10-K
1
tm2031767d1_10k.htm
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For the fiscal year ended September 30,
2020
OR
For
the transition period from _______________ to _______________.
Commission File No. 000-31157
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
(Exact name of registrant as specified in
its charter)
(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
720 Pennsylvania Drive, Exton, Pennsylvania 19341
(Address of principal executive offices) (Zip Code)
(610) 646-9800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of
the Act:
Title of each class: Trading symbol(s) Name of each exchange on which registered
Common Stock par value $.001 per share ISSC NASDAQ Global Market
Securities
registered pursuant to Section 12(g) of the Act:None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ̈ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ̈ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ̈
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files). Yes x No ̈
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ̈ Accelerated filer ̈
Non-accelerated filer ̈ Smaller reporting company x
Emerging growth company ̈
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
̈
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ̈
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ̈
No x
The aggregate market value of the registrant’s
common stock held by non-affiliates of the registrant as of March 31, 2020 (the last business day of the registrant’s
most recently completed second quarter) was approximately $41.4 million (based on the closing sale price of the registrant’s
common stock on the NASDAQ Global Market on such date). Shares of common stock held by each executive officer and director and
by each person who owns 10% or more of the registrant’s outstanding common stock have been excluded since such persons may
be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of November 30, 2020, there were
17,214,384 outstanding shares of the registrant’s common stock.
Documents Incorporated by Reference
Portions of the registrant’s Proxy
Statement for the 2021 Annual Meeting of Shareholders to be filed prior to January 28, 2021 are incorporated by reference
into Part III of this Report. Such Proxy Statement, except for the parts therein which have been specifically incorporated
by reference, shall not be deemed “filed” for the purposes of this Report on Form 10-K.
INNOVATIVE SOLUTIONS AND SUPPORT, INC.
2020 Annual Report on Form 10-K
Table of Contents
Page
PART I
Item 1. Business 4
Item 1A. Risk Factors 15
Item 1B. Unresolved Staff Comments 23
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Mine Safety Disclosures 23
PART II
Item 6. Selected Consolidated Financial Data 25
Item 7A. Quantitative and qualitative disclosures about market risk 37
Item 8. Financial statements and supplementary data 37
Item 9A. Controls and procedures 64
Item 9B. Other Information 64
PART III
Item 10. Directors, executive officers and corporate governance 65
Item 11. Executive compensation 65
Item 14. Principal accounting fees and services 66
PART IV
Item 15. Exhibits, financial statement schedules 67
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FORWARD-LOOKING STATEMENTS
This report contains forward looking statements within the
meaning of the federal securities laws. 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 report, the words “anticipates,” “believes,”
“may,” “will,” “estimates,” “continues,” “anticipates,” “intends,”
“forecasts,” “expects,” “plans,” “could,” “should,” “would,”
“is likely” 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 “IS&S,” the “Registrant,” the “Company,” “we,” “us” or
“our” are to Innovative Solutions and Support, Inc. and its consolidated subsidiaries.
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 and the following factors:
· continued market acceptance of the Company’s air data systems and products;
· government budget deficits and the availability of government funding;
· the ability to gain regulatory approval of products in a timely manner;
· risks related to our self-insurance program;
· our lack of substantial backlog;
· the ability to service the international market;
· the competitive environment and new product offerings from competitors;
· the impact of the COVID-19 pandemic on the Company’s business;
· the ability to respond to technological change;
· challenges associated with the complexity of our products;
· protection of intellectual property rights;
· failure to retain/recruit key personnel;
· risks related to 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;
· volatility and weakness in capital markets;
· the efficacy of our internal control over financial reporting;
· potential future acquisitions; and
Except as expressly required by the federal securities laws,
the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information,
future events, or otherwise after the date of this report. Results of operations in any past period should not be considered indicative
of the results to be expected for future periods. Fluctuations in operating results may result in fluctuations in the price of
the Company’s common stock.
Readers
are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report
on Form 10-K. The Company does not undertake any obligation to publicly release any revisions to these forward-looking statements
to reflect events, circumstances or changes in expectations after the date of this Annual Report on Form 10-K, or to reflect
the occurrence of unanticipated events. The forward-looking statements in this document are intended to be subject to the safe
harbor protection provided by Sections 27A of the Securities Act of 1933, as amended (the “Securities Act”), and 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
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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, such
reports are not the responsibility of the Company.
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PART I
Item 1. Business.
