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Supplemental Balance Sheet Disclosures

6 Months Ended

Mar. 31, 2024

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. The allocation of the purchase price has not been finalized as of the date of this filing due to the fact that, while legal control has been transferred, the Company has not received physical possession of all 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 Asset Purchase and License 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, may be subject to change within the measurement period.

The preliminary allocation of the 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	^(d)	$	12,069,114
Equipment		2,609,000		(54,000)	^(d)		2,555,000
Construction in progress		1,238,000		—			1,238,000
Intangible assets ^(b)		20,900,000		(4,460,000)	^(d)		16,440,000
Goodwill ^(c)		4,608,041		(1,050,155)	^(d)(e)		3,557,886
Assets acquired		39,391,201		(3,531,201)			35,860,000
Accrued expenses		(3,531,201)		3,531,201	^(e)		—
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 agreement 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 Intangible assets within Note 2, “Supplemental Balance Sheet Disclosures” for further details.

(c)

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 and one reporting unit. 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 March 31, 2024 and as such, no impairment charges have been recorded for the three- and six-month periods ended March 31, 2024; the Company also determined that the preliminary goodwill was not impaired as of September 30, 2023.

(d)

During the fourth quarter of 2023, the Company identified measurement period adjustments related to preliminary fair value estimates. The measurement period adjustments were due to the refinement of inputs used to calculate the fair value of the prepaid inventory, equipment, license agreement and customer relationships, with the assistance of an independent third-party valuation firm 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 preliminary fair value estimates did not have a material impact to the condensed consolidated statement of operations.

(e)

During the fourth quarter of 2023, the Company identified measurement period adjustments related to the preliminary fair value estimates for accrued expenses. While the Asset Purchase and License 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 related 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 condensed consolidated statement of operations.

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 at September 30, 2023 within the condensed 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

In connection with the Transaction, the Company incurred acquisition costs of $408,961, which were expensed as incurred and included in selling, general and administrative expenses in the condensed consolidated statement of operations for the year ended September 30, 2023; the debt issuance costs related to the Term Loan were not material. For the three- and six-month periods ended March 31, 2024, the Company incurred no acquisition costs.

Unaudited actual and pro forma information

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:


	Three Months Ended		Six Months Ended

	March 31, 2023
Net sales	$	12,213,137	$	24,811,043
Net income	$	2,740,693	$	5,072,071

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.

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:


	March 31,		September 30,
	2024		2023
Raw materials	$	7,611,331	$	5,162,177
Work-in-process		1,443,189		966,888
Finished goods		66,350		10,648
	$	9,120,870	$	6,139,713

Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:


	March 31,		September 30,
	2024		2023
Prepaid insurance	$	386,743	$	623,186
Other		325,029		449,826
	$	711,772	$	1,073,012

Intangible assets

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


	As of March 31, 2024
	Gross Carrying		Accumulated		Accumulated		Net Carrying
	Value		Impairment		Amortization		Value
License agreement acquired from the Transaction ^(a)	$	5,700,000	$	—	$	—	$	5,700,000
Customer relationships acquired from the Transaction ^(a)		10,740,000		—		(805,500)		9,934,500
Licensing and certification rights ^(b)		696,506		(44,400)		(638,285)		13,821
Total	$	17,136,506	$	(44,400)	$	(1,443,785)	$	15,648,321


	As of September 30, 2023
	Gross Carrying		Accumulated		Accumulated		Net Carrying
	Value		Impairment		Amortization		Value
License agreement acquired from the Transaction ^(a)	$	5,700,000	$	—	$	—	$	5,700,000
Customer relationships acquired from the Transaction ^(a)		10,740,000		—		(268,500)		10,471,500
Licensing and certification rights ^(b)		696,506		(44,400)		(638,285)		13,821
Total	$	17,136,506	$	(44,400)	$	(906,785)	$	16,185,321

(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 Acquisition within this Note 2, “Supplemental Balance Sheet Disclosures” 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 nine years and three months. The Company determined that the preliminary intangible assets were not impaired as of March 31, 2024 and September 30, 2023; no impairment charges have been recorded for the three- and six-month periods ended March 31, 2024.

