Innovative Solutions and Support 10Q 2022 Q3 Quarterly report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2022

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

[For the transition period from to ]

Commission File No. 000-31157

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

(Exact name of registrant as specified in its charter)


PENNSYLVANIA		23-2507402
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

720 Pennsylvania Drive, Exton, Pennsylvania		19341
(Address of Principal Executive Offices)		(Zip Code)

(610) 646-9800

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

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

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

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

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

As of July 29, 2022, there were 17,276,213 shares of the Registrant’s Common Stock, with par value of $.001 per share, outstanding.

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INNOVATIVE SOLUTIONS AND SUPPORT, INC.

FORM 10-Q June 30, 2022

INDEX


		Page No.
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets – June 30, 2022 (unaudited) and September 30, 2021	1

	Condensed Consolidated Statements of Operations – Three and Nine Months Ended June 30, 2022 and 2021 (unaudited)	2

	Condensed Consolidated Statements of Shareholders’ Equity – Three and Nine Months Ended June 30, 2022 and 2021 (unaudited)	3 - 4

	Condensed Consolidated Statements of Cash Flows – Nine Months Ended June 30, 2022 and 2021 (unaudited)	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6 - 20

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21 - 29

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29

Item 4.	Controls and Procedures	29

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults upon Senior Securities	31

Item 4.	Mine Safety Disclosures	31

Item 5.	Other Information	31

Item 6.	Exhibits	32

SIGNATURES		33

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PART I—FINANCIAL INFORMATION

Item 1- Financial Statements

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	June 30,		September 30,
	2022		2021
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	14,541,901	$	8,265,606
Accounts receivable		3,003,362		4,046,337
Inventories		4,905,034		4,545,392
Prepaid expenses and other current assets		778,850		833,076
Assets held for sale		1,558,475		—
Total current assets		24,787,622		17,690,411
Property and equipment, net		6,381,461		8,143,483
Deferred income taxes		278,085		1,063,822
Other assets		168,900		188,284

Total assets	$	31,616,068	$	27,086,000

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	752,479	$	623,620
Accrued expenses		1,683,430		1,431,115
Contract liability		329,116		417,504

Total current liabilities		2,765,025		2,472,239

Other liabilities		18,407		28,680

Total liabilities		2,783,432		2,500,919

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. NaN shares issued and outstanding at June 30, 2022 and September 30, 2021		—		—
Common stock, $.001 par value: 75,000,000 shares authorized, 19,372,664 and 19,342,823 issued at June 30, 2022 and September 30, 2021		19,373		19,343
Additional paid-in capital		52,142,818		51,817,095
(Accumulated deficit)		(1,961,018)		(5,882,820)
Treasury stock, at cost, 2,096,451 shares at June 30, 2021 and September 30, 2021		(21,368,537)		(21,368,537)

Total shareholders’ equity		28,832,636		24,585,081
Total liabilities and shareholders’ equity	$	31,616,068	$	27,086,000

The accompanying notes are an integral part of these statements.

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INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Three Months Ended June 30,				Nine Months Ended June 30,
	2022		2021		2022		2021
Net Sales:
Product	$	6,935,976	$	5,981,462	$	20,279,371	$	15,886,967
Engineering development contracts		—		198,721		198,203		284,713
Total net sales		6,933,976		6,180,183		20,477,574		16,171,680

Cost of sales:
Product		2,879,462		2,764,765		8,253,981		7,270,708
Engineering development contracts		—		60,916		16,748		77,656
Total cost of sales		2,879,462		2,825,681		8,270,729		7,348,364

Gross profit		4,056,514		3,354,502		12,206,845		8,823,316

Operating expenses:
Research and development		676,381		646,795		2,062,937		1,936,747
Selling, general and administrative		1,694,233		1,512,138		5,226,015		4,847,410
Total operating expenses		2,370,614		2,158,933		7,288,952		6,784,157

Operating income		1,685,900		1,195,569		4,917,893		2,039,159

Interest income		10,429		107		10,871		1,138
Other income		21,608		17,231		49,401		50,994
Income before income taxes		1,717,937		1,212,907		4,978,165		2,091,291

Income tax expense (benefit)		358,763		(1,473,014)		1,056,363		(1,443,352)

Net income	$	1,359,174	$	2,685,921	$	3,921,802	$	3,534,643

Net income per common share:
Basic	$	0.08	$	0.16	$	0.23	$	0.21
Diluted	$	0.08	$	0.16	$	0.23	$	0.21

Weighted average shares outstanding:
Basic		17,261,349		17,230,387		17,253,822		17,222,312
Diluted		17,265,798		17,231,438		17,255,305		17,223,908

The accompanying notes are an integral part of these statements.

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INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(unaudited)


	Nine Months Ended June 30, 2022
			Additional
	Common		Paid-In		(Accumulated		Treasury
	Stock		Capital		Deficit)		Stock		Total
Balance, September 30, 2021	$	19,343	$	51,817,095	$	(5,882,820)	$	(21,368,537)	$	24,585,081

Share-based compensation		0		45,591		0		0		45,591
Net income		0		0		1,133,058		0		1,133,058

Balance, December 31, 2021	$	19,343	$	51,862,686	$	(4,749,762)	$	(21,368,537)	$	25,763,730

Issuance of stock to directors		25		159,970		—		—		159,995
Share-based compensation		—		44,594		—		—		44,594
Net income		—		—		1,429,570		—		1,429,570

Balance, March 31, 2022	$	19,368	$	52,067,250	$	(3,320,192)	$	(21,368,537)	$	27,397,889

Issuance of stock to directors		2		13,329		—		—		13,331
Share-based compensation		—		45,088		—		—		45,088
Exercise of stock options		3		17,151		—		—		17,154
Net income		—		—		1,359,174		—		1,359,174

Balance, June 30, 2022	$	19,373	$	52,142,818	$	(1,961,018)	$	(21,368,537)	$	28,832,636

The accompanying notes are an integral part of these statements.

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INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(unaudited)


	Nine Months Ended June 30, 2021
			Additional
	Common		Paid-In		(Accumulated		Treasury
	Stock		Capital		Deficit)		Stock		Total
Balance, September 30, 2020	$	19,311	$	51,458,787	$	(2,340,530)	$	(21,368,537)	$	27,769,031

Share-based compensation		0		45,591		0		0		45,591
Dividends declared		0				(8,607,192)				(8,607,192)
Net income		0		0		240,145		0		240,145

Balance, December 31, 2020	$	19,311	$	51,504,378	$	(10,707,577)	$	(21,368,537)	$	19,447,575

Issuance of stock to directors		27		159,953		—		—		159,980
Share-based compensation		—		44,594		—		—		44,594
Net income		—		—		608,577		—		608,577

Balance, March 31, 2021	$	19,338	$	51,708,925	$	(10,099,000)	$	(21,368,537)	$	20,260,726

Share-based compensation		—		45,084		—		—		45,084
Exercise of stock options		5		17,005		—		—		17,010
Net income		—		—		2,685,921		—		2,685,921

Balance, June 30, 2021	$	19,343	$	51,771,014	$	(7,413,079)	$	(21,368,537)	$	23,008,741

The accompanying notes are an integral part of these statements.

