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Item 1A. Risk Factors

2024-01-12 compared with 2022-12-16 · 155 added, 119 removed, 132 unchanged (67% of the section changed)

Risk Factors.

Each reader should carefully consider the risks, uncertainties and other factors described below, in addition to the other information set forth in this report, because they 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.

An investment in our common stock involves various risks, including risks related to the items listed below.

However, you are urged to carefully consider all of the matters discussed in this Part I, Item 1A of this Report under the caption “Risk Factors” (not just those discussed in this summary) in considering our business and prospects.

IS&S-Specific Risk Factors

The Company faces risks relating to:

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

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

● the potential for losses due to cost overruns on fixed-price contract projects;

federal government budget deficits and audit practices, including the possibility of reductions in government expenditures;

● the possibility that IS&S may lose one or more key customers;

● the self-insured portion of IS&S’ employee medical insurance program;

● our lack of substantial backlog;

● the ability to service the international market;

● intense competition with key competitors.

General Risk Factors

The Company faces risks relating to:

● the ongoing COVID-19 pandemic;

● the ability to respond to technological change;

● delays in receiving components from third-party suppliers;

● challenges associated with the complexity of our products;

● our ability to protect our intellectual property rights;

● failure to retain/recruit key personnel;

● succession planning;

● variations in our revenue and operating results over time;

● a cyber security incident;

● potential litigation;

● 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;

● volatility and weakness in capital markets, including rising inflation and interest rates;

● the efficacy of our internal control over financial reporting.

IS&S-Specific Risk Factors

Investing in our common stock involves a high degree of risk.

You should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before making a decision to invest in our common stock.

Our business, financial condition, results of operations, or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material.

If any of the risks actually occur, our business, financial condition, results of operations, and prospects could be adversely affected.

In that event, the market price of our common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business and Industry

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 IS&S fails to enhance existing products, or to develop and achieve market acceptance for flat panel displays, flight management systems, autothrottle technology and other new products that meet customer requirements, its business, reputation and statements of income may be affected adversely.

Currently, IS&S spends a large portion of its R&D efforts in developing and marketing the FPDS, FMS, ThrustSense® Autothrottle and complementary products.

If the Company fails to enhance existing products, or to develop and achieve market acceptance for flat panel displays, flight management systems, autothrottle technology and other new products that meet customer requirements, its business, reputation and statements of income may be affected adversely.

The Company spends a large portion of its R&D efforts in developing and marketing the FPDS, FMS, ThrustSense® Autothrottle and complementary products.

The Company’s ability to grow and diversify its operations through introduction and sale of new products is dependent upon its continued success in product development and engineering activities, its sales and marketing efforts, and its ability to obtain necessary regulatory approvals to sell such products.

Sales growth will depend in part on market acceptance of and demand for the FPDS, FMS, ThrustSense® Autothrottle and future products.

IS&S cannot be certain that it will be able to develop, introduce or market its FPDS, FMS, ThrustSense® Autothrottle or other new products or product enhancements in a timely or cost-effective manner, or that any new products or product enhancements will receive market acceptance or necessary regulatory approval.

The Company cannot be certain that it will be able to develop, introduce or market its FPDS, FMS, ThrustSense® Autothrottle or other new products or product enhancements in a timely or cost-effective manner, or that any new products or product enhancements will receive market acceptance or necessary regulatory approval.

In addition, the Company’s business is dependent upon maintaining its reputation and relationships with existing customers.

If the Company’s performance does not meet its customers’ expectations, the Company’s reputation and its relationships could be damaged, which may have a material adverse impact on the Company’s business and statements of income, including reductions in sales.

If the Company’s performance or the performance of the Company’s products does not meet its customers’ expectations, the Company’s reputation and its relationships could be damaged, which may have a material adverse impact on the Company’s business and statements of income, including reductions in sales.

In seeking new customers, the Company may have difficulty in displacing the products of incumbent competitors.

IS&S cannot be assured that potential customers will accept its products or that existing customers will not abandon them.

The Company cannot be assured that potential customers will accept its products or that existing customers will not abandon them.

Contracts can be terminated by many of the Company’s customers at any time and, therefore, may not result in sales.

IS&S’s contracts, including contracts with government agencies, includes various terms and conditions that impose certain requirements on IS&S, including the ability of the government agency or general contractor to alter the price, quantity or delivery schedule of the products.

