Item 1A. RISK FACTORS 11
Item 1B UNRESOLVED STAFF COMMENTS 18
Item 2. PROPERTIES 18
Item 3. LEGAL PROCEEDINGS 18
Item 4. MINE SAFETY DISCLOSURES 20
PART II
Item 6. SELECTED FINANCIAL DATA 21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26
Item 9A CONTROLS AND PROCEDURES 26
Item 9B. OTHER INFORMATION 30
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 30
Item 11. EXECUTIVE COMPENSATION 30
Item 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES 30
PART IV
INDEX TO FINANCIAL STATEMENTS 33
Item 16 FORM 10-K SUMMARY
2
PART
I
Item 1. BUSINESS
Forward
Looking Statements
This
Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995. When used in this Annual Report on Form 10-K and in future filings by us with the Securities and Exchange Commission
(“SEC”), the words or phrases “will likely result,” “management expects” or “we expect,”
“will continue,” “is anticipated,” “estimated” or similar expressions are intended to identify
forward-looking statements. In addition, any statements that refer to projections, forecasts or other
characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Readers
are cautioned not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made.
There can be no assurance that future developments will be those that have been anticipated. We may
not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements. Further, such statements
are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. The risks are included in “Item 1A: Risk Factors” and “Item 7: Management’s
Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K. We
have no obligation to publicly release the result of any revisions, which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of such statements.
You
should read the financial information set forth below in conjunction with our consolidated financial statements and notes thereto.
General
CPI
Aerostructures, Inc., including its wholly owned subsidiaries ("CPI Aero", ”CPI”, the "Company",
"us" or "we") is a manufacturer of structural assemblies, integrated systems, and kitted components for the
international aerospace and defense ("A&D") markets. Our products are generally used by customers in the production
of fixed wing aircraft, helicopters, electronic warfare ("EW") systems, intelligence, surveillance, and reconnaissance
("ISR") systems, missiles, and other sophisticated A&D products. We are primarily a Tier 1 supplier to Original
Equipment Manufacturers ("OEMs"). We are also a Tier 2 supplier to larger Tier 1 manufacturers and a prime contractor
to the U.S. Department of Defense ("DOD"), primarily the U.S. Air Force ("USAF"). Our products are used by
OEMs within both commercial aerospace and national security end markets. In addition to our assembly operations, we provide manufacturing
engineering, program management, supply chain management, and maintenance repair and overhaul ("MRO") services.
Our
OEM customers in the defense sector include leading prime defense contractors such as:
80%
and 72% of our revenue in 2020 and 2019, respectively, were generated by subcontracts with defense prime contractors.
We
have positioned our Company to take advantage of opportunities in the military aerospace market to a broad customer base, which
we believe will reduce the potential impact of industry consolidation. Our success as a subcontractor to defense prime contractors
has provided us with opportunities to act as a subcontractor to prime contractors in the production of commercial aircraft structures,
which we believe will also reduce our exposure to defense industry consolidation, government spending decisions, and other defense
industry risks.
3
Our
OEM customers in the civil aviation market include:
10%
and 21% of our revenue in 2020 and 2019, respectively, were generated by commercial contract sales.
CPI
also is a prime contractor to the DOD, primarily through contracts directly with the USAF and the Defense Logistics Agency (“DLA”).
10% and 7% of our revenue in 2020 and 2019, respectively, were generated by direct government sales.
CPI
Aero has over 40 years of experience as a contractor. Our team possesses extensive technical expertise and program management
and integration capabilities. Our competitive advantage lies in our ability to offer large contractor capabilities with the flexibility
and responsiveness of a small company, while staying competitive in cost and delivering superior quality products.
We
maintain a website located at www.cpiaero.com. Our corporate filings, including our Annual
Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, our proxy statements and reports filed
by our officers and directors under Section 16(a) of the Securities Exchange Act of 1934, as amended (“Exchange Act”),
and any amendments to those filings, are available, free of charge, on our website as soon as reasonably practicable after we
electronically file such material with the SEC. The contents of our website are not incorporated in or otherwise to be regarded
as a part of this Annual Report on Form 10-K.
Significant
Contracts
Some
of our significant contracts are as follows:
Military
Aircraft – Subcontracts with Prime Contractors
NGC
E-2D “Advanced Hawkeye”: The NGC E-2 Hawkeye is an all-weather, carrier-based tactical Airborne Early Warning
aircraft. The twin turboprop aircraft was designed and developed in the 1950s by the Grumman Aircraft Company for the United States
Navy. The United States Navy aircraft has been progressively updated with the latest variant, the E-2D, first flying in 2007.
In 2008, we received an initial $7.9 million order from NGC to provide structural kits used in the production of Outer Wing Panels
(“OWP”) of the E-2D. We initially valued the long-term agreement at approximately $98 million over an eight-year period,
with the potential to be in excess of $195 million over the life of the aircraft program. In February of 2019, we announced a
new multi-year award valued at up to approximately $47.5 million. In June 2020, we announced that we had received firm orders
valued in excess of $43 million and $5 million in long-lead funding in anticipation of purchase orders for OWP structural components
and kits. Since 2008, the cumulative orders we have received on this program through December 31, 2020 exceed $207 million.
