860,000	35,860,000
Honeywell International, Inc | Asset Purchase and License Agreement
Business Acquisition [Line Items]
Total consideration		35,900,000
Construction in progress | Honeywell International, Inc
Business Acquisition [Line Items]
Assets acquired	$ 1,238,000	$ 1,238,000

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Supplemental Balance Sheet Disclosures - Intangible assets (Details) - USD ($)	3 Months Ended		9 Months Ended
	Jun. 30, 2023	Jun. 30, 2022	Jun. 30, 2023	Jun. 30, 2022	Sep. 30, 2022
Finite-Lived Intangible Assets, Net
Accumulated Impairment	$ (44,400)		$ (44,400)
Accumulated Amortization	(637,221)		(637,221)		$ (636,158)
Intangible asset amortization expense	1,063	$ 0	1,063	$ 1,063
Intangible Assets, Net (Excluding Goodwill)
Gross Carrying Value	21,596,506		21,596,506		696,506
Accumulated Impairment	(44,400)		(44,400)
Accumulated Amortization	(637,221)		(637,221)		(636,158)
Net Carrying Value	20,914,885		20,914,885		60,348
Customer relationships acquired from the Transaction
Finite-Lived Intangible Assets, Net
Gross Carrying Value	13,030,000		13,030,000
Total	$ 13,030,000		$ 13,030,000
Estimated weighted average life	10 years		10 years
Impairment charges	$ 0		$ 0
Licensing and certification rights
Finite-Lived Intangible Assets, Net
Gross Carrying Value	696,506		696,506		696,506
Accumulated Impairment	(44,400)		(44,400)
Accumulated Amortization	(637,221)		(637,221)		(636,158)
Total	14,885		14,885		60,348
Impairment charges	44,400	$ 0	44,400	$ 0
Intangible Assets, Net (Excluding Goodwill)
Accumulated Impairment	(44,400)		(44,400)
Accumulated Amortization	(637,221)		(637,221)		$ (636,158)
Licensing and certification rights
Indefinite-Lived Intangible Assets (Excluding Goodwill)
Gross Carrying Value	7,870,000		7,870,000
Net Carrying Value	$ 7,870,000		$ 7,870,000

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Supplemental Balance Sheet Disclosures - Intangible assets timing of future amortization expense (Details) - Customer relationships acquired from the Transaction	Jun. 30, 2023 USD ($)
Expected future amortization expense
2023 (three months remaining)	$ 325,750
2024	1,303,000
2025	1,303,000
2026	1,303,000
2027	1,303,000
Thereafter	7,492,250
Total	$ 13,030,000

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Supplemental Balance Sheet Disclosures - Inventories and Prepaid expenses and other current assets (Details) - USD ($)	Jun. 30, 2023	Sep. 30, 2022
Inventory Valuation
Raw materials	$ 5,115,987	$ 4,451,045
Work-in-process	570,487	795,723
Finished goods	56,139	102,336
Total inventories	5,742,613	5,349,104
Prepaid expenses and other current assets
Prepaid insurance	614,700	777,311
Other	775,334	365,159
Total prepaid expenses and other current assets	$ 1,390,034	$ 1,142,470

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Supplemental Balance Sheet Disclosures - Property and Equipment & Other Assets (Details) - USD ($)	3 Months Ended		9 Months Ended
	Jun. 30, 2023	Jun. 30, 2022	Jun. 30, 2023	Jun. 30, 2022	Sep. 30, 2022
Property and Equipment
Property and equipment, gross	$ 22,150,195		$ 22,150,195		$ 18,226,302
Less: accumulated depreciation and amortization	(12,103,751)		(12,103,751)		(11,934,113)
Property and equipment, net	10,046,444		10,046,444		6,292,189
Depreciation and amortization for property and equipment	86,439	$ 89,072	257,829	$ 269,567
Other assets
Operating lease right-of-use asset	18,407		18,407		28,680
Other non-current assets	179,926		179,926		75,300
Total other assets	198,333		198,333		103,980
Accumulated amortization of intangible assets	637,221		637,221		636,158
Intangible asset amortization expense	1,063	0	1,063	1,063
Prepaid software licenses	56,855		56,855		0
Computer equipment
Property and Equipment
Property and equipment, gross	2,325,721		2,325,721		2,307,139
Corporate airplane
Property and Equipment
Property and equipment, gross	2,406,468		2,406,468		2,406,468
Furniture and office equipment
Property and Equipment
Property and equipment, gross	976,993		976,993		976,993
Manufacturing facility
Property and Equipment
Property and equipment, gross	5,889,491		5,889,491		5,889,491
Equipment
Property and Equipment
Property and equipment, gross	8,292,277		8,292,277		5,624,966
Land
Property and Equipment
Property and equipment, gross	1,021,245		1,021,245		$ 1,021,245
Construction in progress
Property and Equipment
Property and equipment, gross	1,238,000		1,238,000
Prepaid software licenses
Other assets
Intangible asset amortization expense	$ 2,601	$ 2,021	$ 2,601	$ 7,534