The Company’s contracts, including contracts with government agencies, include various terms and conditions that impose certain requirements on the Company, including the ability of the government agency or general contractor to alter the price, quantity or delivery schedule of the products.

Additionally, government agencies and general contractors typically retain the right to terminate the contract at any time at their convenience.

Upon alteration or termination of these contracts, IS&S is entitled typically to an equitable adjustment to the contract price so that it would be compensated for delivered items and allowable costs incurred.

Upon alteration or termination of these contracts, the Company is entitled typically to an equitable adjustment to the contract price so that it would be compensated for delivered items and allowable costs incurred.

However, because these contracts can be terminated for convenience, the Company cannot be assured that its backlog will result in sales.

The Company enters into fixed-price contracts or service arrangements to perform specified design and EDC services related to its products that could subject IS&S to losses in the event the Company incurs cost overruns on its projects.

The Company enters into fixed-price contracts or service arrangements to perform specified design and EDC services related to its products that could subject the Company to losses in the event the Company incurs cost overruns on its projects.

During fiscal year 2023, approximately 3.3% percent of the Company’s total sales were from fixed-price EDC arrangements with customers to perform specified design and EDC services related to its products.

These arrangements allow IS&S to benefit by recovering some of its product development costs, but it carries the risk of potential cost overruns.

These arrangements allow the Company to benefit by recovering some of its product development costs, but it carries the risk of potential cost overruns.

If the Company’s initial cost estimates are incorrect, it can incur potentially large one time charges and losses on these contracts.

These EDC arrangements can expose the Company to potential losses because the customer may compel IS&S to complete a project or, in the event of a termination for default, pay the incremental cost of its replacement by another provider.

Because some of these projects involve new technologies and applications, and can last for more than a year, unforeseen events such as technological difficulties, fluctuations in the price of raw materials, problems with subcontractors, and cost overruns can result in the contractual price becoming less favorable or even unprofitable to IS&S over time.

These EDC arrangements can expose the Company to potential losses because the customer may compel the Company to complete a project or, in the event of a termination for default, pay the incremental cost of its replacement by another provider.

Furthermore, if the Company does not meet project deadlines or if its products do not meet customer specifications, it may need to renegotiate contracts on less favorable terms, be forced to pay penalties or liquidated damages, or suffer losses if the customer exercises its right to terminate.

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Lower earnings caused by cost overruns could have a negative impact on the Company’s financial condition, operating results and cash flows.

A portion of IS&S sales come from government contracts, which could be adversely affected by continued high U.S.

A portion of the Company’s sales come from government contracts, which could be adversely affected by continued high U.S.

federal budget deficits.

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government’s audit practices.

A portion of IS&S sales has been, and is expected to continue to be, from defense contractors or government agencies in connection with government aircraft retrofit or OEM contracts.

A portion of the Company’s sales has been, and is expected to continue to be, from defense contractors or government agencies in connection with government aircraft retrofit or OEM contracts.

Sales to government contractors and government agencies could decline as a result of DoD spending cuts and general budgetary constraints, which may become more severe as the federal budget deficit remains high.

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As a result, the Company’s reputation could be harmed even if the allegations were later determined to be false.

Reductions in government expenditures could adversely affect IS&S business.

Reductions in government expenditures could adversely affect the Company’s business.

Reductions in funding of the DoD and U.S.

defense spending could have significant consequences to the Company’s business and industry.

While the full impact of such reductions is not determinable, the impact of any resulting reductions in defense appropriations, and/or reductions in U.S.

defense spending could result in delays in procurement of products and services due to lack of funding, and negatively affect the IS&S’s revenues, financial condition and results of operations.

The impact of any such reductions in defense appropriations and/or reductions in U.S.

defense spending could result in delays in procurement of products and services due to lack of funding, and negatively affect the Company’s revenues, financial condition and results of operations.

The loss of a key customer or a significant deterioration in the financial condition of a key customer could have a material adverse effect on the Company’s results of operations.

The Company’s revenue is concentrated with a limited number of customers.

During fiscal year 2022 IS&S derived 58% of revenue from the top five customers.

IS&S expects a relatively small number of customers to account for a majority of its revenues for the foreseeable future.

During fiscal year 2023 the Company derived 54% of revenue from the top five customers.

The Company continues to expect a relatively small number of customers to account for a majority of its revenues for the foreseeable future.

As a result of the concentrated customer base, a loss of one or more of these customers or a dispute or litigation with one of these key customers could affect adversely its revenue and results of operations.

