Acquisition

12 Months Ended

Sep. 30, 2023

Acquisition

Acquisition

4.  Acquisition

On June 30, 2023, the Company entered into the Honeywell 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”). 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 20, “Loan Agreement” for further details. The 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. The allocation of the purchase price has not been finalized as of the date of this filing due to fact that while legal control has occurred, the Company has not received physical possession of the prepaid inventory, equipment and construction in progress, and thus these assets will be subject to settlement adjustments upon transfer as outlined in the Honeywell Agreement. The transfer of the prepaid inventory, equipment and construction in progress is expected to occur within the measurement period. As a result, the purchase price amount for the Transaction and the allocation of the preliminary purchase consideration for prepaid inventory, equipment, construction in progress and goodwill are preliminary estimates, which may be subject to change within the measurement period.

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

	Amounts Recognized as of
	Acquisition Date		Measurement			Purchase Price
	(as previously reported)		Period Adjustments			Allocation
Cash consideration	$	35,860,000	$	—		$	35,860,000
Total consideration	$	35,860,000	$	—		$	35,860,000
							—
Prepaid inventory (a)	$	10,036,160	$	2,032,954	(1)	$	12,069,114
Equipment		2,609,000		(54,000)	(1)		2,555,000
Construction in progress		1,238,000		—			1,238,000
Intangible assets (b)		20,900,000		(4,460,000)	(1)		16,440,000
Goodwill (c)		4,608,041		(1,050,155)	(1)(2)		3,557,886
Assets acquired		39,391,201		(3,531,201)			35,860,000
Accrued expenses		(3,531,201)		3,531,201	(2)		—
Liabilities assumed		(3,531,201)		3,531,201			—
Net assets acquired	$	35,860,000	$	—		$	35,860,000

(a) Prepaid inventory consists of raw materials and finished goods acquired by the Company but not in the Company’s physical possession as of the Acquisition Date. The fair value of raw materials was estimated to equal the replacement cost. The fair value of finished goods was determined based on the estimated selling price, net of selling costs and a margin on the selling activities, which resulted in a step-up in the value of the finished goods.

(b) Intangible assets consist of license agreements related to the license rights to use certain Honeywell intellectual property and customer relationships and are recorded at estimated fair values. The 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 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 5, “Intangible assets” for further details.

(c) Goodwill represents the excess of the purchase consideration over the preliminary fair value of the net assets acquired. The goodwill recognized is primarily attributable to the expected synergies from the Transaction. Goodwill resulting from the Transaction has been assigned to the Company’s one reporting unit. The goodwill is not expected to be deductible for income tax purposes. Further, the Company determined that the goodwill was not impaired as of September 30, 2023 and as such, no impairment charges have been recorded for the year ended September 30, 2023.

(1) During the fiscal fourth quarter of 2023, the Company identified measurement period adjustments related to fair value estimates. The measurement period adjustments resulted from the refinement of inputs used to calculate the fair value of the prepaid inventory, equipment, license agreement, and customer relationships based on facts and circumstances that existed as of the Acquisition Date. The adjustments resulted in an overall increase to goodwill of $2.5 million. Additionally, the change to the fair value estimates did not have a material impact to the consolidated statements of operations for the year ended September 30, 2023.

(2) During the fourth quarter of fiscal year 2023, the Company identified measurement period adjustments related to the preliminary fair value estimates for accrued expenses. While the Honeywell Agreement indicated an amount of liabilities related to open supplier purchase orders to be assumed by the Company as of the Acquisition Date, it was determined that there were no actual liabilities outstanding as relates to these open supplier purchase orders as of the Acquisition Date; therefore, the $3.5 million assumed liabilities preliminarily recorded were reversed. The adjustments resulted in an overall decrease to goodwill of $3.5 million; the adjustments have no impact to the consolidated statements of operations for the year ended September 30, 2023.

Transition services agreement

Concurrent with the Transaction, the Company entered into a transition services agreement (the “TSA”) with Honeywell, at no additional cost, to receive certain transitional services and technical support during the transition service period. The Company accounted for the TSA separate from the business combination and has recognized $140,000 in prepaid expenses and other current assets within the consolidated balance sheet as of the Acquisition Date 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 year ended September 30, 2023, the Company incurred acquisition costs of $408,961, 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

For the year ended September 30, 2023, the Company recognized $5.8 million of revenues and $3.0 million of 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:

	Year Ended September 30,
	2023		2022
Net sales	$	43,757,196	$	49,218,764
Net income	$	8,542,330	$	9,716,082

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 are 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.