INNOVATIVE SOLUTIONS & SUPPORT INC

Previous wording

All forward-looking statements are based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Many of the factors that will determine the Company’s future results are beyond the ability of management to control or predict. The forward-looking statements in this report are only predictions and actual events or results may differ materially. In evaluating such statements, a number of risks, uncertainties and other factors could cause actual results, performance, financial condition, cash flows, prospects and opportunities to differ materially from those expressed in, or implied by, the forward-looking statements. These risks, uncertainties and other factors include those set forth in Item 1A (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended September 30, 2024 and in Item 1A (Risk Factors) to Part II of this Quarterly Report on Form 10-Q, as well as the following factors:

Current wording

All forward-looking statements are based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company. Many of the factors that will determine the Company’s future results are beyond the ability of management to control or predict. The forward-looking statements in this report are only predictions and actual events or results may differ materially. In evaluating such statements, a number of risks, uncertainties and other factors could cause actual results, performance, financial condition, cash flows, prospects and opportunities to differ materially from those expressed in, or implied by, the forward-looking statements. These risks, uncertainties and other factors include those set forth in Item 1A (Risk Factors) of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2024 and in Item 1A (Risk Factors) to Part II of this Quarterly Report on Form 10-Q, as well as the following factors:

Previous wording

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

Current wording

The following discussion provides an analysis of the Company’s financial condition, cash flows and results of operations from management’s perspective and should be read in conjunction with “Selected Consolidated Financial Data” and the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2024. Our objective is to also provide discussion of events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or of future financial condition and to offer information that provides understanding of our financial condition, cash flows and results of operations.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

The Company believes that its critical accounting policies affect its more significant estimates and judgments used in the preparation of its condensed consolidated financial statements. The Annual Report on Form 10-K for the fiscal year ended September 30, 2024 contains a discussion of these critical accounting policies. There have been no material changes in the Company’s critical accounting policies since September 30, 2024. See also Note 1 to the unaudited condensed consolidated financial statements for the three months ended December 31, 2024 as set forth herein.

Current wording

The Company believes that its critical accounting policies affect its more significant estimates and judgments used in the preparation of its condensed consolidated financial statements. The Annual Report on Form 10-K for the fiscal year ended September 30, 2024 contains a discussion of these critical accounting policies. See also Note 1 to the unaudited condensed consolidated financial statements for the three and six months ended March 31, 2025 as set forth herein.

Previous wording

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED

Current wording

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED

Previous wording

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

Current wording

Historically, the Company presented Net Sales and Cost of Sales related to each of Customer service and Engineering and development contracts separately on the Consolidated Statements of Operations. For the three and six months ended March 31, 2025, the Company has aggregated these items into one category, “Services” and reclassified Customer service and Engineering and development contracts revenues as well as Cost of sales to conform the presentation of the Consolidated Statements of Operations for the three and six months ended March 31, 2024. For additional information, see Note 3,Summary of Significant Accounting Policies, (“Reclassifications”) to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2024.

Previous wording

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

Current wording

Research and development. R&D expense decreased $0.2 million, or 15.9%, to $0.9 million for the three months ended March 31, 2025 from $1.0 million for the three months ended March 31, 2024. As a percentage of net sales, R&D expenses decreased to 4.0% of net sales for the three months ended March 31, 2025 from 9.6% of net sales for the three months ended March 31, 2024. The decrease in R&D expenses in the quarter was primarily the result of recharacterizing $0.2 million of R&D expense as Cost of sales related to the EDC sales.

Previous wording

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

Current wording

Income taxes. Income tax expense was $1.3 million for the three months ended March 31, 2025 as compared to income tax expense of $0.3 million for the three months ended March 31, 2024. The effective tax rate for the three months ended March 31, 2025 was 19.2 % as compared to 21.2% for the three months ended March 31, 2024. The increase in income tax expense was primarily due to higher taxable earnings for the three months ended March 31, 2025, compared to the same period last year.

Previous wording

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

Current wording

Net sales. Net sales for the six months ended March 31, 2025 increased by $17.9 million, or 89.1%, to $37.9 million from $20.0 million for the six months ended March 31, 2024. Net sales of $37.9 million for the six months ended March 31, 2025 was comprised of $21.2 million in organic Net sales and $16.7 million in Net sales related to the September 2024 Honeywell Agreement. The increase in Net sales was driven primarily by a $13.8 million, or 147.6%, increase in Product sales derived from the September 2024 Honeywell Agreement. and an increase in commercial air transport sales of $5.0 million, offset by $3.5 million of reduced shipsets in business aviation and $1.5 million of reduced shipsets in military. Service sales for the six months ended March 31, 2024 increased $4.0 million, or 37.4%, compared to Services sales for the six months ended March 31, 2024. The increase in service sales primarily reflects increases in engineering development services of $1.2 million and an increase in customer service sales from the product lines acquired from Honeywell of $3.8 million, partially offset by lower legacy customer service revenue of $1.0 million.

