Item 1A. Risk Factors
Item 1A. RISK FACTORS
In addition to other risks and uncertainties
described in this Comprehensive Form 10-K/A, 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 this 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”). This Comprehensive Form 10-K/A
includes 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 the Inventory Costing Errors and 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 this restatement and the prior 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.
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, March 31, June 30, September 30, and December 31, 2020 and we have also concluded that our disclosure controls and procedures
were not effective as of December 31, 2019 March 31, June 30, September 30 and December 31, 2020 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.
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As described in Item 9A of this Comprehensive
Form 10-K/A, 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, 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 and we cannot assure you 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. 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.
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.
Additionally, beginning in the fourth quarter
of 2019, the Company began using inventory valuation and cost collection software associated with its non-percentage of completion
orders. 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.
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We received waivers of non-compliance
with certain covenants under our credit facility with BankUnited and there can be no assurance that we will not fall out of compliance
with our covenants in the future.
The Company was not in compliance with
certain financial covenants under its credit facility (the “BankUnited Facility”) with BankUnited, N.A. (“BankUnited”)
for the year ended December 31, 2020 and the quarter ended March 31, 2021, and financial statement submission covenants for the
year ended December 31, 2020 and the quarters ended March 31, 2021 and June 30, 2021
and obtained waivers of the non-compliance, as described in more detail in Part I, Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Recent Developments”. We cannot assure you that we
will be in compliance with our covenants in the future or that BankUnited will grant further waivers if we fall out of compliance.
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 Quarterly Reports for
the three months ended March 31, 2021, June 30, 2021 and September 30, 2021 within the timeframe required by the SEC. We will regain
status as a current filer when we file all of such Quarterly 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.
If our common stock is delisted from
the NYSE American exchange, our business, financial condition, results of operations and stock price could be adversely affected,
and the liquidity of our stock and our ability to obtain financing could be impaired .
On May 25, 2021, we received a notice from NYSE American
LLC stating that our failure to timely file our Quarterly Report on Form 10-Q for the three months ended March 31, 2021 caused us to be
out of compliance with the NYSE American LLC’s continued listing standards under the timely filing criteria included in Section
1007 of the NYSE American Company Guide (“Company Guide”). Also, our failure to timely file our Quarterly Reports on Form
10-Q for the three months ended June 30, 2021 and September 30, 2021 is an additional noncompliance with the NYSE American LLC’s
continued listing standards under the timely filing criteria included in Section 1007 of the Company Guide.
In accordance with Section 1007 of the Company Guide,
we had six months from May 24, 2021, or until November 24, 2021, to file the Form 10-Q for the period ended March 31, 2021 with the SEC.
On November 23, 2021, the Company received a notice from NYSE American LLC informing the Company that it had accepted the Company’s
plan to regain compliance with its standards for continued listing of the Company’s common stock under the timely filing criteria
included in the Company Guide. NYSE American has granted the Company until April 14, 2022, to regain compliance with the timely filing
criteria. If the Company is unable to cure the delinquency by April 14, 2022, the Company may request an additional extension up to the
maximum cure period of May 24, 2022. In addition, if the Company does not make progress consistent with the plan during the plan period
or if the Company does not complete its delayed filings with the SEC by the end of the maximum 12-month cure period on May 24, 2022, NYSE
American staff will initiate delisting proceedings. There can be no assurance that we will be able to file the delayed filings as required.
On September 17, 2021, we received notice
from NYSE American LLC indicating that the Company does not meet the continued listing standards set forth in Part 10 of the Company Guide.
The Company is not in compliance with Section 1003(a)(i) of the Company Guide since it has stockholders’ equity of less than $2.0
million and losses from continuing operations and/or net losses in two of its three most recent fiscal years and Section 1003(a)(ii) of
the Company Guide since it has stockholders’ equity of less than $4.0 million and losses from continuing operations and/or net losses
in three of its four most recent fiscal years. The Company has therefore become subject to the procedures and requirements of Section
1009 of the Company Guide and was required to, and timely did, submit a plan to NYSE American LLC addressing how the Company intends to
regain compliance with the continued listing standards by March 17, 2023 (the “Plan”). On November 19, 2021, we received notice
from NYSE American LLC that it has accepted the Plan, subject to periodic review, including quarterly monitoring, for compliance with
the Plan. If the Company is not in compliance with the continued listing standards by March 17, 2023 or if the Company does not make progress
consistent with the Plan during the plan period, the NYSE Regulation staff may initiate delisting proceedings.
