UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, ~~2017~~2022

OR

☐oTRANSITION 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		~~(I.R.S. Employer~~
of Incorporation or Organization)		~~Identification No.)~~

~~720 Pennsylvania Drive, Exton, Pennsylvania~~		~~19341~~(I.R.S. Employer Identification No.)

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

~~(610)~~ (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 x☒ No o☐

Indicate by check mark whether the Registrant has submitted electronically ~~and posted on its corporate Website, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). Yes x☒ No o

☐

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.

o☐ Large accelerated filer		o☐ Accelerated filer
☐ Non-accelerated filer
o ~~Non-accelerated filer (Do not check if a smaller reporting company)~~		x☒ Smaller reporting company

o☐ 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. o☐

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

☒

As of January 31, ~~2018,~~2023, there were ~~16,840,599~~17,398,808 shares of the Registrant’s Common Stock, with par value of $.001 per share, outstanding.

Table of Contents

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

FORM 10-Q December 31, ~~2017~~2022

INDEX

~~INDEX~~


			Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements
~~Item 1.~~	~~Financial Statements~~

	~~Condensed~~ Consolidated Balance Sheets —– December 31, ~~2017~~2022 (unaudited) and September 30, ~~2017~~2021	1

	~~Condensed~~ Consolidated Statements of Operations —– Three Months Ended December 31, ~~2017~~2022 and ~~2016~~2021 (unaudited)	2

	Consolidated Statements of Shareholders’ Equity – Three Months Ended December 31, 2022 and 2021 (unaudited)		3 - 4

	~~Condensed~~ Consolidated Statements of Cash Flows —– Three Months Ended December 31, ~~2017~~2022 and ~~2016~~2021 (unaudited)	35

	Notes to ~~Condensed~~ Consolidated Financial Statements (unaudited)	~~4 – 15~~6 - 18

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~16 – 22~~19 - 25

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2226

Item 4.	Controls and Procedures	26


~~Item 4.~~	~~Controls and Procedures~~	22

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	27

Item 1.1A.	~~Legal Proceedings~~Risk Factors	2327

Item ~~1A.~~2.	~~Risk Factors~~	23

~~Item 2.~~	Unregistered Sales of Equity Securities and Use of Proceeds	2327

Item 3.	Defaults upon Senior Securities	2327

Item 4.	Mine Safety Disclosures	27

Item 5.	Other Information	27

Item 6.	Exhibits	28
~~Item 4.~~	~~Mine Safety Disclosures~~	23

~~Item 5.~~	~~Other Information~~	23

~~Item 6.~~	~~Exhibits~~	23

SIGNATURES		2429

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1- Financial Statements

~~Item 1- Financial Statements~~

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

~~CONDENSED~~ CONSOLIDATED BALANCE SHEETS


	December 31,		September 30,
	2022		2022
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	19,443,231	$	17,250,546
Accounts receivables		3,316,519		4,297,457
Contract assets		162,742		162,742
Inventories		5,252,295		5,349,104
Prepaid expenses and other current assets		1,049,206		1,142,470
Total current assets		29,223,993		28,202,319
Property and equipment, net		6,239,496		6,292,189
Deferred income taxes		331,176		46,487
Other assets		160,862		164,328
Total assets	$	35,955,527	$	34,705,323

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	842,262	$	708,845
Accrued expenses		2,508,971		2,972,275
Contract liability		83,221		135,686
Contract liability - related party		8,558		123,497
Total current liabilities		3,443,012		3,940,303

Other liabilities		421,938		15,065

Total liabilities		3,864,950		3,955,368

Commitments and contingencies (See Note 6)

Shareholders’ equity
Preferred stock, 10,000,000 shares authorized, $.001 par value, of which 200,000 shares are authorized as Class A Convertible stock. No shares issued and outstanding at December 31, 2022 and September 30, 2022		—		—
Common stock, $.001 par value: 75,000,000 shares authorized, 19,470,248 and 19,412,664 issued at December 31, 2022 and September 30, 2022		19,470		19,413
Additional paid-in capital		53,100,035		52,458,121
Retained Earnings (accumulated deficit)		339,609		(359,042)
Treasury stock, at cost, 2,096,451 shares at December 31, 2022 and September 30, 2022		(21,368,537)		(21,368,537)

Total shareholders’ equity		32,090,577		30,749,955
Total liabilities and shareholders’ equity	$	35,955,527	$	34,705,323

December 31,

September 30,

2017

2017

(unaudited)

ASSETS

Current assets

Cash and cash equivalents

$
24,662,454

$
24,680,301

Accounts receivable

1,480,622

2,748,597

Unbilled receivables, net

1,083,165

1,480,822

Inventories

4,495,051

4,179,654

Prepaid expenses and other current assets

1,102,047

1,092,064

Total current assets

32,823,339

34,181,438

Property and equipment, net

6,649,220

6,669,011

Other assets

187,016

187,315

Total assets

$
39,659,575

$
41,037,764

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities

Accounts payable

$
926,766

$
1,321,251

Accrued expenses

1,739,028

1,760,037

Deferred revenue

137,465

280,354

Total current liabilities

2,803,259

3,361,642

Deferred income taxes

129,555

67,742

Total liabilities

2,932,814

3,429,384

Commitments and contingencies (See Note 6)

Shareholders’ equity

Preferred stock, 10,000,000 shares authorized, $.001 par value, of which 200,000 shares are authorized as Class A Convertible stock. No shares issued and outstanding at December 31, 2017 and September 30, 2017

$
—

$
—

Common stock, $.001 par value: 75,000,000 shares authorized, 18,879,580 issued at December 31, 2017 and September 30, 2017

18,880

18,880

Additional paid-in capital

51,583,841

51,583,841

Retained earnings

6,492,577

7,374,196

Treasury stock, at cost, 2,096,451 shares at December 31, 2017 and September 30, 2017

(21,368,537
)
(21,368,537
)

Total shareholders’ equity

36,726,761

37,608,380

Total liabilities and shareholders’ equity

$
39,659,575

$
41,037,764

The accompanying notes are an integral part of these statements.

1

Table of Contents

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

~~CONDENSED~~ CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

Three Months Ended December 31,

2017

2016

Sales:

Product

$
3,087,984

$
3,475,171

Engineering development contracts

—

348,876

Returns and allowances

—

(458,181
)
Total net sales

3,087,984

3,365,866

Cost of sales:

Product

1,593,268

1,740,703

Engineering development contracts

—

87,349

Total cost of sales

1,593,268

1,828,052

Gross profit

1,494,716

1,537,814

Operating expenses:

Research and development

923,721

1,085,988

Selling, general and administrative

1,622,555

2,047,121

Total operating expenses

2,546,276

3,133,109

Operating loss

(1,051,560
)
(1,595,295
)

Interest income

9,624

9,876

Other income

21,431

19,114

Loss before income taxes

(1,020,505
)
(1,566,305
)

Income tax benefit

(138,886
)
(371,331
)

Net loss

$
(881,619
)
$
(1,194,974
)

Net loss per common share:

Basic

$
(0.05
)
$
(0.07
)
Diluted

$
(0.05
)
$
(0.07
)

Weighted average shares outstanding:

Basic

16,783,129

16,716,014

Diluted

16,783,129

16,716,014


	Three Months Ended December 31,
	2022		2021
Net Sales:
Product	$	6,149,357	$	6,695,778
Engineering development contracts		366,899		—
Total net sales		6,516,256		6,695,778

Cost of sales:
Product		2,735,046		2,728,057
Engineering development contracts		57,406		—
Total cost of sales		2,792,452		2,728,057

Gross profit		3,723,804		3,967,721

Operating expenses:
Research and development		670,445		736,525
Selling, general and administrative		2,261,863		1,806,982
Total operating expenses		2,932,308		2,543,507

Operating income		791,496		1,424,214

Interest income		115,892		96
Other income		18,196		16,238
Income before income taxes		925,584		1,440,548

Income tax expense		226,933		307,490

Net income	$	698,651	$	1,133,058

Net income per common share:
Basic	$	0.04	$	0.07
Diluted	$	0.04	$	0.07

Weighted average shares outstanding:
Basic		17,316,766		17,246,372
Diluted		17,326,177		17,246,372

The accompanying notes are an integral part of these statements.