In
addition, in 2015 we won an award to supply structural components and kits for the Wet Outer Wing Panel (“WOWP”) on
the E-2D Advanced Hawkeye airborne early warning and control (“AEW&C”) aircraft that will be manufactured for
Japan. We are responsible for component source selection, supply chain management, delivery of kits, and are providing manufacturing
engineering services to NGC during the integration of the components into the WOWP. In late 2019, CPI Aero received additional
WOWP kit requirements increasing the total expected value of the WOWP program for Japan to be in excess of $37 million.
In
February 2020, the Company’s WMI subsidiary received from NGC approximately $4 million in purchase orders to provide numerous
welded structure and tubes for the E-2D Advanced Hawkeye. Under the terms of the purchase orders, WMI will manufacture more than
140 different items in support of the production of at least 25 E-2D aircraft. The period of performance is expected to be through
2022.
ALQ-249
Next Generation Jammer – Mid-Band Pod (NGJ-MB): The Raytheon NGJ-MB pod is an external jamming pod that will disrupt
and degrade enemy aircraft and ground radar and communication systems and will replace the ALQ-99 system on the U.S. Navy's EA-6B
Growler carrier-based electronic warfare aircraft. The U.S. Navy plans to install these pods on 138 EA-18G Growlers during the
production phase. There are 2 pods per aircraft. Raytheon received a $1 billion sole source contract from the U.S. Navy in April
2016, and CPI has a contract with Raytheon to assemble the pod structural housing and air management system (“AMS”).
In 2019, Raytheon authorized CPI Aero to begin production of pod structures and air management system components for the System
Demonstration and Test Article (“SDTA”) phase of the NGJ-MB program. All SDTA pods and AMS components are expected
to ship during 2021. CPI Aero estimates the value of the NGJ-MB program through the SDTA phase to be approximately $60 million.
We believe that the total value of the NGJ-MB program through production will be in excess of $210 million through 2030.
4
A-10
Thunderbolt II “Warthog”: The Boeing A-10 Thunderbolt II, also known as the Warthog, is a twin-engine aircraft
that provides close-air support of ground forces and employs a wide variety of conventional munitions including general-purpose
bombs. The simple, effective and survivable single-seat aircraft can be used against all ground targets, including tanks and other
armored vehicles. On August 21, 2019, Boeing announced an award from the USAF with a maximum contract value of $999 million to
manage the production of up to 112 new wing sets and spares kits for A-10 aircraft. The USAF ordered 27 wing sets immediately
at contract award. In 2019, CPI announced the receipt of an Indefinite Delivery/Indefinite Quantity (IDIQ) contract with a maximum
ceiling value of $48 million from Boeing for structural assemblies for the A-10. Under the terms of the IDIQ contract, CPI Aero
will manufacture major structural subassemblies of the A-10 aircraft’s wing. The Company also announced that it has received
initial purchase orders under the IDIQ contract valued at approximately $6 million for the production of 4 shipsets of assemblies
and associated program start-up costs. In May 2020, CPI Aero announced the receipt of additional purchase orders totaling approximately
$14 million from Boeing.
F-35
Lightning II: The Lockheed F-35 Lightning II is a family of single-seat, single-engine, all-weather stealth multirole
fighters designed to perform ground attack, aerial reconnaissance, and air defense missions. The DOD plans to acquire over 2,400
F-35's by 2034 and 11 other countries also have plans to acquire the aircraft. The Company has two significant contracts for products
used on the F-35. In 2015, CPI was awarded a multi-year contract to supply four different lock assemblies for the arresting gear
door on the F-35A CTOL. CPI made its first delivery under that contract in May 2017. In 2018, the Company received a new long-term
agreement value at approximately $8 million for lock assemblies to be delivered between 2020 and 2024. In November 2017, CPI was
awarded an additional $15.8 million multi-year contract to manufacture canopy activation drive shaft assemblies for the F-35A,
F-35B, and F-35C aircraft.
UH-60
“BLACK HAWK”: The Sikorsky UH-60 BLACK HAWK helicopter is the leader in multi-mission-type-aircraft. Among
the mission configurations its serves are troop transport, medical evacuation, electronic warfare, attack, assault support and
special operations. More than 3,000 BLACK HAWK helicopters are in use today, operating in 29 countries. CPI Aero and its WMI subsidiary
manufacture several different structural assemblies, including welded structure, for the BLACK HAWK helicopter. The majority of
CPI’s contracts for the BLACK HAWK are as a Tier 1 supplier to Sikorsky. The Company also is a Tier 2 supplier to GKN Aerospace
for ultimate use on the BLACK HAWK. In 2017, CPI Aero received an approximate $21 million long-term agreement through 2022 for
the production of fuel panel assemblies, work it has performed for Sikorsky since 2010. Also in 2017, the Company received an
$8 million long-term agreement through 2022 to manufacture machine gunner window assemblies, continuing work it has performed
since 2010. More recently, since October 2018, CPI Aero has received multiple purchase orders totaling $22 million for Hover Infrared
Suppression System (HIRSS) module assemblies for use as spares on older variants of the UH-60 BLACK HAWK helicopter. The HIRSS
is a defensive countermeasures system that is integral to the survival of the UH-60 Black Hawk by reducing the opportunity for
an infrared-seeking threat system to acquire, lock onto, track, and destroy the helicopter.
