Item 1. Business
Item 1. BUSINESS
General
CPI Aerostructures, Inc.,
including its wholly owned subsidiaries (“CPI Aero”, 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, kitting and maintenance repair and overhaul (“MRO”) services.
Our OEM customers in the defense sector include
leading prime defense contractors such as:
● Lockheed Martin Corporation - we provide products used in the production of Lockheed
Martin Corporation’s (“Lockheed Martin”) F-35 Joint Strike Fighter and an international variant of the F-16 Falcon.
We also provide structural assemblies to Sikorsky, a Lockheed Martin company (“Sikorsky”), for many of their military
helicopter platforms including the UH-60 BLACK HAWK©, CH-53E, and a special purpose helicopter;
● Raytheon Technologies Corporation - we provide products to three business divisions
of Raytheon Technologies Corporation (“Raytheon”): Intelligence and Space (the Next Generation Jammer – Mid-Band
pod), Missile Systems (wing), and Integrated Defense Systems (Evolved Sea Sparrow missile launcher controller);
● The Boeing Company - we provide critical wing structure for The Boeing Company’s
(“Boeing”) A-10 re-wing program and welded structure for the CH-47 Chinook; and
● Northrop Grumman Corporation – we provide structural components and kits for
the Northrop Grumman Corporation (“NGC”) E-2D Advanced Hawkeye, various integrated radar and laser pod structures,
and welded fluid tanks for a classified program.
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.
Our OEM customers in
the civil aviation market include:
● Embraer Executive Jets – we provide engine inlet assemblies for the Phenom
300 business jet; and
● Gulfstream Aircraft Company – we provide a critical structure used to produce
the wing of Gulfstream Aircraft Company’s flagship G650 large business jet and derivative models such as the G650ER.
10% and 21% of our revenue in 2020 and
2019, respectively, were 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”).
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 and Form 10-K/A, our Quarterly
Reports on Form 10-Q and Forms 10-Q/A, 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 Comprehensive Form 10-K/A.
6
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 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”). 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. 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 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 Aero 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 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 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 Aero was awarded a multi-year contract to supply four different lock assemblies for the arresting
gear door on the F-35A CTOL. 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.
7
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 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. 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. In May 2021, the Company announced receiving a multi-year contract valued
at up to $17.2 million for the overhaul
and repair (O&R) 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 $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, 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, 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.
8
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 2021,
the Company announced it had received three separate orders for additional requirements valued at $16.2 million, bringing total
orders under this long term contract to approximately $31.5 million.
Commercial Aircraft
– Subcontracts with Prime Contractors
G650/G650ER : 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 (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.
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.
9
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”). 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 (NGJ-MB), 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.
Our total backlog as of December 31, 2020
and 2019 was as follows:
Backlog
(Total)
December 31,
2020
December 31,
2019
Funded
$ 169,567,000
$ 147,647,000
Unfunded
306,618,000
414,231,000
Total
$ 476,185,000
$ 561,878,000
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:
Backlog
(Government)
December 31,
2020
December 31,
2019
Funded
$ 166,156,000
$ 136,932,000
Unfunded
290,632,000
359,770,000
Total
456,788, 000
$ 496,702,000
Our backlog attributable to commercial contracts
at December 31, 2020 and 2019 was as follows:
Backlog
(Commercial)
December 31,
2020
December 31,
2019
Funded
$ 3,411,000
$ 10,715,000
Unfunded
15,986,000
54,461,000
Total
$ 19,397,000
$ 65,176,000
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.
10
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 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.
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. 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 Comprehensive Form 10-K/A.
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.
11
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.
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.
12
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.
13