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INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	For the Nine Months Ended June 30,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,921,802	$	3,534,643
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		278,164		334,250
Share-based compensation expense
Stock options		135,273		135,269
Stock awards		173,326		159,980
Loss on disposal of property and equipment		357		—
Excess and obsolete inventory cost		—		(195,762)
Deferred income taxes		785,737		(1,461,617)
(Increase) decrease in:
Accounts receivable		1,042,975		75,383
Inventories		(264,789)		(351,714)
Prepaid expenses and other current assets		69,344		(22,219)
Increase (decrease) in:
Accounts payable		128,859		145,150
Accrued expenses		357,566		206,627
Income taxes payable		(119,855)		17,784
Contract liability		(88,388)		1,215,329
Net cash provided by operating activities		6,420,371		3,793,103

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(161,230)		(324,025)
Net cash used in investing activities		(161,230)		(324,025)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options		17,154		17,010
Dividend paid		—		(19,788,092)
Net cash provided by (used in) financing activities		17,154		(19,771,082)

Net increase (decrease) in cash and cash equivalents		6,276,295		(16,302,004)
Cash and cash equivalents, beginning of year		8,265,606		23,784,867

Cash and cash equivalents, end of year	$	14,541,901	$	7,482,863

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes	$	390,481	$	481

The accompanying notes are an integral part of these statements.

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INNOVATIVE SOLUTIONS AND SUPPORT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Summary of Significant Accounting Policies

Description of the Company

Innovative Solutions and Support, Inc. (the “Company,” “IS&S,” “we” or “us”) was incorporated in Pennsylvania on February 12, 1988. The Company operates in 1 business segment as a systems integrator that designs, develops, manufactures, sells and services air data equipment, engine display systems, standby equipment, primary flight guidance, autothrottles and cockpit display systems for retrofit applications and original equipment manufacturers (“OEMs”). The Company supplies integrated Flight Management Systems (“FMS”), Flat Panel Display Systems (“FPDS”), FPDS with Autothrottle, air data equipment, Integrated Standby Units (“ISU”), ISU with Autothrottle and advanced Global Positioning System (“GPS”) receivers that enable reduced carbon footprint navigation.

The Company has continued to position itself as a system integrator, which capability provides the Company with the potential to generate more substantive orders over a broader product base. This strategy, as both a manufacturer and integrator, is designed to leverage the latest technologies developed for the computer and telecommunications industries into advanced and cost-effective solutions for the general aviation, commercial air transport, United States Department of Defense (“DoD”)/governmental and foreign military markets. This approach, combined with the Company’s industry experience, is designed to enable IS&S to develop high-quality products and systems, to reduce product time to market, and to achieve cost advantages over products offered by its competitors.

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, 2021 is derived from the audited financial statements of the Company. Operating results for the three-and nine-month periods ended June 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2022, including in terms of the impact of the coronavirus pandemic (the “COVID-19 pandemic”), 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, 2021.

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.

Impact of the Russia and Ukraine War

The war between Russia and Ukraine and the global response to this war could have an adverse impact on our business and results of operations. Although the war has not had, and is not expected to have, a material impact on our operating results, it is not possible to predict the broader or long-term consequences of the war between Russia and Ukraine, which may include further sanctions, embargoes, regional instability, geopolitical shifts and adverse effects on macroeconomic conditions, cybersecurity conditions, financial markets and energy markets. Such geopolitical instability and uncertainty could have a negative impact on our ability to sell and ship products, collect payments from and support customers in certain regions, and could increase the costs, risks and adverse impacts from supply chain and logistics disruptions. Another potential impact could also be an adjustment to accounting estimates related to asset valuation.

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Impact of the COVID-19 Pandemic

The Company has not yet seen a material impact from the COVID-19 pandemic on its business, financial position, liquidity, or ability to service customers or maintain critical operations. IS&S will continue to monitor the impact of the COVID-19 pandemic on its business, including how it has impacted and will impact the Company’s employees, customers, suppliers and distribution channels. The Company could face liquidity shortages, weaker product demand from its customers, disruptions in its supply chain, and/or staffing shortages in its workforce in the future due to the direct and indirect effects of the COVID-19 pandemic.

Use of Estimates

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

Cash and Cash Equivalents

Highly liquid investments, purchased with an original maturity of three months or less, are classified as cash equivalents. Cash equivalents at June 30, 2022 and September 30, 2021 consist of cash on deposit and cash invested in money market funds with financial institutions.

Inventory Valuation

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

Assets Held for Sale

Assets to be disposed of by sale (“disposal groups”) are reclassified into “assets held for sale” if their carrying amounts are principally expected to be recovered through a sale transaction rather than through continuing use. The reclassification occurs when the disposal group is available for immediate sale and the sale is probable. These criteria are generally met when an agreement to sell exists, or management has committed to a plan to sell the assets within one year. Disposal groups are measured at the lower of carrying amount or fair value less costs to sell and are not depreciated or amortized. When the net realizable value of a disposal group increases during a period, a gain can be recognized to the extent that it does not increase the value of the disposal group beyond its original carrying value when the disposal group was reclassified as held for sale. The fair value of a disposal group, less any costs to sell, is assessed each reporting period it remains classified as held for sale and any remeasurement to the lower of carrying value or fair value less costs to sell is reported as an adjustment to the carrying value of the disposal group.

Property and Equipment

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

Long-Lived Assets

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

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impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows. NaN impairment charges were recorded during the three-and nine-month periods ended June 30, 2022 or 2021.

Fair Value of Financial Instruments

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

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

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

●

Quoted prices for similar assets or liabilities in active markets;

●

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

●

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

●

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

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

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2022 and September 30, 2021, according to the valuation techniques the Company used to determine their fair values.


	Fair Value Measurement on June 30, 2022
	Quoted Price in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets
Cash and cash equivalents:
Money market funds	$	10,945,240	$	—	$	—

	Fair Value Measurement on September 30, 2021
	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	$	6,051,902	$	—	$	—

Revenue Recognition

The Company enters into sales arrangements with customers that, in general, provide for the Company to design, develop, manufacture and deliver large flat-panel display systems, flight information computers, autothrottles and advanced monitoring systems

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that measure and display critical flight information, including data relative to aircraft separation, airspeed, altitude, and engine and fuel data measurements.

