Item 1A. RISK FACTORS 12
Item 1B UNRESOLVED STAFF COMMENTS 24
Item 2. PROPERTIES 24
Item 3. LEGAL PROCEEDINGS 25
Item 4. MINE SAFETY DISCLOSURES 27
PART II
Item 6. [RESERVED] 28
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 41
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 41
Item 9A CONTROLS AND PROCEDURES 41
Item 9B. OTHER INFORMATION 45
Item 9C DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS 45
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 45
Item 11. EXECUTIVE COMPENSATION 49
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 57
PART IV
INDEX TO FINANCIAL STATEMENTS 60
2
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” “will likely result,” “management expects”
or “we expect,” “could,” “will continue,” “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” 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.
PART
I
Item
1. BUSINESS
General
CPI
Aerostructures, Inc., including its wholly owned subsidiary Welding Metallurgy, Inc. (“WMI”) and Compac Development
Corporation, a wholly owned subsidiary of WMI (collectively, “CPI Aero”, the “Company”, “us”
or “we”) is a manufacturer of structural assemblies, integrated systems, and kitted components for the domestic and
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 United States (“U.S.”) Air Force (“USAF”).
Our products are used by OEMs within both commercial aerospace and national security markets. In addition to our assembly operations,
we provide manufacturing engineering, program management, supply chain management, kitting and maintenance repair and overhaul
(“MRO”) services.
Our
OEM customers in the defense sector include leading prime defense contractors such as:
3
91%
and 80% of our revenue in 2021 and 2020, respectively, was 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.
Our
OEM customers in the civil aviation market include:
6%
and 10% of our revenue in 2021 and 2020, respectively, was generated by commercial contract sales.
CPI
Aero also is a prime contractor to the DOD, primarily through contracts directly with the USAF and the Defense Logistics Agency
(“DLA”), providing supply chain management, assembly & integration, and kitting services for the F-16 and T-38
Programs. 3% and 10% of our revenue in 2021 and 2020, 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 (the “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
Our
most significant contracts are described below:
Military
Aircraft – Subcontracts with Prime Contractors
NGC
E-2D Advanced Hawkeye: The NGC E-2D Advanced 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 U.S. Navy.
The U.S. 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, 2021 exceed $227 million.
4
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
the Japan Air Self Defense Force (“JASDF”). 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 JASDF to be in excess of $37 million.
In
February 2020, the Company’s subsidiary WMI 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 with strong potential for follow-on orders.
Raytheon
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 139 EA-18G
Growlers during the production phase. There are also 11 EA-18Gs operated by the Royal Australian Air Force. There are two pods
per aircraft. Raytheon received a $1 billion sole source contract from the U.S. Navy in April 2016, and CPI Aero has a contract
with Raytheon to assemble the pod structural housing and air management system (“AMS”) and integrate some Customer
Furnished Equipment. 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 complete shipping during the first quarter of 2022. CPI Aero estimates the value of the NGJ-MB program through
the SDTA phase to be approximately $60 million. On November 16, 2021 the Company announced it was authorized by Raytheon to start
the production phase of the program. We believe that the total value of the NGJ-MB program through production will be in excess
of $210 million through 2030.
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 it had received an Indefinite Delivery/Indefinite Quantity (“IDIQ”)
contract 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, and the USAF ordered 27 wing sets from Boeing immediately at contract award. In 2019, CPI Aero
announced the receipt of an 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 four 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 Martin F-35 Lightning II is a family of single-seat, single-engine, all-weather stealth multirole
fighter aircraft that provides unmatched multi-role capability, survivability, and connectivity with data sharing capabilities
essential for Joint All Domain Operations. Current DOD plans call for acquiring a total of 2,456 F-35s. Allies are expected to
purchase hundreds of additional F-35s, with eight nations cost-sharing partners in the program with the United States and six
other allied nations purchasing the F-35 via Foreign Military Sales agreements with the DOD. The Company has two significant contracts
for products used on the F-35. In 2015, CPI Aero was awarded a multi-year contract to supply four different lock assemblies for
the arresting gear door on the F-35C Carrier Take Off and Landing variant. CPI Aero 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 Aero 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.
5
UH-60
“BLACK HAWK”: The Sikorsky UH-60 BLACK HAWK helicopter is the leader in multi-mission rotary wing 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 Aero’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. A third five-year LTA was awarded in January 2022 estimated at $13.6 million with a period of performance
from 2023-2027. 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. In May 2021, the Company announced
receiving a multi-year contract valued at up to $17.2 million for the repair and overhaul
of outboard stabilator assemblies in support of the Sikorsky MH-60 SEAHAWK.