F-16V
Fighting Falcon: The Lockheed Martin F-16 is the world’s most successful, combat-proven multirole fighter. Approximately
3,000 operational F-16s are in service today in 25 countries. The F-16V is a new variant, sold exclusively to international air
forces and is the most technologically advanced, fourth generation fighter in the world. In 2019, the Company announced it had
been awarded a multi-year contract by Lockheed Martin to manufacture Rudder Island and Drag Chute Canister (RI/DCC) assemblies
for the F-16V. The RI/DCC is a large structural sub-assembly that is installed on the tail section of the aircraft. Deliveries
are expected to begin during late 2020 and continue through 2024. In June 2020, the Company announced that it had been awarded
a follow-on order from Lockheed Martin to manufacture structural assemblies for new production F-16 Block 70/72 aircraft. The
total value of the RI/DCC program is approximately $21 million and we have received more than $8.7 million in orders through December
31, 2020.
CH-53K
King Stallion: The CH-53K is a heavy-lift helicopter being developed by Sikorsky for the United States Marine Corps. Flight
testing began in 2018. We manufacture composite electronics racks as a Tier 2 supplier to Spirit AeroSystems, Inc., the manufacturer
of the CH-53K cockpit and cabin. Through December 31, 2020, we have received orders for development and test valued at more than
$2.5 million, including a $1.1 million order for rack with delivery requirements commencing in mid-2020 through 2021.
Undisclosed
Vehicle: In 2018 the Company received an initial purchase order from Raytheon Missile Systems Company, a subsidiary of
Raytheon Company, to manufacture structural assemblies on an undisclosed vehicle. In 2019 CPI Aero completed the initial order
and in January 2021 announced a subsequent purchase order to manufacture additional units. The undisclosed vehicle is currently
under development. Terms of the order will not be disclosed.
5
Undisclosed
Pod Structure: In 2019 the Company received an initial purchase order from Raytheon to manufacture pod structures for
an undisclosed application. The initial value of the order is approximately $2.3 million for manufacturing engineering service,
development of assembly tooling and the production of the prototypes. The undisclosed vehicle is currently under development.
A prototype is expected to be manufactured during 2021.
Military
Aircraft – Prime Contracts with U.S. Government
F-16
“Fighting Falcon”: Since 2014, we have been a prime contractor to the DLA to provide structural wing components
and logistical support for global F-16 aircraft MRO operations. Through December 31, 2020 we have received almost $15 million
in orders on this program.
T-38
Pacer Classic III, Phase 2: For more than 50 years, the Northrop T-38 has been the principal supersonic jet trainer used
by the USAF. The T-38C Pacer Classic III Fuselage Structural Modification Kit Integration program (“PC III”) and the
Talon Repair Inspection and Maintenance (“TRIM”) programs are expected to increase the structural service life of
the T-38 beyond 2030. In 2015, CPI Aero was awarded Phase 2 of PC III and has received purchase orders valued at approximately
$2 million from the USAF to provide structural modification kits for the PC III aircraft structural modification program. Through
December 2020, we have received $23.8 million in orders on this program.
T-38
Pacer Classic III, Phase 3 and TRIM: In July 2019, the Company announced a new $65.7 million IDIQ contract from the USAF
for the final phase of PC III as well as TRIM. The TRIM program is a separate USAF structural modification effort that will extend
the structural service life of T-38A and T-38 model types, as well as, T-38C models that were not modified during PC III. Through
December 31 2020, the Company has received orders valued at approximately $15.3 million for the PC III, Phase 3 and TRIM programs.
In February 2021, the Company announced it had received orders for additional requirements valued at $8.7 million, bringing total
orders under this long term contract to approximately $24 million.
Commercial
Aircraft – Subcontracts with Prime Contractors
G650/G650ER:The Gulfstream G650 is a twin-engine business jetairplane produced
by Gulfstream Aerospace that can be configured to carry from 11 to 18 passengers.
Gulfstream began the G650 program in 2005 and revealed it to the public in 2008. The G650 is Gulfstream’s largest and fastest
business jet. The G650ER is an extended range version of the aircraft. In 2020, Gulfstream announced the launch of a new derivative
the G700. In March 2008, Spirit AeroSystems, Inc. awarded us a contract to provide fixed leading edges (FLE) for the Gulfstream
G650 business jet, and derivative models, a commercial program that Spirit was supporting. In December 2014, Spirit transferred
its work-scope on this program to Triumph Group. Due to the impact of the COVID-19 pandemic, in May 2020, Triumph Group cancelled
nearly all open orders with the Company. On May 27, 2020, Triumph Group announced it had reached an agreement in principle to
sell the G650 wing program to Gulfstream Aerospace, and on June 12, 2020, we received a joint communication from Gulfstream Aerospace
and Triumph Group that stated Gulfstream’s intention at the conclusion of the transaction is to continue to purchase G650
wing components from the Company. In December 2020, we received purchase orders directly from Gulfstream for wing components for
use on the G650, G650ER and/or G700 aircraft.
Phenom
300:The Phenom 300 is a twin-engine, executive jet produced by Brazilian aircraft company Embraer, S.A. that can carry
between 6 and 10 passengers and a crew of 2. We have been producing engine inlet assemblies for Embraer under a long-term agreement
we entered into in 2012. We have received approximately $36 million in orders on this program through December 31 2020. We estimate
the potential value of the program to be in excess of $52 million.