Overview
Innovative Solutions and Support, Inc. (the “Company,”
“IS&S,” “we” or “us”) was incorporated in Pennsylvania on February 12, 1988. The Company
operates in one business segment as a systems integrator that designs, develops, manufactures, sells and services air data equipment,
engine display systems, standby equipment, primary flight guidance, autothrottles and cockpit display systems for retrofit applications
and original equipment manufacturers (“OEMs”). The Company supplies integrated Flight Management Systems (“FMS”),
Flat Panel Display Systems (“FPDS”), FPDS with Autothrottle, air data equipment, Integrated Standby Units (“ISU”),
ISU with Autothrottle and advanced Global Positioning System (“GPS”) receivers that enable reduced carbon footprint
navigation.
The Company has continued to position itself as a system integrator,
which capability provides the Company with the potential to generate more substantive orders over a broader product base. The strategy,
as both a manufacturer and integrator, is designed to leverage the latest technologies developed for the computer and telecommunications
industries into advanced and cost-effective solutions for the general aviation, commercial air transport, United States Department
of Defense (“DoD”)/governmental and foreign military markets. This approach, combined with the Company’s industry
experience, is designed to enable IS&S to develop high-quality products and systems, to reduce product time to market, and
to achieve cost advantages over products offered by its competitors.
For several years the Company has been working with advances
in technology to provide pilots with more information to enhance both the safety and efficiency of flying, and has developed its
COCKPIT/IP® Cockpit Information Portal (“CIP”) product line, that incorporates proprietary technology, low cost,
reduced power consumption, decreased weight, and increased functionality. The Company has incorporated Electronic Flight Bag (“EFB”)
functionality, such as charting and mapping systems, into its FPDS product line.
The Company has developed an FMS that combines the savings long
associated with in-flight fuel optimization in enroute flight management combined with the precision of satellite-based navigation
required to comply with the regulatory environments of both domestic and international markets. The Company believes that the FMS,
alongside its FPDS and CIP product lines, is well suited to address market demand driven by certain regulatory mandates, new technologies,
and the high cost of maintaining aging and obsolete equipment on aircraft that will be in service for up to fifty years. The shift
in the regulatory and technological environment is illustrated by the dramatic increase in the number of Space Based Augmentation
System (“SBAS”) or Wide Area Augmentation System (“WAAS”) approach qualified airports, particularly as
realized through Localizer Performance with Vertical guidance (“LPV”) navigation procedures. Aircraft equipped with
the Company’s FMS, FPDS and SBAS/WAAS/LPV enabled navigator, will be qualified to land at such airports and will comply with
Federal Aviation Administration (“FAA”) mandates for Required Navigation Performance, and Automatic Dependent Surveillance-Broadcast
navigation. IS&S believes this will further increase the demand for the Company’s products. The Company’s FMS/FPDS
product line is designed for new production and retrofit applications into general aviation, commercial air transport and military
transport aircraft. In addition, the Company offers what we believe to be a state-of-the-art ISU, integrating the full functionality
of the primary and navigation displays into a small backup-powered unit. This ISU builds on the Company’s legacy air data
computer to form a complete next-generation cockpit display and navigation upgrade offering to the commercial and military markets.
The Company has developed and received certification from the
FAA on its NextGen Flight Deck featuring its ThrustSense® Integrated PT6 Autothrottle (“ThrustSense® Autothrottle”)
for retrofit in the Pilatus PC-12. The NextGen Flight Deck features Primary Flight and Multi-Function Displays and ISUs, as well
as an Integrated FMS and EFB System. The innovative avionics suite includes dual flight management systems, autothrottles, synthetic
vision and enhanced vision. The NextGen enhanced avionics suite is available for integration into other business aircraft with
Non-FADEC and FADEC engines.
The
Company has developed, and in April 2019 received certification from the FAA for, its ThrustSense® Autothrottle for retrofit
in the King Air, dual turbo prop PT6 powered aircraft. The autothrottle is designed to automate the power management for speed
and power control including go-around. ThrustSense® also ensures aircraft envelope protection and engine protection
during all phases of flight reducing pilot workload and increasing safety. The Company has signed a multi-year agreement with Textron
Aviation, Inc. (“Textron”), to supply ThrustSense® on their new production aircraft the King Air 360 and King Air
260. ThrustSense® is also available for retrofit on King Airs through Textron service centers and third party service centers.
More recently, on December 9, 2019 the Company received certification
from the FAA for a safety mode feature during an engine-out condition for its King Air ThrustSense® Autothrottle. LifeGuardTM
provides critical Vmca protection that proportionally reduces engine power to maintain directional control.
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We believe the ThrustSense® Autothrottle is innovative
in that it is the first autothrottle developed for a turbo prop that allows a pilot to automatically control the power
setting of the engine. The autothrottle computes and controls appropriate power levels thereby reducing overall pilot
workload. The system computes thrust, holds selected speed/torque, and implements appropriate speed and engine limit
protection. When engaged by the pilot, the autothrottle system adjusts the throttles automatically to achieve and hold the
selected airspeed guarded by a torque/temperature limit mode. The autothrottle system takes full advantage of the integrated
cockpit utilizing weight and balance information for optimal control settings and enabling safety functions like a turbulence
control mode.