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In addition, the Company is subject to credit risk associated with the concentration of accounts receivable from its key customers.

If any of the Company’s top customers were to become bankrupt or insolvent or otherwise were unable to pay for the products and services provided by the Company, including as a result of the impact of the COVID-19 pandemic on their businesses or financial conditions, then the Company may incur significant write-offs of accounts receivable, incur other impairment charges or result in a significant loss of expected revenues, which may have a material adverse effect on the Company’s results of operations.

If any of the Company’s top customers were to become bankrupt or insolvent or otherwise were unable to pay for the products and services provided by the Company, then the Company may incur significant write-offs of accounts receivable, incur other impairment charges or result in a significant loss of expected revenues, which may have a material adverse effect on the Company’s results of operations.

We self-insure a significant portion of our employee medical insurance program, which may expose us to unpredictable costs and negatively affect our financial performance.

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The Company has limited experience in marketing and distributing its products internationally.

IS&S plans to derive increasing revenues from sales outside the United States, particularly in Europe and Asia.

The Company plans to derive increasing revenues from sales outside the United States, particularly in Europe and Asia.

Risks inherent in doing business internationally include:

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● tariffs, trade and investment barriers, and other regulatory barriers;

● political and economic instability, including changes in government budgets;

● political and economic instability, including changes in government budgets and wars, such as the wars in the Ukraine and Israel;

● changes in diplomatic and trade relationships;

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An increase in the dollar’s value compared to other currencies could render the Company’s products less competitive in the international markets.

In the future, IS&S may be required to conduct sales in the foreign country’s local currency, thus exposing it to fluctuations and volatility in exchange rates that could adversely affect its operating results.

In the future, the Company may be required to conduct sales in the foreign country’s local currency, thus exposing it to fluctuations and volatility in exchange rates that could adversely affect its operating results.

Further, as we pursue customers in Asia and other less developed markets throughout the world, our potential inability to ensure the creditworthiness of counterparties could impose additional risks and affect our overall profitability.

Emerging market operations in particular can present many risks, including cultural differences (such as employment and business practices), volatility in gross domestic product, economic and government instability, and the imposition of exchange controls and capital controls.

While these factors and their impact are difficult to predict, any one or more of them could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

Emerging market operations in particular can present many risks, including volatility in gross domestic product, economic and government instability, and the imposition of exchange controls and capital controls.

These factors and their impact are difficult to predict, and any one or more of them could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

The Company’s competition includes other manufacturers of air data systems and flight information displays against whom it may not be able to compete successfully.

The markets for the Company’s products are intensely competitive and subject to rapid technological change.

Competitors include Honeywell International Inc., Collins Aerospace, Thales Defense & Security, Inc., Garmin Ltd.

Competitors include Honeywell, Collins Aerospace, Thales Defense & Security, Inc., Garmin Ltd.

and GE Aviation Systems.

All these competitors have substantially greater financial, technical, and human resources than does IS&S.

All these competitors have substantially greater financial, technical, and human capital resources than does the Company.

In addition, these competitors have much greater experience in and resources for marketing their products.

As a result, these competitors may be able to respond more quickly to new or emerging technologies and customer preferences, or to devote greater resources to development, promotion and sale of their products than IS&S can.

The Company’s competitors may have greater name recognition and more extensive customer bases.

Such competition could result in price reductions, fewer customer orders, reduced gross margins, and loss of market share.

General Risk Factors

The ongoing COVID-19 pandemic may adversely affect IS&S.

The Company has not yet seen a material impact from the COVID-19 pandemic on its business, financial position, liquidity, or ability to service customers or maintain critical operations.

However, some parts of the world are continuing to see a rise in COVID-19 cases and hospitalizations, and it is possible that new, more virulent strains and variants of COVID-19 may emerge and lead governments and private sectors to re-institute quarantine and trade restrictions, which could adversely impact market conditions.

IS&S will continue to monitor the impact of the COVID-19 pandemic on its business, including how it has impacted and will impact the Company’s employees, customers, suppliers and distribution channels.

The Company could face liquidity shortages, weaker product demand from its customers, disruptions in its supply chain, and/or staffing shortages in its workforce in the future due to the direct and indirect effects of the COVID-19 pandemic.

If IS&S is unable to respond to rapid technological change, its products could become obsolete and its reputation could suffer.

The Company relies on third-party suppliers for components of its products, including any necessary raw materials, and any interruption in the supply of these components could hinder its ability to deliver products on a timely basis.