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 $20.6 million in orders through
December 31, 2021. Given the strength of Lockheed’s International Sales Forecast for the F-16, a follow-on to the existing
contracted orders is possible.
CH-53K
King Stallion: The CH-53K is a heavy-lift helicopter being developed by Sikorsky for the U.S. Marine Corps. 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, 2021, we had received orders valued at more than $3.6 million.
Undisclosed
Vehicle: In 2018 the Company received an initial purchase order from Raytheon Missile Systems Company, a subsidiary of
Raytheon, to manufacture structural assemblies on an undisclosed vehicle. In 2019, CPI Aero completed the initial order and in
January 2021, CPI Aero announced a subsequent purchase order to manufacture additional units. The undisclosed vehicle is currently
under development. Terms of the order will not be disclosed.
Undisclosed
Pod Structure: In 2019, the Company received an initial purchase order from Raytheon to manufacture pod structures for
an undisclosed application. The value of the order was approximately $2.3 million for manufacturing engineering service, development
of assembly tooling and the production of the prototypes. The undisclosed pod structure is currently under development. In October
2021, the Company announced Raytheon awarded an approximate $6 million contract modification that changes the scope of work the
Company would perform and increases the quantity of pods to be produced.
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, 2021 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 2021, we have received $23.2 million in orders on this program.
6
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 had received orders valued at approximately $15.3 million for the PC III, Phase 3 and TRIM programs,
and in 2021, the Company announced it had received three separate orders for additional requirements valued at approximately $16.2
million, bringing total orders under this long term contract to approximately $31.5 million.
Commercial
Aircraft – Subcontracts with Prime Contractors
G650/G650ER/G700:
The Gulfstream G650 is a twin-engine business jet airplane 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 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 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. We expect this work to continue through 2022.
Phenom
300: The Phenom 300 is a twin-engine, executive jet produced by Brazilian aircraft company Embraer, S.A. that can carry
between six and 10 passengers and a crew of two. We have been producing engine inlet assemblies for Embraer under a long-term
agreement we entered into in 2012. We have received approximately $40.3 million in orders on this program through December 31
2021. 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.
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.
7
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
$4.7 million and $2.9 million of our revenue for the years ended December 31, 2021 and 2020, respectively, were from customers
outside the U.S. All other revenue for the years ended December 31, 2021 and 2020 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”). 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, 2021 is primarily comprised of long-term programs with Raytheon (NGJ-MB; B-52 Radar Rack), USAF
(T-38), Boeing (A-10), Sikorsky (UH-60), Northrop Grumman (E-2D), Lockheed Martin (F-16; F-35), Collins Aerospace (MS-110 and
TacSAR pods) and Embraer (Phenom 300). Funded backlog is primarily from purchase orders under long-term contracts with the USAF
(T-38), Boeing (A-10), Sikorsky (UH-60), Northrop Grumman (E-2D), Lockheed Martin (F-16; F-35), Raytheon (NGJ-MB; B-52 Radar Rack)
and Embraer (Phenom 300). Approximately 52% of the funded backlog at December 31, 2021 is expected to be recognized as revenue
during 2022.
Our
total backlog as of December 31, 2021 and 2020 was as follows:
8
Approximately
98% of the total amount of our backlog at December 31, 2021 was attributable to government contracts, compared to 96% at December
31, 2020. Our backlog attributable to government contracts at December 31, 2021 and 2020 was as follows:
Our
backlog attributable to commercial contracts at December 31, 2021 and 2020 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 customers. 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 Martin, 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.
9
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 that quarter and subsequent to that 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.
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.
During
late 2020, we began to experience an increased rate of employees testing positive for COVID-19 and we took steps to mitigate virus
transmission within the workplace. These steps included adding a second manufacturing shift to lessen employee density on the
manufacturing floor and to require most non-manufacturing personnel to work from home. These measures continued into 2021. Despite
these measures, we experienced a relatively high level of absenteeism directly or indirectly related to COVID-19. We have taken
mitigating steps in an attempt to reduce the adverse effects of COVID-19 on our business. For example, we have curtailed discretionary
spending and business travel, and taken other steps to preserve cash. We have also taken action to more closely manage the flow
of materials to be more responsive to unanticipated changes in customer delivery schedules. Since May 2021 and through the date
of this Annual Report on Form 10-K, we have experienced a decrease in the impact of COVID-19. However, we believe that the impact
of COVID-19 on illness and absence rates, workflows and productivity at the Company and our business providers has been a contributing
factor to the time required for our financial statement closing processes and the delayed filing of our SEC reports. Most non-manufacturing
personnel have now returned to their regular in-person work schedules and we have returned to a single day shift manufacturing
operation, although we do continue to experience employees and business partners with new COVID-19 diagnoses on an intermittent
basis and we take needed steps to mitigate these impacts on the Company’s operation as they occur.
