INNOVATIVE SOLUTIONS AND SUPPORT, INC._December 31, 2024
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Table of Contents

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 December 31, 2024

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. 001-41503

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 February 6, 2025, there were 17,545,314 shares of the Registrant’s Common Stock, with par value of $0.001 per share, outstanding.

Table of Contents

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

FORM 10-Q December 31, 2024

INDEX

 

 

Page No.

PART I.

FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements (Unaudited)

 

 

Condensed Consolidated Balance Sheets - December 31, 2024 (unaudited) and September 30, 2024

1

 

 

Condensed Consolidated Statements of Operations - Three Months Ended December 31, 2024 and 2023 (unaudited)

2

 

Condensed Consolidated Statements of Shareholders’ Equity - Three Months Ended December 31, 2024 and 2023 (unaudited)

3 - 4

 

Condensed Consolidated Statements of Cash Flows - Three Months Ended December 31, 2024 and 2023 (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

23 - 31

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31

 

 

Item 4.

Controls and Procedures

32

 

PART II.

OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

32

 

 

Item 1A.

Risk Factors

32

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

Item 3.

Defaults upon Senior Securities

33

 

 

Item 4.

Mine Safety Disclosures

33

 

 

Item 5.

Other Information

33

 

 

Item 6.

Exhibits

34

 

 

SIGNATURES

35

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1- Financial Statements

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

    

December 31, 

    

September 30, 

2024

2024

ASSETS

Current assets

Cash and cash equivalents

$

604,561

$

538,977

Accounts receivable

 

7,716,632

 

12,612,482

Contract assets

 

3,410,340

 

1,680,060

Inventories

15,506,851

 

12,732,381

Prepaid inventory

5,251,653

5,960,404

Prepaid expenses and other current assets

 

1,565,883

 

1,161,394

Total current assets

34,055,920

34,685,698

Goodwill

5,213,104

5,213,104

Intangible assets, net

26,544,011

27,012,292

Property and equipment, net

 

13,449,044

 

13,372,298

Deferred income taxes

1,841,737

1,625,144

Other assets

 

150,119

 

473,725

Total assets

$

81,253,935

$

82,382,261

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities

Accounts payable

1,876,313

2,315,479

Accrued expenses

 

4,283,466

 

4,609,294

Contract liability

358,806

340,481

Total current liabilities

6,518,585

7,265,254

Long-term debt

26,512,491

28,027,002

Other liabilities

451,351

451,350

Total liabilities

33,482,427

35,743,606

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 December 31, 2024 and September 30, 2024

 

 

Common stock, $.001 par value: 75,000,000 shares authorized, 19,635,515 and 19,599,052 issued at December 31, 2024 and September 30, 2024, respectively

19,635

19,599

Additional paid-in capital

 

55,717,125

 

55,320,500

Retained earnings

 

13,403,285

 

12,667,093

Treasury stock, at cost, 2,096,451 shares at December 31, 2024 and at September 30, 2024, respectively

 

(21,368,537)

 

(21,368,537)

Total shareholders’ equity

47,771,508

46,638,655

Total liabilities and shareholders’ equity

$

81,253,935

$

82,382,261

See accompanying notes to the unaudited condensed consolidated financial statements.

1

Table of Contents

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

Three Months Ended December 31, 

    

2024

    

2023

    

Net Sales:

Product

$

9,984,234

$

4,424,108

Services

5,984,495

4,883,955

Total net sales

 

15,968,729

 

9,308,063

Cost of sales:

Product

 

6,262,690

 

1,781,345

Services

3,095,582

2,003,556

Total cost of sales

 

9,358,272

 

3,784,901

Gross profit

 

6,610,457

 

5,523,162

Operating expenses:

Research and development

 

1,107,736

 

901,144

Selling, general and administrative

 

4,158,903

 

3,006,819

Total operating expenses

 

5,266,639

 

3,907,963

Operating income

 

1,343,818

 

1,615,199

Interest expense

 

(427,149)

 

(360,013)

Interest income

 

5,250

 

79,479

Other income

 

6

 

17,699

Income before income taxes

 

921,925

 

1,352,364

Income tax expense (benefit)

 

185,733

 

295,014

Net income

$

736,192

$

1,057,350

Net income per common share:

Basic

$

0.04

$

0.06

Diluted

$

0.04

$

0.06

Weighted average shares outstanding:

Basic

 

17,514,193

 

17,451,362

Diluted

 

17,584,037

 

17,474,906

See accompanying notes to the unaudited condensed consolidated financial statements.

2

Table of Contents

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(unaudited)

Three Months Ended December 31, 2024

Additional

Total

Common

Paid-In

Retained

Treasury

shareholders’

    

Stock

    

Capital

    

Earnings

    

Stock

    

equity

Balance, September 30, 2024

$

19,599

$

55,320,500

$

12,667,093

$

(21,368,537)

$

46,638,655

Share-based compensation

36

396,625

396,661

Net income

736,192

736,192

Balance, December 31, 2024

$

19,635

$

55,717,125

$

13,403,285

$

(21,368,537)

$

47,771,508

See accompanying notes to the unaudited condensed consolidated financial statements.

3

Table of Contents

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(unaudited)

    

    

    

    

    

Additional

Common

Paid-In

Retained

Treasury

Stock

Capital

Earnings

Stock

Total

Balance, September 30, 2023

$

19,543

$

54,317,265

$

5,668,713

$

(21,368,537)

$

38,636,984

Share-based compensation

6

205,710

205,716

Net income

 

 

 

1,057,350

 

 

1,057,350

Balance, December 31, 2023

$

19,549

$

54,522,975

$

6,726,063

$

(21,368,537)

$

39,900,050

See accompanying notes to the unaudited condensed consolidated financial statements.

4

Table of Contents

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

For the Three Months Ended December 31, 

    

2024

    

2023

    

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$

736,192

$

1,057,350

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

 

1,367,075

 

411,421

Share-based compensation expense

Stock options

 

36,078

 

105,285

Restricted stock awards and Market stock unit awards

 

360,583

 

100,431

Gain on disposal of property and equipment

 

 

(160,577)

Deferred income taxes

 

(216,593)

 

(676,483)

(Increase) decrease in:

Accounts receivable

 

4,895,851

 

4,160,121

Contract assets

 

(1,730,281)

 

(160,505)

Inventories

 

(2,065,720)

 

(1,660,222)

Prepaid inventories

 

 

560,047

Prepaid expenses and other current assets

 

(800,131)

 

153,373

Other non-current assets

 

2,973

 

(35,800)

Increase (decrease) in:

Accounts payable

 

(439,166)

 

208,523

Accrued expenses

 

(726,054)

 

(903,673)

Income taxes payable

 

402,326

 

971,497

Contract liabilities

 

18,325

 

84,947

Net cash provided by operating activities

 

1,841,458

 

4,215,735

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment

 

(261,364)

 

(182,918)

Proceeds from the sale of property and equipment

2,225,810

Net cash (used in) provided by investing activities

 

(261,364)

 

2,042,892

CASH FLOWS FROM FINANCING ACTIVITIES:

Repayments of term note

(19,500,000)

Proceeds from line of credit note

19,402,560

Repayments of line of credit note

(1,514,510)

(8,791,046)

Net cash (used in) financing activities

 

(1,514,510)

 

(8,888,486)

Net increase (decrease) in cash and cash equivalents

 

65,584

 

(2,629,859)

Cash and cash equivalents, beginning of year

 

538,977

 

3,097,193

Cash and cash equivalents, end of year

$

604,561

$

467,334

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid for interest

383,229

324,043

SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION

Transfer from prepaid inventory to inventory

$

708,751

$

Transfer from prepaid expenses to PP&E

$

119,647

$

Transfer from prepaid expenses to intangible assets, net

$

275,995

$

See accompanying notes to the unaudited condensed consolidated financial statements.