The Company’s manufacturing process consists primarily of assembling components purchased from its supply chain.

The suppliers may not continue to be available to the Company, or be able to perform or timely deliver our components.

If the Company is unable to maintain relationships with key third-party suppliers, the development and distribution of its products could be delayed until equivalent components can be obtained and integrated into the products.

In addition, substitution of certain components from other manufacturers may require product redesign or FAA, EASA or other approvals, which could delay the Company’s ability to ship products, and any increase in component costs, including the costs of any necessary raw materials, in the Company’s supply chain could adversely affect the Company’s results of operations.

The Company depends on key personnel to manage its business effectively, and an inability to retain its key employees and plan for management succession could adversely impact the Company’s ability to compete.

The Company’s success depends on the efforts, abilities, and expertise of its senior management and other key personnel.

There can be no assurance that the Company will be able to retain such employees, and the loss of some could damage its ability to execute its business strategy.

The Company intends to continue hiring key management, engineering, and sales and marketing personnel.

Competition for skilled personnel is intense, and the Company may not be able to attract or retain additional qualified personnel.

The Company’s future success will depend in part on its ability to implement and improve its operational, administrative and financial systems and controls and to manage, train and expand its employee base.

The Company cannot provide assurance that current and planned personnel levels, systems, procedures and controls will be adequate to support its current and future customer base.

In such a circumstance, the Company may not be able to fully capitalize on existing and potential market opportunities.

Any delays or difficulties encountered could impair the Company’s ability to attract new customers or maintain its relationships with existing customers.

In addition, effective succession planning is important to our long-term success.

Failure to ensure effective transfer of knowledge and smooth transitions involving senior management and other key personnel could hinder our strategic planning and execution

The Company’s revenue and operating results may vary significantly from quarter to quarter, which may cause its stock price to decline.

The Company’s revenue and operating results may vary significantly from quarter to quarter because of a number of factors, including, but not limited to:

● demand for products and/or delivery schedule changes by its customers;

● capital expenditure budgets of aircraft owners and operators, and appropriation cycles of the U.S.

● changes in the use of the Company’s products, including air data systems, flat panel displays, flight management systems and autothrottle technology;

● delays in introducing or obtaining government approval for new products;

● new product introductions by competitors;

● changes in the Company’s pricing policies or pricing policies of competitors;

● costs related to possible acquisition of technologies or businesses.

If the Company is unable to respond to rapid technological change, its products could become obsolete and its reputation could suffer.

Future generations of flat panel displays, air data systems, engine and fuel displays, flight management systems and autothrottle technology which embody new technologies or new industry standards could render the Company’s products obsolete.

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● develop and introduce timely, high-quality, cost effective new products and product enhancements to address the increasingly sophisticated needs of its customers.

If IS&S fails to modify or improve its products in response to evolving industry standards and government regulations, its products could rapidly become obsolete.

If the Company fails to modify or improve its products in response to evolving industry standards and government regulations, its products could rapidly become obsolete.

The Company’s products are currently subject to direct regulation by the FAA and other equivalent organizations.

The Company’s products, as they relate to aircraft applications, must be approved by the FAA, EASA, or other equivalent organizations before they can be installed in an aircraft.

To be certified, IS&S must demonstrate that its products are accurate and able to maintain certain levels of repeatability over time.

To be certified, the Company must demonstrate that its products are accurate and able to maintain certain levels of repeatability over time.

Although the certification requirements of the FAA and EASA are substantially similar, no formal reciprocity exists between the two regulators.

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Significant delay in receiving certification for newly developed products or enhancements to the Company’s products, or the loss of certification for its existing products, could result in lost sales or delays in sales.

Furthermore, new regulations or product standards, and changes to existing product standards could require IS&S to change its products and underlying technology.

IS&S cannot ensure that it will receive regulatory approval on a timely basis or at all.

IS&S relies on third-party suppliers for components of its products, including any necessary raw materials, and any interruption in the supply of these components could hinder its ability to deliver products on a timely basis.

The Company’s manufacturing process consists primarily of assembling components purchased from its supply chain.

The suppliers may not continue to be available to IS&S, including as a result of the impact of the COVID-19 pandemic on their businesses or financial conditions.

Furthermore, new regulations or product standards, and changes to existing product standards could require the Company to change its products and underlying technology.

The Company cannot ensure that it will receive regulatory approval on a timely basis or at all.