2

Table of Contents

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~(unaudited)

~~(unaudited)~~


	Three Months Ended December 31, 2022
						(Accumulated
				Additional		Deficit)
	Common			Paid-In		Retained		Treasury
	Stock			Capital		Earnings		Stock		Total
Balance, September 30, 2022	$	19,413		$	52,458,121	$	(359,042)	$	(21,368,537)	$	30,749,955

Share-based compensation		—			233,125		—		—		233,125
Exercise of stock options		57	��		408,789		—		—		408,846
Net income		—			—		698,651		—		698,651

Balance, December 31, 2022	$	19,470		$	53,100,035	$	339,609	$	(21,368,537)	$	32,090,577

For the Three Months Ended December 31 ,

2017

2016

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

$
(881,619
)
$
(1,194,974
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization

103,368

108,336

Deferred income taxes

61,813

7

(Increase) decrease in:

Accounts receivable

1,267,975

724,111

Unbilled receivables, net

397,657

(6,397
)
Inventories

(315,397
)
(552,604
)
Prepaid expenses and other current assets

191,171

(2,594
)
Income taxes

(201,155
)
(372,794
)
Increase (decrease) in:

Accounts payable, net

(394,485
)
209,845

Accrued expenses

(21,009
)
356,246

Deferred revenue

(142,889
)
171,644

Net cash provided by (used in) operating activities

65,430

(559,174
)

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment

(83,277
)
(47,340
)
Net cash used in investing activities

(83,277
)
(47,340
)

CASH FLOWS FROM FINANCING ACTIVITIES:

Purchase of Company’s stock

—

—

Net cash used in financing activities

—

—

Net decrease in cash and cash equivalents

(17,847
)
(606,514
)
Cash and cash equivalents, beginning of year

24,680,301

18,767,661

Cash and cash equivalents, end of period

$
24,662,454

$
18,161,147

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid for income tax

$
—

$
—

The accompanying notes are an integral part of these statements.

3

Table of Contents

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(unaudited)


	Three Months Ended December 31, 2021
			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		—		45,591		—		—		45,591
Net income		—		—		1,133,058		—		1,133,058

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

The accompanying notes are an integral part of these statements.

4

Table of Contents

INNOVATIVE SOLUTIONS AND SUPPORT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	For the Three Months Ended December 31,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	698,651	$	1,133,058
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		85,409		92,372
Share-based compensation expense
Stock options		—		45,591
Stock awards		283,195		40,018
Deferred income taxes		(284,689)		231,298
(Increase) decrease in:
Accounts receivable		980,938		325,121
Inventories		96,809		(61,083)
Prepaid expenses and other assets		93,264		(48,402)
Increase (decrease) in:
Accounts payable		133,417		(123,156)
Accrued expenses		(614,657)		(111,624)
Income taxes payable		511,622		76,192
Contract liability		(167,404)		(81,650)
Net cash provided by operating activities		1,816,555		1,517,735

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(32,716)		(77,348)
Net cash used in investing activities		(32,716)		(77,348)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options		408,846		—
Net cash provided by financing activities		408,846		—

Net increase in cash and cash equivalents		2,192,685		1,440,387
Cash and cash equivalents, beginning of period		17,250,546		8,265,606

Cash and cash equivalents, end of period	$	19,443,231	$	9,705,993

The accompanying notes are an integral part of these statements.

5

Table of Contents

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”~~“Company,” “IS&S,” “we” or ~~“IS&S”~~“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 Global Positioning System (“GPS”) receivers that enable reduced carbon footprint ~~navigation and an Autothrottle, which allows a pilot to automatically control the power setting of the engine and is designed to reduce pilot workload and enhance safety.~~

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. ~~The~~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. Customers include commercial air transport carriers and corporate/general aviation companies, the DoD and its commercial contractors, aircraft operators, aircraft modification centers, foreign militaries, and various OEMs.

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, ~~2017~~2022 is derived from the audited financial statements of the Company. Operating results for the ~~three months~~three-month period ended December 31, ~~2017~~2022 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, ~~2018.~~2023. 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, ~~2017.~~2022.

Principles of Consolidation

The Company’s ~~condensed~~ consolidated financial statements include the accounts of its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The ~~Company prepares its condensed consolidated~~ financial statements of the Company have been prepared in ~~conformity~~accordance with ~~GAAP,~~accounting principles generally accepted in the United States of America, which ~~requires~~require management to make estimates and assumptions that affect the amounts reported ~~amounts of assets and liabilities, and disclosure of contingent assets and liabilities, as of the date of~~in the financial ~~statements and the reported amounts of net sales and expenses during the reporting period.~~statements. Actual results could differ from those estimates. Estimates are used in accounting for, among other items, long term contracts, ~~allowance~~allowances for doubtful accounts, inventory obsolescence, product warranty cost liabilities, income taxes, engineering and material costs on Engineering Development ~~Contracts~~Contract (“EDC”) programs, ~~percentage-of-completion~~percentage of completion on EDC contracts, recoverability of long-lived assets ~~stock-based compensation expense, self-insurance reserves,~~ and contingencies. ~~Actual results could differ materially from those estimates.~~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 December 31, ~~2017~~2022 and September 30, ~~2017~~2022 consist of cash on deposit and cash invested in money market funds with financial institutions.

6

Table of Contents

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. The building is being~~airplane, which are depreciated ~~on a~~using the straight-line ~~basis~~method over ~~39 years. During the three months ended December 31, 2017~~their estimated useful lives of thirty-nine years and ~~2016, no depreciation was provided for the airplane because it had been depreciated to its estimated salvage value.~~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.

~~Fair Value of Financial Instruments~~

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

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

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

· ~~Quoted prices for similar assets or liabilities in active markets;~~

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

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

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

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

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2017 and September 30, 2017, according to the valuation techniques the Company used to determine their fair values.

Fair Value Measurement on December 31, 2017

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

$
23,906,780

$
—

$
—

Fair Value Measurement on September 30, 2017

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

$
23,897,092

$
—

$
—

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 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. No impairment charges were recorded during the ~~three months~~three-month periods ended December 31, ~~2017~~2022 or ~~2016.~~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;

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●

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

●

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

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

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2022 and September 30, 2022, according to the valuation techniques the Company used to determine their fair values.

Fair Value Measurement on December 31, 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

$
16,194,409

$
—

$
—

Fair Value Measurement on September 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

$
16,083,571

$
—

$
—

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 that measure and display critical flight information, including data relative to aircraft separation, airspeed, altitude, and engine and fuel data measurements. ~~The Company’s sales arrangements may include multiple deliverables as defined in FASB ASC Topic 605-25 “~~

~~Multiple-Element Arrangements~~Revenue from Contracts with Customers~~” (“ASC Topic 605-25”), which typically include design and engineering services and the production and delivery of the flat panel display and related components.~~

The Company includes any design and engineering development services elements in EDC sales and any functional upgrade and product elements in product sales on the accompanying consolidated statements of operations.