Sales
and Marketing
We
are recognized within the aerospace industry as a Tier 1 or Tier 2 supplier to major aircraft suppliers. Additionally, we may
bid for military contracts set aside specifically for small businesses.
We
are generally awarded initial contracts for our products and services through the process of competitive bidding. This process
begins when we first learn, formally or otherwise, of a potential contract from a prospective customer and concludes after all
negotiations are completed upon award. When preparing our response to a prospective customer for a potential contract, we evaluate
the contract requirements and determine and outline the services and products we can provide to fulfill the contract at a competitive
price.
6
Many
times for our defense programs, after the initial contract, subsequent follow-on contracts are awarded on a sole-source basis,
subject to cost-justification and direct negotiation with our customer and in some cases, the federal government.
Our
average sales cycle, which generally commences at the time a prospective customer issues a request for proposal and ends upon
delivery of the final product to the customer, varies widely.
Because
of the complexities inherent in the aerospace industry, the time from the initial request for proposal to award ranges from as
little as a few weeks to several years. Additionally, our contracts have ranged from six months to as long as 10 years. Also,
repeat and follow-on jobs for current contracts frequently provide additional opportunities with minimal start-up costs and rapid
rates to production.
The
Market
We
have positioned our Company to take advantage of opportunities in the military aerospace market to a broad customer base, thereby
reducing the impact of direct government contracting limitations. Our success as a subcontractor to defense prime contractors
has provided us with opportunities to act as a subcontractor to prime contractors in the production of commercial aircraft structures,
which also reduced our exposure to government spending decisions.
Over
time, our Company has expanded in both size and capabilities, with growth in our operational and global supply chain program management.
These expansions have allowed us the ability to supply more complex aerostructure assemblies and aerosystems and structures in
support of our government-based programs as well as to pursue opportunities within the commercial and business jet markets. Our
capabilities have also allowed us to acquire MRO and kitting contracts.
Approximately
$2.9 million and $3.3 million of our revenue for the years ended December 31, 2020 and 2019, respectively, were from
customers outside the U.S. All other revenue for the years ended December 31, 2020 and 2019 has been attributable to
customers within the U.S. We have no assets outside the U.S.
Government-based
contracts are subject to national defense budget and procurement funding decisions that, accordingly, drive demand for our business
in that market. Government spending and budgeting for procurement, operations and maintenance are affected not only by military
action, but also the related fiscal consequences of these actions, as well as the political process.
Backlog
We
produce custom assemblies pursuant to long-term contracts and customer purchase orders. Funded backlog consists of aggregate funded
values under such contracts and purchase orders, excluding the portion previously included in operating revenues pursuant to Accounting
Standards Codification Topic 606 (“ASC606”), and including estimates of future contract price escalation. Unfunded backlog
is the estimated amount of future orders under the expected duration of the program. Substantially all of our backlog is subject
to termination at will and rescheduling, without significant penalty. Funds are often appropriated for programs or contracts on
a yearly or quarterly basis, even though the contract may call for performance that is expected to take a number of years. Therefore,
our funded backlog does not include the full value of our contracts.
The
total backlog at December 31, 2020 is primarily comprised of long-term programs with Raytheon (Next Generation Jammer –
Mid Band), Northrop Grumman (E-2D), USAF (T-38), Boeing (A-10), and Embraer (Phenom 300). Funded backlog is primarily
from purchase orders under long-term contracts with Northrop Grumman (E-2D), Sikorsky (BLACK HAWK), Lockheed Martin (F-16V), and
the USAF (T-38). Approximately 54% of the funded backlog at December 31, 2020 is expected to be recognized as revenue during 2021.
7
Our
total backlog as of December 31, 2020 and 2019 was as follows:
Approximately
96% of the total amount of our backlog at December 31, 2020 was attributable to government contracts, compared to 88% at December
31, 2019. Our backlog attributable to government contracts at December 31, 2020 and 2019 was as follows:
Our
backlog attributable to commercial contracts at December 31, 2020 and 2019 was as follows:
Material
and Parts
We
subcontract production of substantially all parts incorporated into our products to third-party manufacturers under firm fixed
price orders. Our decision to purchase certain components generally is based upon whether the components are available to meet
required specifications at a cost and with a delivery schedule consistent with customer requirements. From time to time, we are
required to purchase custom made parts from sole suppliers and manufacturers in order to meet specific customer requirements.
We
obtain our raw materials from several commercial sources. Although certain items are only available from limited sources of supply,
we believe that the loss of any single supplier would not have a material adverse effect on our business.
Competition
We
face competition in our role as both a prime contractor to the U.S. Government and as a Tier 1 or Tier 2 subcontractor to military
and commercial aircraft manufacturers. Within our aerostructures capability, we often compete against much larger Tier 1
suppliers, such as Triumph Group, Spirit AeroSystems, Kaman Aerospace, GKN, Ducommun, and LMI Aerospace. We believe that
we can compete effectively with these larger companies by delivering products with the same level of quality and performance at
a better value for our customer. Within our aerosystems capability, such as our portfolio of EW and ISR integrated pod structures,
we find more limited competition and are not aware of competition from any of the aerostructures companies mentioned above. In
these cases, we typically compete with the internal manufacturing arm of our customer. We believe our unique skills related to
integrated pod structures combined with a very efficient and generally much lower cost structure creates a competitive advantage
for bidding on aerosystems contracts.