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Supplemental Balance Sheet Disclosures - Accrued Expenses (Details) - USD ($)	3 Months Ended	9 Months Ended
	Jun. 30, 2023	Jun. 30, 2023	Sep. 30, 2022
Accrued expenses
Warranty	$ 589,048	$ 589,048	$ 607,001
Salary, benefits and payroll taxes	746,576	746,576	1,030,628
Professional fees	119,129	119,129	364,794
Operating lease	$ 13,125	$ 13,125	13,615
Operating Lease, Liability, Current, Statement of Financial Position [Extensible List]	Total accrued expenses	Total accrued expenses
Supplier purchase orders	$ 3,531,201	$ 3,531,201
Other	275,962	275,962	956,237
Total accrued expenses	5,275,041	5,275,041	$ 2,972,275
Warranty cost and accrual information
Warranty accrual, beginning of period	587,650	607,001
Accrued expense	29,119	63,495
Warranty cost	(27,721)	(81,448)
Warranty accrual, end of period	$ 589,048	$ 589,048

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Supplemental Balance Sheet Disclosures - Summary of unaudited pro forma consolidated information (Details) - Honeywell International, Inc - USD ($)	3 Months Ended		9 Months Ended
	Jun. 30, 2023	Jun. 30, 2022	Jun. 30, 2023	Jun. 30, 2022
Business Acquisition [Line Items]
Net sales	$ 11,865,707	$ 12,071,221	$ 36,118,352	$ 37,553,854
Net income	$ 2,661,132	$ 2,690,013	$ 7,439,335	$ 8,444,970

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Income Taxes (Details)	3 Months Ended		9 Months Ended
	Jun. 30, 2023	Jun. 30, 2022	Jun. 30, 2023	Jun. 30, 2022
Income Taxes
Effective tax rate (as a percent)	19.30%	20.90%	20.50%	21.20%

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Shareholders' Equity and Share-Based Payments (Details) - USD ($)	3 Months Ended		9 Months Ended
	Jun. 30, 2023	Jun. 30, 2022	Jun. 30, 2023	Jun. 30, 2022	Sep. 30, 2022
Shareholders' Equity and Share-Based Payments
Common stock, shares authorized	75,000,000		75,000,000		75,000,000
Preferred stock, shares authorized	10,000,000		10,000,000		10,000,000
2019 Plan
Shareholders' Equity and Share-Based Payments
Common stock, shares authorized	139,691		139,691
Share-based compensation expense	$ 214,084	$ 58,419	$ 1,230,655	$ 308,599
Unrecognized compensation cost, related to non-vested stock options	$ 260,398		$ 260,398
2019 Plan | Maximum
Shareholders' Equity and Share-Based Payments
Number of shares of common stock reserved for awards	750,000		750,000
2019 Plan | Employee
Shareholders' Equity and Share-Based Payments
Share-based compensation expense	$ 164,342	45,088	$ 954,140	135,273
2019 Plan | Non Employee Director
Shareholders' Equity and Share-Based Payments
Share-based compensation expense	$ 49,742	$ 13,331	$ 276,515	$ 173,326

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Earnings Per Share (Details) - USD ($)	3 Months Ended		9 Months Ended
	Jun. 30, 2023	Jun. 30, 2022	Jun. 30, 2023	Jun. 30, 2022
Numerator:
Net income	$ 1,423,379	$ 1,359,174	$ 3,393,133	$ 3,921,802
Denominator:
Basic weighted average shares	17,576,969	17,261,349	17,415,358	17,253,822
Dilutive effect of share-based awards	619	4,449	3,907	1,483
Diluted weighted average shares	17,577,588	17,265,798	17,419,265	17,255,305
Earnings per common share:
Basic EPS	$ 0.08	$ 0.08	$ 0.19	$ 0.23
Diluted EPS	$ 0.08	$ 0.08	$ 0.19	$ 0.23
Options to purchase common stock outstanding (in shares)	128,815	100,000	128,815	100,000
Restricted stock units outstanding (in shares)	76,636	0	76,636	0
Diluted weighted-average shares outstanding excluded from computation of diluted EPS (in shares)	312,210	0	196,577	66,667

