Share-Based Compensation

12 Months Ended

Sep. 30, 2023

Share-Based Compensation

Share-Based Compensation

15.  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.

Total share-based compensation expense was approximately $1,336,000, $345,000, and $341,000 for the fiscal years ended September 30, 2023, 2022 and 2021, respectively. The income tax impact recognized as a credit to additional paid in capital in the statement of shareholders’ equity related to share-based compensation arrangements was $756,000, $166,617 and $181,350 for the fiscal years ended September 30, 2023, 2022 and 2021, respectively. Compensation expense related to share-based awards is recorded as a component of selling, general and administrative expenses.

2019 Stock-Based Incentive Compensation Plan

The 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. As of September 30, 2023, there were 262,000 shares of common stock available for awards under the 2019 Plan.

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.

Following is a summary of option activity under the 2019 Plan for the fiscal year ended September 30, 2023, and changes during the periods then ended:

		Weighted
		Average		Aggregate
		Exercise		Intrinsic
	Options	Price		Value
Outstanding at September 30, 2021	100,000	$	7.10	$	—
Granted	—		—		—
Exercised	(42,416)		8.26		64,896
Cancelled	—		—		—
Outstanding at September 30, 2022	57,584	$	7.10	$	88,104
Granted	224,374		8.19		—
Exercised	(57,584)		7.10		28,792
Cancelled	—		—		—
Outstanding at September 30, 2023	224,374	$	8.19	$	—
Vested and expected to vest	69,796	$	8.20	$	—
Options exercisable at September 30, 2023	154,578	$	8.19	$	—

The following table summarizes information about stock options under the 2019 Plan at September 30, 2023:

Options Outstanding					Options Exercisable
	Outstanding	Weighted-
	As of	Average	Weighted-		As of	Weighted-
Range of Exercise	September 30,	Remaining	Average		September 30,	Average
Prices	2023	Contractual Life	Exercise Price		2023	Exercise Price
$0.00 - $9.00	224,374	9.4	$	8.20	154,578	$	8.19

Fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. Options are exercisable over a maximum term of ten years from date of grant and vest typically over periods of three to five years from the grant date. The expected term of options represents the period of time that options granted are expected to be outstanding and is based on historical experience and the expected turnover rate of the employees receiving the options. Expected volatility is based on historical volatility of the Company’s stock. The risk free interest rate is based on U.S. Treasuries with maturities consistent with the expected life of the options in effect at the time of grant. Compensation expense for employee stock options includes an estimate for forfeitures and is recognized ratably over the vesting term.

Below are the fair value assumptions used to record stock option compensation expense, related to the 2019 Plan, for the following periods identified:

	Fiscal Year Ended September 30,
	2023		2022 (1)		2021 (1)
Expected dividend rate	—		—		—
Expected volatility	55.1	%	—	%	—	%
Weighted average risk-free interest rate	3.7	%	—	%	—	%
Expected lives (years)	5.3		—		—

(1) The Company did not grant any options in fiscal 2022 and 2021.

Total compensation expense associated with stock option awards to employees under the 2019 Plan was approximately $756,000, $164,000 and $181,000 for fiscal years ended September 30, 2023, 2022 and 2021, respectively.

At September 30, 2023, unrecognized compensation expense of $205,000, net of forfeitures, related to non-vested stock options under the 2019 Plan, will be recognized.

Restricted Stock Units

During fiscal 2023, the Company’s Board of Directors (the “Board”) approved grants of RSUs to the non-employee directors on the Board as compensation for their services from the beginning of calendar year 2023 to vest on the date of the Company’s 2023 Annual Meeting of Shareholders. After the 2023Annual Meeting of Shareholders, the Board approved grants of RSUs to the non-employee directors on the Board as compensation for their services. Under the terms of the awards, the RSUs will vest on the first anniversary of the grant date. At the time of vesting, the RSUs will be settled in shares of the Company’s common stock at a rate of one share of stock for each unit, provided that, if a director resigns from the Board prior to the vesting date, such director shall only receive a pro rata portion of such award for time served.

During fiscal 2023, the Board approved grants of RSUs to both the Chief Executive Officer and the former Chief Financial Officer. Certain RSUs to the Chief Executive Officer vested immediately, and the remainder will vest quarterly over a three-year period. The approved grants of the RSUs to the former Chief Financial Officer will vest over a four-year period. On November 8, 2023, Michael Linacre, Chief Financial Officer of Innovative Solutions and Support, Inc., notified the Company of his resignation from all of his positions with the Company, effective immediately, which resulted in the forfeiture of 11,503 RSUs.

As of September 30, 2023, there were 101,968 unvested restricted stock units outstanding under the 2019 Plan. As of September 30, 2022, and September 30, 2021 there were 32,897 and 25,396 respectively, unvested restricted stock units outstanding under the 2019 Plan.

	Non-vested	Weighted Average
	Stock Awards	Share Price
Balance at September 30, 2021	25,396	$	6.30
Granted	38,986		6.52
Issued	(27,425)		6.32
Cancelled	(4,059)		6.57
Balance at September 30, 2022	32,897	$	6.51
Granted	133,554		8.00
Issued	(64,483)		7.51
Cancelled	—		—
Balance at September 30, 2023	101,968	$	7.84

Total share-based compensation expense associated with the annual grant of stock awards to non-employee directors under the 2019 Plan was approximately $212,000, $178,000 and $160,000 for the fiscal years ended September 30, 2023, 2022 and 2021, respectively.

Total share-based compensation expense associated with the annual grant of stock awards to employees under the 2019 Plan was approximately $368,000, $3,000 and $0 for the fiscal years ended September 30, 2023, 2022 and 2021, respectively.

At September 30, 2023, unrecognized compensation expense of $659,000, net of forfeitures, related to non-vested stock awards under the 2019 Plan, will be recognized.