For
certain unrestricted contracts for the U.S. Government, we may compete against well-established prime contractors, including NGC,
Lockheed and Boeing. All of these competitors possess significantly larger infrastructures, greater resources and the capabilities
to respond to much larger contracts. We believe that our competitive advantage lies in our ability to offer large contractor
capabilities with the flexibility and responsiveness of a small company, while staying competitive in cost and delivering superior
quality products. While larger prime contractors compete for significant modification awards, they generally do not compete
for awards in smaller modifications, spares and replacement parts, even for aircraft for which they are the original manufacturer. In
certain instances, the large prime contractors often subcontract much of the work they win to their Tier 1 suppliers so we also
may act as a subcontractor to some of these major prime contractors. Further, in some cases these companies are not permitted
to bid, for example when the U.S. Government designates a contract as a Small Business Set-Aside. In these restricted contracts
for the U.S. Government, CPI Aero typically competes against numerous small business competitors. We believe we compete effectively
against the smaller competitors because smaller competitors generally do not have the expertise we have in responding to requests
for proposals for government contracts, nor will they typically have the more than 40 years of past performance in conducting
thousands of contracts for the U.S. Government.
8
COVID-19
Coronavirus Pandemic Impact on Our Business
The
outbreak of the COVID-19 coronavirus was declared a pandemic by the World Health Organization during our first quarter of 2020.
During the latter part of our first quarter and subsequent to our quarter end, the COVID-19 pandemic grew, causing non-essential
businesses to shut down and many people to observe the shelter-in-place directive from our state government. Our business and
operations and the industries in which we operate have been impacted by public and private sector policies and initiatives in
the U.S. to address the transmission of COVID-19, such as the imposition of travel restrictions and the adoption of remote work.
The COVID-19 pandemic has contributed to a general slowdown in the global economy, has adversely impacted the businesses of certain
of our customers and suppliers, and, if it continues for an extended period of time, it could adversely impact our results of
operations and financial condition. In response to the COVID-19 impact on our business, we have been and continue to actively
mitigate costs and adjust production schedules. We have also been taking actions to preserve capital and protect the long-term
needs of our businesses, including negotiating progress payments with our customers and reducing discretionary spending. For more
information on the current and potential impact of the COVID-19 pandemic on our business, see Risk Factors included in Part I,
Item 1A of this Annual Report on Form 10-K.
Government
Regulation
Environmental
Regulation
We
are subject to regulations administered by the U.S. Environmental Protection Agency, the U.S. Occupational Safety and Health Administration,
various state agencies and county and local authorities acting in cooperation with federal and state authorities. Among other
things, these regulatory bodies impose restrictions to control air, soil and water pollution, to protect against occupational
exposure to chemicals, including health and safety risks, and to require notification or reporting of the storage, use and release
of certain hazardous chemicals and substances. The extensive regulatory framework imposes compliance burdens and risks on us.
Governmental authorities have the power to enforce compliance with these regulations and to obtain injunctions or impose civil
and criminal fines in the case of violations.
The
Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) imposes strict, joint and
several liability on the present and former owners and operators of facilities that release hazardous substances into the environment.
The Resource Conservation and Recovery Act of 1976 (“RCRA”) regulates the generation, transportation, treatment, storage
and disposal of hazardous waste. In New York State, the handling, storage and disposal of hazardous substances are governed by
the Environmental Conservation Law, which contains the New York counterparts of CERCLA and RCRA. In addition, the Occupational
Safety and Health Act, which requires employers to provide a place of employment that is free from recognized and preventable
hazards that are likely to cause serious physical harm to employees, obligates employers to provide notice to employees regarding
the presence of hazardous chemicals and to train employees in the use of such substances.
Our
operations require the use of a limited amount of chemicals and other materials for painting and cleaning, including solvents
and thinners, which are classified under applicable laws as hazardous chemicals and substances. We have obtained a permit from
the Town of Islip, New York, Building Division in order to maintain a paint booth containing flammable liquids.
Federal
Aviation Administration Regulation
We
are subject to regulation by the Federal Aviation Administration (“FAA”) under the provisions of the Federal Aviation
Act of 1958, as amended. The FAA prescribes standards and licensing requirements for aircraft and aircraft components. We are
subject to inspections by the FAA and may be subjected to fines and other penalties (including orders to cease production) for
noncompliance with FAA regulations. Our failure to comply with applicable regulations could result in the termination of or our
disqualification from some of our contracts, which could have a material adverse effect on our operations.
Government
Contract Compliance
Our government contracts and
sub-contracts are subject to the procurement rules and regulations of the U.S. Government. Many of the contract terms are dictated by
these rules and regulations. Specifically, cost-based pricing is determined under the Federal Acquisition Regulation (“FAR”),
which provide guidance on the types of costs that are allowable in establishing prices for goods and services under U.S. Government contracts.
For example, costs such as those related to charitable contributions, advertising, interest expense, and public relations are unallowable,
and therefore not recoverable through sales. During and after the fulfillment of a government contract, we may be audited in respect
of the direct and allocated indirect costs attributed thereto. These audits may result in adjustments to our contract costs. Additionally,
we may be subject to U.S. Government inquiries and investigations because of our participation in government procurement. Any inquiry
or investigation can result in fines or limitations on our ability to continue to bid for government contracts and fulfill existing contracts.