Inasmuch as the Company’s products utilize sophisticated technology and are deployed in complex aircraft cockpit environments, problems with these products may arise that could harm the Company’s reputation for quality assurance and, consequently, its business prospects.

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Despite the Company’s quality assurance process, errors, omissions or defects could occur in its current products, in new products, or in new versions or enhancements of existing products.

IS&S may be required to redesign or recall those products or pay damages.

The Company may be required to redesign or recall those products or pay damages.

Such an event could result in the following:

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● litigation costs.

Although IS&S carries product liability insurance, this insurance may not be adequate to cover its losses in the event of a large product liability claim.

In addition, IS&S may not be able to maintain such insurance in the future.

The Company’s product liability insurance, may not be adequate to cover its losses in the event of a large product liability claim.

In addition, the Company may not be able to maintain such insurance in the future.

We may pursue strategic acquisitions, investments, strategic partnerships or other ventures, and our business could be materially harmed if we fail to successfully identify, evaluate, complete, and integrate such transactions.

Acquisitions, including the Transaction, involve inherent risks that may adversely affect our operating results and financial condition.

The Company may be unable to successfully integrate and realize the anticipated benefits of the Transaction.

Our growth strategy includes evaluating acquisition opportunities and opportunities to make investments in complementary businesses, technologies, services or products, or to enter into strategic partnerships with parties who can provide access to those assets, additional product or services offerings, additional distribution or marketing synergies or additional industry expertise.

One example is the recent asset acquisition of certain inertial, communication and navigation product lines from Honeywell.

We may not be able to identify suitable acquisition, investment or strategic partnership candidates, or if we do identify suitable candidates in the future, we may not be able to complete those transactions on commercially favorable terms, or at all.

Acquisitions, including the Transaction, involve various inherent risks, such as:

our ability to assess accurately the value, strengths, weaknesses, internal controls, contingent and other liabilities and potential profitability of acquisition candidates;

difficulties in integrating acquired businesses, including the potential loss of key personnel from an acquired business, our potential inability to achieve identified financial, operating and other synergies anticipated to result from an acquisition, and integration issues associated with internal controls of acquired businesses;

the diversion of management’s attention from our existing businesses;

the potential impairment of assets;

potential unknown liabilities associated with a business that we acquire or in which we invest, including environmental liabilities;

new and proposed regulations limiting the enforcement of noncompetition and nonsolicitation agreements;

and production delays associated with consolidating acquired facilities and manufacturing operations.

Any past or future acquisition, including the Transaction, could also result in such risks.

Due diligence performed prior to closing acquisitions may not uncover certain risks or liabilities that could materially impact our business and financial results.

We may not successfully integrate business, operational, and financial activities such as internal controls, the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”) compliance, cyber security measures, the GDPR and other corporate governance and regulatory matters, operations, personnel or products related to acquisitions we may make in the future.

We closed the Transaction in June 2023 and are working to integrate the Honeywell product lines into our business.

The success of the Transaction, including anticipated benefits and potential additional revenue opportunities, will depend, in part, on the Company’s ability to successfully integrate the Honeywell product lines in a manner that results in various benefits, including, among other things, enhancing the Company’s current offerings in the air transport, military and business aviation markets, creating potential cost synergies, accelerating the Company’s growth and enhancing its global reputation.

The ongoing process of integrating the Transaction could result in a loss of

key personnel, cause an interruption of, or loss of momentum in, the activities of one or more of the Company’s businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the ability of the Company to maintain relationships with customers and employees.

The diversion of management’s attention and any delays or difficulties encountered in connection with the integration of the Transaction could have an adverse effect on the business, financial condition, operating results and prospects of the Company.

If the Company experiences difficulties in the integration process, including those listed above, the Company may fail to realize the anticipated benefits of the Transaction in a timely manner or at all.

Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues, lost cost savings and revenue opportunities and diversion of management’s time and energy, and could have an adverse effect on the Company’s business, financial condition, operating results and prospects.

If we fail to successfully integrate such transaction, or any future transactions, our business could be materially harmed.

In connection with our acquisitions, including those acquisitions that we do not complete, we may incur significant transaction costs.

We are required to expense such transaction costs as incurred, which may have a material adverse impact on our financial results.

Risks Related to Intellectual Property, Privacy, Cybersecurity, and Technical Infrastructure

The Company’s success depends on its ability to protect its proprietary rights against potential risk of infringement.