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.
10
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.
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 $15 million of director and officers’ insurance. 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.
11
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, 2021, we had 249 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 and 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.
During
the first quarter of 2022, the Company began a cost reduction initiative designed to improve operational efficiency and reduce
costs during fiscal year 2022. Management is reallocating resources and reducing operating and general administrative expenses
to more properly align the Company’s costs to anticipated near-term revenue given the timing differences between the conclusion
of certain mature programs and the commencement of new programs in 2022. In connection with the cost reduction initiative, the
Company executed a headcount reduction and furlough action in March 2022.
None
of our employees is a member of a union. We believe that our relations with our employees are good.
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
We
have restated our consolidated financial statements during the past three years, including the restatement included in our 2020
Comprehensive Form 10-K/A. These restatements have 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, have resulted and may continue to result in stockholder
litigation and may reduce customer confidence in our ability to complete new contract opportunities.
In
February 2019, we filed an amended Quarterly Report on Form 10-Q/A for the nine months ended September 30, 2018, which included
a restatement of our financial statements for the period then ended. The restatement of such financial statements corrected an
overstatement of revenue in such period due to the miscoding of an invoice in the Company’s records (the “Coding Error”).
In August 2020, we filed an Annual Report on Form 10-K for the year ended December 31, 2019, which included a restatement of our
financial statements for the year ended December 31, 2018 to correct certain errors relating to our recognition of revenue, which
errors resulted from an incorrect application of U.S. GAAP (the “Revenue Recognition Error”). In November 2021, we
filed a comprehensive Form 10-K/A (the “Comprehensive Form 10-K/A”) which included a restatement of our (i) consolidated
balance sheet as of December 31, 2020 and December 31, 2019, and the related consolidated statements of operations, cash flows
and shareholders’ deficit for the years ended December 31, 2020 and December 31, 2019, and (ii) consolidated balance sheets
and statements of shareholders’ deficit as of March 31, 2020, June 30, 2020 and September 30, 2020, the related consolidated
statements of operations for the three months ended March 31, 2020, the three and six months ended June 30, 2020 and the three
and nine months ended September 30, 2020, and the consolidated statements of cash flows for the three, six and nine month periods
ended March 31, 2020, June 30, 2020 and September 30, 2020, respectively, and related disclosures to correct errors in such financial
statements relating to the recording and reporting of inventory costing and related internal controls (the “Inventory Costing
Errors”) and resulting deficiencies in reserves (the “Insufficient Reserves”). The Inventory Costing Errors
resulted from software processing and coding errors, inconsistent units of measure being used for quantities ordered and quantities
received of certain purchased parts, incorrect accruals to accounting periods of the cost of certain goods received and the Company
not having a procedure to address over or under absorbed overhead costs at the end of accounting periods. The Insufficient Reserves
resulted from insufficient inventory reserves and provisions for loss contracts. The existence of the Coding Error, Revenue Recognition
Error, the Inventory Costing Errors and the Insufficient Reserves, along with the related restatements, have had and may continue
to have the effect of eroding investor confidence in the Company and our financial reporting and accounting practices and processes,
have negatively impacted and may continue to negatively impact the trading price of our common stock, have 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.
12
We
have identified material weaknesses in our internal control over financial reporting which did and could continue to adversely
affect our ability to report our financial condition and results of operations in a timely and accurate manner.
As
a result of the Inventory Costing Errors and the Insufficient Reserves, we have concluded that our internal control over financial
reporting was not effective as of December 31, 2019, December 31, 2020 and December 31, 2021, and we have also concluded that
our disclosure controls and procedures were not effective as of December 31, 2019, December 31, 2020 and December 31, 2021 due
to material weaknesses in our internal control over financial reporting. In connection with the Revenue Recognition Error, we
previously determined that our internal control over financial reporting and our disclosure controls and procedures were not effective
as of December 31, 2019 and December 31, 2018, and in connection with the Coding Error, we previously determined that our internal
control over financial reporting and our disclosure controls and procedures were not effective as of September 30, 2018. The Revenue
Recognition Error, Inventory Costing Errors and the Insufficient Reserves caused us to fail to comply with the financial covenants
under our credit facility with BankUnited, N.A. and the restatement of such errors was a contributing factor in our failure to
timely file periodic reports required under the Exchange Act. The Revenue Recognition Error also resulted in shareholder litigation.