Revenue from Contracts with Customers

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

Identify the contract with a customer

The Company’s contract with its customers typically is the form of a purchase order issued to the Company by its customers and, to a lesser degree, in the form of a purchase order issued in connection with a formal contract executed with a customer. For the purpose of accounting for revenue under ASC 606, a contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

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.

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.

Allocate the transaction price to performance obligations in the contract

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

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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 it is identified.

The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates did not change our revenue and operating earnings (and diluted earnings per share) for the three-and nine-month periods ended June 30, 2022 and 2021, respectively. Therefore, no adjustment on any contract was material to our unaudited consolidated financial statements for the three-and nine-month periods ended June 30, 2022 and 2021, respectively.

Contract Balances

Contract assets consist of the right to consideration in exchange for product offerings that we have transferred to a customer under the contract. Contract liabilities primarily relate to consideration received in advance of performance under the contract. The following table reflects the Company’s contract assets and contract liabilities:


	Contract
	Liabilities
September 30, 2021	$	417,504
Amount transferred to receivables from contract assets		0
Contract asset additions		0
Performance obligations satisfied during the period that were included in the contract liability balance at the beginning of the period		(316,320)
Increases due to invoicing prior to satisfaction of performance obligations		227,932
June 30, 2022	$	329,116

Customer Service Revenue

The Company enters into sales arrangements with customers for the repair or upgrade of its various products that are not under warranty. The Company’s customer service revenue and cost of sales are included in product sales and product cost of sales,

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respectively, on the accompanying consolidated statements of operations. The Company’s customer service revenue and cost of sales for the three-and nine-month periods ended June 30, 2022 and 2021 respectively are as follows:


	For the Three Months Ended June 30,				For the Nine Months Ended June 30,
	2022		2021		2022		2021
Customer Service Sales	$	1,338,893	$	980,845	$	3,784,493	$	3,010,720
Customer Service Cost of Sales		369,562		408,161		1,112,298		1,079,462
Gross Profit	$	961,331	$	572,684	$	2,672,195	$	1,931,258

Lease Recognition

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

Income Taxes

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

Deferred tax assets are reduced by a valuation allowance if, based on the consideration of all available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. Significant weight is given to evidence that can be verified objectively, and significant management judgment is required in determining any valuation allowance recorded against net deferred tax assets. The Company evaluates deferred income taxes on a quarterly basis to determine if a valuation allowance is required by considering available evidence. Deferred tax assets are recognized when expected future taxable income is sufficient to allow the related tax benefits to reduce taxes that would otherwise be payable. The sources of taxable income that may be available to realize the benefit of deferred tax assets are future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and credit carryforwards, taxable income in carry-back years, and tax planning strategies which are both prudent and feasible. For the quarter ended June 30, 2021, the valuation allowance was released for all federal and some state deferred tax assets. This release both increased the deferred tax asset and removed the valuation allowance. The Company will continue to assess all available evidence during future periods to evaluate any changes to the realization of its deferred tax assets.If the Company were to determine that it would be able to realize additional state deferred tax assets in the future, it would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

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

The Company files a consolidated U.S. federal income tax return. The Company prepares and files tax returns based on the interpretation of tax laws and regulations, and records estimates based on these judgments and interpretations. In the normal course of business, the tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities, and the Company records a liability when it is probable that there will be an assessment. The Company adjusts the estimates periodically as a result of ongoing examinations by and settlements with the various taxing authorities, and changes in tax laws, regulations and precedent. The consolidated tax provision of any given year includes

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adjustments to prior years’ income tax accruals that are considered appropriate, and any related estimated interest. Management believes that it has made adequate accruals for income taxes. Differences between estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material effect on the Company’s consolidated financial position but could possibly be material to its consolidated results of operations or cash flow of any one period.

Engineering Development

The Company invests a significant percentage of its sales on engineering development, both Research & Development (“R&D”) and EDC. At June 30, 2022, approximately 19% of the Company’s employees were engineers engaged in various engineering development projects. Total engineering development expense comprises both internally funded R&D and product development and design charges related to specific customer contracts. Engineering development expense consists primarily of payroll-related expenses of employees engaged in EDC projects, engineering related product materials and equipment, and subcontracting costs. R&D charges incurred for product design, product enhancements, and future product development are expensed as incurred. Product development and design charges related to specific customer contracts are charged to cost of sales-EDC based on the method of contract accounting (either percentage-of-completion or completed contract) applicable to such contracts.

Treasury Stock

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

Comprehensive Income

Pursuant to FASB ASC Topic 220, “Comprehensive Income,” the Company is required to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of its condensed consolidated balance sheets. For the three-and nine-month periods ended June 30, 2022 and 2021, comprehensive income consisted of net income only, and there were no items of other comprehensive income for any of the periods presented.

Share-Based Compensation

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

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

Warranty Reserves

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

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warranty obligation is affected by product failure rates and the related corrective costs. If actual product failure rates and/or corrective costs differ from the estimates, the Company revises the estimated warranty liability accordingly.

Self-Insurance Reserves

Since January 1, 2014, the Company has self-insured a significant portion of its employee medical insurance. The Company maintains a stop-loss insurance policy that limits its losses both on a per employee basis and an aggregate basis. Liabilities associated with the risks that are retained by the Company are estimated based upon actuarial assumptions such as historical claims experience and demographic factors. The Company estimated the total medical claims incurred but not reported and the Company believes that it has adequate reserves for these claims at June 30, 2022 and September 30, 2021, respectively. However, the actual value of such claims could be significantly affected if future occurrences and claims differ from these assumptions. At June 30, 2022 and September 30, 2021, the estimated liability for medical claims incurred but not reported was $57,274 and $55,934, respectively. The Company has recorded the excess of funded premiums over estimated claims incurred but not reported of $347,287 and $208,651 as a current asset in the accompanying condensed consolidated balance sheets as of June 30, 2022 and September 30, 2021, respectively.

Concentrations

Major Customers and Products

In the three-month period ended June 30, 2022, 3 customers, Pilatus Aircraft Ltd (“Pilatus”), Textron Aviation, Inc. (“Textron”) and Cargojet Inc., accounted for 27%, 16% and 14% of net sales, respectively. In the nine-month period ended June 30, 2022, 3 customers, Pilatus, Textron and Air Transport Services Group, accounted for 27%, 11% and 10% of net sales, respectively.

In the three-month period ended June 30, 2021, 2 customers, Pilatus, and Textron, accounted for 25%, and 21% of net sales, respectively. In the nine-month period ended June 30, 2021, 2 customers, Pilatus and Textron, accounted for 20% and 17% of net sales, respectively.