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Related Party Transactions (Details) - USD ($)	3 Months Ended		9 Months Ended
	Jun. 30, 2023	Jun. 30, 2022	Jun. 30, 2023	Jun. 30, 2022	Sep. 30, 2022
Related Party Transactions
Acquiring of shares	10.00%		10.00%
Investor
Related Party Transactions
Sales amount to Eclipse	$ 155,000	$ 57,000	$ 231,000	$ 574,000
Contract liability to Eclipse	$ 25,000		$ 25,000		$ 123,000

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Leases (Details) - USD ($)	3 Months Ended	9 Months Ended
	Jun. 30, 2023	Jun. 30, 2023	Sep. 30, 2022
Leases
Operating leases	$ 18,407	$ 18,407	$ 28,680
Operating Lease, Right-of-Use Asset, Statement of Financial Position [Extensible List]	Other Assets, Noncurrent	Other Assets, Noncurrent
Operating leases- current	$ 13,125	$ 13,125	$ 13,615
Operating Lease, Liability, Current, Statement of Financial Position [Extensible List]	Accrued Liabilities, Current	Accrued Liabilities, Current
Operating leases - noncurrent	$ 5,282	$ 5,282
Operating Lease, Liability, Noncurrent, Statement of Financial Position [Extensible List]	Other Liabilities, Noncurrent	Other Liabilities, Noncurrent
Present value of minimum lease payments	$ 18,407	$ 18,407
Operating leases expenses	$ 3,669	$ 11,007
Weighted average remaining lease term	1 year 4 months 24 days	1 year 4 months 24 days
Weighted average discount rate	5.00%	5.00%

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Leases - Future minimum lease payments (Details) - USD ($)	Jun. 30, 2023	Sep. 30, 2022
Future minimum lease payments under operating leases
2024	$ 14,676
2025	6,115
Total minimum lease payments	20,791
Amount representing interest	(2,384)
Present value of minimum lease payments	18,407
Current portion	(13,125)	$ (13,615)
Long-term portion of lease obligations	$ 5,282
Operating Lease, Liability, Current, Statement of Financial Position [Extensible List]	Accrued Liabilities, Current

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Loan Agreement (Details) - USD ($)		9 Months Ended
	Jun. 30, 2023	Jun. 30, 2023	Jun. 28, 2023	May 11, 2023
Senior secured revolving line of credit
Loan Agreement
Aggregate principal amount				$ 10,000,000
Annual commitment fee (in percent)		0.15%
Amount drawn		$ 0
SOFR | Senior secured revolving line of credit
Loan Agreement
Adjustment to variable interest rate		10.00%
SOFR | Minimum | Senior secured revolving line of credit
Loan Agreement
Applicable Margin		1.50%
SOFR | Maximum | Senior secured revolving line of credit
Loan Agreement
Applicable Margin		2.50%
Senior secured term loan
Loan Agreement
Aggregate principal amount			$ 20,000,000.0
Future interest payments, Remainder of fiscal 2023	$ 400,000	$ 400,000
Future interest payments, fiscal 2024	1,500,000	1,500,000
Future interest payments, fiscal 2025	1,300,000	1,300,000
Future interest payments, fiscal 2026	1,100,000	1,100,000
Future interest payments, thereafter	$ 1,600,000	$ 1,600,000
Adjustment to variable interest rate		10.00%
Amortization period of debt	10 years
Balance	$ 20,000,000	$ 20,000,000
Fixed mandatory principal repayments due on the outstanding Term Loan
2024	2,000,000	2,000,000
2025	2,000,000	2,000,000
2026	2,000,000	2,000,000
2027	2,000,000	2,000,000
2028	12,000,000	12,000,000
Total	$ 20,000,000	$ 20,000,000
Senior secured term loan | Maximum
Loan Agreement
Amortization period of debt in equal monthly principal installments	60 months
Senior secured term loan | SOFR | Minimum
Loan Agreement
Applicable Margin		1.50%
Senior secured term loan | SOFR | Maximum
Loan Agreement
Applicable Margin		2.50%