The Company sells to both the OEM and the retrofit markets.
Customers include various OEMs, commercial air transport carriers and corporate/general aviation companies, DoD and its commercial
contractors, aircraft operators, aircraft modification centers, government agencies, and foreign militaries. Occasionally, IS&S
sells its products directly to DoD; however, the Company sells its products primarily to commercial customers for end use in DoD
programs. Sales to defense contractors are generally made on commercial terms, although some of the termination and other provisions
of government contracts are applicable to these contracts. The Company’s retrofit projects are generally pursuant to either
a direct contract with a customer or a subcontract with a general contractor to a customer (including government agencies).
Customers have been and may continue to be affected by 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, the impact of the ongoing COVID-19 pandemic, general levels of consumer spending, increases in fuel and
energy costs, conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence,
and other macroeconomic factors that affect spending behavior. Furthermore, spending by government agencies may be reduced in the
future if tax revenues decline. 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, earlier 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
pandemic will result in other suspensions, delays or order cancellations by the Company’s customers or suppliers.
The Company believes that in adverse economic conditions, customers
that may have otherwise elected to purchase newly manufactured aircraft may be interested instead in retrofitting existing aircraft
as a cost-effective alternative, thereby creating a market opportunity for IS&S.
In particular, the ongoing COVID-19 pandemic is a significant
event, driver of market trends, and source of uncertainty that may ultimately have a direct or indirect material impact on the
Company’s business, financial position, liquidity, or ability to service customers or maintain critical operations. In direct
response to the COVID-19 pandemic, the Company has taken specific actions to seek to ensure the safety of its employees, including
increased safety measures and the transitioning of many employees to remote work.
Industry
A wide range of information is critical for proper and safe
operation of aircraft. With advances in technology, new types of information to assist pilots are becoming available for display
in cockpits, such as satellite-based weather, ground terrain maps, and ADS-B navigation. The Company believes that aircraft cockpits
will become more complete information centers, capable of delivering additional information that is either mandated by regulation
or demanded by pilots to assist in the safe and efficient operation of aircraft.
The Company classifies flight data into four general types:
aircraft heading and altitude information, flight critical aircraft control data, navigation data, and maintenance and aircraft
health data. Aircraft heading and altitude information includes aircraft speed, altitude, and rates of ascent and descent. Flight
critical aircraft control information includes engine data, such as fuel and oil quantity, and other engine measurements. Navigation
data includes radio position, flight management, GPS, and alternative source information (i.e. information not originating on the
aircraft, including weather depiction maps, GPS navigation, and surface terrain maps). Maintenance and aircraft health data includes
on-board sensors and programs to measure parameters related to the health of a system on the aircraft. Air data calculations are
based primarily on air pressure measurements derived from sensors on the aircraft. Engine data are determined by measuring various
indices such as temperature, volume, revolutions per minute, and pressure within an aircraft’s engines and other mechanical
equipment. GPS and alternative source information are derived typically from satellites or equipment located on land and transmitted
by satellite or radio signals to the aircraft. Maintenance and aircraft health data measure multiple parameters on various products
and interface with various components to manage, measure, and report on the health, reliability and usability of a system. This
information is displayed in the cockpit for reference, enhanced position awareness, and reduced support logistics on properly equipped
aircraft.
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Traditionally, flight data and other cockpit information were
displayed on a series of separate analog mechanical instruments. In the early 1980s, Cathode Ray Tubes (“CRT”) and
digital displays using monochromatic Liquid Crystal Displays (“LCD”) began to replace some individual analog instruments.
Presently, the industry offers high resolution color flat panels using Active Matrix Liquid Crystal Displays (“AMLCD”)
to replace traditional analog instruments, CRT or LCD displays. IS&S expects that the ability to display more information in
an efficient space and custom platform will become increasingly important if additional information, such as weather depiction
maps, traffic information, surface terrain maps, datalink messaging, and surveillance displays, becomes mandated by regulation
or demanded by pilots. Accordingly, the Company believes flat panel displays, which can integrate and display a “suite”
of information, will replace individual instrument CRTs and LCDs on legacy aircraft.
In the past, equipment data, such as engine and fuel-related
information, were displayed on conventional analog mechanical instruments. Engine and fuel instruments provide information on engine
activity, including oil and hydraulic pressures, and temperature. These instruments are clustered throughout an aircraft’s
cockpit. Engine and fuel instruments tend to be replaced more frequently than other instruments due to obsolescence and normal
wear-and-tear. Aircraft operators continue to purchase individual conventional engine and fuel instruments as replacements because
the information that these instruments display is vital for safe and efficient flight. Increasingly, operators are replacing their
clusters of analog mechanical instruments with integrated Engine Instrument Display Systems or FPDS packages.