As
described in Item 9A of this Annual Report on Form 10-K, we have taken a number of steps during 2021 in order to strengthen our
accounting function so as to allow us to be able to provide timely and accurate financial reporting, which have remediated the
internal control deficiencies that led to the Revenue Recognition Error and the internal control deficiencies that led to the
Coding Error which had been previously remediated. However, such steps were not sufficient to prevent the Inventory Costing Errors
and the Insufficient Reserves referred to within Item 9A of this Annual Report on Form 10-K as the “First Quarter 2021 Material
Weaknesses” and there can be no assurance that these steps will be successful in preventing future errors or that additional
material weaknesses in our internal control over financial reporting will not arise or be identified in the future.
During
2021, controls and procedures have been put in place to address the Insufficient Reserves, some improvements in the Company’s
internal controls over financial reporting have been made during 2021 with respect to the Inventory Costing Errors, and during
2022, we plan to conduct further work, and design and implement additional internal controls to remediate the material weakness
in internal controls that existed at December 31, 2021 due to the Inventory Costing Errors, although there can be no guarantee
that these controls, this work or planned additional controls will be successful.
We
intend to continue our remediation activities and to continue to improve our overall control environment and our operational and
financial systems and infrastructure, as well as to continue to train, retain and manage our personnel who are essential to effective
internal control. In doing so, we will continue to incur expenses and expend management’s time on compliance-related issues.
However, we cannot ensure that the steps that we have taken or will take will successfully remediate the errors. If we are unable
to successfully complete our remediation efforts or favorably assess the effectiveness of our internal control over financial
reporting, our operating results, financial position, ability to accurately report our financial results and timely file our periodic
reports under the Exchange Act, and our stock price could be adversely affected.
13
Additionally,
beginning in the fourth quarter of 2019, the Company began using inventory valuation and cost collection software associated with
the Company’s jobs for which revenue is recognized using the point in time method of accounting. There can be no assurance
that controls over inventory will be adequate to address all potential valuation issues that may arise in the future relating
to the use of the software and additional internal controls may need to be developed.
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.
The
restatements of our consolidated financial statements due to the Coding Error, the Revenue Recognition Error, the Inventory Costing
Errors and the Insufficient Reserves have diverted, and our ongoing efforts to remediate our internal control may continue to
divert management from the operation of our business. The absence of timely and accurate financial information has hindered and
may in the future hinder our ability to effectively manage our business.
The
restatements of our consolidated financial statements due to the Coding Error, the Revenue Recognition Error, the Inventory Costing
Errors and the Insufficient Reserves have diverted, and our ongoing efforts to remediate our internal control may continue to
divert management from the operation of our business. Our board of directors, members of management, and our accounting, and other
staff have spent significant time on the restatements and remediation and will continue to spend significant time on remediation
of internal control over our financial reporting. These resources have been, and will likely continue to be, diverted from the
strategic and day-to-day management of our business and may have an adverse effect on our ability to accomplish our strategic
objectives.
We
face litigation relating to the Revenue Recognition Error.
Our
Company and certain of our current and former executive officers and directors are defendants in litigation arising out of the
Revenue Recognition Error 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. 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.
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 Quarterly Reports for the three months ended March 31, 2021, June 30, 2021 and September 30, 2021, this Annual
Report on Form 10-K, our Quarterly Report on Form 10-Q for the three months ended March 31, 2022 (the “2022 Q1 Form 10-Q”) and our
Quarterly Report on Form 10-Q for the three and six months ended June 30, 2022 (the “2022 Q2 Form 10-Q”) within the timeframes
required by the SEC. We have not yet filed the 2022 Q1 Form 10-Q or the 2022 Q2 Form 10-Q. We will regain status as a current filer when we file the 2022 Q2 Form 10-Q and any subsequently delayed reports. However, we will not be considered a timely filer and will not be eligible to file a 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.
14
The
NYSE American exchange has suspended trading of our common stock and may delist our common stock from trading on the exchange.
If our common stock is delisted from the NYSE American exchange, our business, financial condition, results of operations, stock
price and investors’ ability to make transactions in our common stock could be adversely affected and the liquidity of our
stock and our ability to obtain financing could be impaired.
On
May 19, 2022, the NYSE American exchange (the “Exchange”) announced the suspension of trading of our common stock
due to non-compliance with the SEC annual and quarterly report timely filing criteria provided for in Section 1007 of the Exchange’s
Company Guide (the “Company Guide”) and announced that it was initiating proceedings to delist our common stock. The
Company filed a request for review of the Exchange’s determination to initiate delisting proceedings to a Committee of the
Board of Directors of NYSE Regulation (the “Committee”). A hearing for this review before a Listing Qualification