~~To the extent that an arrangement contains software elements that are essential to the functionality of tangible products sold in the arrangement, the Company recognizes revenue~~accounts for ~~the deliverables in accordance with the guidance included in FASB Accounting Standards Update 2009-14, “~~~~Revenue Arrangements That Include Software Elements~~~~” (“ASU 2009-14”); and FASB Accounting Standards Update 2009-13, “~~~~Multiple-Deliverable Revenue Arrangements-a consensus of the FASB Emerging Issues Task Force~~~~” (“ASU 2009-13”); and FASB ASC Topic 605, “~~~~Revenue Recognition~~~~” (“ASC Topic 605”).~~

To the extent that an arrangement contains software components, which include functional upgrades that the Company sells on a standalone basis and which the Company has deemed outside the scope of the exception defined by ASU 2009-14, the Company recognizes software revenue in accordance with ASC ~~Topic 985,~~ 606, Revenue from Contracts with Customers (“~~Software~~~~” (“~~ASC ~~Topic 985”~~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:

~~Multiple Element Arrangements -~~

1)
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 ~~and/~~or services that are ~~to be delivered separately under a sales arrangement and allocates sales to each deliverable (if more than one)~~transferred is probable based on ~~that deliverable’s fair value.~~the customer’s intent and ability to pay the promised consideration. The Company ~~then considers~~applies judgment in determining the ~~appropriate recognition method for each deliverable. The Company’s multiple element arrangements can include defined design~~customer’s ability and ~~development activities, and/or functional upgrades, and product sales.~~

~~The Company utilizes the selling price hierarchy that has been established by ASU 2009-13,~~intention to pay, which ~~requires that the selling price for each deliverable be~~is based on ~~vendor-specific objective evidence if~~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.

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2)

Identify the performance obligations in the contract

Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available ~~third-party evidence if vendor-specific objective evidence~~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 ~~not~~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 ~~estimated selling~~services are accounted for as a combined performance obligation.

3)

Determine the transaction price

The transaction price ~~if neither vendor-specific objective evidence nor third-party evidence~~ is ~~available.~~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 ~~an arrangement includes~~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 ~~deliverable for~~significant future reversal of cumulative revenue under the contract will not occur.

4)

Allocate the transaction price to performance obligations in the contract

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

5)

Recognize revenue when or as the Company satisfies a performance obligation

The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to ~~determine the price to sell the deliverable on~~ a ~~standalone basis.~~

~~To the extent that an arrangement contains defined design and EDC activities as identified deliverables in addition to products (resulting in a multiple element arrangement),~~customer. Historically, the Company ~~recognizes as EDC sales amounts earned during the design and development phase of the contract following the guidance included in FASB ASC Topic 605-35,~~ ~~“Construction-Type and Production-Type Contracts” (“~~~~ASC Topic 605-35~~”) ~~under the percentage-of-completion method. To the extent that multiple element arrangements include product sales, sales are generally~~has also recognized ~~once revenue recognition criteria for the product deliverables have been met based on the provisions of ASC Topic 605.~~

~~Single Element Arrangements -~~

~~Products~~

To the extent that a single element arrangement provides for product sales and repairs, the Company recognizes sales when revenue recognition criteria for the product deliverable have been met based on the provisions of ASC Topic 605. In addition, the Company also receives orders for equipment and parts, and in general, recognizes revenue upon shipment to customers.

~~The Company may offer its customers extended warranties for additional fees, which it records as deferred revenue and recognizes as sales on a straight-line basis over the warranty periods.~~

~~Engineering Development Contracts~~

~~The Company may enter into contracts to perform specified design and EDC services related to its products. The Company recognizes~~ revenue from ~~these arrangements as~~ EDC ~~sales, following the guidance included in ASC Topic 605-35,~~contracts and ~~considers the nature of these contracts (including term, size of contract, and level of effort) when determining the appropriate accounting treatment for a~~

~~particular contract. Certain of these contracts are accounted for under the percentage-of-completion method of accounting when the Company determines that progress toward completion~~ is reasonably estimable, and the contract is long-term in nature. The Company uses the completed contract method for all other contracts. Sales and profit margins under the percentage-of-completion method are recorded based on the ratio of actualrecognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs ~~expected~~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 ~~incurred~~performed.

As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract- related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter in which it is identified.

The impact of adjustments in contract estimates on our operating earnings 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-month periods ended December 31, 2022 and 2021, respectively.

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Contract Balances

Contract assets consist of the right to consideration in exchange for product offerings that we have transferred to a customer under the ~~cost-to-cost method.~~

~~The percentage-of-completion method~~contract. Contract liabilities primarily relate to consideration received in advance of ~~accounting requires the Company to estimate the profit margin for each individual contract or contract segment, and to apply that profit margin on a uniform basis as sales are recorded~~performance under the contract. The estimation of profit margin requires the Company to make projections of the total sales to be generated and the total costs that will be incurred under a contract. These projections require the Company to make numerous assumptions and estimates relating to items such as the complexity of design and related development costs, performance of subcontractors, availability and cost of materials, engineering productivity, prototype costs, overhead costs, and capital costs. These contracts sometimes include purchase options for additional quantities and for customer change orders for additional or revised product functionality. Revenues and costs related to profitable purchase options are included infollowing table reflects the Company’s ~~estimates only when the options are exercised, while revenues~~contract assets and costs related to unprofitable purchase options are included in the Company’s estimates when exercise is determined to be probable. Revenues related to change orders are included in profit estimates only if they can be estimated reliably and collectability is reasonably assured. Purchase options and change orders are accounted for either as an integral part of the original contract or separately, depending upon the nature and value of the item, in the period in which any change order or purchase option becomes effective. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable.liabilities:


	Contract		Contract
	Assets		Liabilities
September 30, 2022	$	162,742	$	259,183
Amount transferred to receivables from contract assets		—		—
Contract asset additions		—		—
Performance obligations satisfied during the period that were included in the contract liability balance at the beginning of the period		—		(202,794)
Increases due to invoicing prior to satisfaction of performance obligations		—		35,390
December 31, 2022	$	162,742	$	91,779

The Company reviews estimates of profit margins for contracts on a quarterly basis. Assuming the initial estimates of revenue and costs under a contract are accurate, the percentage-of-completion method results in the profit margin being recorded evenly as revenue is recognized under the contracts. Changes in these underlying estimates due to revisions in revenues and cost estimates or the exercise of contract options may result in profit margins being recognized unevenly over a contract as such changes are accounted for on a cumulative basis in the period in which the estimates are revised. Significant changes in estimates related to accounting for long-term contracts may have a material effect on the Company’s results of operations in the period in which the revised estimates are made. Cumulative catch-up adjustments (loss contracts), if any, resulting from changes in estimates are included in results of operations and disclosed in the notes to the consolidated financial statements of the Company.

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, respectively, on the accompanying consolidated statements of operations. The Company’s customer service revenue and cost of sales for the ~~three months~~three-month periods ended December 31, ~~2017~~2022 and ~~2016~~2021 respectively are as follows:

	For the Three Months Ended December 31,
	2017		2016


					For the Three Months Ended December 31,
					2022		2021
Customer Service Sales	$	1,038,847	$	703,732	$	1,061,149	$	1,085,445
Customer Service Cost of Sales	513,357		342,439			319,102		343,650
Gross Profit	$	525,490	$	361,293	$	742,047	$	741,795

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 ~~net operating losses (“NOL”)~~NOLs and tax credit ~~carry-forwards.~~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 ~~and year-end~~ 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

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both prudent and feasible. ~~The Company’s current balance of~~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 is recorded against all of its federal and state deferred tax assets.~~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~~assets.If the Company were to determine that it would be able to realize additional ~~federal or~~ 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 ~~United States~~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 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 ~~large~~significant percentage of its sales on engineering development, both ~~research and development~~Research & Development (“R&D”) and EDC. At December 31, ~~2017,~~2022, approximately ~~28%~~21% of the Company’s employees were engineers engaged in various engineering development projects. Total engineering development expense ~~is comprised of~~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 ~~stockholder’s~~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”~~Income,” ~~(“ASC Topic 220”),~~ 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 months~~three-month periods ended December 31, ~~2017~~2022 and ~~2016, respectively,~~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 ~~FASB ASC Topic 505-50,~~ ~~“Equity-Based Payments to Non-Employees”~~ ~~(“ASC Topic 505-50”), and~~ ASC Topic 718, “Stock Compensation” (“ASC Topic 718”), which ~~require~~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. Our policy is to recognize forfeitures as incurred.