We believe that we are in compliance with all federal, state and local laws and regulations governing our operations and have obtained
all material licenses and permits required for the operation of our business.
9
The
U.S. Government generally has the ability to terminate our contracts, in whole or in part, without prior notice, for convenience
or for default based on performance. If a U.S. Government contract were to be terminated for convenience, we generally would be
protected by provisions covering reimbursement for costs incurred on the contract and profit on those costs, but not the anticipated
profit that would have been earned had the contract been completed. In the unusual circumstance where a U.S. Government contract
does not have such termination protection, we attempt to mitigate the termination risk through other means. Termination resulting
from our default may expose us to liability and could have a material adverse effect on our ability to compete for other contracts.
The U.S. Government also has the ability to stop work under a contract for a limited period of time for its convenience. In the
event of a stop work order, we generally would be protected by provisions covering reimbursement for costs incurred on the contract
to date and for costs associated with the temporary stoppage of work on the contract. However, such temporary stoppages and delays
could introduce inefficiencies for which we may not be able to negotiate full recovery from the U.S. Government, and could ultimately
result in termination for convenience or reduced future orders on certain contracts. Additionally, we may be required to continue
to perform for some period of time on certain of our U.S. Government contracts, even if the U.S. Government is unable to make
timely payments.
Insurance
We
maintain a $2 million general liability insurance policy, a $100 million products liability insurance policy, and a $5 million
umbrella liability insurance policy. Additionally, we maintain a $10 million director and officers’ insurance policy. We
believe this coverage is adequate for claims that have been and may be brought against us, and for the types of products presently
marketed because of the strict inspection standards imposed on us by our customers before they take possession of our products.
Additionally, the FAR generally provide that we will not be held liable for any loss of or damage to property of the U.S. Government
that occurs after the U.S. Government accepts delivery of our products and that results from any defects or deficiencies in our
products unless the liability results from willful misconduct or lack of good faith on the part of our managerial personnel.
Proprietary
Information
None
of our current assembly processes or products is protected by patents. We rely on proprietary know-how and information and employ
various methods to protect the processes, concepts, ideas and documentation associated with our products. These methods, however,
may not afford complete protection and there can be no assurance that others will not independently develop such processes, concepts,
ideas and documentation.
CPI
Aero® is a registered trademark of the Company.
Human
Capital Management
As
of December 31, 2020, we had 267 full-time employees. We employ temporary personnel with specialized disciplines on an as-needed
basis. We depend on a highly educated and skilled workforce. We seek to advance a diverse, equitable and inclusive work environment
for all employees. Our ability to attract, develop and retain the best talent, particularly those with technical, engineering
and science backgrounds or experience, is critical for us to execute our strategy and grow our businesses. Our management, with
oversight from the Compensation & Human Resources Committee of our board of directors, monitors the hiring, retention and
management of our employees and regularly conducts succession planning to ensure that we continue to cultivate the pipeline of
talent needed to operate our business.
In
addition, we have taken measures to protect our workforce in response to the COVID-19 pandemic, including allowing employees to
work from home when possible and implementing safety protocols to support our essential employees required to work onsite, such
as making changes to shift work to promote social distancing among our manufacturing personnel, and providing masks and hand sanitizer.
None
of our employees is a member of a union. We believe that our relations with our employees are good.
10
Item
1A. RISK FACTORS
In
addition to other risks and uncertainties described in this Annual Report on Form 10-K, the following material risk factors should
be carefully considered in evaluating our business because such factors may have a significant impact on our business, operating
results, liquidity and financial condition. As a result of the risk factors set forth below, actual results did and could continue
to differ materially from those projected in any forward-looking statements.
Risks
Related to the Restatement of our Prior Period Consolidated Financial Statements and Material Weaknesses in our Internal Control
In
2020, we restated our consolidated financial statements for several prior periods, which has affected and may continue to affect
investor confidence, our stock price, our ability to raise capital in the future, and our reputation with our customers, which
has resulted and may continue to result in stockholder litigation and may reduce customer confidence in our ability to complete
new contract opportunities.
In
August 2020 we filed an Annual Report on Form 10-K for the year ended December 31, 2019, which included a restatement of the financial
statements which were previously filed with our Annual Report on Form 10-K for the year ended December 31, 2018. The prior restatement
of our consolidated financial statements primarily reflects the correction of certain errors relating to our recognition of revenue,
which errors resulted from an incorrect application of U.S. GAAP. Such restatement has had and may continue to have the effect of eroding
investor confidence in the Company and our financial reporting and accounting practices and processes, has negatively impacted and may
continue to negatively impact the trading price of our common stock, has resulted and may continue to result in stockholder litigation,
may make it more difficult for us to raise capital on acceptable terms, if at all, and may negatively impact our reputation with our
customers and cause customers to place new orders with other companies.