If IS&S is unable to protect and enforce its intellectual property rights, it may be unable to compete effectively.

If the Company is unable to protect and enforce its intellectual property rights, it may be unable to compete effectively.

The Company’s success and ability to compete will depend in part on its ability to obtain and maintain patent or other protection for its technology and products, both in the United States and internationally.

In addition, IS&S must operate without infringing the proprietary rights of others.

As of September 30, 2022, IS&S holds 14 U.S.

patents and has 3 U.S.

In addition, the Company must operate without infringing the proprietary rights of others.

As of September 30, 2023, the Company holds 32 U.S.

patents and has three U.S.

patent applications pending relating to its technology.

In addition, the Company holds 40 international patents and has 2 international patent applications pending.

IS&S cannot be certain that patents will be issued on any of its present or future applications.

In addition, the Company holds 85 international patents and has six international patent applications pending.

The Company cannot be certain that patents will be issued on any of its present or future applications.

In addition, existing patents or future patents may not adequately protect the Company’s technology if they are not broad enough or are successfully challenged, or if other entities are able to develop competing methods without violating its patents.

If IS&S is not successful in protecting its intellectual property, competitors could begin to offer products that incorporate its technology.

If the Company is not successful in protecting its intellectual property, competitors could begin to offer products that incorporate its technology.

Patent protection involves complex legal and factual questions, and, therefore, is highly uncertain.

Litigation relating to intellectual property is often very time consuming and expensive.

If a successful claim of patent infringement were made against IS&S, and if the Company were unable to develop non-infringing technology, or to license the infringed or similar technology on a timely and cost-effective basis, the Company might not be able to produce and sell some of its products.

Further, IS&S has incurred, and may continue to incur, significant legal and other costs in defense of its intellectual property.

IS&S depends on key personnel to manage its business effectively, and an inability to retain its key employees and plan for management succession could adversely impact the Company’s ability to compete.

The Company’s success depends on the efforts, abilities, and expertise of its senior management and other key personnel.

There can be no assurance IS&S will be able to retain such employees, and the loss of some could damage its ability to execute its business strategy.

The Company intends to continue hiring key management, engineering, and sales and marketing personnel.

Competition for skilled personnel is intense, and IS&S may not be able to attract or retain additional qualified personnel.

IS&S cannot provide assurance that current and planned personnel levels, systems, procedures, and controls will be adequate to support its current and future customer base.

In such a circumstance, the Company may not be able to fully capitalize on existing and potential market opportunities.

Any delays or difficulties encountered could impair the Company’s ability to attract new customers or maintain its relationships with existing customers.

In addition, effective succession planning is important to our long-term success.

Failure to ensure effective transfer of knowledge and smooth transitions involving senior management and other key personnel could hinder our strategic planning and execution.

The Company’s revenue and operating results may vary significantly from quarter to quarter, which may cause its stock price to decline.

The Company’s revenue and operating results may vary significantly from quarter to quarter because of a number of factors, including, but not limited to:

● demand for products and/or delivery schedule changes by its customers;

● capital expenditure budgets of aircraft owners and operators, and appropriation cycles of the U.S.

● changes in the use of the Company’s products, including air data systems, flat panel displays, flight management systems and autothrottle technology;

● delays in introducing or obtaining government approval for new products;

● new product introductions by competitors;

● changes in IS&S pricing policies or pricing policies of competitors;

● costs related to possible acquisition of technologies or businesses.

If a successful claim of patent infringement were made against the Company, and if the Company were unable to develop non-infringing technology, or to license the infringed or similar technology on a timely and cost-effective basis, the Company might not be able to produce and sell some of its products.

Further, the Company has incurred, and may continue to incur, significant legal and other costs in defense of its intellectual property.

A cyber security incident or other technology disruption could have a negative impact on our business.

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These risks, if not effectively mitigated or controlled, could materially harm our business or reputation.

While we believe that we have implemented appropriate measures and controls, there can be no assurance that such actions will be sufficient to prevent disruptions to critical systems, unauthorized release of confidential information or corruption of data.

There can be no assurance that actions we have taken to implement appropriate measures and controls will be sufficient to prevent disruptions to critical systems, unauthorized release of confidential information or corruption of data.

The security measures we have implemented may become subject to third-party security breaches, employee error, malfeasance, faulty password management or other irregularities.

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Such an event could require significant management attention and resources, negatively impact our reputation among our customers and the public and challenge our eligibility for future work on sensitive or classified systems, which could have a material adverse effect on our business, financial condition and results of operations.