Major Suppliers

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

For the three- and nine-month periods ended June 30, 2022, the Company had 0 and 2 suppliers, respectively that were individually responsible for greater than 10% of the Company’s total inventory related purchases.

For the three- and nine-month periods ended June 30, 2021, the Company had three and 1 suppliers, respectively that were individually responsible for greater than 10% of the Company’s total inventory related purchases.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash balances and accounts receivable. The Company invests its excess cash where preservation of principal is the major consideration. Cash balances are maintained with 2 major banks. Balances on deposit with certain money market accounts and operating accounts may exceed the Federal Deposit Insurance Corporation limits. The Company’s customer base consists principally of companies within the aviation industry. The Company requests advance payments and/or letters of credit from customers that it considers to be credit risks.

Recent Accounting Pronouncements

In June 2016, FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument (“ASU 2016-13”). ASU 2016-13 replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for SEC small business filers for fiscal years beginning after December 15, 2022. The impact ASU 2016-13 is not expected to be material for the Company.

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In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies the accounting for income taxes, eliminates certain exceptions within Accounting Standards Codification Topic 740, “Income Taxes” (“ASC 740”), and clarifies certain aspects of ASC 740 to promote consistency among reporting entities. We adopted this update effective October 1, 2021. The adoption of this standard did not have a material impact on our condensed consolidated financial statements or related disclosures.

As new accounting pronouncements are issued, we will adopt those that are applicable.

2. Supplemental Balance Sheet Disclosures

Inventories

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


	June 30,		September 30,
	2022		2021
Raw materials	$	4,116,347	$	3,729,692
Work-in-process		670,883		629,814
Finished goods		117,804		185,886
	$	4,905,034	$	4,545,392

Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:


	June 30,		September 30,
	2022		2021
Prepaid insurance	$	483,344	$	318,138
Income tax		15,118		—
Other		280,388		514,938
	$	778,850	$	833,076

Assets held for sale

The asset classified as held for sale, net consists of the following:


	June 30,		September 30,
	2022		2021
Corporate airplane (Pilatus PC-12)	$	3,142,500	$	—
Less: accumulated depreciation		(1,584,025)		—
	$	1,558,475	$	—

As of June 30, 2022, the Company classified $1.6 million of net property and equipment as “assets held for sale” on the consolidated balance sheet. During the quarter ended June 30, 2022, management of the Company implemented a plan to sell a Company-owned aircraft and commenced efforts to locate a buyer for the aircraft. In June 2022, the Company entered into an agreement to sell the aircraft for $2,900,000, and management expects to complete the sale during the quarter ended September 30, 2022 at which time, the Company will recognize a gain on the sale of the aircraft.

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Property and equipment

Property and equipment, net consists of the following:


	June 30,		September 30,
	2022		2021
Computer equipment	$	2,307,139	$	2,309,053
Corporate airplanes		2,406,468		5,601,039
Furniture and office equipment		976,993		970,725
Manufacturing facility		5,889,491		5,889,491
Equipment		5,624,966		5,545,529
Land		1,021,245		1,021,245
		18,226,302		21,337,082
Less: accumulated depreciation and amortization		(11,844,841)		(13,193,599)
	$	6,381,461	$	8,143,483

Depreciation and amortization related to property and equipment was $89,072 and $90,061 for the three-month periods ended June 30, 2022 and 2021, respectively. The corporate airplanes are utilized primarily in support of product development. The Pilatus PC-12 airplane, 1 of the Company’s 2 corporate airplanes, has been depreciated to its estimated salvage value.

Depreciation and amortization related to property and equipment was approximately $269,567 and $278,956 for the nine-month periods ended June 30, 2022 and 2021, respectively.

Other assets

Other assets consist of the following:


	June 30,		September 30,
	2022		2021
Intangible assets, net of accumulated amortization of $635,095 and $634,032 at June 30, 2022 and September 30, 2021	$	61,411	$	62,474
Operating lease right-of-use asset		32,189		42,976
Other non-current assets		75,300		82,834
	$	168,900	$	188,284

Intangible assets consist of licensing and certification rights which are amortized over a defined number of units. NaN impairment charges were recorded in the nine-month periods ended June 30, 2022 and 2021.

Intangible asset amortization expense was $0 and $16,841 for the three-month periods ended June 30, 2022 and 2021, respectively. Intangible asset amortization expense was $1,063 and $49,314 for the nine-month periods ended June 30, 2022 and 2021, respectively. The timing of future amortization expense is not determinable because the intangible assets are being amortized over a defined number of units.

Other non-current assets as of June 30, 2022 and September 30, 2021 include the security deposit for an airplane hangar and a deposit for medical claims required under the Company’s medical plan. In addition, other non-current assets as of June 30, 2022 and September 30, 2021 includes $0 and $7,535, respectively, of prepaid software licenses that will be earned upon the shipment of a certain product to a customer. Other non-current assets amortization expense was $2,021 and $2,870 for the three-month periods ended June 30, 2022 and 2021, respectively. Other non-current assets amortization expense was $7,534 and $5,980 for the nine-month periods ended June 30, 2022 and 2021, respectively.

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Accrued expenses

Accrued expenses consist of the following:


	June 30,		September 30,
	2022		2021
Warranty	$	600,621	$	589,260
Salary, benefits and payroll taxes		553,482		385,287
Professional fees		176,433		163,130
Income tax		—		104,737
Operating lease		13,782		14,296
Other		339,112		174,405
	$	1,683,430	$	1,431,115

Warranty cost and accrual information for the three-month period ended June 30, 2022 is highlighted below:


	Three Months Ending		Nine Months Ending
	June 30, 2022		June 30, 2022
Warranty accrual, beginning of period	$	585,867	$	589,260
Accrued expense		50,399		115,043
Warranty cost		(35,645)		(103,682)
Warranty accrual, end of period	$	600,621	$	600,621

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.

The income tax expense for the three-month period ended June 30, 2022 was $358,763 as compared to an income tax benefit of $1,473,014 for the three-month period ended June 30, 2021.

The effective tax rate for the three-month period ended June 30, 2022 was 20.9% and differs from the statutory tax rate primarily due to permanent items and state taxes.

The effective tax benefit rate for the three-month period ended June 30, 2021 was 121.4% and differs from the statutory tax rate primarily due to the release of the valuation allowance for deferred tax assets. This release both increased the deferred tax asset and removed the valuation allowance.

The income tax expense for the nine-month period ended June 30, 2022 was $1,056,363 as compared to an income tax benefit of $1,443,352 for the nine-month period ended June 30, 2021.