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~~Warranty~~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 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 and other actuarial assumptions.~~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 December 31, ~~2017~~2022 and September 30, ~~2017.~~2022, respectively. However, the actual value of such claims could be significantly affected if future occurrences and claims differ from these assumptions. At December 31, ~~2017~~2022 and September 30, ~~2017,~~2022, the estimated liability for medical claims incurred but not reported was ~~approximately $49,000~~$48,146 and ~~$53,000~~$51,590, respectively. The Company has recorded the excess of funded premiums over estimated claims incurred but not reported of ~~approximately $184,000~~$505,776 and ~~$249,000~~$424,155 as a current asset in the accompanying ~~condensed~~ consolidated balance sheets as of December 31, ~~2017~~2022 and September 30, ~~2017,~~2022, respectively.

Concentrations

Major Customers and Products

~~For~~In the ~~three months~~three-month period ended December 31, ~~2017, one customer, S&K Aerospace LLC,~~2022, three customers, Pilatus Aircraft Ltd (“Pilatus”), Air Transport Services Group, and Textron Aviation, Inc. (“Textron”), accounted for ~~10% of net sales. For the three months ended December 31, 2016, three customers, Sierra Nevada Corporation (“Sierra Nevada”)~~38%, ~~Pilatus Aircraft Limited (“Pilatus”) and the DoD accounted for 32%, 18%~~13% and 11% of net sales, respectively.

In the three-month period ended December 31, 2021, two customers, Air Transport Services Group, and Pilatus, accounted for 25%, and 24% 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 months~~three-month period ended December 31, ~~2017,~~2022, the Company had ~~one supplier~~two suppliers, respectively that ~~was~~were individually responsible for greater than 10% of the Company’s total inventory related purchases.

For the ~~three months~~three-month period ended December 31, ~~2016,~~2021, the Company had two suppliers that were individually responsible for greater than 10% of the Company’s total inventory related purchases.

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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 ~~primary~~the major consideration. Cash balances are maintained with two major banks. Balances on deposit with certain money market accounts and operating accounts may exceed the Federal Deposit Insurance Corporation ~~(“FDIC”)~~ 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.

~~Basis of Presentation~~

~~Certain prior year financial statement amounts have been reclassified to conform to the current year presentation.~~

Recent Accounting Pronouncements

In ~~March~~June 2016, ~~the~~ FASB issued ASU ~~2016-09, Improvements~~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 Employer Share-Based Payment Account, which simplifies the tax treatment of stock “shortfalls” and “windfalls.” Previous guidance required excess tax benefits (“windfalls”) to be recorded in equity. Tax deficiencies (“shortfalls”) were recorded in equity to the extent of previous windfalls then to the income statement. The new guidance simplifies this treatment by having all “windfalls” and “shortfalls” recorded through the income statement. This guidance became effective for us beginning on October 1, 2017. Adoption of this standard did not have a material effect upon our consolidated financial statements.

~~In February 2016, the FASB issued~~inform credit loss estimates. ASU 2016-02, Leases (Topic 842). Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance2016-13 is effective for ~~annual reporting periods~~SEC small business filers for fiscal years beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company is currently evaluating the impacts of adoption of this guidance.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which simplifies balance sheet presentation of deferred income taxes. Previous guidance required an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position; however, the new guidance requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The updated standard is effective for the Company beginning October 1, 2017, with early adoption permitted as of the beginning of any interim or annual reporting period. The Company early adopted this standard retrospectively and reclassified its current deferred tax balances to noncurrent deferred tax for all periods presented.2022. The adoption of this ~~guidance did~~standard is not expected to have a material impact on ~~the Company’s consolidated financial statements.~~

In July 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-11, Simplifying the Measurement of Inventory. ASU 2015-11 simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. ASU 2015-11 applies only to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method. ASU 2015-11 is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. We implemented ASU 2015-11 effective October 1, 2017 and the implementation had no impact on our consolidated financial ~~statements.~~

statements or related disclosures.

In ~~August 2014,~~December 2019, the FASB issued ASU ~~No. 2014-15, Presentation~~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 ~~Financial Statements - Going Concern (Subtopic 205-40) (ASU 2014-15).~~ASC 740 to promote consistency among reporting entities. We adopted this update effective October 1, 2021. The objective of ASU 2014-15 is to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and provide related disclosures. Currently, GAAP does not provide guidance to evaluate whether there is substantial doubt regarding an organization’s ability to continue as a going concern. This ASU provides guidance to an organization’s management, with principles and definitions to reduce diversity in the timing and content of financial statement disclosures commonly provided by organizations. This standard was adopted by the Company at September 30, 2017, and the adoption of this ~~ASU~~standard did not have a material impact on our consolidated financial ~~statements.~~statements or related disclosures.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which provides a single, comprehensive revenue recognition model for all contracts with customers, and contains principles to determine the measurement of revenue and timing of when it is recognized. The model will supersede most existing revenue recognition guidance, and also requires enhanced revenue-related disclosures. The FASB has also issued several related ASUs which provide additional implementation guidance and clarify the requirements of the model. Adoption of the new rules could affect the timing of revenue recognition for certain transactions. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring retrospective application of the new standard with the cumulative effect of applying the new standard as of the date of initial application recognized and disclosure of results under old standards. Based on the nature of the Company’s business, the adoption of ASU No. 2014-09, or any of the subsequent related ASU’s, is not expected to impact financial reporting with respect to the majority of its revenue streams. The Company is currently in the process of evaluating current accounting policies to identify potential differences for each of its revenue streams, and there is the potential for some changes to revenue recognition practices for multiple-element arrangements. In addition, the Company is currently determining the transition method and disclosure requirements. The Company plans to adopt this standard in fiscal year 2019.

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

2. Supplemental Balance Sheet Disclosures

~~Unbilled Receivables~~

~~Unbilled receivables principally represent sales recorded under the percentage-of-completion method of accounting that have not been billed to customers in accordance with applicable contract terms.~~ ~~Unbilled receivables, net of progress payments were $1.1 million at December 31, 2017 and $1.5 million at September 30, 2017.~~

Significant changes in estimates related to accounting for long-term contracts under the percentage-of-completion method may have a material effect on the Company’s results of operations in the period in which the revised estimates are made. Cumulative catch-up adjustments resulting from changes in estimates were $0 for the three months ended December 31, 2017. Cumulative catch-up adjustments resulting from changes in estimates increased operating income by $154,000 for the three months ended December 31, 2016.

Inventories

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

December 31,

September 30,

2017

2017

Raw materials

$
3,296,968

$
2,920,209

Work-in-process

795,633

794,756

Finished goods

402,450

464,689

$
4,495,051

$
4,179,654


	December 31,		September 30,
	2022		2022
Raw materials	$	4,685,109	$	4,451,045
Work-in-process		530,992		795,723
Finished goods		36,194		102,336
	$	5,252,295	$	5,349,104

Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

	December 31,		September 30,
	2017		2017


					December 31,		September 30,
					2022		2022
Prepaid insurance	$	414,660	$	402,300	$	801,703	$	777,311
Income tax refund receivable	461,664		260,509
Other	225,723		429,255			247,503		365,159
	$	1,102,047	$	1,092,064
					$	1,049,206	$	1,142,470

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Property and equipment

Property and equipment, net consists of the following:

	December 31,			September 30,
	2017			2017

Land	$	1,021,245		$	1,021,245

							December 31,		September 30,
							2022		2022
Computer equipment	2,311,068			2,247,866			$	2,269,243	$	2,307,139
Corporate airplane	3,194,571			3,194,571
Corporate airplanes								2,406,468		2,406,468
Furniture and office equipment	1,051,637			1,051,637				976,993		976,993
Manufacturing facility	5,733,313			5,733,313				5,889,491		5,889,491
Equipment	5,527,849			5,507,774				5,607,387		5,624,966
	18,839,683			18,756,406
Land								1,021,245		1,021,245
								18,170,827		18,226,302
Less: accumulated depreciation and amortization	(12,190,463		)	(12,087,395		)		(11,931,331)		(11,934,113)
	$	6,649,220		$	6,669,011
							$	6,239,496	$	6,292,189

Depreciation and amortization related to property and equipment was ~~approximately $103,000~~$85,409 and ~~$108,000~~$92,372 for the ~~three months~~three-month periods ended December 31, ~~2017~~2022 and ~~2016,~~2021, respectively. The corporate airplane is utilized primarily in support of product ~~development and has been depreciated to its estimated salvage value.~~development.