As
the skies and airports become more crowded, the aviation industry and its regulators are concentrating on new technologies, procedures,
and regulations that allow more aircraft to operate in the skies and on the ground safely, efficiently, and with less impact on
the environment. These new technologies and procedures, such as traffic avoidance, ground awareness, increased precision of navigation
and vertical position, runway incursion prevention, and increased digital communication, will require innovation and intuitive
methods to display situational awareness information for the pilots. The Company believes that flat panel displays provide a strong
solution to the growing need for innovation and new methods in this area.
Strategy
The Company’s objective is to become a leading supplier
and integrator of cockpit information, and believes that its industry experience and reputation, technology and products, and business
strategy provide the basis to achieve this objective. Key elements of the Company’s strategy include:
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Products
Current lines of products include:
Flat Panel Display Systems
Flat panel displays are AMLCD screens that can replicate the
display of one or a suite of analog or digital displays on one screen. Flat panel displays can replace existing displays in legacy
aircraft. AMLCDs are used also for security monitoring on-board aircraft and as tactical workstations on military aircraft. The
flat panel product line offers numerous advantages for presentation of engine performance data. During fiscal years 2020, 2019
and 2018, revenues related to FPDS accounted for 80%, 90% and 75%, respectively, of total sales.
The Company’s FPDS can replace conventional analog and
digital displays and can display additional information which is not commonly displayed in the cockpit with conventional analog
and digital displays. The COCKPIT/IP® is capable of displaying nearly all types of air data, engine and fuel data, altitude,
heading and navigational data, maintenance and aircraft health data, and alternative source information. As technology and information
delivery systems develop further, additional information will be displayed in the cockpit, such as surface terrain maps and data
link messaging. IS&S designed the COCKPIT/IP® to be capable of displaying information from a variety of sources,
including its Reduced Vertical Separation Minimum (“RVSM”) air data system, engine and fuel instrumentation, and third-party
data and information products.
From time to time, customers may order one or more FPDSs customized
to their particular requirements. Typically, the Company charges for the added development cost. This revenue is reported as Engineering
Development Contracts (“EDC”) on the consolidated statements of operations. Engineering costs incurred in customizing
the FPDSs are included in cost of sales.
Flight Management Systems
The IS&S NextGen Flight Management System is an easily installed
navigation and performance computer that complements the IS&S Flat Panel Display System upgrade for commercial air transport
aircraft. The FMS interfaces with the IS&S, SBAS, and GPS to provide a GPS-based navigation solution. The GPS receiver is located
remotely depending on space availability. To minimize use of cockpit space and ease installation efforts, the FMS is housed in
an ARINC 739B compliant Multifunction and Control Display Unit (“MCDU”).
Each FMS/MCDU has an LCD display, keyboard, mode and function
keys, line select keys and annunciator lights, and supports ethernet data loading. The flight crew can manually or datalink waypoint
flight plans, routes or user-defined waypoints on the IS&S FMS and modify and update these plans via the FMS/MCDU screen. Once
the flight plan data is entered, the MCDU computes the most economical flight profiles and provides steering commands for use by
the aircraft control system to fly the airplane along the desired route.
The
FMS/MCDU package incorporates a robust navigation database capable of storing today’s global database with ample growth for
the future. Flight crews can utilize the data in the navigation database to create, edit and modify flight plans for display on
the FPDS. The navigation data includes airways, jet routes, Standard Instrument Departure, Standard Terminal Arrival Route,
and company stored routes.
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The FMS/MCDU is ARINC 739B compliant, which provides an interface
option for other cockpit equipment such as SATCOM, ACARS, CMU, HUD, and a printer. The interface to the IS&S FPDS is provided
via ethernet. The IS&S EFB is integrated with the FMS/MCDU and FPDS where the control selection of the EFB features and applications
are handled via the FMS/MCDU. The display is a five-inch LCD with VGA resolution. The touchscreen display uses LED backlighting
and is sunlight readable.
Integrated Standby Unit
The Company’s ISU incorporates the measurement and display
of attitude, altitude, airspeed, and navigation data into a single standby/backup navigation instrument for military, commercial
air transport and corporate/general aviation applications. The ISU has an integral Inertial Measurement Unit that includes accelerometer,
gyro, and magnetometer triads. The unit also includes an integral air data measurement module for measurement of static and total
pressure for display of altitude, airspeed, and mach number.