The effective tax rate for the nine-month period ended June 30, 2022 was 21.2% and differs from the statutory tax rate primarily due to permanent items and state taxes.

The effective tax benefit rate for the nine-month period ended June 30, 2021 was 69.0% and differs from the statutory tax rate primarily due to the release of the valuation allowance for deferred tax assets. This release both increased the deferred tax asset and removed the valuation allowance.

4. Shareholders’ Equity and Share-Based Payments

At June 30, 2022, 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.

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Share-Based compensation

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

Total share-based compensation expense was $58,419 and $45,084 for the three-month periods ended June 30, 2022 and 2021, respectively. Total share-based compensation expense was $308,599 and $295,249 for the nine-month periods ended June 30, 2022 and 2021, respectively.

2019 Stock-Based Incentive Compensation Plan

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

Subject to an adjustment necessary upon a stock dividend, recapitalization, forward split or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase or share exchange, extraordinary or unusual cash distribution, or similar corporate transaction or event, the maximum number of shares of common stock available for awards under the 2019 Plan is 750,000, plus 139,691 shares of common stock that were authorized but unissued under the 2009 Plan as of the effective date of the 2019 Plan (i.e., April 2, 2019), all of which may be issued pursuant to awards of incentive stock options. In addition, the 2019 Plan provides that no more than 300,000 shares may be awarded in any calendar year to any employee. As of June 30, 2022, there were 661,722 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.

The compensation expense related to options issued to employees under the 2019 Plan was $45,088 and $135,273 for the three- and nine-month periods ended June 30, 2022, respectively. The compensation expense related to options issued to employees under the 2019 Plan was $45,084 and $135,269 for the three- and nine-month periods ended June 30, 2021, respectively.

The compensation expense under the 2019 Plan related to shares issued to non-employee members of the Board was $13,331 and $173,326 for the three- and nine-month periods ended June 30, 2022, respectively. The compensation expense under the 2019 Plan related to shares issued to non-employee members of the Board was $0 for the three-month period ended June 30, 2021and $159,980 for the nine-month period ended June 30, 2021.

Total compensation expense associated with the 2019 Plan was $58,419 and $45,084 for the three-month periods ended June 30, 2022 and 2021, respectively. Total compensation expense associated with the 2019 Plan was $308,599 and $295,249 for the nine-month periods ended June 30, 2022 and 2021, respectively.

At June 30, 2022, unrecognized compensation expense of approximately $28,739, net of forfeitures, related to non-vested stock options under the 2019 Plan, will be recognized.

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5. Earnings Per Share


	Three Months Ended June 30,				Nine Months Ended June 30,
	2022		2021		2022		2021
Numerator:
Net income	$	1,359,174	$	2,685,921	$	3,921,802	$	3,534,643
Denominator:
Basic weighted average shares		17,261,349		17,230,387		17,253,822		17,222,312
Dilutive effect of share-based awards		4,449		1,051		1,483		1,596
Diluted weighted average shares		17,265,798		17,231,438		17,255,305		17,223,908

Earnings per common share:
Basic EPS	$	0.08	$	0.16	$	0.23	$	0.21
Diluted EPS	$	0.08	$	0.16	$	0.23	$	0.21

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

The number of incremental shares from the assumed exercise of stock options and RSUs is calculated by using the treasury stock method. As of June 30, 2022 and 2021, there were 100,000 options to purchase common stock outstanding, respectively, and no shares subject to vesting of restricted stock units outstanding, respectively. The average outstanding diluted shares calculation excludes options with an exercise price that exceeds the average market price of shares during the period.

For the three-month periods ended June 30, 2022 and 2021, respectively, 0 and 100,000 diluted weighted-average shares outstanding were excluded from the computation of diluted EPS because the effect would be anti-dilutive.

For the nine-month periods ended June 30, 2022 and 2021, respectively, 66,667 and 100,000 diluted weighted-average shares outstanding were excluded from the computation of diluted EPS because the effect would be anti-dilutive.

6. Contingencies

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

7. Leases

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

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

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

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

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

The following table presents the lease-related assets and liabilities reported in the Consolidated Balance Sheet as of June 30, 2022:


Classification on the Consolidated Balance Sheet on June 30, 2022
Assets
Operating leases	Other assets	$	32,189

Liabilities
Operating leases- current	Accrued expenses	$	13,782
Operating leases – noncurrent	Other liabilities	$	18,407
Total lease liabilities		$	32,189

Rent expense and cash paid for various operating leases in aggregate are $3,669 and $11,007 for the three- and nine-month periods ended June 30, 2022. The weighted average remaining lease term is 2.4 years and the weighted average discount rate is 5.0% as of June 30, 2022.

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Future minimum lease payments under operating leases are as follows at June 30, 2022:


	Twelve Months
	Ending	Operating
	June 30,	Leases
	2023	$	14,676
	2024		14,676
	2025		6,115
Total minimum lease payments		$	35,467
Amount representing interest			(3,278)
Present value of minimum lease payments			32,189
Current portion			(13,782)
Long-term portion of lease obligations		$	18,407

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

The forward-looking statements in this report are only predictions, and actual events or results may differ materially. In evaluating such statements, a number of risks, uncertainties and other factors could cause actual results, performance, financial condition, cash flows, prospects and opportunities to differ materially from those expressed in, or implied by, the forward-looking statements. These risks, uncertainties and other factors include those set forth in Item 1A (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 and the following factors:

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

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

●	the competitive environment and new product offerings from competitors;

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

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

●	the ability to service the international market;

●	the availability of government funding;

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

●	the impact of general economic trends on the Company’s business, including as a result of the COVID-19 pandemic;

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

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

●	delays in receiving components from third-party suppliers;

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

●	protection of intellectual property rights;

●	the ability to respond to technological change;

●	failure to retain/recruit key personnel;

●	risks related to succession planning;

●	a cyber security incident;

●	risks related to our self-insurance program;

●	potential future acquisitions;

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

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

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

Except as expressly required by the federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise after the date of this report. Results of operations in any past period should not be considered indicative of the results to be expected for future periods. Fluctuations in operating results may result in fluctuations in the price of the Company’s common stock.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect

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events, circumstances or changes in expectations after the date of this report, or to reflect the occurrence of unanticipated events. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act of 1933, as amended (the “Securities Act”), and 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Investors should also be aware that while the Company, from time to time, communicates with securities analysts, it is against its policy to disclose any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.