(b)

The licensing and certification rights are amortized over a defined number of units. No impairment charges were recorded during the three- and six-month periods ended March 31, 2024 and 2023.

Intangible asset amortization expense was $268,500 and $0 for the three-month periods ended March 31, 2024 and 2023, respectively. Intangible asset amortization expense was charged to selling, general and administrative expense.

Intangible asset amortization expense was $537,000 and $0 for the six-month periods ended March 31, 2024 and 2023, respectively. Intangible asset amortization expense was charged to selling, general and administrative expense.

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 March 31, 2024 is as follows:


2024 (six months remaining)	$	537,000
2025		1,074,000
2026		1,074,000
2027		1,074,000
2028		1,074,000
Thereafter		5,101,500
Total	$	9,934,500

Assets Held for Sale

As of September 30, 2023, the Company classified $2.1 million of net property and equipment as “assets held for sale” on the condensed consolidated balance sheet. During the fourth quarter 2023, management of the Company implemented a plan to sell a Company-owned aircraft and commenced efforts to locate a buyer for the aircraft. On November 20, 2023, the Company sold its assets held for sale, the King Air aircraft, for $2.3 million. The resultant gain on the sale of $162,000 is a reduction to selling, general and administrative expense in the quarter ended December 31, 2023.

Property and equipment

Property and equipment, net consists of the following:


	March 31,		September 30,
	2024		2023
Computer equipment	$	3,602,893	$	2,343,996
Furniture and office equipment		977,224		970,230
Manufacturing facility		6,048,349		5,926,584
Equipment		12,593,072		9,554,197
Land		1,021,245		1,021,245
		24,242,783		19,816,252
Less accumulated depreciation and amortization		(11,792,358)		(11,923,825)
	$	12,450,425	$	7,892,427

Depreciation and amortization related to property and equipment was $146,156 and $85,981 for the three-month periods ended March 31, 2024 and 2023, respectively.

Depreciation and amortization related to property and equipment was approximately $289,077 and $171,390 for the six-month periods ended March 31, 2024 and 2023, respectively.

Other assets

Other assets consist of the following:


	March 31,		September 30,
	2024		2023
Operating lease right-of-use assets	$	8,503	$	15,065
Other non-current assets		311,201		176,657
	$	319,704	$	191,722

Other non-current assets as of March 31, 2024 includes deferred ERP implementation costs, a supplier credit from one of our suppliers and a deposit for medical claims required under the Company’s medical plan. Other non-current assets as of September 30, 2023 includes a supplier credit from one of our suppliers, a deposit for medical claims required under the Company’s medical plan and an airplane hanger deposit. In addition, other non-current assets as of March 31, 2024 and September 30, 2023 includes $44,072 and $53,585, 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 $4,905 and $0 for the three-month periods ended March 31, 2024 and 2023, respectively. Other non-current assets amortization expense was $9,513 and $0 for the six-month periods ended March 31, 2024 and 2023, respectively.

Accrued expenses

Accrued expenses consist of the following:


	March 31,		September 30,
	2024		2023
Warranty	$	574,971	$	562,645
Salary, benefits and payroll taxes		1,074,812		1,181,219
Professional fees		145,421		200,668
Operating lease		8,503		12,965
Income tax payable		—		116,697
Other		611,388		844,131
	$	2,415,095	$	2,918,325

Warranty cost and accrual information for the three- and six-month periods ended March 31, 2024 is highlighted below:


	Three Months Ending		Six Months Ended
	March 31, 2024		March 31, 2024
Warranty accrual, beginning of period	$	541,450	$	562,645
Accrued expense		53,707		73,211
Warranty cost		(20,186)		(60,885)
Warranty accrual, end of period	$	574,971	$	574,971