As described in Item 9A this Annual Report on Form 10-K, we have
taken a number of steps in order to strengthen our accounting function so as to allow us to be able to provide timely and accurate financial
reporting. However, we cannot assure you that these steps will be successful and we cannot assure you that additional material weaknesses
in our internal control over financial reporting will not arise or be identified in the future. To the extent these steps are not successful,
we could be required to incur significant additional time and expense. Moreover, because of the inherent limitations of any control system,
material misstatements due to error or fraud may not be prevented or detected and corrected on a timely basis, or at all. If we are unable
to provide reliable and timely financial reports in the future, our business and reputation may be further harmed. The occurrence of
any future errors, misstatements, or failures in internal control may also cause us to fail to meet reporting obligations, negatively
affect investor and customer confidence in our management and the accuracy of our financial statements and disclosures, result in events
of default under our banking agreements, or result in adverse publicity and concerns from investors and customers, any of which could
have a negative effect on the price of our common stock, subject us to regulatory investigations and penalties or additional stockholder
litigation, and have a material adverse impact on our business and financial condition.
We
face litigation and regulatory action relating to the restatement of the Non-Reliance Period consolidated financial statements.
Our
Company and certain of our current and former executive officers and directors are defendants in litigation arising out of the
errors in and restatements of our financial statements for the year ended December 31, 2018, and quarters ended March 31, 2018,
June 30, 2018, September 30, 2018, March 31, 2019, June 30, 2019, and September 30, 2019 (“Non-Reliance Periods”).
Please see Part I, Item 3, “Legal Proceedings.” These proceedings may result in significant expenses and the diversion
of management attention from our business. We cannot ensure that additional litigation or other claims by shareholders will not
be brought in the future arising out of the same subject matter.
As
previously disclosed, on May 22, 2020, the Company received a subpoena from the Securities and Exchange Commission (the “Commission”)
Division of Enforcement (the “Division”) seeking documents and information relating, among other things, to previously
disclosed errors in and restatement of the Company’s financial statements, the Company’s October 16, 2018 equity offering
and the recent separation of the Company’s former Chief Financial Officers. By letter dated March 12, 2021 and received
on March 16, 2021, the Division Staff notified the Company that the Division has concluded its investigation and, based on the
information the Division has as of such date, it does not intend to recommend an enforcement action by the Commission against
the Company. The Division’s notice was provided under the guidelines described in the final paragraph of Securities Act
Release No. 5310 which states in part that the notice “must in no way be construed as indicating that the party has been
exonerated or that no action may ultimately result from the staff’s investigation.” Please see Part I, Item 3, “Legal
Proceedings.” We may also be subject to further examinations, investigations, proceedings and orders by regulatory authorities,
including a cease and desist order, suspension of trading of our securities, delisting of our securities and/or the assessment
of possible civil monetary penalties. Any such further actions could be expensive and damaging to our business, results of operations
and financial condition.
11
We
are in compliance with various covenants under our credit facility with BankUnited as of December 31, 2020 but there can be no
assurance that we will not fall out of compliance with the amended covenants in the future.
The
Company is in compliance with the various covenants under our credit facility (the “BankUnited Facility”) with BankUnited,
N.A. (“BankUnited”) for the year ended December 31, 2020. If we fall out of compliance with our banking covenants,
BankUnited. may declare a default under the BankUnited Facility and, among other remedies, could declare the full amount of the
BankUnited Facility immediately due and payable and could foreclose against our collateral. If this
were to occur, we may be unable to secure outside financing, if needed, to fund ongoing operations and for other capital needs.
Any sources of financing that may be available to us could also be at higher costs and require us to satisfy more restrictive
covenants, which could limit or restrict our operations, cash flows and earnings. We cannot ensure that additional financing would
be available to us, or be sufficient or available on satisfactory terms.
We
are currently ineligible to file a registration statement on Form S-3 to register the offer and sale of securities, which could
adversely affect our ability to raise future capital.
We
did not file our Annual Report for the year ended December 31, 2019 or our Quarterly Reports for the three months ended March
31, 2020, June 30, 2020 and September 30, 2020 within the respective timeframes required by the SEC. However, we regained status
as a current filer when we filed our Quarterly Report for the three months ended September 30, 2020. However, we will not be considered
a timely filer and will not be eligible to offer and sell securities using our existing shelf registration statement on Form S-3
or file a new short-form registration statement on Form S-3 to register the offer and sale of our securities until twelve full
calendar months from the date we regain status as a current filer. If we wish to register the offer and sale of our securities
to the public prior to such time, we will be required to use the long-form registration statement, Form S-1, which may increase
both our transaction costs and the amount of time required to complete the transaction. This may adversely affect our ability
to raise funds, if we choose to do so.
Risks
Related to COVID-19
The
impact of the coronavirus (COVID-19) pandemic on our operations, supply chain, and customers has impacted and could continue to
have a material adverse effect on our business, financial position, results of operations and/or cash flows.
It
is possible that the continued spread of COVID-19 could cause disruption in our supply chain or significantly increase
the costs required to meet our contractual commitments, cause delay, or limit the ability of, the U.S. Government and other customers
to perform, including making timely payments to us, negotiating contracts, performing quality inspections, accepting delivery
of finished products, and cause other unpredictable events. The disruption of air travel has impacted demand for the commercial
air industry. Commercial aircraft manufacturers are reducing production rates due to fewer expected aircraft deliveries and, as
a result, may reduce demand for our products. There have been and may continue to be changes in our government and commercial
customers’ priorities and practices, as our customers confront competing budget priorities and more limited resources. These
changes may impact current and future programs, procurements, and funding decisions, which in turn could impact our results of
operations.