Previous wording

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

Current wording

Cost of sales. Cost of sales was $20.0 million, or 52.8% of Net sales, for the six months ended March 31, 2025 compared to $8.9 million, or 44.6% of Net sales, for the six months ended March 31, 2024. The increase in Cost of sales was primarily the result of an increase in overall sales volume. The Company’s overall gross margin for the six months ended March 31, 2025 was 47.2% compared to 55.4% for the six months ended March 31, 2024. The decrease in overall gross margin percentage for the six months ended March 31, 2025, compared to the six months ended March 31, 2024 is primarily the result of changes in product mix, increased depreciation and cost inefficiencies due to hiring and training of additional personnel and other integration costs associated with the September 2024 Honeywell Agreement. The factors that have been, and will continue to effect the Company’s gross margin capture include depreciation resulting from recent product line acquisitions and the increased weight of military sales in the Company’s sales mix.

Previous wording

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

Current wording

Selling, general, and administrative. SG&A expenses increased $1.7 million or 28.0%, to $7.6 million from $5.9 million for the six months ended March 31, 2024. The increase in SG&A expense for the six months ended March 31, 2025 was primarily the result of increases in professional services fees and other related fees of $0.3 million primarily due to acquisition related expenses and corporate initiatives. In addition, the Company incurred increased depreciation and amortization expenses of $0.6 million related to the customer relationships and backlog intangible assets resulting from the combined acquisitions and $0.6 million due to employee related expenses and benefits resulting from increased headcount. As a percentage of Net sales, SG&A expenses were 20.0% for the six months ended March 31, 2025 compared to 29.5% for the six months ended March 31, 2024.

Previous wording

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

Current wording

Interest income. Interest income was negligible for the six months ended March 31, 2025 and decreased by $0.1 million as compared to the six months ended March 31, 2024. The decrease in interest income was primarily the result of a general decrease in interest rates as compared to the six months ended March 31, 2024.

Previous wording

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

Current wording

Net income. As a result of the factors described above, the Company’s net income for the six months ended March 31, 2025 was $6.1 million compared to net income of $2.3 million for the six months ended March 31, 2024. On a fully diluted basis, net income per share was $0.34 for the six months ended March 31, 2025, compared to a net income of $0.13 per share for the six months ended March 31, 2024.

Previous wording

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

Current wording

In connection with the June 2023 Honeywell Agreement, the Company entered into a term loan with PNC Bank for $20.0 million to fund a portion of the June 2023 Honeywell Agreement. Refer to* *the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2024, Note 20, “Loan Agreement” for further details. In addition to providing for the Term Loan, The Loan Agreement, together with a corresponding Line of Credit Note in favor of PNC, executed on May 11, 2023, provides for the senior secured Revolving Line of Credit in an aggregate principal amount of $10,000,000, with an expiration date of May 11, 2028.

Previous wording

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

Current wording

On December 19, 2023, the Company and PNC entered into the Restated Loan Amendment and the corresponding Restated Line of Credit Note and Restated Rider, to increase the aggregate principal amount available under the Company’s senior secured revolving line of credit from $10,000,000 to $30,000,000 and extend the maturity date until December 19, 2028. The proceeds of the Restated Line of Credit Note will be used for working capital and other general corporate purposes, for acquisitions as permitted under the Restated Loan Amendments and to pay off and close the loan evidenced by that certain Term Note executed in favor of PNC, dated June 28, 2023, which provided for a senior secured term loan in aggregate principal amount of $20,000,000, with a maturity date of June 28, 2028.

Previous wording

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

Current wording

Credit”). The interest rate applicable to loans outstanding under the Revolving Line of Credit is a rate per annum equal to the sum of (A) Daily SOFR (as defined in the A&R Revolving Line of Credit Note) plus (B) an unadjusted spread of the Applicable SOFR Margin plus (C) a SOFR adjustment of ten basis points. The Applicable SOFR Margin ranges from 1.5% to 2.5% depending on the Company’s funded debt to EBITDA ratio, as defined in the A&R Revolving Line of Credit Note. The A&R Rider provides for how PNC will make advances to the Company under the Revolving Line of Credit.

Previous wording

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

Current wording

The Company’s existing cash balances, anticipated cash flows from operations and current banking facility are expected to be adequate to satisfy the Company’s liquidity needs for at least the next 12 months, which include funding requirements for working capital, construction in process related to progress payments in support of the Company’s facilities expansion as well as computer software integration associated with the Company’s Netsuite ERP system.

Previous wording

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

Current wording

Net cash provided by operating activities was $3.1 million for the six months ended March 31, 2025 and consisted primarily of funding from net income of $6.1 million and changes in working capital.

Previous wording

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

Current wording

Net cash used in investing activities was $1.8 million for the six months ended March 31, 2025 and consisted of expenditures related to additions and improvements in the Company’s facilities and purchases of equipment and computer hardware.

Previous wording

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

Current wording

Net cash used in financing activities was $0.6 million for the six months ended March 31, 2025 and consisted of payments against the Company’s line of credit.

Previous wording

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

Current wording

At March 31, 2025, our backlog was $79.6 million compared with $89.2 million at September 30, 2024. Backlog at March 31, 2025 included $66.0 million of acquired backlog as a result of the September 27, 2024 acquisition. Backlog is converted into sales in future periods as work is performed or deliveries are made. We expect to recognize approximately 59% of our backlog over the next 12 months and approximately 81% over the next 24 months as revenue, with the remainder recognized thereafter.

Previous wording

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

Current wording

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