The ISU is a highly reliable and accurate standby navigation
system that is based on IS&S’s merger of COCKPIT/IP® display technology and RVSM air data products coupled
with the modern technology in MEMS Gyros that have exceptional stability. An IS&S proprietary algorithm provides for accurate
computation of attitude, heading and air data parameters. The unit includes a triaxial magnetometer that is designed to be tolerant
to the local soft iron effects.
The display uses a familiar Primary Flight Display format to
reduce pilot workload. Logistics and maintenance savings are realized due to increased reliability and a reduction in line-replaceable
units. The unit is equipped with built-in test and display of navigational aid and maintenance data.
Air Data Systems and Components
The Company’s air data products calculate and display
various measures such as aircraft speed, altitude, and vertical rate of change. These air data products utilize advanced sensors
to gather air pressure data and customized algorithms to interpret data, thus allowing the system to calculate altitude more accurately.
During fiscal 2020, 2019, and 2018, sales of air data systems and components accounted for 20%, 10% and 25%, respectively, of total
sales.
IS&S sells individual components and partial and complete
air data systems. The components and systems include:
· altitude displays, which convey aircraft altitude measurements;
Engine and Fuel Displays
IS&S develops, manufactures and markets engine and fuel
displays. These solid-state multifunction displays convey information with respect to fuel and oil levels, and engine activity,
such as oil and hydraulic pressure and temperature. They include individual and multiple displays installed throughout the cockpit.
The displays can be used in conjunction with the Company’s engine and fuel data equipment or that of other manufacturers.
Engine and fuel displays are vital to safe flight. In addition,
accurate conveyance of engine and fuel information is critical for monitoring engine stress and parts maintenance. Engine and
fuel displays tend to be replaced more frequently than other displays, and have been slow to incorporate new technology since
their introduction because of their low cost, standard design and universal use.
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IS&S believes that its air data engine and fuel displays
are extremely reliable, have been designed to be programmable, and are adaptable easily without major modification to most modern
aircraft. These products have been installed on B727, B737, C-130H, DC-9, DC-10, P-3, F-16 and A-10 aircraft.
Integrated Global Navigation System
The Company’s Integrated Global Navigation System product
is an alternative for adding GPS navigation capability to legacy aircraft through the OEM FMS without the high cost of upgrading
the current FMS.
This product includes RNP and RNAV approaches via the certified
IS&S Beta 3 GPS and leverages components of the Company’s FPDS to provide annunciation to the pilot during GPS procedures.
Autothrottle
– ThrustSense®
The
IS&S Autothrottle, ThrustSense®, is a full regime autothrottle, from takeoff to landing phases of flight including
go around. ThrustSense® combines full-authority digital engine control (“FADEC”) functionality with low and high
speed protection for the Pilatus PC-12 and Beechcraft King Air series aircraft. IS&S believes ThrustSense® improves safety
and performance for Pratt and Whitney PT6-powered single and multi-engine aircraft. In the case of multi-engine aircraft, such
as the Beechcraft King Air, ThrustSense® provides Vmca protection during an engine out condition. The system is
light weight, installs with minimal downtime and provides the user with high value for performance. IS&S believes ThrustSense®
can attain fuel savings of 3% and when flying constant angle-of-attack the fuel savings can be as much as 10%. The Company in April
2019 received certification from the FAA for, its ThrustSense® Autothrottle for retrofit in the King Air, dual turbo prop PT6
powered aircraft. The Company has signed a multi-year agreement with Textron to supply ThrustSense® on their new production
aircraft, the King Air 360 and King Air 260. ThrustSense® is also available for retrofit on King Airs through Textron service
centers and third party service centers.
The IS&S ThrustSense® Autothrottle is designed to ensure
stabilized approaches by controlling speeds during descent. During high pilot workload, the autothrottle is designed to prevent
the airplane from becoming dangerously slow or fast and protects against overtorque and overtemp, thereby enhancing the safety
and capability of your aircraft.
Control of the autothrottle is housed in an easy-to-install
ISU that provides standby functionality on a high resolution LCD display. The ThrustSense® Autothrottle is designed to avoid
structural modifications to the existing throttle quadrant. ThrustSense® has MEL Relief and On Condition Maintenance.
IS&S believes ThrustSense® can be adapted to virtually
all PT6 powered aircrafts with the IS&S ISU. The ISU executes software to control the autothrottle actuator. In addition the
ISU calculates, processes and displays altitude, attitude, airspeed, slip/skid, and navigation display information, which IS&S
believes is presented in a logical and concise single instrument display. It features a high resolution LCD display with full LED
backlighting, thereby improving reliability and full sunlight readability to the pilot, and fully anti-aliased graphics.