Company Overview

Innovative Solutions and Support, Inc. (the “Company,” “IS&S,” “we” or “us”) was incorporated in Pennsylvania on February 12, 1988. The Company operates in one business segment as a systems integrator that designs, develops, manufactures, sells and services air data equipment, engine display systems, standby equipment, primary flight guidance, autothrottles and cockpit display systems for retrofit applications and original equipment manufacturers (“OEMs”). The Company supplies integrated Flight Management Systems (“FMS”), Flat Panel Display Systems (“FPDS”), FPDS with Autothrottle, air data equipment, Integrated Standby Units (“ISU”), ISU with Autothrottle and advanced GPS receivers that enable reduced carbon footprint navigation.

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

The Company has developed an FMS that combines the savings long associated with in-flight fuel optimization in enroute flight management combined with the precision of satellite-based navigation required to comply with the regulatory environments of both domestic and international markets. The Company believes that the FMS, alongside its FPDS and CIP product lines, is well suited to address market demand driven by certain regulatory mandates, new technologies, and the high cost of maintaining aging and obsolete equipment on aircraft that will be in service for up to fifty years. The shift in the regulatory and technological environment is illustrated by the dramatic increase in the number of Space Based Augmentation System (“SBAS”) or Wide Area Augmentation System (“WAAS”) approach qualified airports, particularly as realized through Localizer Performance with Vertical guidance (“LPV”) navigation procedures. Aircraft equipped with the Company’s FMS, FPDS and SBAS/WAAS/LPV enabled navigator, will be qualified to land at such airports and will comply with Federal Aviation Administration (“FAA”) mandates for Required Navigation Performance, and Automatic Dependent Surveillance-Broadcast navigation. IS&S believes this will further increase the demand for the Company’s products. The Company’s FMS/FPDS product line is designed for new production and retrofit applications into general aviation, commercial air transport and military transport aircraft. In addition, the Company offers what we believe to be a state-of-the-art ISU, integrating the full functionality of the primary and navigation displays into a small backup-powered unit. This ISU builds on the Company’s legacy air data computer to form a complete next-generation cockpit display and navigation upgrade offering to the commercial and military markets.

The Company has developed and received certification from the FAA on its NextGen Flight Deck featuring its ThrustSense® Integrated PT6 Autothrottle (“ThrustSense® Autothrottle”) for retrofit in the Pilatus PC-12. The NextGen Flight Deck features Primary Flight and Multi-Function Displays and ISUs, as well as an Integrated FMS and EFB System. The innovative avionics suite includes dual flight management systems, autothrottles, synthetic vision and enhanced vision. The NextGen enhanced avionics suite is available for integration into other business aircraft with Non-FADEC and FADEC engines.

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

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

The Company sells to both the OEM and the retrofit markets. Customers include various OEMs, commercial air transport carriers and corporate/general aviation companies, DoD and its commercial contractors, aircraft operators, aircraft modification centers, government agencies, and foreign militaries. Occasionally, IS&S sells its products directly to DoD; however, the Company sells its products primarily to commercial customers for end use in DoD programs. Sales to defense contractors are generally made on commercial terms, although some of the termination and other provisions of government contracts are applicable to these contracts. The Company’s retrofit projects are generally pursuant to either a direct contract with a customer or a subcontract with a general contractor to a customer (including government agencies).

Customers have been and may continue to be affected by changes in economic conditions both in the United States 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, the war between Russia and Ukraine and the global response to this war, the impact of the ongoing COVID-19 pandemic, 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, and other macroeconomic factors that affect spending behavior. Furthermore, spending by government agencies may be reduced in the future if tax revenues decline. 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.

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

The ongoing COVID-19 pandemic is nevertheless a significant event, driver of market trends, and source of uncertainty that may ultimately have a direct or indirect material impact on the Company’s business, financial position, liquidity, or ability to service customers or maintain critical operations. In direct response to the COVID-19 pandemic, the Company has taken specific actions to seek to ensure the safety of its employees, including temperature monitoring, frequent sanitization of workspaces, observance of social distancing protocols, and other increased safety measures.

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

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

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Selling, general and administrative expenses consist of sales, marketing, business development, professional services, salaries and benefits for executive and administrative personnel, facility costs, recruiting, legal, accounting and other general corporate expenses.

Critical Accounting Policies and Estimates

The discussion and analysis of financial condition and consolidated results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. 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. On an ongoing basis, IS&S management evaluates its estimates based upon historical experience and various other assumptions that it believes to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The Company believes that its critical accounting policies affect its more significant estimates and judgments used in the preparation of its consolidated financial statements. The Annual Report on Form 10-K for the fiscal year ended September 30, 2021 contains a discussion of these critical accounting policies. There have been no significant changes in the Company’s critical accounting policies since September 30, 2021. See also Note 1 to the unaudited condensed consolidated financial statements for the three and nine months ended June 30, 2022 as set forth herein.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED

JUNE 30, 2022 AND 2021

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


	Three Months Ended June 30,				Nine Months Ended June 30,
	2022		2021		2022		2021
Net sales:
Product	100.0	%	96.8	%	99.0	%	98.2	%
Engineering development contracts	0.0	%	3.2	%	1.0	%	1.8	%
Total net sales	100.0	%	100.0	%	100.0	%	100.0	%

Cost of sales:
Product	41.5	%	44.7	%	40.3	%	45.0	%
Engineering development contracts	0.0	%	1.0	%	0.1	%	0.5	%
Total cost of sales	41.5	%	45.7	%	40.4	%	45.4	%

Gross profit	58.5	%	54.3	%	59.6	%	54.6	%

Operating expenses:
Research and development	9.8	%	10.5	%	10.1	%	12.0	%
Selling, general and administrative	24.4	%	24.5	%	25.5	%	30.0	%
Total operating expenses	34.2	%	34.9	%	35.6	%	42.0	%

Operating income	24.3	%	19.3	%	24.0	%	12.6	%

Interest income	0.2	%	0.0	%	0.1	%	0.0	%
Other income	0.3	%	0.3	%	0.2	%	0.3	%
Income before income taxes	24.8	%	19.6	%	24.3	%	12.9	%

Income tax expense	5.2	%	(23.8)	%	5.2	%	(8.9)	%

Net income	19.6	%	43.5	%	19.2	%	21.9	%

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Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021

Net sales. Net sales were $6,935,976 for the three months ended June 30, 2022 compared to $6,180,183 for the three months ended June 30, 2021, an increase of 12.2%. Product sales increased $596,467 and customer service sales increased $358,048 in the three months ended June 30, 2022 compared to the year ago quarter. This increase in product sales for the three months ended June 30, 2022 was primarily the result of additional shipments of displays for retrofit programs to commercial air transport customers as well as additional volume sold to Pilatus under the Company’s PC-24 contract.