Legal and Regulatory Risks

Litigation with customers, employees and others could harm our reputation and impact operating results.

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Tax changes could affect the Company’s effective tax rate and future profitability.

The Company’s future results could be affected negatively by changes in the effective tax rate as a result of changes in the overall profitability and changes to statutory tax rates in the United States and in other jurisdictions, changes in tax legislation, and the results of audits and examinations of previously filed tax returns.

The Company’s future results could be affected negatively by changes in the effective tax rate due to changes in the Company’s overall profitability, changes to statutory tax rates in the United States and in other jurisdictions, changes in tax legislation, and the results of audits and examinations of previously filed tax returns.

In addition, adverse changes in the underlying profitability and financial outlook of our operations or future changes in tax law could lead to changes in the value of tax assets or liabilities that we currently or in the future may hold, which could materially affect our results of operations.

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Failure to comply with all applicable laws could result in investigation and remediation costs to the Company and could adversely impact the operations and profits of the Company.

In addition, the evolving and at times overlapping regulatory regimes to which the Company is subject may change at any time, including as a result of the upcoming change in the U.S.

presidential administration.

In addition, the evolving and at times overlapping regulatory regimes to which the Company is subject may change at any time.

Any changes to existing laws or regulations, or the adoption of new laws or regulations, could increase our compliance costs and operating costs.

In addition, failure to timely comply with regulatory changes could cause payments to be withheld and/or an impact on future business.

Volatility and weakness in capital markets may adversely affect credit availability and related financing costs, which could adversely affect IS&S.

Bank and capital markets can experience periods of volatility and disruption.

During these periods of volatility and disruption, risks to IS&S include:

● declines in revenues and profitability from reduced orders, payment delays or other factors caused by the economic problems of customers;

● reprioritization of government spending away from defense programs in which IS&S participates;

● reduced access to credit sources;

● disruptions in supplies associated with any financial constraints faced by vendors.

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, which may adversely affect investor confidence in the Company and, as a result, the value of the Company’s common stock.

The Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”) requires, among other things, that the Company maintain effective internal control over financial reporting and disclosure controls and procedures.

The Sarbanes-Oxley Act requires, among other things, that the Company maintain effective internal control over financial reporting and disclosure controls and procedures.

Under Section 404 of the Sarbanes-Oxley Act, the Company is required to furnish a report by management on, among other things, the effectiveness of the Company’s internal control over financial reporting.

6 unchanged sentences

Any failure to maintain internal control over financial reporting could severely inhibit the Company’s ability to accurately report its financial condition, results of operations or cash flows.

If the Company is unable to conclude that its internal control over financial reporting is effective, or if its independent registered public accounting firm determines the Company has a material weakness or significant deficiency in its internal control over financial reporting once that firm begin its reviews, the Company could lose investor confidence in the accuracy and completeness of its financial reports, the market price of its common stock could decline, and it could be subject to sanctions or investigations by NASDAQ, the Securities and Exchange Commission or other regulatory authorities.

Failure to remedy any material weakness in the Company’s internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict the Company’s future access to the capital markets.

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 is traded on NASDAQ.

Although an active trading market has developed for our common stock, there can be no assurance that an active trading market for our common stock will be sustained.

Failure to maintain an active trading market for our common stock may adversely affect our shareholders’ ability to sell our common stock in short time periods, or at all.

stock has experienced, and may experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock.

Our common stock has experienced and may continue to experience price fluctuations, which could cause you to lose a significant portion of your investment and interfere with our efforts to grow our business.

Stock markets are subject to significant price fluctuations that may be unrelated to the operating performance of particular companies, and accordingly the market price of our common stock may frequently and meaningfully change.

In addition, the market price of our common stock has fluctuated and may continue to fluctuate substantially due to a variety of other factors.

Possible exogenous incidents and trends may also impact the capital markets generally and our common stock prices specifically.

For example, the war in the Middle East and the war between Russia and Ukraine and resulting economic sanctions imposed by many countries on Russia have led to disruption, instability and volatility in the U.S.

and global markets and industries and are expected to have a negative impact on the U.S.

and broader global economies.

The timing of your purchase and sale of our common stock relative to fluctuations in its trading price may result in you losing a significant portion of your investment.

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.

We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future.

In addition, the terms of any future debt agreements may preclude us from paying dividends.