Other assets

Other assets consist of the following:

	December 31,		September 30,
	2017		2017
Intangible assets, net of accumulated amortization of $531,637 and $531,637 at December 31, 2017 and September 30, 2017	$	68,600	$	68,600

					December 31,		September 30,
					2022		2022
Intangible assets, net of accumulated amortization of $636,158 at December 31, 2022 and September 30, 2022					$	60,348	$	60,348
Operating lease right-of-use asset						25,214		28,680
Other non-current assets	118,416		118,715			75,300		75,300
	$	187,016	$	187,315
					$	160,862	$	164,328

Intangible assets consist of licensing and certification rights which are amortized over a defined number of units. No impairment charges were recorded in the ~~three months~~three-month periods ended December 31, ~~2017~~2022 and ~~2016.~~2021.

~~There was no~~Intangible asset amortization expense was $0 for the ~~three months~~three-month periods ended December 31, ~~2017~~2022 and ~~2016.~~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 December 31, 2022 and September 30, 2022 include the security deposit for an airplane hangar and a deposit for medical claims required under the Company’s medical plan.

Accrued expenses

Accrued expenses consist of the following:

	December 31,		September 30,
	2017		2017


					December 31,		September 30,
					2022		2022
Warranty	$	926,965	$	1,013,461	$	577,690	$	607,001
Salary, benefits and payroll taxes	374,109		258,688			381,822		1,030,628
Professional fees	299,493		219,331			275,077		364,794
Income tax						475,200		—
Operating lease						13,450		13,615
Other	138,461		268,557			785,732		956,237
	$	1,739,028	$	1,760,037
					$	2,508,971	$	2,972,275

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Warranty cost and accrual information for the ~~three months~~three-month period ended December 31, ~~2017~~2022 is highlighted below:

	Three Months Ending
	December 31, 2017


				Three Months Ending
				December 31, 2022
Warranty accrual, beginning of period	$	1,013,461		$	607,001
Accrued expense	(26,259		)		(536)
Warranty cost	(60,237		)		(28,775)
Warranty accrual, end of period	$	926,965		$	577,690

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~~2017 Tax Cuts and Jobs Act amended IRC §174 to require that amounts paid or incurred for specified research or experimental expenditures, including software development expenses, be amortized ratably over 60 months for tax ~~benefit for~~years beginning after 2021. Under the ~~three~~law change, research and experimental expenditures may no longer be deducted. The Company may no longer elect an amortization period 60 months ~~ended December 31, 2017 was~~ ~~$0.1 million as compared to an income~~or greater beginning when benefits are first realized. The Company must now amortize these expenses beginning at the mid-point of the tax ~~benefit of $0.4 million for~~year in which the ~~three months ended December 31, 2016.~~

expenditures are paid or incurred.

The effective tax rate ~~benefit~~ for the ~~three months~~three-month period ended December 31, ~~2017~~2022 was ~~13.6%~~24.5% and differs from the statutory tax rate ~~mostly~~primarily due to ~~a change in the valuation allowance in the current period. The effective tax rate during the three months ended December 31, 2017 was impacted by the Tax Cuts~~permanent items, first quarter discrete adjustments related to stock compensation, and Jobs Act (“the Act”), which was enacted into law on December 22, 2017. Income tax effects resulting from changes in tax laws are accounted for by the Company in accordance with the authoritative guidance, which requires that these tax effects be recognized in the period in which the law is enacted and the effects are recorded as a component of provision for income taxes from continuing operations.

The Act includes significant changes to the U.S. corporate income tax system which reduces the U.S. federal corporate tax rate from 35.0% to 21.0% as of January 1, 2018. The decrease in the U.S. federal corporate tax rate from 35.0% to 21.0% results in a blended statutory tax rate of 24.5% for the fiscal year ending September 30, 2018.

state taxes.

The effective tax rate for the ~~three months~~three-month period ended December 31, ~~2016~~2021 was ~~23.7%. The effective tax rate for the three months ended December 31, 2016~~21.3% and differs from the statutory tax rate primarily due to ~~the change in the valuation allowance in that period.~~permanent items and state taxes.

4. Shareholders’ Equity and ~~Share-based~~Share-Based Payments

At December 31, ~~2017,~~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.

~~Share-based~~Share-Based compensation

The Company accounts for share-based compensation under the provisions of ~~ASC Topic 505-50 and~~ ASC Topic 718 by using the fair value method for expensing stock options and stock awards.

Total share-based compensation expense was $0 for each of the three months ended December 31, 2017 and 2016. The income tax effect recognized as a credit to additional paid-in capital related to share-based compensation arrangements was $0 for the three months ended December 31, 2017 and 2016.

~~The Company has three share-based compensation plans, the 1998 Stock Option Plan (the “1998 Plan”), the 2003 Restricted Stock Plan (the “Restricted Plan”) and the 2009~~2019 Stock-Based Incentive Compensation Plan (the “2009 Plan”), each of which the shareholders approved. The 1998 Plan expired on November 13, 2008. The last awards under the Restricted Plan were made in 2010, and no further shares remain to be awarded under the Restricted Plan.

~~1998 Stock Option Plan~~

The 1998 Plan allowed the granting of incentive and nonqualified stock options to employees, officers, directors and independent contractors, and consultants. No stock options were granted to independent contractors or consultants under this plan. Incentive stock options granted under the 1998 Plan have exercise prices that are at least equal to the fair value of the common stock on the grant date. Nonqualified stock options granted under the plan have exercise prices that are less than, equal to or greater than the fair value of the common stock on the date of grant. The Company reserved 3,389,000 shares of common stock for awards under the plan. On November 13, 2008, the 1998 Plan expired and no additional shares were granted under the 1998 Plan after that date.

~~Total compensation expense associated with stock option awards to employees under the 1998~~2019 Plan was ~~$0 for~~approved by the ~~three month period ended December 31, 2017 and 2016.~~

~~2009 Stock-Based Incentive Compensation Plan~~

Company’s shareholders at the Company’s Annual Meeting of Shareholders held on April 2, 2019. The ~~2009~~2019 Plan authorizes the grant of stock appreciation rights, restricted stock, options ~~RSUs~~ and other equity-based ~~awards (collectively referred to as “Awards”).~~awards. Options granted under the ~~2009~~2019 Plan may be either “incentive stock options” as defined in section 422 of the ~~Internal Revenue~~ Code ~~of 1986, as amended (the “Code”),~~ or nonqualified stock options, as determined by the Compensation ~~Committee of the Company’s Board of Directors (the “Compensation Committee”).~~

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 ~~other~~ similar corporate transaction or event, the maximum number of shares of common stock available for ~~Awards~~awards under the 2019 Plan is 750,000, plus 139,691 shares of common stock that were authorized but unissued under the 2009 Plan ~~shall be 1,200,000,~~as of the effective date of the 2019 Plan (i.e., April 2, 2019), all of which may be issued pursuant to ~~Awards~~awards of incentive stock options. In addition, the 2019 Plan provides that no more than 300,000 shares ~~of common stock per year~~ may be awarded in any calendar year to any ~~employee as a performance-based Award under Section 162(m)~~employee. As of ~~the Code. At~~ December 31, ~~2017~~2022, there were ~~259,598~~628,825 shares of common stock available for awards under the ~~plan.~~

2019 Plan.

If any ~~Award~~award is forfeited, terminates or ifotherwise is settled for any ~~option terminates, expires or lapses~~reason without ~~being exercised,~~an actual distribution of shares to the participant, the related shares of common stock subject to such ~~Award~~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~~award (including, in any case, shares withheld from

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any such ~~Award)~~award) will not be available for future grant under the ~~2009~~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,~~awards, the number and ~~type~~kind of shares of common stock covered by ~~Awards~~awards then outstanding under the ~~2009~~2019 Plan, the aggregate number and ~~type~~kind of shares of common stock available under the ~~2009~~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,~~award, or if deemed appropriate, make provision for a cash payment with respect to any outstanding Award, provided that no adjustment may be made that would adversely affect the status of any Award that is intended to be a performance-based Award under Section 162(m) of the Code, unless otherwise determined by the Compensation Committee.award. In addition, the Compensation Committee may make adjustments in the terms and conditions of any ~~Awards,~~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, provided that no adjustment may be made that would adversely affect the status of any Award that is intended to be a performance-based Award under Section 162(m) of the Code, unless otherwise determined by the Compensation Committee.principles.