Cost of sales. Cost of sales increased $53,781, or 1.9%, to $2,879,462, or 41.5% of net sales, in the three months ended June 30, 2022, compared to $2,825,681 or 45.7% of net sales, in the three months ended June 30, 2021. The increase in cost of sales was primarily the result of an increase in product sales volume for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The Company’s overall gross margin was 58.5% and 54.3% for the three months ended June 30, 2022 and 2021, respectively. The increase in gross margin percentage for the three months ended June 30, 2022 is attributable to favorable leveraging of fixed costs resulting from the increased sales and production volume, lower FTE’s, and a favorable product mix.

Research and development. R&D expense decreased $29,586, or 4.6%, to $676,381 in the three months ended June 30, 2022 from $646,795 in the three months ended June 30, 2021. As a percentage of net sales, R&D expense decreased to 9.8% of net sales in the three months ended June 30, 2022 from 10.5% of net sales in the three months ended June 30, 2021 reflecting increased net sales in the current quarter. The increase in R&D expense in the quarter was primarily the result of a slight decrease in payroll and payroll related benefits.

Selling, general and administrative. Selling, general and administrative expense increased by $182,095 or 12.0% to $1,694,233 in the three months ended June 30, 2022 from $1,512,138 in the three months ended June 30, 2021. As a percentage of net sales, selling, general and administrative expenses remained consistent on a quarterly basis to prior year. The overall increase in selling, general and administrative expense in the quarter was primarily the result of an increase in professional fees.

Interest income. Interest income increased by $10,322 to $10,429 in the three months ended June 30, 2022 from $107 in the three months ended June 30, 2021, mainly a result of increased cash balance in the current year period compared to the same period in the prior year.

Other income. Other income is mainly composed of royalties earned and increased by $4,377 to $21,608 in the three months ended June 30, 2022 compared to the same period in the prior year.

Income tax expense. The income tax expense for the three months ended June 30, 2022 was $358,763 as compared to an income tax benefit of $1,473,014 for the three months ended June 30, 2021. This difference was the result of the release of valuation allowances against deferred tax assets in the prior year.

The effective tax rate for the three-month period ended June 30, 2022 was 20.9% and differs from the statutory tax rate primarily due to permanent items and state taxes.

Net income. The Company reported net income for the three months ended June 30, 2022 of $1,359,174 compared to net income of $2,685,921 for the three months ended June 30, 2021. On a diluted basis, the net income per share was $0.08 for the three months ended June 30, 2022 compared to net income per share of $0.16 for the three months ended June 30, 2021.

Nine Months Ended June 30, 2022 Compared to the Nine Months Ended June 30, 2021

Net sales. Net sales were $20,477,574 for the nine months ended June 30, 2022 compared to $16,171,680 for the nine months ended June 30, 2021, an increase of 26.6%. Product sales increased $3,618,631, customer service increased $773,773 and EDC sales decreased ($86,510) in the nine months ended June 30, 2022 compared to the same period in the prior year. This increase in product sales for the nine months ended June 30, 2022 primarily resulted from increased shipments of displays for retrofit programs to commercial air transport customers as well as increased shipments to Pilatus under the Company’s PC-24 contract.

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Cost of sales. Cost of sales increased $922,365, or 12.6%, to $8,270,729, or 40.4% of net sales, in the nine months ended June 30, 2022, compared to $7,348,364 or 45.4% of net sales, in the nine months ended June 30, 2021. The increase in cost of sales was primarily the result of an increase in product sales volume for the nine months ended June 30, 2022 compared to the nine months ended June 30, 2021. The Company’s overall gross margin was 59.6% and 54.6% for the nine months ended June 30, 2022 and 2021, respectively. The increase in gross margin percentage for the nine months ended June 30, 2022 is attributable to favorable leveraging of fixed costs resulting from the increased sales and production volume, lower FTE’s, and a favorable product mix.

Research and development. R&D expense increased $126,190, or 6.5%, to $2,062,937 in the nine months ended June 30, 2022 from $1,936,747 in the nine months ended June 30, 2021. As a percentage of net sales, R&D expense decreased to 10.1% of net sales in the nine months ended June 30, 2022 from 12.0% of net sales in the nine months ended June 30, 2021 reflecting increased net sales in the current period compared to the same period in the prior year. Also driving the expense lower as a percentage of sales as of June 30, 2022 was a lower proportion of efforts focused upon product development programs.

Selling, general and administrative. Selling, general and administrative expense increased by $378,605 to $5,226,015 in the nine months ended June 30, 2022 from $4,847,410 in the nine months ended June 30, 2021. As a percentage of net sales, selling, general and administrative expenses decreased to 25.5% of net sales in the nine months ended June 30, 2022 from 30.0% of net sales in the nine months ended June 30, 2021 reflecting increased net sales and leveraging of fixed costs in the period compared to the same period in the prior year. The overall increase in selling, general and administrative expense in the period was primarily the result of professional fees, adding FTE’s, and the resumption of sales and business development expenses as a result of returning to more normal business conditions post COVID.

Interest income. Interest income increased by $9,733 to $10,871 in the nine months ended June 30, 2022 from $1,138 in the nine months ended June 30, 2021, mainly a result of increased cash balance in the current year period compared to the same period in the prior year.

Other income. Other income is mainly composed of royalties earned and decreased by $1,593 to $49,401 in the nine months ended June 30, 2022 compared to the same period in the prior year.

Income tax expense. The income tax expense for the nine months ended June 30, 2022 was $1,056,363 as compared to an income tax benefit of $1,443,352 for the nine months ended June 30, 2021. This difference was the result of the release of valuation allowances against deferred tax assets in the prior year.

The effective tax rate for the nine-month period ended June 30, 2022 was 21.2% and differs from the statutory tax rate primarily due to permanent items and state taxes.

Net income. The Company reported net income for the nine months ended June 30, 2022 of $3,921,802 compared to net income of $3,534,643 for the nine months ended June 30, 2021. On a diluted basis, the net income per share was $0.23 for the nine months ended June 30, 2022 compared to net income per share of $0.21 for the nine months ended June 30, 2021.

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Liquidity and Capital Resources

The following table highlights key financial measurements of the Company:


	June 30,		September 30,
	2022		2021
Cash and cash equivalents	$	14,541,901	$	8,265,606
Accounts receivable		3,003,362		4,046,337
Current assets		24,787,622		17,690,411
Current liabilities		2,765,025		2,472,239
Contract liability		329,116		417,504
Other non-current liabilities (1)		18,407		28,680
Quick ratio (2)		6.35		4.98
Current ratio (3)		8.40		7.16


	Nine Months Ended June 30,
	2022		2021
Cash flow activities:
Net cash provided by operating activities	$	6,420,371	$	3,793,104
Net cash used in investing activities		(161,230)		(324,025)
Net cash provided by (used in) financing activities		17,154		(19,771,082)

(1)	Excludes contract liability

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

(3)	Calculated as: current assets divided by current liabilities

The Company’s principal source of liquidity has been cash flows from current year operations and cash accumulated from prior years’ operations. Cash is used principally to finance inventory, accounts receivable, contract assets, and payroll, as well as the Company’s known contractual and other commitments (including those described in Note 7, “Leases”). The Company’s existing cash balances and anticipated cash flows from operations 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.

