Good morning, and welcome to the Innovative Solutions & Support, Inc. third quarter 2018 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the call over to Mr. Hedrick. Please go ahead.
Good morning. This is Jeff Hedrick. I'd like to welcome you this morning to our conference call to discuss the third quarter fiscal 2018 current business conditions and outlook for the upcoming year. Joining me today are Shahram Askarpour, our president, and Relland Winand, our CFO. Before I begin, I'd like Relland to read the safe harbor message. Rel?
Thank you, Jeff, and good morning, everyone. I would remind our listeners that certain matters discussed in the conference call today, including new products and operational financial results for future periods, are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially, either better or worse, from those discussed, including other risks and uncertainties reflected in our company's 10K, which is on file with the SEC and other public filings. I'll turn the call back to Jeff.
Thank you, Rel. In the third quarter, revenues were down, but backlog increased from the second quarter. Revenues were down 25% as compared to a year ago, reflecting the lower beginning backlog in the quarter. In the third quarter, we took actions to better align the company with evolving market opportunities. Because of our confidence in the potential of our ThrustSense AutoThrottle, which has been granted U.S. patents and European patents, as well as that of our existing portfolio of cockpit technologies, we have implemented new organizational structure to intently focus on these opportunities while streamlining the business to support our strategy and reduce costs. Importantly, we have transitioned the organizational structure from market-oriented strategy to a product-oriented strategy consistent with many of our competitors. That, for instance, our dedicated AutoThrottle Utility Management System will now pursue growth in all markets and all opportunities.
We have staffed it with a new sales staff with 10 years of direct AutoThrottle experience. That'll aid us in addressing these markets. We believe that this new approach will help us improve market development and penetration because of the added technical and other product expertise this will bring to point of the customer contact. To support the further development and certification of our AutoThrottle, we purchased a Beechcraft King Air. By owning the aircraft, we have now unrestricted access. That helps to speed the development process. We have already successfully flight tested the majority of the system's unique features. Later this month, we have planned to conduct our first flight test with the FAA. This test, the first of several, is an important step in obtaining product certification.
When certified, King Air will join our existing PC-12 AutoThrottle as another large market that our new dedicated AutoThrottle team can aggressively target. Beyond the AutoThrottle, we are beginning to see new interest emerge for a variety of our other innovative solutions. We are presently under contract to develop a new air data computer for the U.S. Navy in support of their Next Gen program. This air data computer is expected to find broader demand in the market. We are presently upgrading the Utility Management System to provide our existing customers and future opportunities with significant performance and versatility improvements. Consequently, we have modified our strategy to focus on these well-defined markets. As a result, we are able to shed costs, lowering our break-even point. We expect to gain efficiency inherent in this narrowing of focus.
We are early in the process, and the third quarter. It's too soon to show the impact of these more concentrated efforts. It may even take a quarter before we see significant results and effects of these changes, which are consistent with our historic perspective, which is long-term. Our balance sheet continues to remain strong. With lowering operating expenses, we are well prepared to undertake a period of investment and change. Over the long term, we believe this dedication to our proven technology will reward us with improved market visibility and increased growth. Let me turn it over to Rel for a discussion on the financials.
Thank you, Jeff. Thank you all for joining us this morning. For the three months ended June 30th, 2018, net sales were $3.4 million compared to $4.5 million from the third quarter of last year. Consistent with recent quarters, the majority of revenue was either from production contracts or customer service, including revenue recognized on intra-quarter book and ship orders. For the third quarter of fiscal 2018, gross margins were 47%, down from 52% in the third quarter last year. Despite lower volumes, which would tend to adversely impact our ability to absorb fixed overhead and thus weigh on margins, we have managed to sustain healthy margins, primarily due to lower material costs and higher-margin customer service revenue. However, I continue to caution that margins can vary from quarter to quarter as a result of changes in either product mix or volume.
Total operating expenses in the third quarter were $2.7 million, down from $2.9 million in the third quarter of 2017. Research and development expenses were approximately $200,000 lower than a year ago, We should see this expense continue to trend downward as a result of the workforce reduction during the quarter. I would point out that as measured as a proportion of revenues, it is clear we remain committed to investing in research and development. Selling, general, and administrative costs were $1.6 million in the quarter, little change from a year ago. We do expect lower spending in SG&A, as we did make workforce reductions in this area. For the third quarter of fiscal 2018, we reported a net loss of $1 million, inclusive of $259,000 severance expense due to the workforce reduction.
Beginning in fiscal 2019, we expect to realize the savings of $3.5 million on an annual basis in payroll and related costs. In the year-ago quarter, net income was $19,000, which reflected a $537,000 income tax benefit due to a change in anticipated profitability in that year. At June 30th, 2018, we believe the company remains in a strong financial position with nearly $21 million of cash on hand and no debt. Despite the loss during the quarter, the cash used in operations was only $200,000 in the quarter, We did use approximately $2.4 million to purchase the King Air. We believe the company has sufficient cash to fund operations for the foreseeable future. I'd like to turn the call over to Shahram.
Thank you, Rel. Good morning, everyone. As Jeff mentioned, AutoThrottle remains the prime focus. We already have certified on the PC-24 Next Gen cockpit, We are working on a second general aviation AutoThrottle for the Beechcraft King Air. We made a significant investment to purchase a King Air B200GT aircraft. This aircraft represents the newer model King Airs. We believe this model has the greatest whole value and will serve as the best platform for our effort to secure our initial King Air certification. We expect that our partnership with Blackhawk Modifications will significantly benefit from this base certification by allowing us to demonstrate the safety and operational capabilities of our AutoThrottle in a twin turbo platform. We have already installed our AutoThrottle in our King Air and have successfully performed company test flights with FAA-designated flight test pilots.
Next week, we have scheduled a flight test of King Air AutoThrottle with the FAA that we believe will result in an expedient certification of our system. Since we acquired the aircraft, we've made significant progress that had previously been somewhat stalled based on aircraft availability. This delay is one of the reasons Jeff suggests that our performance over the next couple of quarters may best be evaluated primarily in terms of the progress of our investment and development rather than revenue growth. Let me quickly remind everyone why the AutoThrottle has created such a buzz. We believe that our AutoThrottle provides a set of innovative safety features, including engine protection and aircraft envelope protection, while yielding significant fuel savings through constant optimization of aircraft speed.
We also believe that an AutoThrottle system will be a key element in harnessing the benefits of Next Gen mandates, such as ADSB and RNP. The company has received a patent on our AutoThrottle. In addition, we received trademark approval of ThrustSense for our AutoThrottle product line. We have received significant interest in our ThrustSense AutoThrottle from potential customers and industry experts. The experts' opinion, expressed in various aviation publications, have characterized our Next Gen flight deck and turboprop AutoThrottle as one of the most innovative products the experts have seen in the industry. More recently, our ThrustSense AutoThrottle has received increased interest from both aircraft OEMs and engine manufacturers to integrate with their offering. As Jeff mentioned, to capitalize on this opportunity, we have reorganized the business by transitioning from a market focus to a product focus.
To spearhead our AutoThrottle initiative, we have recently added a new business development manager who is well-seasoned in the AutoThrottle market. We have already received our initial orders. Shortly expect additional orders for the PC-12 AutoThrottle. We anticipate delivery of several systems this fiscal year. Looking at some of our other ongoing programs, the PC-24 program is going well with $1.2 million in new orders in the third quarter. Based on statements from industry experts, Pilatus may sell over 50 PC-24s a year over the long term. We are investing engineering efforts in performance enhancement for the UMS product line to support Pilatus for additional features on the PC-24 platform, as well as applicability of UMS to other aircraft types. Finally, we continue to ship our legacy products in the air transport and military markets.
In summary, we have taken a disciplined approach centered on the key tenets of our growth strategy. We believe that this will enable us to have better control over our performance in the long term, which we believe is the key to building value for our shareholders. Let me turn the call back to Jeff for some closing remarks.
Thank you, Shahram. We arrived at our decision to narrow the focus of our technical and business resources to focus on those things that we believe have the highest probability of return. In the past, the many opportunities we pursued distracted and weakened our focused efforts on the few now proving to be very successful programs. Our AutoThrottle is the first and only Part 23 FAA certified turboprop AutoThrottle. As mentioned before, it's covered by both U.S. and European patents. We believe that our Flat Panel Display Systems and new ThrustSense autopilot, AutoThrottle, as well as the UMS, are technologies that have tremendous long-term potential, and that we need to concentrate our efforts on those areas. The addition of our AutoThrottle product line manager will drive these effects.
While the new quarter or two may be bumpy, we let our new strategy take root and see the certification of the King Air and the huge market opportunity it brings play out over the longer term. We believe that we can penetrate these markets and create value for our shareholders. I appreciate your time and interest today. I'll be happy to answer your questions. Operator, please.
Thank you. At this time, we will open the floor to questions. If you would like to ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Again, that's star and then the number one if you would like to ask a question. I am showing no questions at this time, I would like to conclude our question and answer session as well as today's conference. We thank you for attending today's presentation. You may now disconnect your lines.