IS&S believes the autothrottle retrofit and standby are
easily installed, and typical installation can take less than a day with minimum modifications to the existing flight deck.
Other potential benefits of the ThrustSense® Autothrottle
include:
· safety enhancements and pilot workload reduction;
· life-saving enhancements in multi-engine aircraft;
· FADEC-like engine protection;
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Utilities Management System
IS&S provides the Utilities Management System (“UMS”)
for the Pilatus PC-24 which has been certified and delivered. The IS&S UMS integrates a wide range of aircraft functions, which
are commonly supported by multiple individual controllers. The UMS-24 monitors aircraft sensors and aircraft control systems as
required to achieve system functionality. This open architecture system allows Pilatus to design and/or refine control and monitoring
algorithms, in-house.
IS&S believes there is interest in its UMS from other aircraft
manufacturers as well. The UMS is an innovative design that controls 20 plus aircraft systems such as navigation, auto-flight,
landing gear, surface positions, fire protection, ice/rain protection, electrical loads, lighting, environmental conditions, cabin
pressurization, and oxygen systems based on OEM custom configuration.
The UMS is a Data Concentrator and Processing Unit (“DCPU”)
that allows manufacturers to configure and program specific applications on a ARINC 653 operating system in an open architecture
platform. The UMS acts as the aircraft central maintenance computer allowing for a maximum of six DCPUs to be included in the communication
ring. The system provides a significant power and weight saving over the use of federated boxes and utilizes the latest IS&S
technological advancements in avionics circuit design.
Customers
The Company’s customers include the United States government
(including DoD, the Department of Interior and the Department of Homeland Security), American Airlines, Inc. (“AAL”),
Boeing, Deutsche Post DHL Group (“DHL”), FedEx Corporation (“FedEx”), Icelandair, L3Harris Technologies, Inc.,
Lockheed Martin Corporation, Pilatus, Sierra Nevada Corporation (“Sierra Nevada”), and the Department of National Defense
(Canada), among others.
The Company’s revenue is concentrated with a limited number
of customers. In fiscal year 2020, the three largest customers, Pilatus, Dayton T Brown and Kalitta Air accounted for 33%, 12%
and 10% of total revenue, respectively. In fiscal year 2019, the two largest customers, Pilatus and Air Transport Services Group
Inc. accounted for 25% and 14% of total revenue, respectively. In fiscal year 2018, the largest customer, Pilatus, accounted for
20% of total revenue.
Retrofit Market
Historically, a majority of the Company’s sales have come
from the retrofit market, which IS&S has pursued because of its continued growth in response to the need to support the
world’s aging fleet of aircraft. The design and airframe structure of many types of older aircraft generally exceeds the
technology and technical capabilities of the original cockpit instruments and avionics. The Company has developed products that
enable owners and operators to upgrade their aircraft by retrofitting them with IS&S products at a competitive cost and with
equipment that provides cockpit displays with capabilities and technology equivalent to new aircraft.
IS&S expects its main customers in the retrofit market will
continue to be:
· the DoD and defense contractors,
· aircraft operators, and
· aircraft modification centers.
Department
of Defense and Defense Contractors. The Company sells its products directly to the DoD and to domestic and international
defense contractors for end use on military aircraft retrofit programs. DoD programs generally take one of two forms: a subcontract
with a prime government contractor, such as Boeing, Lockheed Martin, or L3 Harris Technologies, Inc. or a direct contract
with the appropriate government agency, such as the U.S. Air Force. The government’s desire for cost-effective retrofit of
its aircraft has led it to purchase commercial off-the-shelf equipment rather than to develop specially designed products, which
are usually more costly and take longer to implement. These retrofit contracts tend to be on arms-length commercial terms, although
some termination and other provisions of government contracts are typically applicable to these contracts, as described under “Government
Regulation” below. Each government agency or general contractor retains the right to terminate a contract at any time at
its convenience. Upon such alteration or termination, IS&S is entitled typically to be compensated for already delivered
items and reimbursement for allowable costs incurred.
Aircraft
Operators. The Company sells its products to aircraft operators, including commercial airlines, cargo carriers, and
business and general aviation aircraft owners or suppliers, primarily for retrofitting of aircraft owned or operated by these customers.
The Company’s commercial fleet customers include or have included, among others, AAL, ABX Air, FedEx and Icelandair. IS&S
sells these customers a range of products from FPDS to air data systems.
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Aircraft
Modification Centers. Aircraft modification centers, which repair and retrofit private aircraft, represent the primary
retrofit market for private and corporate jets. IS&S has established relationships with a number of aircraft modification centers
throughout the United States, which act as distribution outlets for the Company’s products.
Original Equipment Manufacturers
IS&S
has signed a multi-year agreement with Textron to supply ThrustSense® on their new production aircraft, the King Air
360 and King Air 260 as described above in “Products-Autothrottle – ThrustSense®”. The Company has developed
and manufactures the UMS for Pilatus’ PC-24 aircraft under a multi-year production contract as described above under “Products-Utilities
Management System”. The Company also markets its products to other OEMs including, among others, Boeing and Lockheed Martin.
Backlog
September 30
Backlog represents the value of contracts and purchase orders,
less the revenue recognized to date on those contracts and purchase orders. The year over year decrease of $2.3 million was the
result of booking of $19.3 million in net new business, offset by $21.6 million in recognized revenue. FPDS backlog as of September 30,
2020 decreased $2.1 million from September 30, 2019, and air data product backlog as of September 30, 2020 decreased
by $0.2 million from September 30, 2019. The backlog excludes potential future sole-source production orders from products
developed under the Company’s EDC programs, including the Pilatus PC-24, the KC-46A and the Textron King Air 360 and King
Air 260 ThrustSense® Autothrottle programs. Although the Company believes that the orders included in backlog are firm, most
of the backlog involves orders that can be modified or terminated by the customer. As of September 30, 2020, none of the Company’s
backlog was expected to be filled beyond fiscal 2021.
Engineering Development
The
Company invests a significant percentage of its sales on engineering development, both Research & Development (“R&D”)
and EDC. At September 30, 2020, approximately 21% of the Company’s employees were engineers engaged in various engineering
development projects. Total engineering development expense comprises both internally funded R&D and product development and
design charges related to specific customer contracts. Engineering development expense consists primarily of payroll-related expenses
of employees engaged in EDC projects, engineering related product materials and equipment, and subcontracting costs. R&D charges
incurred for product design, product enhancements, and future product development are expensed as incurred. Product development
and design charges related to specific customer contracts are charged to cost of sales-EDC based on the method of contract accounting
(either percentage-of-completion or completed contract) applicable to such contracts.
Sales and Marketing
IS&S focuses its sales efforts on passenger and cargo carrying
aircraft operators, general aviation operators, aircraft modification centers, the DoD, DoD contractors, and OEMs. Periodically,
the Company evaluates its sales and marketing efforts with respect to these focus areas and, where appropriate, makes use of third-party
sales representatives who receive compensation through commissions based on performance. As of September 30, 2020, we have thirteen
representatives worldwide that are actively selling IS&S products.
We are continuing to expand our maintenance, repair and overhaul
(“MRO”) dealer network to address worldwide markets for Boeing 737, 757 and 767, Pilatus PC-12’s, Beechcraft
King Air models and other aircraft types. We have added major MRO’s like Lufthansa Technik AG and have established a dealer
network for ThrustSense®, and we are in the process of exploring adding more MRO dealerships in the United States and internationally.
Our marketing efforts have focused on applicable markets using
email campaigns, advertisements, trade shows, web casts, direct mailers and social media. Our Autothrottle offering on the Pilatus
PC-12 and King Air have been favorably featured in multiple articles in major publications over the past several years.
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The
Company believes its ability to provide prompt and effective repair and upgrade service is critical to its marketing efforts. The
Company’s customer service program offers a 24-hour customer hotline. The Company services its customers utilizing either
field service engineers or its in-house repair and upgrade facility. The Company may lend spare units to customers when
it is repairing or overhauling their equipment. IS&S provides customers with a standard two-year warranty on new products.
The Company offers customers extended warranties of varying lengths beyond the two years for additional fees.
The majority of the Company’s sales, personnel and assets
are within the United States. In fiscal years 2020, 2019 and 2018 net sales outside the United States amounted to $9.4 million,
$7.5 million and $4.7 million, respectively.
Government Regulation
FAA regulations govern the manufacture and installation of the
Company’s products in aircraft owned and operated in the United States. Both the IS&S manufacturing facility and the
IS&S repair station are FAA-certified. The most significant product and installation regulations are Technical Standard Orders
(“TSOs”) and STCs, which establish the minimum operational performance standards. For example, in April 2019,
the FAA issued its TSO authorization and STC for the Company’s ThrustSense® Autothrottle for retrofit in the King Air
dual prop PT6 powered aircraft. In February 2019, the FAA issued its TSO authorization and STC for the Company’s B767 Integrated
Standby Unit to be used on B767 aircraft in the United States.
Generally, sales of IS&S products to European or other non-U.S.
owners of aircraft require approval of EASA, or other relevant governmental agencies. EASA certification requirements for the manufacture
and installation of the Company’s products in European owned aircraft mirror FAA regulations, and its process for European
certification is similar to that of the FAA. For example, in August 2015, EASA issued an STC on the Company’s B757 ISU
to be used on B757 aircraft in the European Union.
In addition to product-related regulations, IS&S is
subject to U.S. government procurement regulations with respect to the sale of the Company’s products to government entities
or government contractors. The government agency or general contractor retains the right to terminate a contract at any time at
its convenience. Upon such alteration or termination, IS&S is generally entitled to an equitable adjustment to the contract
price, so that the Company receives the purchase price for products or services already delivered, reimbursement for allowable
costs incurred and for termination related costs.
The Company’s business is also impacted by various other
laws and regulations, including, but not limited to, local, state, federal, and international tax codes, import and export controls
and customs laws, employment and employment-related laws, environmental laws, intellectual property laws, and consumer protection
statutes. The Company from time to time incurs costs in the ordinary course of business in connection with maintaining compliance
with these evolving and at times overlapping regulatory regimes.
Manufacturing, Assembly and Materials Acquisition
The Company’s manufacturing activities consist primarily
of assembling and testing components and subassemblies and integrating them into finished systems. Typically, the Company purchases
components for products, including any necessary raw materials, from third-party suppliers, a number of which are sole source,
and assembles them in a clean room environment. Many of the components purchased are standard products, although certain parts
are made to the Company’s specifications. Although there are a limited number of suppliers of particular components, management
believes other suppliers could provide similar components on comparable terms.
When appropriate, IS&S enters into long-term supply
agreements and uses its relationships with long-term suppliers to improve product quality and availability, and to reduce delivery
times and product costs. In addition, the Company identifies alternative suppliers for important component parts. Generally, the
introduction of component parts from new suppliers into existing products requires FAA certification of the entire finished product
if the newly sourced component varies significantly from the original drawings and specifications. IS&S has not experienced
significant delays in delivery of products caused by the inability to obtain either component parts or FAA approval of products
incorporating new component parts.
Quality Assurance
Product quality is of vital importance. The Company is ISO 9001
and AS9100D certified. These standards represent an international consensus on effective management practices with the goal of
ensuring that a company can deliver its products and related services consistently in a manner that meets or exceeds customer quality
requirements. IS&S’s certification to these standards allows the Company to represent to customers that it maintains
high-quality industry standards in the education of its employees and in the design and manufacture of its products. In addition,
the Company’s products undergo extensive and documented quality control testing prior to being delivered to customers.
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Competition
The
market for the Company’s products is highly competitive. Competitors vary in size and resources, and substantially all of
the Company’s competitors are much larger than IS&S and have substantially greater resources. With respect to air data
systems and related products, the Company’s principal competitors include Honeywell International Inc., Collins Aerospace,
Thales Defense & Security, Inc., and Garmin Ltd. With respect to flat panel displays, principal competitors currently
include Honeywell International Inc., Collins Aerospace, L3Harris Technologies, Inc., Garmin Ltd. and GE Aviation Systems.
However, as the flat panel display industry evolves and the demand for flat panel displays increases, IS&S may face future
competition in this area from other suppliers. The Company believes that the principal competitive factors in its markets are cost,
development cycle time, responsiveness to customer preferences, product quality, technology, and reliability. IS&S believes
that its significant and long-standing customer relationships reflect the Company’s ability to compete favorably with respect
to these factors.
Intellectual Property and Proprietary Rights
IS&S
relies on patents to protect its proprietary technology. As of September 30, 2020, the Company holds 47 U.S. patents and has
5 U.S. patent applications pending relating to its technology. In addition, IS&S holds 102 international patents and has
21 international patent applications pending. Certain of these patents and patent applications cover technology relating to air
data measurement systems and others cover technology relating to flat panel display systems and other aspects of the COCKPIT/IP®
solution. While IS&S believes these patents have significant value in protecting its technology, it believes that the innovative
skill, technical expertise, and know-how of the Company’s personnel in applying the technology reflected in its patents would
be difficult, costly, and time consuming to reproduce.
While IS&S is not aware of any pending lawsuits against
the Company alleging patent infringement or the violation of other intellectual property rights, it cannot be certain such infringement
claims will not be asserted against the Company in the future.
Employees
As of September 30, 2020, IS&S had 86 employees
(84 of whom were full-time employees). The Company’s future success depends on its ability to attract, train and retain highly
qualified personnel. Competition for such qualified personnel is intense, and the Company may not be able to attract, train, and
retain highly qualified personnel in the future. None of the Company’s employees are currently represented by a labor union.
Executive Officers of the Registrant
The following is a list of the Company’s executive officers,
their ages and their positions in each case.
Name Age Position
Geoffrey S. M. Hedrick 78 Chairman of the Board and Chief Executive Officer
Shahram Askarpour 63 President