5

Table of Contents

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Summary of Significant Accounting Policies

Certain of Innovative Solutions and Support, Inc.’s (the “Company,” “IS&S,” “we” or “us”) significant accounting policies are described below. All of the Company’s significant accounting policies are disclosed in the notes to the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2024.

Description of the Company

Incorporated in Pennsylvania in 1988, ISSC is a vertically integrated provider of flight solutions and equipment to commercial air transport, general aviation markets, the United States Department of Defense (“DoD”) and allied foreign militaries.

We operate in one business segment that designs, develops, manufactures, sells and services avionics products and systems for retrofit applications and Original Equipment Manufacturers (“OEMs”).

On September 27, 2024, the Company entered into a second Asset Purchase and License Agreement (the “September 2024 Honeywell Agreement”) with Honeywell, International Inc. (“Honeywell”), pursuant to which Honeywell sold, assigned or licensed certain assets related to its various generations of military display generators and flight control computers, including a sale of certain inventory, equipment and customer-related documents; an assignment of certain contracts; and a grant of exclusive and non-exclusive licenses to use certain Honeywell intellectual property related to its various generations of military display generators and flight control computers to repair, overhaul, manufacture sell, import, export and distribute certain products to the Company for consideration of $14.2 million in cash. The exclusive licensing of these product lines from Honeywell is a unique opportunity for the Company that enhances its current offerings in the air transport, military and business aviation markets. In addition, there are potential cost synergies from better utilization of the Company’s skilled engineering team and its existing operational capacity. The Company believes the September 2024 Honeywell Agreement will help to accelerate the Company’s growth and enhance its global reputation for delivering best price-for-performance product and service solutions.

In July 2024, the Company entered into an exclusive license agreement and acquired additional key assets for certain communication and navigation product lines from Honeywell (the “July 2024 Honeywell Asset Acquisition”). This transaction complements the previous Honeywell license and asset acquisition completed in June 2023. Total consideration was $4.2 million in cash.

In June 2023, the Company entered into an Asset Purchase and License Agreement (the “June 2023 Honeywell Agreement”) with Honeywell pursuant to which Honeywell sold, assigned or licensed certain assets related to its inertial, communication and navigation product lines, including a sale of certain inventory, equipment and customer-related documents, an assignment of certain contracts and a grant of exclusive and non-exclusive licenses to use certain Honeywell intellectual property related to its inertial, communication and navigation product lines to repair, overhaul, manufacture sell, import, export and distribute certain products to the Company for cash consideration of $35.9 million.

Basis of Presentation

The accompanying unaudited condensed 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 condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the results for the interim periods presented. The condensed consolidated balance sheet as of September 30, 2024 is derived from the audited financial statements of the Company. Operating results for the three months ended December 31, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2025 which cannot be determined at this time. These unaudited condensed 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, 2024.

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Principles of Consolidation

The Company’s condensed 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 GAAP, 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, inventory obsolescence, product warranty cost liabilities, income taxes, engineering and material costs on Engineering Development Contracts (“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 condensed consolidated statements of operations in the period they are determined.

Reclassification

Historically, the Company presented Customer service and Engineering and development contracts Net Sales and Cost of sales separately on the Consolidated Statements of Operations. For the three months ended December 31, 2024, the Company has aggregated these items into one category, “Services” and reclassified Customer service and Engineering and development contracts revenues as well as Cost of sales to conform the presentation of the Consolidated Statements of Operations for three months ended December 31, 2023. For additional information, see Note, 3 Summary of Significant Accounting Policies, (“Reclassifications”) to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2024.

Business Combinations

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 condensed consolidated statements of operations.

We allocate the purchase price of acquired entities to the underlying tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values, with any excess recorded as goodwill. The valuations of the acquired assets and liabilities will impact the determination of future operating results. Determining the fair value of assets we acquire and liabilities we assume requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items. We determine the fair values of intangible assets acquired generally in consultation with third-party valuation advisors. Fair value adjustments to the

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assets and liabilities are recognized and the results of operations of the acquired business are included in our consolidated financial statements from the effective date of the acquisition.

Asset Acquisitions

Acquisitions that do not meet the definition of a business are accounted for as asset acquisitions. The Company allocates the cost of the acquisition, including direct and incremental transaction costs, to the individual assets acquired and liabilities assumed on a relative fair value basis. Goodwill is not recognized in an asset acquisition.

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 in the notes of the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2024.

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 at fiscal year-end on September 30 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:

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;
a projection or 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 condensed consolidated statements of operations.

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Fair Value of Financial Instruments

The net carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value because of the short-term nature of these instruments. The carrying value of our debt approximates fair value as the interest rate is variable and approximates current market levels. 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 December 31, 2024 and September 30, 2024, according to the valuation techniques the Company used to determine their fair values.

Fair Value Measurement on December 31, 2024

    

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

$

501,810

$

$

Fair Value Measurement on September 30, 2024

    

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

$

504,104

$

$

The December 31, 2024 money market funds balance differs from the cash and cash equivalents balance on the condensed consolidated balance sheet due to the timing of sweep transactions within the PNC cash investment accounts.

Revenue from Contracts with Customers

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.

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The Company accounts for revenue in accordance with Accounting Standards Codification (“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 in 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. In addition, the Company enters fixed-price contracts, in which the Company agrees to perform the specified work for a pre-determined price. The contractual terms of the fixed-price contracts are usually long-term, however they often contain a termination for convenience clause that results in the Company treating these contracts as short-term under ASC 606. To the extent our actual costs vary from the estimates upon which the price was negotiated, the Company will generate more or less profit or could incur a loss. 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. Payment terms are defined by when payment is typically due. 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

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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 is typically reflected in consolidated revenues. There were no material contract estimate adjustments to our condensed consolidated financial statements for the three-months ended December 31, 2024 and 2023.

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, 2024

$

1,680,060

$

340,481

Amount transferred to receivables from contract assets

 

(1,029,584)

Contract asset additions

 

2,759,864

Performance obligations satisfied during the period that were included in the contract liability balance at the beginning of the period

 

(297,610)

Increases due to invoicing prior to satisfaction of performance obligations

 

315,935

December 31,  2024

$

3,410,340

$

358,806

Concentrations

Major Customers and Products

In the three months ended December 31, 2024, three customers, Lockheed Martin, Boeing and Pilatus Aircraft Ltd (“Pilatus”), accounted for 38%, 9% and 8% of net sales, respectively.

In the three months ended December 31, 2023, one customer, Pilatus accounted for 29% of net sales.

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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 months ended December 31, 2024, the Company had one supplier that was individually responsible for greater than 10% of the Company’s total inventory related purchases.

For the three months ended December 31, 2023, the Company had three suppliers 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.

New Accounting Pronouncements

The Company considers the applicability and impact of all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company's Consolidated Financial Statements.

In November 2024, the FASB issued ASU No. 2024-03 (“ASU 2024-03”), Disaggregation of Income Statement Expenses. The guidance primarily will require enhanced disclosures about certain types of expenses. The amendments in ASU 2024-03 are effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027 and may be applied either on a prospective or retrospective basis. We are evaluating the impact of the standard on our disclosures.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires companies to enhance the disclosures about segment expenses. The new standard requires the disclosure of the Company’s Chief Operating Decision Maker (CODM), expanded incremental line-item disclosures of significant segment expenses used by the CODM for decision-making, and the inclusion of previous annual only segment disclosure requirements on a quarterly basis. This ASU should be applied retrospectively for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. We are evaluating the impact of the standard on our disclosures

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Taxes Disclosures, which requires greater disaggregation of income tax disclosures. The new standard requires additional information to be disclosed with respect to the income tax rate reconciliation and income taxes paid disaggregated by jurisdiction. This ASU should be applied prospectively for fiscal years beginning after December 15, 2024, with retrospective application permitted. We are evaluating the impact of the standard on our disclosures

Recently Adopted Accounting Pronouncements

None.

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2. Supplemental Balance Sheet Disclosures

September 2024 Honeywell Agreement

On September 27, 2024, the Company entered into and closed the transaction contemplated by the September 2024 Honeywell Agreement.

Pursuant to the September 2024 Honeywell Agreement, Honeywell sold, assigned or licensed certain assets related to its various generations of military display generators and flight control computers, including a sale of certain inventory, equipment and customer-related documents; an assignment of certain contracts; and a grant of exclusive and non-exclusive licenses to use certain Honeywell intellectual property related to its various generations of military display generators and flight control computers to repair, overhaul, manufacture sell, import, export and distribute certain products to the Company. The September 2024 Honeywell Agreement 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. The Company financed the September 2024 Honeywell Agreement with borrowings against the Company’s revolving line of credit. The purchase consideration transferred at the acquisition date was $14.2 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 timing of the transaction and due to the fact that, while legal control has been transferred, the Company has not received physical possession of certain of the acquired assets and thus these assets will be subject to settlement adjustments upon transfer as outlined in the September 2024 Honeywell Agreement. As a result, the purchase price amount for the transaction and the allocation of the preliminary purchase consideration are preliminary estimates, and may be subject to change within the measurement period.

The following purchase price allocation table presents the Company's estimates of the fair value of assets acquired and liabilities assumed as of the acquisition date, and subsequent measurement period adjustments recorded during the three months ended December 31, 2024:

Amounts Recognized as of

    

Acquisition Date

    

Measurement

    

Purchase Price

(as previously reported)

Period Adjustments

Allocation

Total consideration

$

14,060,000

$

$

14,060,000

Prepaid inventory (a)

$

3,191,000

$

$

3,191,000

Prepaid equipment and other current assets

160,000

160,000

Intangible assets (b)

9,570,000

9,570,000

Goodwill (c)

1,139,000

1,139,000

Net assets acquired

$

14,060,000

$

$

14,060,000

(a)Prepaid inventory consists primarily of raw materials 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.
(b)Intangible assets consists of backlog, customer relationships, and license agreements related to the license rights to use certain Honeywell intellectual property and are recorded at estimated fair values. The estimated fair value of these license agreements are based on a variation of the income valuation approach and are determined using the relief from royalty method. The estimated fair value of the backlog and customer relationships are based on a variation of the income valuation approach known as the multi-period excess earnings method. Refer to the Company’s 2024 10K, 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 September 2024 Honeywell

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Agreement. Goodwill resulting from the September 2024 Honeywell Agreement has been assigned to the Company’s one reporting unit.

Transition services agreement

Concurrent with the September 2024 Honeywell Agreement, the Company entered into a transition services agreement (the “2024 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 2024 TSA separate from business combination and has 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 2024 TSA was determined using the with and without method. For the three months ended December 31, 2024, the Company recognized no additional adjustments to prepaid expenses and other current assets within the consolidated balance sheets for services received from Honeywell.

Acquisition and related costs

For the fiscal year ended September 30, 2024, the Company incurred $589,000 of acquisition costs included in SG&A expenses in connection with the June 2023 Honeywell Agreement. The debt issuance costs related to the Term Loan were not material. For the three months ended December 31, 2024, the Company incurred $86,688 of costs in connection to the September 2024 Honeywell Agreement. For the three months ended December 31, 2023, 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, 2023:

Three Months Ended December 31, 

    

2023

Net sales

$

12,021,871

Net income

$

401,129

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.

June 2023 Honeywell Agreement

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

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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 the Company’s 2024 10K, Note 8, “Loan Agreement” for further details. The purchase consideration transferred at the acquisition date was $35.9 million, which was entirely cash.

In the third quarter of 2024 and within one year from the acquisition date, the Company finalized its accounting of the transaction. The following purchase price allocation table presents the Company's estimates of the fair value of assets acquired and liabilities assumed as of the acquisition date, and subsequent measurement period adjustments recorded during the one-year period ended June 30, 2024:

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

$

(3,012,626)

(d)

$

7,023,534

Equipment

2,609,000

3,675,000

(d)

6,284,000

Construction in progress

1,238,000

1,238,000

Intangible assets (b)

20,900,000

(3,660,000)

(d)

17,240,000

Goodwill (c)

4,608,041

(533,575)

(d)(e)

4,074,466

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 change 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 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 Intangible assets within Note 2, “Supplemental Balance Sheet Disclosures” for further details.
(c)Goodwill represents the excess of the purchase consideration over the estimated 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 assigned to the Company’s one operating segment and one reporting unit.

(d)

In the third quarter of 2024 and within one year from the acquisition date, the Company identified measurement period adjustments related to 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 based on facts and circumstances that existed as of the acquisition date. One of the refinements of inputs used was a change in classification of prepaid inventory to equipment of $3.7 million. The adjustments resulted in an overall increase to goodwill of $3.0 million. As a result of the measurement period adjustments to the estimated fair values of equipment and customer relationships, during the third quarter of 2024, the Company recognized $218,623 additional depreciation expense in cost of sales and $67,500 additional amortization expense in selling, general and administrative respectively, related to the effects that would have been recognized in previous quarters if the measurement period adjustments were recognized as of the acquisition date. For the remaining measurement period adjustments, the change to the preliminary fair value estimates did not have a material impact to the condensed consolidated statement of operations.

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(e)

During the fourth quarter of 2023, the Company identified measurement period adjustments related to the 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 June 2023 Honeywell Agreement, the Company entered into a transition services agreement (the “2023 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 2023 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 2023 TSA was determined using the with and without method.

Other

On July 22, 2024, the Company completed the July 2024 Honeywell Asset Acquisition of certain additional assets related to its communication and navigation product lines, including a sale of certain inventory and customer-related documents; an assignment of certain contracts; and a grant of exclusive and non-exclusive licenses to use certain Honeywell intellectual property related to its communication and navigation product lines to manufacture, upgrade and repair certain additional products for consideration of $4.2 million in cash. The Company accounted for the transaction as an asset acquisition and allocated the cost of the acquisition, including direct and incremental transaction costs, to the tangible and intangible assets based on their relative fair value as detailed under ASC 805 – Business Combinations (“ASC 805”). Definite lived assets were recorded to the relative fair value of $2,601,000 to property and

equipment and $430,000 to customer relationships and backlog. Since license agreements are indefinite lived assets, they were recorded at fair value in the amount of $1,240,000 in accordance with ASC 805.

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:

    

December 31, 

    

September 30, 

2024

2024

Raw materials

$

12,227,940

$

9,862,591

Work-in-process

 

1,590,822

 

1,357,504

Finished goods

 

1,688,089

 

1,512,286

$

15,506,851

$

12,732,381

Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

    

December 31, 

    

September 30, 

2024

2024

Prepaid insurance

$

292,636

$

54,197

Honeywell TSA Agreement

70,000

140,000

Other

 

1,203,247

 

967,197

1,565,883

$

1,161,394

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Intangible assets

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

    

As of December 31, 2024

    

Gross Carrying

    

Accumulated

    

Accumulated

    

Net Carrying

Value

 

Impairment

 

Amortization

 

Value

License agreement (a)

$

9,140,000

$

$

$

9,140,000

Customer relationships (a)

 

13,284,327

 

 

(1,809,762)

 

11,474,565

Backlog (b)

6,310,000

(394,375)

5,915,625

Licensing and certification rights (c)

 

696,506

 

(44,400)

 

(638,285)

 

13,821

Total

$

29,430,833

$

(44,400)

$

(2,842,422)

$

26,544,011

As of September 30, 2024

    

Gross Carrying

    

Accumulated

    

Accumulated

    

Net Carrying

 

Value

 

Impairment

 

Amortization

 

Value

License agreement (a)

$

9,140,000

$

$

$

9,140,000

Customer relationships (a)

 

13,008,332

 

 

(1,459,861)

 

11,548,471

Backlog (b)

6,310,000

6,310,000

Licensing and certification rights (c)

 

696,506

 

(44,400)

 

(638,285)

 

13,821

Total

$

29,154,838

$

(44,400)

$

(2,098,146)

$

27,012,292

(a)As part of the September 2024 Honeywell Agreement, the July 2024 Honeywell Asset Acquisition, and the June 2023 Honeywell Agreement transactions, the Company acquired intangible assets related to the license agreements for the license rights to use certain Honeywell intellectual property, backlog and customer relationships. The license agreements have an indefinite life and are not subject to amortization; the customer relationships have an estimated weighted average life of ten years.

(b)As part of the September 2024 Honeywell Agreement, the Company acquired intangible assets related to backlog with a useful life of four years.

(c)The licensing, and certification rights are amortized over a defined number of units.

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 December 31, 2024 is as follows:

Amortization Expense

2025 (nine months remaining)

$

2,218,895

2026

2,958,527

2027

2,958,527

2028

 

2,958,527

2029

 

1,381,027

Thereafter

 

4,914,687

Total

$

17,390,190

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Property and equipment

Property and equipment, net consists of the following:

    

December 31, 

    

September 30, 

2024

2024

Computer equipment

$

2,922,175

$

2,416,795

Furniture and office equipment

 

984,205

 

984,205

Buildings and improvements

 

6,241,299

 

6,198,690

Equipment other

 

15,312,781

 

15,161,225

Land

 

1,021,245

 

1,021,245

 

26,481,705

 

25,782,160

Less accumulated depreciation and amortization

 

(13,032,661)

 

(12,409,862)

$

13,449,044

$

13,372,298

Depreciation and amortization related to property and equipment was $622,799 and $142,921 for the three months ended December 31, 2024 and 2023, respectively.

Other assets

Other assets consist of the following:

    

December 31, 

    

September 30, 

2024

2024

Operating lease right-of-use assets

$

$

2,100

Other non-current assets

 

150,119

 

471,625

$

150,119

$

473,725

Other non-current assets as of December 31, 2024 and September 30, 2024 consists primarily of deposits for medical claims required under the Company’s medical plan.

Accrued expenses

Accrued expenses consist of the following:

    

December 31, 

    

September 30, 

2024

2024

Warranty

$

522,724

$

596,538

Salary, benefits and payroll taxes

 

426,558

 

1,685,372

Professional fees

 

142,709

 

262,320

Operating lease

2,100

Income tax payable

1,596,511

1,194,185

Other

 

1,594,964

 

868,779

$

4,283,466

$

4,609,294

Warranty cost and accrual information for the three months ended December 31, 2024 is highlighted below:

    

Three Months Ending

December 31, 2024

    

Warranty accrual, beginning of period

$

596,538

Accrued expense (Adjustment)

 

(20,000)

Warranty cost

 

(53,814)

Warranty accrual, end of period

$

522,724

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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 rates for the three-months ended December 31, 2024 and 2023 were 20.1% and 21.8%, respectively. The effective tax rate for the three months ended December 31, 2024 differs from the statutory tax rate primarily due to the effect of state income taxes, tax credits and certain nondeductible expenses. The effective tax rate for the three months ended December 31, 2023 differs from the statutory tax rate primarily due to higher state taxes as a result of a taxable gain recognized from the sale of the Company’s King Air aircraft.

4. Shareholders’ Equity and Share-Based Payments

At June 30, 2024, 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, “Compensation – Stock Compensation”, by using the fair value method for expensing stock options, performance based equity awards and stock awards.

Amended and Restated 2019 Stock-Based Incentive Compensation Plan

The Company’s 2019 Stock-Based Incentive Compensation Plan (as amended, 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, performance based equity awards, and other equity-based awards. Options granted under the 2019 Plan may be either “incentive stock options” as defined in Section 422 of the U.S. Internal Revenue Code of 1986, as amended (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 Company’s 2009 Plan as of April 2, 2019, the effective date of the 2019 Plan, all of which may be issued pursuant to awards of incentive stock options. On April 18, 2024, the Company amended the 2019 Plan to include an additional 1,950,000 authorized shares available for issuance. As of December 31, 2024, there were 1,679,135 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.

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The 2019 Plan will terminate on April 2, 2029, unless earlier terminated by the Company’s Board of Directors (the “Board”). Termination will not affect awards outstanding at the time of termination. The Board may amend, alter, suspend, discontinue, or terminate the 2019 Plan without shareholder approval, provided that shareholder approval is required for any amendment which (i) would increase the number of shares subject to the 2019 Plan; (ii) would decrease the price at which awards may be granted; or (iii) would require shareholder approval by law, regulation, or the rules of any stock exchange or automated quotation system.

Market-Based Restricted Stock Units

During the three months ended December 31, 2024, to better align executive compensation with the Company’s Total Shareholder Return (“TSR”), the Board approved a special one-time grant of 201,000 market-based restricted stock units (“MSUs”) to the Company’s Chief Executive Officer under the terms and conditions of the 2019 Plan. The MSU is a restricted stock unit containing vesting terms conditional upon the attainment of both 1) continued service to vesting and 2) stock price appreciation targets indexed against the Company’s actual stock price performance over a specified measurement period. Under the terms of the grant, the MSU will vest as follows:

1) an initial one-third (1/3rd) of the MSUs shall vest on the first trading date after the shares of the Company’s common stock have traded at a price equal to or greater than Ten Dollars ($10.00) per share for twenty (20) consecutive trading days or as provided in the provisions of the second succeeding paragraph below;

2)an additional one-third (1/3rd) of the MSUs shall vest on the first trading date after shares of the Company’s common stock have traded at a price equal to or greater than Twelve Dollars ($12.00) per share for twenty (20) consecutive trading days; and

3)the remaining MSUs shall vest on the first trading date after the shares of the Company’s common stock have traded at a price equal to or greater than Fourteen Dollars ($14.00) per share for twenty (20) consecutive trading days.

Additionally, if the tranche of MSU’s subject to vesting pursuant to (1) above does not vest on or before November 20, 2027, then, with respect to such MSUs, the target trading price for the Company’s common stock will be increased to Twelve Dollars ($12.00) per share, such that the MSUs subject to (1) above will vest on the first trading date after shares of the Company’s common stock have traded at a price equal to or greater than Twelve Dollars ($12.00) per share for twenty (20) consecutive trading days.

Any MSUs that have not vested on or before the fourth anniversary of the grant date are immediately forfeited.

With respect to each MSU that becomes vested in accordance with the terms of the award agreement, the Grantee will be entitled to receive one share of common stock upon the settlement of the MSUs.

The Company estimated both the grant-date fair value of the MSU’s awards and the derived vesting periods using a Monte Carlo simulation with the following input assumptions:

Number of MSU's Granted

201,000

Grant Date

November 20, 2024

Grant Date Stock Price

$ 7.72

Expected Dividend Rate

0%

Expected Volatility

45%

Weighted average risk-free interest rate

4.27%

Contractual Term

4 years

Utilizing Monte Carlo simulation, the MSU’s grant date fair value was estimated to be $1,138,557 with a $5.66 weighted average grant date fair value per award and the derived vesting periods were estimated to be between 0.8 years and 1.7 years.

For the three months ended December 31, 2024, the Company recognized $117,108 of compensation expense related to MSU awards. As of December 31, 2024, unrecognized compensation expense of $1,021,449 associated with non-vested MSU’s will be recognized in future periods under the 2019 Plan. During the three months ended December 31, 2024, no MSUs vested or were forfeited.

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The compensation expense related to stock options, and restricted stock awards issued to employees under the 2019 Plan was $206,527 and $155,581 for the three months ended December 31, 2024 and 2023, respectively.

The compensation expense under the 2019 Plan related to restricted stock awards issued to non-employee members of the Board was $73,026 and $50,135 for the three months ended December 31, 2024 and 2023, respectively.

Total compensation expense associated with the 2019 Plan was $396,661 and $205,716 for the three months ended December 31, 2024 and 2023, respectively.

As of December 31, 2024, unrecognized compensation expense of approximately $1,141,422 net of forfeitures, related to non-vested restricted stock under the 2019 Plan, will be recognized in future periods.

As of December 31, 2024, unrecognized compensation expense of approximately $459,721, net of forfeitures, related to non-vested stock options under the 2019 Plan, will be recognized in future periods.

For the three-months ended December 31, 2024, 361,613 diluted weighted-average shares outstanding were excluded from the computation of diluted earnings per share (“EPS”), because the effect would be anti-dilutive.

5. Earnings Per Share

Three Months Ended December 31,

    

2024

    

2023

Numerator:

Net income

$

736,192

$

1,057,350

Denominator:

Basic weighted average shares

 

17,514,193

 

17,451,362

Dilutive effect of share-based awards

 

69,844

 

23,544

Diluted weighted average shares

 

17,584,037

 

17,474,906

Net income per common share:

Basic

$

0.04

$

0.06

Diluted

$

0.04

$

0.06

Net income per share is calculated pursuant to ASC Topic 260, “Earnings per Share”. Basic 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 MSUs and RSUs.

The number of incremental shares from the assumed exercise of stock options, and RSUs is calculated by using the treasury stock method. The number of incremental shares from assumed vestings of MSU’s is calculated using the ‘if-converted method.’ As of December 31, 2024 no outstanding MSU’s were included in the three months ended December 31, 2024 weighted-average diluted shares calculation using the if converted method. As of December 31, 2024 and 2023, there were 361,613 and 224,374 options to purchase common stock outstanding, respectively, and 201,000 and 0 MSU’S subject to vesting outstanding, respectively. As of December 31, 2024 and 2023, there were 204,707 and 101,968 shares of restricted stock units subject to vesting outstanding, respectively. The weighted average outstanding diluted shares calculation excludes options with an exercise price that exceeds the average market price of shares during the period. Additionally, the weighted-average diluted shares calculation excludes RSUs that are deemed anti-dilutive when applying the treasury stock method.

For the three-months ended December 31, 2024 and 2023, respectively, 361,613 and 213,409 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. Commitments and 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. Prior balances are disclosed below for comparability.

Sales to Eclipse amounted to approximately $5,981 and $84,500 for the three months ended December 31, 2024 and 2023, respectively.

A company in which Parizad Olver (Parchi), a former member of the Board, is the managing partner and has an ownership interest, received a consulting fee of $72,990 in November 2023 for services provided in connection with the sale of the Company’s 2008 Super King Air B200GT SN BY-50.

On October 18, 2024, the Company entered into a consulting agreement with Peduzzi Associated, ltd. (“PAL”), an entity in which Maj. General Dean serves as President. PAL will provide consulting services in support of the Company’s business development growth into the DoD. The term of the agreement is for one year and in consideration for services the Company will pay PAL a retainer of $9,500 per month. For the three months ended December 31, 2024, the Company paid PAL $28,500.

8. 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 2023 transaction with Honeywell. 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.

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 consists 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, provided 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”).

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

On September 30, 2024, the Company and one of its subsidiaries, Innovative Solutions and Support, LLC (“ISSL,” entered into an Amendment to Loan Documents (the “Loan 2024 Amendment”) with PNC, which amends certain terms of the Loan Agreement to increase the line of credit with PNC. Concurrently with the Loan 2024 Amendment, the Company entered into (i) an Amended and Restated Revolving Line of Credit in favor of PNC (the “A&R Revolving Line of Credit”), and (ii) an Amended and Restated Line of Credit and Investment Sweep Rider with PNC (the “A&R Rider”).

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The A&R Revolving Line of Credit Note provides for a senior secured revolving line of credit in an aggregate principal amount of $35,000,000, with an expiration date of December 19, 2028. The interest rate applicable to loans outstanding under the A&R Revolving Line of Credit is a rate per annum equal to the sum of (A) Daily SOFR (as defined in the A&R Revolving Line of Credit Note) plus (B) an unadjusted spread of the Applicable SOFR Margin plus (C) a SOFR adjustment of ten basis points. The applicable SOFR Margin ranges from 1.5% to 2.5% depending on the Company’s funded debt to EBITDA ratio as defined in the A&R Revolving Line of Credit Note. The A&R Rider provides for how PNC will make advances to the Company under the AR Revolving Line of Credit.

The Company was in compliance with all applicable covenants throughout and at December 31, 2024. As of the three months ended December 31, 2024, The outstanding balance drawn on the A&R Revolving Line of Credit was $26,512,491 with an effective interest rate of 6.3 percent. As of December 31, 2024, the Company had availability of $8,487,509 under the A&R Revolving Line of Credit.

9. Subsequent Events

On January 27, 2025, the Board increased the size of the Board to six directors and appointed Denise Devine to serve as an independent director, effective immediately, for a term until the Company’s next annual meeting of shareholders or until her successor is duly elected and qualified or until her earlier death, disqualification, resignation or removal. In connection therewith, Ms. Devine was also appointed by the Board to serve as a member of the Audit Committee.

On February 13, 2025, the performance condition for 67,000 units of MSUs granted to the Company’s Chief Executive Officer was met, these shares will vest according to the Company’s Amended and Restated 2019 Stock-Based Incentive Compensation Plan.

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.

All forward-looking statements are based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Many of the factors that will determine the Company’s future results are beyond the ability of management to control or predict. 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, 2024 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, Vmca 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 impact of general economic trends on the Company’s business;

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disruptions in the Company’s supply chain, customer base and workforce;
the ability to gain, drive and sustain regulatory approval, including domestic and international certifications, 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”).

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.

Objective

The following discussion provides an analysis of the Company’s financial condition, cash flows and results of operations from management’s perspective and should be read in conjunction with “Selected Consolidated Financial Data” and the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K. Our objective is to also provide discussion of events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or of future financial condition and to offer information that provides understanding of our financial condition, cash flows and results of operations.

Company Overview

The Company was incorporated in Pennsylvania on February 12, 1988. The Company operates in one business segment as a systems integrator that designs, develops, manufactures, sells and services, air data equipment, engine display systems, standby equipment, primary flight guidance, autothrottles and cockpit display systems for retrofit applications and OEMs. The Company supplies integrated FMS, FPDS, FPDS with autothrottle, air data equipment, integrated standby units, integrated standby units with autothrottle and advanced GPS receivers that enable reduced carbon footprint navigation, communication and navigation products and inertial reference units.

The Company has continued to position itself as a system integrator, which provides the Company with the capability and potential to generate more substantive orders over a broader product base. This strategy, as both a manufacturer and integrator, is designed to leverage the latest technologies developed for the computer and telecommunications industries into advanced and cost-effective

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solutions for the general aviation, commercial air transport, the DoD/governmental and foreign military markets. This approach, combined with the Company’s industry experience, is designed to enable the Company to develop high-quality products and systems, to reduce product time to market and to achieve cost advantages over products offered by its competitors.

The Company sells to both the OEM and the retrofit markets. Customers include various OEMs, commercial air transport carriers and corporate/general aviation companies, the DoD and its commercial contractors, aircraft operators, aircraft modification centers, government agencies and foreign militaries. Occasionally, the Company sells its products directly to the DoD; however, the Company sells its products primarily to commercial customers for end use in DoD programs. 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).

In June 2023, the Company entered into the June 2023 Honeywell Agreement with Honeywell pursuant to which Honeywell sold, assigned or licensed certain assets related to its inertial, communication and navigation product lines, including a sale of certain inventory, equipment and customer-related documents, an assignment of certain contracts and a grant of exclusive and non-exclusive licenses to use certain Honeywell intellectual property related to its inertial, communication and navigation product lines to repair, overhaul, manufacture sell, import, export and distribute certain products to the Company for cash consideration of $35.9 million.

In July 2024, the Company entered into the July 2024 Honeywell Asset Acquisition, an exclusive license agreement and acquired additional key assets for certain communication and navigation product lines from Honeywell. This transaction complements the previous Honeywell license and asset acquisition completed in June 2023. Total consideration was $4.2 million in cash.

On September 27, 2024, the Company entered into the September 2024 Honeywell Agreement with Honeywell, pursuant to which Honeywell sold, assigned or licensed certain assets related to its various generations of military display generators and flight control computers, including a sale of certain inventory, equipment and customer-related documents; an assignment of certain contracts; and a grant of exclusive and non-exclusive licenses to use certain Honeywell intellectual property related to its various generations of military display generators and flight control computers to repair, overhaul, manufacture sell, import, export and distribute certain products to the Company for consideration of $14.2 million in cash.

The exclusive licensing of these product lines from Honeywell is a unique opportunity for the Company to enhance its current offerings in the air transport, military and business aviation markets. In addition, there are potential cost synergies from better utilization of the Company’s skilled engineering team and its existing operational capacity. The Company believes that each of the June 2023 Honeywell Agreement, the July 2024 Honeywell Asset Acquisition and the September 2024 Honeywell Agreement will help to accelerate the Company’s growth and enhance its global reputation for delivering some of the industry’s best price-for-performance product and service solutions.

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

Cost of sales related to EDC sales comprises engineering labor, consulting services and other costs associated with specific design and development projects. These costs are incurred pursuant to contractual arrangements and are accounted for typically as contract costs within Cost of sales, with reimbursement accounted for as a sale in accordance with the percentage-of-completion method or completed contract method of accounting. Company funded R&D expenditures relate to internally-funded efforts for the development of new products and the improvement of existing products. These costs are expensed as incurred and reported as R&D expenses. The Company intends to continue investing in the development of new products that complement current product offerings and to expense associated R&D costs as they are incurred.

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

The Company sells its products to agencies of the United States and foreign governments, aircraft operators, aircraft modification centers and OEMs. Customers have been and may continue to be affected by changes in economic conditions both in the United States

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and abroad. Such changes may cause customers to curtail or delay their spending on both new and existing aircraft. Factors that can impact general economic conditions and the level of spending by customers include, but are not limited to, general levels of consumer spending, increases in fuel and energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence, inflation, public health crises and pandemics and other macroeconomic factors that affect spending behavior. Furthermore, spending by government agencies may be reduced in the future. If customers curtail or delay their spending or are forced to declare bankruptcy or liquidate their operations because of adverse economic conditions, the Company’s revenues and results of operations would be affected adversely. For example, in the 2020 fiscal year, certain of the Company’s customers temporarily suspended product deliveries as a result of the COVID-19 pandemic, and while these deliveries subsequently resumed, there is a possibility that the COVID-19 or similar pandemics will result in other suspensions, delays or order cancellations by the Company’s customers or suppliers.

Environmental, Social and Governance Considerations

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

Critical Accounting Policies and Estimates

The discussion and analysis of financial condition and consolidated results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The preparation of these condensed 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 policies and estimates are those related to revenue recognition, inventory valuation and valuation of tangible and intangible assets acquired. On an ongoing basis, the Company’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 condensed consolidated financial statements. The Annual Report on Form 10-K for the fiscal year ended September 30, 2024 contains a discussion of these critical accounting policies. There have been no material changes in the Company’s critical accounting policies since September 30, 2024. See also Note 1 to the unaudited condensed consolidated financial statements for the three months ended December 31, 2024 as set forth herein.

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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED

DECEMBER 31, 2024 AND 2023

The following table sets forth the statements of operations data expressed as a percentage of total net sales for the periods indicated (some items may not add due to rounding):

Three Months Ended December 31, 

2024

    

2023

    

Net sales:

Product

62.5

%  

47.5

%  

Services

37.5

%  

52.5

%  

Total net sales

100.0

%  

100.0

%  

Cost of sales:

 

  

 

Product

39.2

%  

19.1

%  

Services

19.4

%  

21.6

%  

Total cost of sales

58.6

%  

40.7

%  

Gross profit

41.4

%  

59.3

%  

Operating expenses:

 

  

 

Research and development

7.0

%  

9.7

%  

Selling, general and administrative

26.0

%  

32.3

%  

Total operating expenses

33.0

%  

42.0

%  

Operating income

8.4

%  

17.4

%  

Interest expense

(2.7)

%  

(3.9)

%

Interest income

0.0

%  

0.9

%  

Other income

0.0

%  

0.2

%  

Income before income taxes

5.7

%  

14.5

%  

Income tax expense

1.2

%

3.2

%

Net income

4.5

%  

11.4

%  

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

Historically, the Company presented Customer service and Engineering and development contracts Net Sales and Cost of sales separately on the Consolidated Statements of Operations. For the three months ended December 31, 2024, the Company has aggregated these items into one category, “Services” and reclassified Customer service and Engineering and development contracts revenues as well as Cost of sales to conform the presentation of the Consolidated Statements of Operations for three months ended December 31, 2023. For additional information, see Note 3, Summary of Significant Accounting Policies, (“Reclassifications”) to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2024.

Net sales. Net sales for the three months ended December 31, 2024 increased $6.7 million, or 71.6%, to $16.0 million from $9.3 million for the three months ended December 31, 2023. The increase in Net sales was driven by a 125.7% increase or $5.6 million in product sales which was driven primarily by the recent acquired military product line of $6.0 million and an increase commercial air transport sales $1.1 million partially offset by $1.2 million reduced shipsets in business aviation. Service sales for the three months ended December 31, 2024 increased $1.1 million, or 22.5%, compared to three months ended December 31, 2023. The increase in service sales primarily reflects increases in engineering development services of $0.8 million and an increase in customer service sales from the product lines acquired from Honeywell of $0.8 million, partially offset by lower legacy customer service revenue of $0.5 million.

Cost of sales. Cost of sales was $9.4 million, or 58.6% of Net sales, for the three months ended December 31, 2024 compared to $3.8 million, or 40.7% of Net sales, for the three months ended December 31, 2023. The increase in Cost of sales was primarily the result of an increase in overall sales volume. The Company’s overall gross margin for the three months ended December 31, 2024 was 41.4% compared to 59.3% for the three months ended December 31, 2023. The decrease in overall gross margin percentage for the three months ended December 31, 2024, compared to the three months ended December 31, 2023 is primarily the result of changes in product mix, increased depreciation and cost inefficiencies due to hiring and training of additional personnel and other integration costs. There are several factors that have been impacting our gross margin capture in recent quarters, which continued during the first quarter and will remain a factor in the near-term. These factors included incremental depreciation that has resulted from recent product line acquisitions and the shift in our sales mix, as military sales will be a higher percentage of sales. More specifically, during the first quarter, the impact of the acquired Honeywell military product line volume with lower margins of approximately 30% gross margins, impacted the overall gross margin by approximately 5%, increased third party expenses from Honeywell with respect to their transition services of $0.2 million resulted in a 2% impact and higher depreciation from recent acquisitions of $0.5 million resulted in a 5% impact to overall margins.

Research and development. R&D expenses were $1.1 million for the three months ended December 31, 2024 and $0.9 million for the three months ended December 31, 2023. The increase in R&D expense was due to higher salaries and benefits due to higher headcount. As a percentage of Net sales, R&D expense decreased to 7.0% of Net sales for the three months ended December 31, 2024 compared to 9.7% for the three months ended December 31, 2023.

Selling, general, and administrative. SG&A expenses increased $1.2 million or 38.3%, to $4.2 million from $3.0 million for the three months ended December 31, 2023. The increase in SG&A expense for the three months ended December 31, 2024 was primarily the result of increases in professional services fees of $0.2 million primarily due to acquisition related expenses and corporate initiatives. In addition, the Company incurred increased depreciation and amortization expenses of $0.5 million related to the customer relationships and backlog intangible assets resulting from the combined acquisitions and $0.3 million was due to higher salaries and benefits due to increased headcount to support the growth of the business. As a percentage of sales, selling, general and administrative expenses were 26.0% for the three months ended December 31, 2024 compared to 32.3% for the three months ended December 31, 2023.

Interest income. Interest income was negligible for the three months ended December 31, 2024 and decreased by $0.1 million as compared to the three months ended December 31, 2023. The decrease in interest income was primarily the result of a general decrease in interest rates as compared to the three months ended December 31, 2023.

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

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

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31, 2024 was 20.1% as compared to 21.8% for the three months ended December 31, 2023. The decrease in income tax expense was primarily due to a decrease in earnings for the three months ended December 31, 2024, compared to the same period last year.

Net income. As a result of the factors described above, the Company’s net income for the three months ended December 31, 2024 was $0.7 million compared to net income of $1.1 million for the three months ended December 31, 2023. On a fully diluted basis, net income per share was $0.04 for the three months ended December 31, 2024, compared to a net income of $0.06 per share for the three months ended December 31, 2023.

Liquidity and Capital Resources

The following table highlights key financial measurements of the Company:

As of

As of

December 31, 

September 30, 

    

2024

    

2024

Cash and cash equivalents

$

604,561

$

538,977

Accounts receivable

$

7,716,632

$

12,612,482

Current assets

$

34,055,920

$

34,685,698

Current liabilities

$

6,518,585

$

7,265,254

Contract liability

$

358,806

$

340,481

Other non-current liabilities

$

26,963,842

$

28,478,352

Quick ratio (1)

 

1.28

 

1.81

Current ratio (2)

 

5.22

 

4.77

    

Three Months Ended December 31, 

    

2024

    

2023

Cash flow activities:

 

  

 

  

 

Net cash provided by operating activities

$

1,841,458

$

4,215,735

Net cash (used in) provided by investing activities

 

(261,364)

 

2,042,892

Net cash (used in) financing activities

 

(1,514,510)

 

(8,888,486)

(1)Calculated as: the sum of cash and cash equivalents plus accounts receivable, net, divided by current liabilities.
(2)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 our revolving credit facility. Cash is used principally to finance inventory, accounts receivable, contract assets, payroll, debt service and acquisitions, as well as the Company’s known contractual and other commitments. The Company’s existing cash balances and anticipated cash flows from operations, together with borrowings under our revolving credit facility, are expected to be adequate to satisfy the Company’s liquidity needs for at least the next 12 months. 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.

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

Debt Facility

In connection with the June 2023 Honeywell Agreement, the Company entered into a term loan with PNC Bank for $20.0 million to fund a portion of the June 2023 Honeywell Agreement. Refer to the Company’s 2024 10K, Note 20, “Loan Agreement” for further details. In addition to providing for the Term Loan, The Loan Agreement, together with a corresponding Line of Credit Note in favor of PNC, executed on May 11, 2023, provides for the senior secured Revolving Line of Credit in an aggregate principal amount of $10,000,000, with an expiration date of May 11, 2028.