As a result, we expect that only appreciation of the price of our common stock, if any, will provide a return to investors in this offering for the foreseeable future.

Volatility and weakness in capital markets may adversely affect credit availability and related financing costs, which could adversely affect the Company.

Bank and capital markets can experience periods of volatility and disruption.

During these periods of volatility and disruption, risks to the Company include:

● declines in revenues and profitability from reduced orders, payment delays or other factors caused by the economic problems of customers;

● reprioritization of government spending away from defense programs in which the Company participates;

● reduced access to credit sources;

● disruptions in supplies associated with any financial constraints faced by vendors.

There are risks associated with our outstanding and future indebtedness.

On June 28, 2023, the Company and one of its subsidiaries entered into an Amendment to Loan Documents (the “Loan Amendment”) with PNC Bank, National Association (“PNC”), which amends certain terms of that certain Loan Agreement entered into by the parties on May 11, 2023 (the “Loan Agreement” and, as amended, the “Amended Loan Agreement”) and (ii) a corresponding Term Note in favor of PNC (the “Term Note”), which together provide for a senior secured term loan in an aggregate principal amount of $20.0 million, with a maturity date of June 28, 2028 (the “Term Loan”).

In addition to providing for the Term Loan, the Loan Agreement, together with a corresponding Revolving Line of Credit Note in favor of PNC, executed May 11, 2023 (“Line of Credit Note”), provides for a senior secured revolving line of credit in an aggregate principal amount of $10.0 million, with an expiration date of May 11, 2028 (the “Revolving Line of Credit”).

As of September 30, 2023, the balance of the Term Loan amounted to $19.5 million.

There was no balance drawn on the Revolving Line of Credit as of September 30, 2023.

We may incur additional indebtedness in the future under these existing credit facilities and/or enter into new financing arrangements.

We may fail to pay these or additional future obligations, as and when required.

Specifically, if we are unable to generate sufficient cash flows from operations or to borrow sufficient funds in the future to service or refinance our debt, our business, operating results, financial condition and cash flows will be harmed.

Any downgrades from credit rating agencies such as Moody’s Investors Service or Standard & Poor’s Rating Services may adversely impact our ability to obtain additional financing or the terms of such financing and reduce the market capacity for our commercial paper.

Furthermore, if prevailing interest rates or other factors result in higher interest rates upon any potential future financing, then interest expense related to the refinance indebtedness would increase.

In addition, all the agreements governing our indebtedness subject us to continued compliance with certain financial and negative covenants.

The Company was in compliance with all applicable covenants throughout and at September 30, 2023.

If we are unable to meet our debt service obligations or should we fail to comply with our financial and other negative covenants contained in the agreements governing our indebtedness, we may be required to refinance all or part of our debt, sell strategic assets at unfavorable prices, incur additional indebtedness or issue common stock or other equity securities.

We may not be able to, at any given time, refinance our debt, sell assets, incur additional indebtedness or issue equity securities on terms acceptable to us, in amounts sufficient to meet our needs.

If we are able to raise additional funds through the issuance of equity securities, such issuance would also result in dilution to our shareholders.

Our inability to service our obligations or refinance our debt could have a material and adverse effect on our business, financial condition or operating results.

On December 19, 2023, the Company and PNC entered into an Amendment to Loan Documents (the “Restated Loan Amendment”) and a corresponding Amended and Restated Revolving Line of Credit Note (“Restated Line of Credit Note”) and Amended and Restated Line of Credit and Investment Sweep Rider (the “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 Amendment, and to pay off and close the loan evidenced by that certain Term Note executed in favor of PNC, dated June 28, 2023, which provides for a senior secured term loan in an aggregate principal amount of $20,000,000, with a maturity date of June 28, 2023.

The interest rate applicable to loans outstanding under the Restated Line of Credit is a rate per annum equal to the sum of (A) Daily SOFR (as defined in the Restated Line of Credit Note) plus (B) an unadjusted spread of Applicable SOFR Margin (as defined in the Restated Line of Credit Note) 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.

The foregoing descriptions of the Restated Loan Amendment, Restated Line of Credit Note and Restated Rider do not purport to be complete and are qualified in their entirety by reference to the full text of the Restated Loan Amendment, Restated Line of Credit Note and Restated Rider, which are filed as Exhibit 10.1, Exhibit 10.2 and Exhibit 10.3, respectively, to the Current Report on Form 8-K filed December 22, 2023 and are incorporated therein by reference .

Unresolved Staff Comments.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors