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| | PART I | |
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| Item 1. | Business | 5 |
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| Item 1A. | Risk Factors | 13 |
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| Item 1B. | Unresolved Staff Comments | 28 |
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| Item 1C. | Cybersecurity | 28 |
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| Item 2. | Properties | 29 |
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| Item 3. | Legal Proceedings | 29 |
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| Item 4. | Mine Safety Disclosures | 29 |
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| | PART II | |
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| Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 29 |
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| Item 6. | Selected Consolidated Financial Data | 30 |
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 31 |
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| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 41 |
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| Item 8. | Financial Statements and Supplementary Data | 41 |
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| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 79 |
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| Item 9A. | Controls and Procedures | 79 |
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| Item 9B. | Other Information | 80 |
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| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 80 |
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| | PART III | |
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| Item 10. | Directors, Executive Officers and Corporate Governance | 80 |
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| Item 11. | Executive Compensation | 80 |
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| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 80 |
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| Item 13. | Certain Relationships and Related Transactions and Director Independence | 81 |
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| Item 14. | Principal Accounting Fees and Services | 81 |
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| | PART IV | |
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| Item 15. | Exhibits and Financial Statement Schedules | 82 |
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are based largely on current expectations and projections about future events and trends affecting the business, are not guarantees of future performance, and involve a number of risks, uncertainties and assumptions that are difficult to predict. In this Annual Report on Form 10-K, the words “anticipates,” “believes,” “may,” “will,” “estimates,” “continues,” “anticipates,” “intends,” “forecasts,” “expects,” “plans,” “could,” “should,” “would,” “is likely,”“ projected,” “might,” “potential,” “preliminary,” “provisionally,” and similar expressions, as they relate to the business or to its management, are intended to identify forward looking statements, but they are not exclusive means of identifying them. Unless the context otherwise requires, all references herein to “IA,” the “Registrant,” the “Company,” “we,” “us” or “our” are to Innovative Solutions and Support, Inc. and its consolidated subsidiaries. ThrustSense® and COCKPIT/IP®, among others, are trademarks of the Company. All other trademarks appearing herein are held by their respective owners. Subsequent use of the Company’s trademarks in this Annual Report on Form 10-K may occur without the applicable superscript symbol (® or TM) in order to facilitate the readability of this Annual Report on Form 10-K and are not a waiver of rights that may be associated with the relevant trademarks.
The forward-looking statements in this Annual Report on Form 10-K 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 this Annual Report on Form 10-K and the following factors:
| ● | market acceptance of the Company’s Vmca Mitigation, flight panel display systems, NextGen Flight Deck, ThrustSense® Autothrottle and COCKPIT/IP® or other planned products or product enhancements; |
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| ● | continued market acceptance of the Company’s air data systems and products; |
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| ● | the competitive environment and new product offerings from competitors; |
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| ● | difficulties in developing, producing or improving the Company’s planned products or product enhancements; |
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| ● | the deferral or termination of programs or contracts for convenience by customers; |
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| ● | the ability to service the international market; |
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| ● | the availability of government funding; |
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| ● | the impact of general economic trends on the Company’s business; |
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| ● | disruptions in the Company’s supply chain, customer base and workforce; |
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| ● | the ability to gain, drive and sustain regulatory approval, including domestic and international certifications, of products in a timely manner; |
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| ● | delays in receiving components from third-party suppliers; |
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| ● | the bankruptcy or insolvency of one or more key customers; |
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| ● | protection of intellectual property rights, including via securing patents; |
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| ● | the ability to respond to technological change; |
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| ● | failure to recruit and retain key personnel; |
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| ● | risks related to succession planning; |
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| ● | a cybersecurity incident; |
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| ● | risks related to our self-insurance program; |
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| ● | potential future acquisitions and integration of prior and potential future acquisitions; |
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| ● | the costs of compliance with present and future laws and regulations; |
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| ● | changes in law, including changes to corporate tax laws in the United States and the availability of certain tax credits; and |
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| ● | other factors disclosed from time to time in the Company’s filings with the U.S. Securities and Exchange Commission (the “SEC”). |
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Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. Except as expressly required by the federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether because 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.
The forward-looking statements in this Annual Report on Form 10-K are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act, and Section 21E of theExchange 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 projections, forecasts or opinions issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, neither such reports nor the projections, forecasts or opinion contained therein are the responsibility of the Company.
The following is a summary of the principal risks described in Part I, Item 1A. “Risk Factors” in this Annual Report on Form 10-K. We believe that the risks described in the “Risk Factors” section are material to investors, but other factors not presently known to us or that we currently believe are immaterial may also adversely affect us. The following summary should not be considered an exhaustive summary of the material risks facing us, and it should be read in conjunction with the “Risk Factors” section and the other information contained in this Annual Report on Form 10-K.
Risks Related to Our Business and Industry
| ● | If the Company fails to enhance existing products, or to develop and achieve market acceptance for flat panel displays, flight control computers, display generators, flight management systems, autothrottle technology and other new products that meet customer requirements, its business, financial condition and results of operation may be affected adversely. |
| ● | Growth of the Company’s customer base could be limited by delays or difficulties in completing development and introduction of planned products or product enhancements. |
| ● | If the Company fails to modify or improve its products in response to evolving industry standards and government regulations, its products could become obsolete rapidly. |
| ● | We design, manufacture and service products that incorporate advanced technologies; the introduction of new products and technologies involves risks, and we may not realize the degree or timing of benefits initially anticipated. |
| ● | We may pursue strategic acquisitions, investments, strategic partnerships, product line acquisitions or other ventures. The Company may be unable to successfully integrate and realize the anticipated benefits of recent acquisitions. |
| ● | The Company’s revenue and operating results may vary significantly from quarter to quarter, which may cause its stock price to decline. |
| ● | Our sales in the commercial aircraft market are subject to downturns affecting the aerospace industry generally. |
| ● | Risks related to performance, schedule, cost and requirements of the F-16 program could adversely affect our performance. |
| ● | Our success depends, in part, on our ability to develop new technologies, products and services and efficiently produce and deliver existing products. |
| ● | Geopolitical, macroeconomic and public health events and conditions could adversely affect our business, financial condition and operating results. |
| ● | Due to the inherent nature of our products and the industry in which we operate, a product safety failure or quality issue could seriously harm to our business. |
| ● | We serve a limited number of customers and face customer concentration risk. |
| ● | Our customers may terminate their contracts with us at any time, which could adversely affect our business. |
| ● | Changes in U.S. government priorities, spending levels and response to world events could adversely affect the Company’s ability to maintain or grow the revenue the Company receives through government contracting. |
| ● | Geopolitical factors and changes in policies and regulations could adversely affect our business. |
| ● | Government contracts are subject to special risks as a result of the U.S. government’s audit practices. |
| ● | The Company could be subjected to unanticipated losses in the event that the Company suffers cost overruns or contractual penalties in connection with fixed-price contracts or service arrangements to perform specified design and EDC services. |
| ● | The Company relies on third-party suppliers for components of its products, including several sole source suppliers, and any interruption in the supply of these components could hinder its ability to deliver products on a timely basis. |
| ● | The impacts of global supply chain and labor market disruptions on our supply chain have negatively affected and will continue to negatively affect our business. |
| ● | Our subcontractors and third-party suppliers may fail to deliver high quality products, materials or services, which may result in a failure of our products or services and a violation of applicable law. |
| ● | Our competitors have greater resources and experience than us, and if we are not able to compete successfully, our business, financial condition and results of operations will be substantially adversely affected. |
| ● | The Company depends on key personnel to manage its business effectively, and an inability to attract and retain key employees and plan for management succession could adversely impact the Company’s ability to compete. |
| ● | We self-insure a significant portion of our employee medical insurance program, which exposes us to unpredictable costs that may negatively affect our financial performance. |
| ● | The Company has limited experience in marketing and distributing its products internationally, which may limit the Company’s ability to penetrate international markets and increase international sales. |
Risks Related to Intellectual Property, Privacy, Cybersecurity, and Technical Infrastructure
| ● | Our intellectual property rights are important to our operations, and we could suffer loss if they infringe upon others’ rights or are infringed upon by others. |
| ● | Certain of our products incorporate and rely upon licensed third-party technology. |
| ● | A cyber security incident or other technology disruption could have a negative impact on our business. |
Legal and Regulatory Risks
| ● | The Company is subject to various laws and regulations. Changes to, or failure by the Company to comply with, these laws and regulations could have a significant negative impact on the Company’s business and operations. |
| ● | Exports and imports of certain of our products are subject to various export controls, sanctions and import regulations and may require authorization from regulatory agencies of the U.S. or other countries. |
| ● | Litigation with customers, employees and others could harm our reputation and impact operating results. |
| ● | Tax changes could affect the Company’s effective tax rate and future profitability. |
| ● | Tariffs and other trade policies could have a substantial impact on our business. |
| ● | If the Company fails to maintain an effective system of internal control over financial reporting, it may not be able to accurately report its financial condition, results of operations or cash flows. |
Risks Related to Our Common Stock, Capital Markets and Indebtedness
| ● | Our common stock may be affected by limited trading volume and may fluctuate significantly. |
| ● | Our common stock has experienced and may continue to experience significant price fluctuations, which could result in a loss of a significant portion of an investment and interfere with our efforts to grow our business. |
| ● | Because we do not intend to declare cash dividends on our shares of common stock in the foreseeable future, shareholders must rely on appreciation of the value of our common stock for any return on their investment. |
| ● | Volatility and weakness in capital markets may adversely affect credit availability and related financing costs, which could adversely affect the Company. |
| ● | There are risks associated with our outstanding and future indebtedness. |