On December 19, 2023, the Company and PNC entered into the Restated Loan Amendment and the corresponding Restated Line of Credit Note and Restated Rider, to increase the aggregate principal amount available under the Company’s senior secured revolving line of credit from $10,000,000 to $30,000,000 and extend the maturity date until December 19, 2028. The proceeds of the Restated

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Line of Credit Note will be used for working capital and other general corporate purposes, for acquisitions as permitted under the Restated Loan Amendments and to pay off and close the loan evidenced by that certain Term Note executed in favor of PNC, dated June 28, 2023, which provided for a senior secured term loan in aggregate principal amount of $20,000,000, with a maturity date of June 28, 2028.

On September 30, 2024, in connection with the July 2024 Honeywell Asset Acquisition and the September 2024 Honeywell Agreement, the Company entered into the Loan 2024 Amendment with PNC, which amends certain terms of the Loan Agreement to increase the line of credit with PNC. Concurrently with the Loan 2024 Amendment, the Company entered into (i) A&R Revolving Line of Credit Note, and (ii) A&R Rider. The A&R Revolving Line of Credit Note provides for a senior secured revolving line of credit in an aggregate principal amount of $35,000,000, with an expiration date of December 19, 2028 (the “Revolving Line of Credit”). The interest rate applicable to loans outstanding under the Revolving Line of Credit is a rate per annum equal to the sum of (A) Daily SOFR (as defined in the A&R Revolving Line of Credit Note) plus (B) an unadjusted spread of the Applicable SOFR Margin plus (C) a SOFR adjustment of ten basis points. The Applicable SOFR Margin ranges from 1.5% to 2.5% depending on the Company’s funded debt to EBITDA ratio, as defined in the A&R Revolving Line of Credit Note. The A&R Rider provides for how PNC will make advances to the Company under the Revolving Line of Credit.

Future Funding Requirements

The Company’s existing cash balances, anticipated cash flows from operations and current banking facility are expected to be adequate to satisfy the Company’s liquidity needs for at least the next 12 months.

Apart from what has been disclosed above, management is not aware of any trends, events or uncertainties that have had or are likely to have a material impact on our liquidity, financial condition and capital resources.

The Company did not pay cash dividends in fiscal years 2023 or 2024. The Company intends to retain future earnings, if any, to finance the development and growth of its business and does not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of any dividend in the future will be at the discretion of the Board and will depend on then-existing conditions, including our operating results, financial condition, business prospects and other factors the Board may deem relevant.

Operating activities

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

Investing activities

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

Financing activities

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

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.

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Backlog

Three Months Ended

December 31, 2024

Backlog, beginning of period

$

89,232,576

Plus: bookings during period, net

 

7,493,086

Less: sales recognized during period

 

(15,968,729)

Backlog, end of period

$

80,756,933

Backlog represents the value of contracts and purchase orders, less the revenue recognized to date on those contracts and purchase orders. The backlog excludes potential future sole-source production orders from products developed under the Company’s engineering development contracts (“EDC”) programs, including the Pilatus PC-24, the KC-46A and the Textron King Air 360 and King Air 260 ThrustSense® Autothrottle programs. Although the Company believes that the orders included in backlog are firm, most of the backlog involves orders that can be modified or terminated by the customer.

At December 31, 2024, our backlog was $80.8 million compared with $89.2 million at September 30, 2024. Backlog at December 31, 2024 included $74.3 million of acquired backlog as a result of the September 27, 2024 acquisition. Backlog is converted into sales in future periods as work is performed or deliveries are made. We expect to recognize approximately 65% of our backlog over the next 12 months and approximately 98% over the next 24 months as revenue, with the remainder recognized thereafter.

During fiscal 2024, we made important progress on our commercial growth strategy highlighted by several key awards and contract wins across our commercial, military and business aviation markets. In October 2024, we announced our ThrustSense® Autothrottle system was selected by the US Army to be installed on their C-12 (B200) aircraft equipped with ProLine21 avionics suites®. Deliveries of the IS&S ThrustSense Autothrottle system for this application began in September 2024, with ongoing installations anticipated. In August 2024, we received a multi-million dollar production contract from a major aerospace company to supply our 19” Multifunction Display (MFD) with Integrated Mission Computer. This order marks our latest OEM contract and builds on existing programs with Pilatus Aircraft (“Pilatus”) for the PC-24, Textron Aviation (“Textron”) for the King Air 260/360 and The Boeing Company (“Boeing”) for the KC-46A, KC-767 and the T-7A.

Off-Balance Sheet Arrangements

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 three-months ended December 31, 2024 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 $5,030 with a resulting impact on cash flows of approximately $5,030 for the three months ended December 31, 2024.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these controls and procedures were effective as of December 31, 2024 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 SEC and that such information is accumulated and communicated to our management including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of such controls that occurred during the fiscal quarter ended December 31, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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. There can be no assurance that we will prevail in any such litigation. 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.

Item 1A. Risk Factors

For information regarding the Company’s risk factors, refer to the “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended September 30, 2024, filed with the SEC on December 30, 2024 (the “Form 10-K”). Other than as set forth below, there have been no material changes in our risk factors as previously disclosed in Part I, Item 1A of the Form 10-K.

Tariffs imposed by the United States government could have a material adverse effect on our results of operations.

The U.S. government has placed tariffs on certain goods imported from China and other countries and may impose new tariffs on goods imported from China and other countries, including products that we import. In retaliation, China and other countries responded by imposing tariffs on a wide range of products imported from the U.S. and by adjusting the value of its currency. The U.S government has recently imposed or threatened to impose new tariffs on additional countries, including Mexico and Canada. Such tariffs could significantly increase the cost of the products that we source and may materially impact our cost of goods and business.

If renegotiations of existing tariffs are unsuccessful or additional tariffs or trade restrictions are implemented by the U.S. or other countries in connection with a global trade war, the resulting escalation of trade tensions could have a material adverse effect on world trade and the global economy. Even in the absence of further tariffs or trade restrictions, the related uncertainty and the market's fear of an economic slowdown could lead to a decrease in demand for our products and services, and we may experience lower net revenues than expected. Reduced revenues may result in reduced operating cash flows if we are not able to appropriately manage inventory levels or leverage expenses.

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

Unregistered Sales of Equity Securities

There were no unregistered sales of equity securities during the quarter ended December 31, 2024.

Use of Proceeds

Not applicable.

Purchase of Equity Securities

We did not repurchase shares of our common stock during the quarter ended December 31, 2024.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Rule 10b5-1 Trading Plans

During the quarter ended December 31, 2024, no executive officer or director of the Company adopted or terminated any contract, instruction, or written plan for the purchase or sale of securities of the Company’s common stock that was intended to satisfy the affirmative defense conditions of Securities Exchange Act Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement” as defined in 17 CFR § 229.408(c).

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Item 6. Exhibits

(a) Exhibits

10.1**

Performance Stock Unit Award Agreement dated November 20, 2024 (1).

31.1

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a), filed herewith.

31.2

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a), filed herewith.

32.1*

Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.

101.INS

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents.

104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

(1)Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 22, 2024, SEC File Number 001-41503.

* This certification is not deemed filed with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof, irrespective of any general incorporation language contained in such filing.

** Denotes compensatory plan or arrangement.

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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: February 14, 2025

By:

/s/ Jeffrey DiGiovanni

Jeffrey DiGiovanni

Chief Financial Officer

(on behalf of Registrant and as Principal Financial Officer and Principal Accounting Officer)

35