~~Total~~The compensation expense related to ~~Options~~stock options and awards issued to employees under the ~~2009~~2019 Plan was ~~approximately $0~~$233,125 and $45,591 for ~~each of~~ the ~~three months~~three-month periods ended December 31, ~~2017~~2022 and ~~2016.~~ 2021, respectively.

The compensation expense under the ~~2009~~2019 Plan related to ~~shares~~stock awards issued to non-employee members of the ~~Company’s~~ Board ~~of Directors as compensation~~ was ~~approximately~~ $0$50,070 and $40,018 for the ~~three months~~three-month periods ended December 31, ~~2017~~2022 and ~~2016.~~ 2021, respectively.

Total compensation expense associated with the ~~2009~~2019 Plan was ~~approximately $0~~$283,195 and $85,609 for ~~each of~~ the ~~three months~~three-month periods ended December 31, ~~2017~~2022 and ~~2016.~~2021, respectively.

~~Restricted Stock Units~~

During fiscal 2016, the Company’s Board of Directors (the “Board”) approved grants of RSUs to the non-employee directors on the Board as compensation for their services during calendar year 2016. Under the terms of the awards, at the conclusion of the vesting period on January 2, 2017, the grants of RSUs were settled in shares of the Company’s common stock at a rate of one share of stock ~~for each unit. Directors that did not serve for the entirety of calendar year 2016 received a pro rata portion of such award for time served. As of~~At December 31, ~~2017, there were no unvested restricted~~2022, unrecognized compensation expense of $0, related to non-vested stock ~~units outstanding~~options under the ~~2009 Plan.~~2019 Plan, will be recognized.

5. Earnings Per Share

	Three Months Ended December 31,
	2017			2016

							Three Months Ended December 31,
							2022		2021
Numerator:
Net loss	$	(881,619	)	$	(1,194,974	)
Net income							$	698,651	$	1,133,058
Denominator:
Basic weighted average shares	16,783,129			16,716,014				17,316,766		17,246,372
Dilutive effect of share-based awards	—			—				9,411		—
Diluted weighted average shares	16,783,129			16,716,014				17,326,177		17,246,372


Earnings per common share:
Basic EPS	$	(0.05	)	$	(0.07	)	$	0.04	$	0.07
Diluted EPS	$	(0.05	)	$	(0.07	)	$	0.04	$	0.07

~~Earnings~~Net income per share ~~(“EPS”) are~~is calculated pursuant to ~~FASB~~ ASC Topic 260, “Earnings ~~Per~~per Share” (“ASC Topic 260”). Basic ~~EPS~~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.~~

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 December 31, ~~2017~~2022 and ~~2016,~~2021, there were ~~586,834~~0 and 100,000 options to purchase common stock ~~outstanding.~~outstanding, respectively, and 7,886 and 0 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 months~~three-month periods ended December 31, ~~2017~~2022 and ~~2016,~~2021, respectively, ~~586,834~~0 and ~~587,341~~100,000 diluted weighted-average shares outstanding were excluded from the computation of diluted EPS because the effect would be anti-dilutive.

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6. Commitments and Contingencies

~~On February 23, 2017~~In the ordinary course of business, the Company ~~entered into~~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 ~~settlement agreement~~material effect on the results of operations or financial position.

7. Related Party Transactions

In recent years, the Company has had sales to AML Global Eclipse, LLC, (“Eclipse”), whose principal shareholder is also a principal shareholder in the Company. Eclipse is a new related party for fiscal year 2022 due to their president acquiring more that 10% in shares on the company. Prior balances are disclosed below for comparability.

Sales to Eclipse amounted to $0.03 million , $0.3 million and $0.03 million for the first quarters ended December 31 2022, 2021 and 2020, respectively. As of December 31, 2022 and 2021, a contract liability to Eclipse was $0.01 million and $0.3 million, respectively.

8. Leases

The Company accounts for leases in accordance with ~~Delta. Under~~ASU 2016-02 and records “right-of-use” assets and corresponding lease liabilities on the ~~terms~~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 ~~settlement, Delta paid~~economic benefits from the ~~Company $7.75 million resulting~~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.

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 ~~reversal~~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 ~~$3.6 million reserve~~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.

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The following table presents the lease-related assets and liabilities reported in the Consolidated Balance Sheet as of December 31, 2022:


Classification on the Consolidated Balance Sheet on December 31, 2022
Assets
Operating leases	Other assets	$	25,214

Liabilities
Operating leases- current	Accrued expenses	$	13,450
Operating leases – noncurrent	Other liabilities	$	11,764
Total lease liabilities		$	25,214

Rent expense and cash paid for various operating leases in aggregate are $3,669 for the ~~collection~~three-month period ended December 31, 2022. The weighted average remaining lease term is 1.9 years and the weighted average discount rate is 5.0% as of ~~the unbilled receivable in the fiscal year ended September 30, 2017.~~December 31, 2022.

Future minimum lease payments under operating leases are as follows at December 31, 2022:


	Twelve Months
	Ending	Operating
	December 31,	Leases
	2023	$	14,676
	2024		13,453
Total minimum lease payments		$	28,129
Amount representing interest			(2,915)
Present value of minimum lease payments			25,214
Current portion			(13,450)
Long-term portion of lease obligations		$	11,764

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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~~forward-looking statements within the meaning of ~~Section 21E of~~ the ~~Securities Exchange Act of 1934, as amended (the “Exchange Act”).~~federal securities laws. These ~~forward looking~~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~~ “is likely” and similar expressions, as they relate to the business or to its management, are intended to identify ~~forward looking~~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 “Registrant,” ~~“the Company,~~the “Company,” “we,” “us” or “our” are to Innovative Solutions and Support, Inc. and its consolidated subsidiaries.

The ~~forward looking~~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~~forward-looking statements. These risks, uncertainties and other factors include those set forth in Item 1A (Risk Factors) of ~~this~~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 flat panel display systems, NextGen Flight Deck, ThrustSense Integrated PT6 Autothrottle (patent pending) 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 and producing the Company’s NextGen Flight Deck, ThrustSense Integrated PT6 Autothrottle (patent pending), COCKPIT/IP~~® ~~Flat Panel Display System or other planned products or product enhancements;~~

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

·~~the availability of government funding;~~

·~~the impact of general economic trends on the Company’s business;~~

·~~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;~~

·~~failure to retain/recruit key personnel;~~

·~~a cyber security incident;~~

·~~the ability to service the international market;~~

·~~risks related to our self-insurance program;~~

·~~potential future acquisitions;~~

·~~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”).~~

●	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,

●	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 ~~Form 10-Q.~~report. The Company does not undertake any obligation to publicly release ~~publicly~~ any revisions to these forward-looking statements to reflect events, circumstances or changes in expectations after the date of this ~~Form 10-Q,~~report, or to reflect the occurrence of unanticipated events. The

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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.~~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 ~~Global Positioning System (“GPS”)~~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. ~~The~~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.

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 believes the CIP product line is suited to address market demand that will be driven by regulatory mandates, new technologies, and the high cost of maintaining aging/obsolete equipment on airplanes that have been in service for up to fifty years. 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~~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, ~~coupled with~~alongside its FPDS and CIP product ~~line~~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, ~~and~~ FPDS ~~product line (equipped with a~~and SBAS/WAAS/LPV enabled ~~navigator)~~navigator, will be qualified to land at such airports and towill comply with ~~upcoming~~ Federal Aviation Administration (“FAA”) mandates for Required Navigation Performance, ~~(“RNP”),~~ and Automatic Dependent Surveillance-Broadcast ~~(“ADS-B”) navigation, a fact which~~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~~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.

~~More recently, the~~The Company has developed and received certification from the FAA on its NextGen Flight Deck featuring its ~~ThrustSense~~ThrustSense® Integrated PT6 Autothrottle ~~(patent pending)~~ (“~~ThrustSense~~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 ~~Electronic Flight Bag~~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 ~~ThrustSense~~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~~weight and ~~Balance~~balance information for optimal control settings and enabling safety functions like a ~~Turbulence~~turbulence control mode. ~~IS&S~~

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 ~~the uncertain~~changes in economic conditions ~~that currently exist~~ both in the United States and abroad. Such ~~conditions~~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, rising interest rates, 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, including as a result of currently proposed tax reform legislation in the United States.~~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. ~~However,~~

On the other hand, the Company believes that in ~~an uncertain~~adverse economic ~~environment,~~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 ~~is comprised of~~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 ~~is comprised~~ primarily ofcomprises 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~~Engineering Development Contracts (“EDC”) sales ~~is comprised of~~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 ~~towards~~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 ~~bad debt expense~~ 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, ~~2017~~2022 contains a discussion of these critical accounting policies. There have been no significant changes in the Company’s critical accounting policies since September 30, ~~2017.~~2022. See also Note 1 to the unaudited ~~condensed~~ consolidated financial statements for the three ~~month period ending~~months ended December 31, ~~2017~~2022 as set forth herein.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED

DECEMBER 31, ~~2017~~2022 AND ~~2016~~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 December 31,
	2017		2016

					Three Months Ended December 31,
					2022		2021
Net sales:
Product	100.0	%	89.6	%	94.4	%	100.0	%
Engineering development contracts	0.0	%	10.4	%	5.6	%	0.0	%
Total net sales	100.0	%	100.0	%	100.0	%	100.0	%


Cost of sales:
Product	51.6	%	51.7	%	42.0	%	40.7	%
Engineering development contracts	0.0	%	2.6	%	0.9	%	0.0	%
Total cost of sales	51.6	%	54.3	%	42.9	%	40.7	%


Gross profit	48.4	%	45.7	%	57.1	%	59.3	%


Operating expenses:
Research and development	29.9	%	32.3	%	10.3	%	11.0	%
Selling, general and administrative	52.5	%	60.8	%	34.7	%	27.0	%
Total operating expenses	82.5	%	93.1	%	45.0	%	38.0	%

Operating loss	(34.1	)%	(47.4	)%


Operating income					12.1	%	21.3	%

Interest income	0.3	%	0.3	%	1.8	%	0.0	%
Other income	0.7	%	0.5	%	0.3	%	0.2	%
Loss before income taxes	(33.0	)%	(46.6	)%

Income tax expense (benefit)	(4.5	)%	(11.0	)%

Net loss	(28.5	)%	(35.6	)%
Income before income taxes					14.2	%	21.5	%

Income tax expense					3.5	%	4.6	%

Net income					10.7	%	16.9	%

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Three Months Ended December 31, ~~2017~~2022 Compared to the Three Months Ended December ~~31, 2016~~30, 2021

Net sales. Net sales were ~~$3.1 million~~$6,516,256 for the three months ended December 31, ~~2017~~2022 compared to ~~$3.4 million~~$6,695,778 for the three months ended December 31, ~~2016,~~2021, a slight decrease of ~~8.3%~~2.7% . Product sales decreased ~~$0.4 million in the three months ended December 31, 2017 compared to the three months ended December 31, 2016, and~~by $522,126, EDC sales ~~decreased $0.3 million from the same period in the prior year. Product sales~~increased $366,899, Customer Repair revenue saw a modest decrease of $24,295 for the three months ended December 31, ~~2017 decreased from the same period~~2022. The increase in the prior year primarily because of decreased shipments of displays for retrofit programs to the DoD and military subcontractors. In the quarter ended December 31, 2016, the Company negotiated with a customer to reconfigure the customer’s avionics system. In connection with this change, the Company agreed to allow the return of products previously sold and, accordingly, netEDC sales ~~and net accounts receivable for the prior year period reflect reductions of $0.5 million for the value of products returned~~was driven by ~~the customer.~~two new Research & Development projects. The decrease in ~~EDC~~product sales was a function of lower aftermarket sales orders to commercial air transport customers . The sales decrease was partially offset by an increase in the ~~current year period was the result of the completion of EDC projects awarded~~OEM business, in ~~prior years and they have not been replaced by new EDC projects.~~

which demand remained strong during Q1.

Cost of sales. Cost of sales ~~decreased $0.2 million,~~increased $64,395, or ~~12.8%~~2.4%, to ~~$1.6 million,~~$2,792,452, or ~~51.6%~~42.9% of net sales, in the three months ended December 31, ~~2017,~~2022, compared to ~~$1.8 million,~~$2,728,057 or ~~54.3%~~40.7% of net sales, in the three months ended December 31, ~~2016.~~2021. The ~~decrease~~increase in cost of sales was primarily the result of ~~a decrease in EDC sales volume~~slightly higher direct material costs. The Company’s overall gross margin was 57.1% and ~~lower material costs~~59.3% for the three months ended December 31, ~~2017 compared~~2022 and 2021, respectively.

Research and development. R&D expense decreased $66,080, or 9.0%, to $670,445 in the three months ended December 31, ~~2016. The Company’s overall gross margin was 48.4% and 45.7% for~~2022 from $736,740 in the ~~quarters~~three months ended December 31, ~~2017 and 2016, respectively. This increase in overall gross margin was primarily the result~~2021. As a percentage of ~~a change in~~net sales, ~~mix.~~

~~Research and development.~~ R&D expense decreased ~~$0.2 million, or 14.9%,~~ to ~~$0.9 million, or 29.9%~~10.3% of net sales in the three months ended December 31, ~~2017~~20221 from ~~$1.1 million, or 32.3%~~11.0% of net sales in the three months ended December 31, ~~2016.~~2021. The decrease in R&D expense in the quarter ~~reflected~~was primarily the result of $57,406 of R&D expense being moved to Cost of Sales related to the EDC sales. Total R&D with the EDC related labor costs amounted to $727,851, which is 11.2% and comparable to R&D as a ~~reduced payroll and related benefit expense.~~

percent to sales in prior year.

Selling, general and administrative. Selling, general and administrative expense ~~decreased~~increased by ~~$0.4 million~~$454,881 to ~~$1.6 million~~$2,261,863 in the three months ended December 31, ~~2017~~2022 from ~~$2.0 million~~$1,806,982 in the three months ended December 31, 2016. The decrease in selling, general, and administrative expense in the three month period was primarily the result of increased legal fees related to the litigation arising from the purported termination of the Delta contract in the prior year period.2021. As a percentage of net sales, selling, general and administrative expenses ~~decreased~~increased to ~~52.5%~~34.7% of net sales in the three months ended December 31, ~~2017~~2022 from ~~60.8%~~27.0% of net sales in the three months ended December 31, ~~2016.~~

2021. The increase in selling, general and administrative expense in the quarter was primarily the result of an increase in non-cash long-term incentive compensation, professional & legal fees, and employee relocation costs.

Interest income. Interest income ~~was $10,000~~increased by $115,796 to $115,892 in the three months ended December 31, ~~2017~~2022 from $96 in the three months ended December 31, 2021, mainly a result of increased cash on the balance sheet, increased interest rates and ~~2016.~~

re-allocating funds into higher yielding investments compared to the same period in the prior year.

Other income. Other income is mainly composed of royalties earned and increased ~~marginally~~ by ~~$2,000,~~$1,957 to ~~$21,000~~$18,196 in the three months ended December 31, ~~2017~~2022 compared to the same period in the prior year.