The
COVID-19 pandemic could also impact our liquidity. Slower production schedules, higher company medical costs, potential inability
of our customers to make timely payments to us, and similar factors could impact our cash flows. A period of generating lower
cash from operations could adversely affect our financial position. We are currently considering a range of options to mitigate
such risks, including progress payments from our customers and longer payment terms with our suppliers; however, we may not be
successful in these efforts. The extent to which COVID-19 impacts our cash flow will determine whether we need to obtain additional
funding, which could be difficult to obtain. Due to uncertainty related to COVID-19 and its impact on us and the aerospace industry,
and the volatility in the capital markets in general, access to financing may be reduced and we may have difficulty obtaining
financing on terms acceptable to us or at all.
The
extent to which COVID-19 affects our operations will depend on future developments, which are highly uncertain, including the
duration of the outbreak, new information which may emerge concerning the severity of the coronavirus and the actions to contain
the coronavirus or address its impact, among others. For instance, the Company’s accounting staff and outside advisors have
been working modified hours and remotely due to social distancing protocols and concern over their safety and the safety of others.
Access to records, the inability to perform tasks efficiently, and IT connectivity issues, along with similar measures taken by
the Company’s outside advisors, have hindered and may continue to hinder timely preparation of our financial statements.
Additionally, even though our facility remains open, we have experienced and may continue to experience additional operating costs
due to social distancing, securing personal protective equipment, and sanitizing workspaces, worker absences, and lower productivity.
If significant portions of our workforce or our suppliers’ workforces are unable to work effectively, including because
of illness, quarantines, government actions, facility closure or other restrictions in connection with the COVID-19 pandemic,
our operations will likely be impacted. We may be unable to perform fully on our contracts and our costs may increase as a result
of the COVID-19 outbreak. These cost increases may not be fully recoverable or adequately covered by insurance.
In addition, the impact on our accounting staff and outside advisors may hamper our efforts to comply with our filing obligations
with the SEC.
12
We
continue to monitor the situation, to assess further possible implications to our business, supply chain and customers, and to
take actions in an effort to mitigate adverse consequences. We cannot at this time predict the future impact of the COVID-19 pandemic,
but it could have a material adverse effect on our business, financial position, results of operations and/or cash flows.
Risks
Related to our Business
We
depend on government contracts for a significant portion of our revenues.
We
are a supplier, either directly or as a subcontractor, to the U.S. Government and its agencies. We depend on government contracts
for a significant portion of our business. If we are suspended or barred from contracting with the U.S. Government, if our reputation
or relationship with individual federal agencies were impaired, whether due to the restatement and errors in the Non-Reliance
Period financial statements or otherwise, or if the U.S. Government otherwise ceased doing business with us or significantly decreased
the amount of business it does with us, our business, prospects, financial condition and operating results would be materially
adversely affected.
We
face risks relating to government contracts.
The
funding of U.S. Government programs is subject to congressional budget authorization and appropriation processes. For many
programs, the U.S. Congress appropriates funds on a fiscal year basis even though a program may extend over several fiscal years.
Consequently, programs are often only partially funded initially and additional funds are committed only as Congress makes further
appropriations. Appropriations are driven by numerous factors, including geopolitical events, macroeconomic conditions, the ability
of the U.S. Government to enact relevant legislation, such as appropriations bills and continuing resolutions, and the threat
or existence of a government shutdown. U.S. Government appropriations for our programs and for defense spending generally may
be impacted or delayed by the COVID-19 pandemic as governmental priorities and finances change. We cannot predict the extent to
which total funding and/or funding for individual programs will be included, increased or reduced in budgets approved by
Congress or be included in the scope of separate supplemental appropriations. In the event that appropriations for any of
our programs becomes unavailable, or is reduced or delayed, our contract or subcontract under such program may be terminated or
adjusted by the U.S. Government, which could have a material adverse effect on our future sales under such program, and on
our financial position, results of operations and cash flows.
We
also cannot predict the impact of potential changes in priorities due to military transformation and planning and/or the nature
of war-related activity on existing, follow-on or replacement programs. A shift of government priorities to programs in which
we do not participate and/or reductions in funding for or the termination of programs in which we do participate, unless offset
by other programs and opportunities, could have a material adverse effect on our financial position, results of operations and
cash flows.
In
addition, the U.S. Government generally has the ability to terminate contracts, completely or in part, without prior notice,
for convenience or for default based on performance. In the event of termination for the U.S. Government’s convenience,
contractors are generally protected by provisions covering reimbursement for costs incurred on the contracts and profit on those
costs but not the anticipated profit that would have been earned had the contract been completed. Termination by the U.S. Government
of a contract for convenience could also result in the cancellation of future work on that program. Termination by the U.S. Government
of a contract due to our default could require us to pay for re-procurement costs in excess of the original contract price, net
of the value of work accepted from the original contract. Termination of a contract due to our default may expose us to liability
and could have a material adverse effect on our ability to compete for contracts. Additionally, we are a subcontractor on some
U.S. Government contracts. In these arrangements, the U.S. Government could terminate the prime contract for convenience or otherwise,
without regard to our performance as a subcontractor. We can give no assurance that we would be awarded new U.S. Government contracts