On September 4, 2020, the Company’s Board of Directors declared a special cash dividend in the amount of $0.65 per share, payable on October 1, 2020 to shareholders of record as of the close of business on September 15, 2020. The total dividend payment was approximately $11.2 million.

On December 10, 2020, the Company’s Board of Directors declared a special cash dividend in the amount of $0.50 per share, payable on December 30, 2020 to shareholders of record as of the close of business on December 21, 2020. The total dividend payment was approximately $8.6 million.

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

The ongoing COVID-19 pandemic is a significant event, driver of market trends, and source of uncertainty that may have a material impact on the Company’s liquidity, financial condition, capital resources, cash flows or operating results. In direct response to the COVID-19 pandemic, the Company has taken specific actions to seek to ensure the safety of its employees, including temperature monitoring, frequent sanitization of workspaces, observance of social distancing protocols, and other increased safety measures.

Operating activities

Net cash provided by operating activities for the nine-month period ended June 30, 2022 resulted primarily from funding from net income of $3,921,802, a decrease in accounts receivables of $1,042,975 and a decrease in deferred income taxes of $785,737.

Net cash provided by operating activities for the nine months ended June 30, 2021 resulted primarily from funding from net income of $3,534,643 and an increase in contract liability of $1,215,329, the majority of this increase in contract liability is from one customer

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offset by an increase in deferred income taxes of $1,461,617, primarily due to the release of the valuation allowance against all of the Company’s federal and some state deferred tax assets.

Investing activities

Net cash used in investing activities was $161,230 for the nine-month period ended June 30, 2022 and consisted primarily of the purchase of laboratory test equipment and computer hardware.

Net cash used in investing activities was $324,025 for the nine months ended June 30, 2021 and consisted primarily of leasehold improvements and laboratory test equipment.

Financing activities

Net cash provided by financing activities was $17,154 for the nine-month period ended June 30, 2022 and consisted of proceeds from the exercise of stock options.

Net cash used in financing activities was $19,771,082 for the nine-month period ended June 30, 2021 and consisted primarily of dividends paid.

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.

Impact of the Russia and Ukraine War

We are closely monitoring Russia’s invasion of Ukraine, which remains an evolving and uncertain situation. Neither Russia nor Ukraine represents a material portion of our business, and therefore, the war thus far has not had a significant effect on our results of operations. Additionally, the war has not significantly affected our ability to source supplies or deliver our products and services to our customers. However, the implications of this war may expand beyond its current scope, potentially resulting in significant adverse impacts on our business.

Impact of the COVID-19 Pandemic

Environmental, Social and Governance Considerations

In recent years, environmental, social and governance (“ESG”) issues have become an increasing area of focus for some of our shareholders, customers and suppliers. Management and the Company’s Board of Directors are committed to identifying, assessing, and understanding the potential impact of ESG issues and related risks on the Company’s business model, as well as potential areas of improvement.

We are committed to recruiting, motivating and developing a diversity of talent. We are an equal opportunity employer and a Vietnam Era Veterans’ Readjustment Assistance Act federal contractor. All qualified applicants receive consideration for employment without

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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.

Backlog

Backlog represents the value of contracts and purchase orders, less the revenue recognized to date on those contracts and purchase orders. Backlog activity for the three-month period ended June 30, 2022:


	Three Months Ended		Nine Months Ended

	June 30, 2022
Backlog, beginning of period	$	7,542,868	$	9,121,585
Bookings, net		11,979,618		23,942,499
Recognized in revenue		(6,935,976)		(20,477,574)
Backlog, end of period	$	12,586,510	$	12,586,510

At June 30, 2022, the majority of the Company’s backlog is expected to be filled within the next twelve months. To the extent new business orders do not continue to equal or exceed sales recognized in the future from the Company’s existing backlog, future operating results may be impacted negatively.

Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s operations are exposed to market risks primarily as a result of changes in interest rates. The Company does not use derivative financial instruments for speculative or trading purposes. The Company’s exposure to market risk for changes in interest rates relates to its cash equivalents. The Company’s cash equivalents consist of funds invested in money market accounts, which bear interest at a variable rate. The Company does not participate in interest rate hedging. Cash balances are maintained with two major banks. Balances on deposit with certain money market accounts and operating accounts may exceed the Federal Deposit Insurance Corporation limits. A change in interest rates earned on the cash equivalents would impact interest income and cash flows but would not impact the fair market value of the related underlying instruments. Assuming that the balances during the three-month period ended June 30, 2022 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 $26,200 and $63,700 with a resulting impact on cash flows of approximately $26,200 and $63,700 for the three- and nine-month periods ended June 30, 2022.

Item 4. Controls and Procedures

(a)

We carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act of 1934. Based on that evaluation, our chief executive officer and chief financial officer concluded that these controls and procedures were effective as of June 30, 2022 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission and accumulated and communicated to our management including our chief executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.

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(b)

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

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PART II–OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

The information set forth in this report should be read in conjunction with the risk factors described under Item 1A of the Company’s Form 10-K for the fiscal year ended September 30, 2021. Such risks are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial could materially and adversely affect the Company’s business, operating results, financial condition, cash flows, prospects, and the value of an investment in IS&S common stock.

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

None

Item 3. Defaults upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None.

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Item 6. Exhibits

(a) Exhibits

31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) ⁽¹⁾

31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) ⁽¹⁾

32.1	Certification Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ⁽²⁾

101.INS	XBRL Instance Document ⁽¹⁾

101.SCH	XBRL Taxonomy Extension Scheme Document ⁽¹⁾

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document ⁽¹⁾

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document ⁽¹⁾

101.LAB	XBRL Taxonomy Extension Label Linkbase Document ⁽¹⁾

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document ⁽¹⁾

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

(1)	Filed herewith

(2)	Furnished herewith

Table of Contents

SIGNATURE

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

	INNOVATIVE SOLUTIONS AND SUPPORT, INC.

Date: August 12, 2022	By:	/s/ MICHAEL LINACRE
		MICHAEL LINACRE
		CHIEF FINANCIAL OFFICER

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Innovative Solutions and Support (ISSC) 10-Q2022 Q3 Quarterly report

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