Income tax expense. The income tax ~~benefit~~expense for the three months ended December 31, ~~2017~~2022 was ~~$0.1 million~~$226,933 as compared to aan income tax ~~benefit~~expense of ~~$0.4 million~~$307,490 for the three months ended December 31, ~~2016. The effective tax rate for the three months ended December 31, 2017 was 13.6% and differs from the statutory tax rate primarily due to a change in the valuation allowance in the current period.~~

2021.

The effective tax rate for the three months ended December 31, ~~2016~~2022 was ~~23.7% and differs from~~24.5%, compared to 21.3% for the ~~statutory rate primarily due to the change in the valuation allowance in that period.~~

three months ending December 31, 2021.

Net ~~loss.~~income. The Company reported a net ~~loss~~income for the three months ended December 31, ~~2017~~2022 of ~~$0.9 million~~$698,651 compared to net ~~loss~~income of ~~$1.2 million~~$1,133,058 for the three months ended December 31, ~~2016.~~2021. On a diluted basis, the ~~loss~~net income per share was ~~$0.05~~$0.04 for the three months ended December 31, ~~2017~~2022 compared to ~~loss~~net income per share of $0.07 for the three months ended December 31, ~~2016.~~2021.

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Liquidity and Capital Resources

The following table highlights key financial measurements of the Company:

	December 31, 2017		September 30, 2017

					December 31,		September 30,
					2022		2022
Cash and cash equivalents	$	24,662,454	$	24,680,301	$	19,443,231	$	17,250,546
Accounts receivable	1,480,622		2,748,597			3,316,519		4,297,457
Current assets	32,823,339		34,181,438			29,223,993		28,202,319
Current liabilities	2,803,259		3,361,642			3,443,012		3,940,303
Deferred revenue	137,465		280,354
Total debt and other non-current liabilities (1)	129,555		67,742
Contract liability						91,779		259,183
Other non-current liabilities (1)						421,938		15,065
Quick ratio (2)	9.33		8.16			6.61		5.47
Current ratio (3)	11.71		10.17			8.49		7.16

Three Months Ended December 31,

2017

2016

Cash flow activites:

Net cash provided by (used in) operating activites

$
65,430

$
(559,174
)
Net cash used in investing activites

(83,277
)
(47,340
)


	Three Months Ended December 31,
	2022		2021
Cash flow activities:
Net cash provided by operating activities	$	1,816,555	$	1,517,735
Net cash used in investing activities		(32,716)		(77,348)
Net cash provided by financing activities		408,846		—

~~(1)~~ ~~Excludes deferred revenue~~

~~(2)~~ ~~The sum of cash and cash equivalents plus accounts receivable, divided by current liabilities~~

~~(3)~~ ~~Current assets divided by current liabilities~~

(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 ~~from~~ cash flows ~~generated~~ from current year operations and cash accumulated from prior years’ operations. Cash is used principally to finance inventory, accounts receivable, ~~unbilled receivables,~~contract assets, and payroll, ~~which are all collectively leveraged to execute~~as well as the Company’s ~~growth strategies~~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 ~~return value~~be adequate to ~~its shareholders.~~satisfy the Company’s liquidity needs for at least the next 12 months. Apart from what has been disclosed above, management is not aware of any trends, events or uncertainties that have had or are likely to have a material impact on our liquidity, financial condition and capital resources.

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

Operating activities

~~Cash generated~~Net cash provided by operating activities for the ~~three months~~three-month period ended December 31, ~~2017~~2022 resulted primarily from ~~the~~funding from net ~~effect~~income of ~~decreases of~~$698,651, a decrease in accounts ~~receivable of $1.3 million and unbilled~~ receivables of $0.4 million, which principally represent sales previously recorded under the percentage-of-completion method of accounting that have been billed to customers in accordance with applicable EDC terms. These increases were mainly offset by funding a loss of $0.9 million, an increase of inventory of $0.3 million and a decrease of accounts payable of $0.4 million.

~~The cash used in operating activities during the three months ended December 31, 2016 mainly funded a net loss of $1.2 million~~$980,938 and an increase in ~~inventory~~income taxes payable of ~~$0.6 million,~~$511,622.

Net cash provided by operating activities for the three-month period ended December 31, 2021 resulted primarily from funding from net income of $1,133,058 and ~~was partially offset by~~ a decrease ofin accounts receivable of ~~$0.7 million, an increase in accrued expenses of $0.4 million and an increase in accounts payable of $0.2 million.~~$325,121.

Investing activities

~~Cash~~Net cash used in investing activities was ~~$0.1 million and $0~~$32,716 for ~~each of~~ the ~~three months~~three-month period ended December 31, ~~2017 and 2016, respectively~~2022 and consisted primarily of the purchase of ~~computer equipment.~~

~~Financing activities~~

manufacturing test equipment and production machinery.

Net cash used in investing activities was $77,348 for the three-month period ended December 31, 2021 and consisted primarily of the purchase of laboratory test equipment.

Financing activities

Net cash provided by financing activities was $408,846 for the three-month period ended December 31, 2022 and consisted of proceeds from the exercise of stock options.

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Table of Contents

Net cash used in financing activities was $0 for ~~each of~~ the ~~three months~~three-month period ended December 31, ~~2017 and 2016.~~2021.

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, ~~IS&S~~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.

~~Backlog~~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 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, ~~received,~~ less ~~sales~~the revenue recognized to date on those contracts and purchase orders. Backlog activity for the ~~three months~~three-month period ended December 31, ~~2017 (in thousands):~~2022:

	Three Months Ended
	December 31, 2017

				Three Months Ended
				December 31, 2022
Backlog, beginning of period	$	3,039		$	11,778,988
Bookings, net	3,390				3,251,226
Recognized in revenue	(3,088		)		(6,516,256)
Backlog, end of period	$	3,341		$	8,513,958

At December 31, ~~2017 and September 30, 2017,~~2022, the Company’s backlog was $3.3 million and $3.0 million, respectively. The $0.3 million increase in backlog was the result of $3.4 million in net new business orders, offset by $3.1 million of sales recognized for the three months ended December 31, 2017. At December 31, 2017, approximately 100%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

~~IS&S~~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.

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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 ~~(“FDIC”)~~ limits. A change in interest rates earned on the cash equivalents would impact interest income and cash flows but would not impact the fair market value of the related underlying instruments. Assuming that the balances during the ~~three months~~three-month period ended December 31, ~~2017~~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 ~~$60,000~~$40,300 with a resulting impact on cash flows of approximately ~~$60,000~~$40,300 for the ~~three months~~three-month period ended December 31, ~~2017.~~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 December 31, 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.

(b)

(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 Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2017. Based on that evaluation, our chief executive officer and chief financial officer concluded that these controls and procedures were effective 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 (i) recorded, processed, summarized, and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

~~(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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Table of Contents

PART ~~II—~~II–OTHER INFORMATION

Item 1.Legal Proceedings

In the ordinary course of business, ~~IS&S~~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.

Item 1A. Risk Factors

~~There are no material changes to~~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, ~~2017.~~2022. 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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Table of Contents

~~None~~

Item 6. Exhibits

(a) Exhibits


31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) ~~(2)~~⁽¹⁾

31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) ~~(2)~~⁽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	Inline XBRL Instance Document ⁽¹⁾

101.SCH	Inline XBRL Taxonomy Extension Scheme Document ⁽¹⁾

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

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

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

101.PRE	Inline 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

28

~~(1) Filed herewith~~Table of Contents

~~(2) Furnished herewith~~

SIGNATURE

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

	INNOVATIVE SOLUTIONS AND SUPPORT, INC.


Date: February 14, ~~2018~~2022	By:	/s/ ~~RELLAND WINAND~~MICHAEL LINACRE
		~~RELLAND WINAND~~MICHAEL LINACRE
		CHIEF FINANCIAL OFFICER

24

29

	Fair Value Measurement on December 31, 2017
	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	$	23,906,780	$	—	$	—