The delisting of our common stock from the
NYSE American exchange would adversely affect our ability to attract new investors, decrease the liquidity of our outstanding shares of
common stock, reduce our flexibility to raise additional capital, reduce the price at which our common stock trades, and increase the
transaction costs inherent in trading such shares with overall negative effects for our stockholders.
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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 implemented several plans to mitigate such risks, including requesting and obtaining progress
payments from our customers and longer payment terms with our suppliers; however, we may not be successful in the future 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. 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. For example, COVID-19 related absences during the first quarter of 2021 contributed to
a delayed financial closing process for the Original Form 10-K and our Quarterly Report on Form 10-Q for the three months ended
March 31, 2021. Further absences may cause us to 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.
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 restatements and errors in our 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.
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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
to offset the revenues lost as a result of the termination of any of our U.S. Government contracts.
We have risks associated
with competing in the bidding process for contracts.
We obtain many of our contracts through
a competitive bidding process. In the bidding process, we face the following risks:
● we must bid on programs in advance of their completion, which may result in unforeseen technological
difficulties or cost overruns;
● we must devote substantial time and effort to prepare bids and proposals for competitively awarded
contracts that may not be awarded to us; and
● awarded contracts may not generate sales sufficient to result in profitability.
Further consolidation in the aerospace industry could
adversely affect our business and financial results.
The aerospace and defense industry is experiencing
significant consolidation, including among our customers, competitors and suppliers. While we believe we have positioned our Company
to take advantage of opportunities to market to a broad customer base, which we believe will reduce the potential impact of industry
consolidation, we cannot assure you that industry consolidation will not impact our business. Consolidation among our customers
may result in delays in the awarding of new contracts and losses of existing business. Consolidation among our competitors may
result in larger competitors with greater resources and market share, which could adversely affect our ability to compete successfully.
Consolidation among our suppliers may result in fewer sources of supply and increased cost to us.
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We are subject to strict governmental
regulations relating to the environment, which could result in fines and remediation expense in the event of non-compliance.
We are required to comply with extensive
and frequently changing environmental regulations at the federal, state and local levels. 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 substances
into the environment. This extensive regulatory framework imposes significant compliance burdens and risks on us. In addition,
these regulations may impose liability for the cost of removal or remediation of certain hazardous substances released on or in
our facilities without regard to whether we knew of, or caused, the release of such substances. Furthermore, we are required to
provide a place of employment that is free from recognized and preventable hazards that are likely to cause serious physical harm
to employees, 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 that
are classified under applicable laws as hazardous chemicals and substances. If we are found not to comply with any of these rules,
regulations or permits, we may be subject to fines, remediation expenses and the obligation to change our business practice, any
of which could result in substantial costs that would adversely affect our business operations and financial condition.
We may be subject to fines and disqualification
for non-compliance with Federal Aviation Administration (“FAA”) regulations.
We are subject to regulation by the 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
and financial condition.
If our subcontractors or suppliers
fail to perform their contractual obligations, our contract performance and our ability to obtain future business and our profitability
could be materially and adversely impacted.
Most of our contracts involve subcontracts
with other companies upon which we rely to perform a portion of the services that we must provide to our customers. There is a
risk that we may have disputes with our subcontractors, including disputes regarding the quality and timeliness of work performed
by the subcontractor, customer concerns about the subcontract, our failure to extend existing task orders or issue new task orders
under a subcontract, our hiring of personnel of a subcontractor, or disputes concerning payment. A failure by one or more of our
subcontractors to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon services may materially
and adversely affect our ability to perform our obligations as the prime contractor. Subcontractor performance deficiencies could
result in a customer eliminating our ability to progress bill or terminating our contract for default. A prohibition on progress
billing may have an adverse effect upon our cash flow and profitability and a default termination could expose us to liability
and have a material adverse effect on our ability to compete for future contracts and orders. In addition, a delay in our ability
to obtain components and equipment parts from our suppliers may affect our ability to meet our customers’ needs and may have
a material adverse effect upon our profitability. For example, the COVID-19 pandemic has impacted, and continues to impact, our
supply chain, as described above.
Due to fixed contract pricing, increasing
contract costs exposes us to reduced profitability and the potential loss of future business.
Operating margin is adversely affected
when contract costs that cannot be billed to customers are incurred. This cost growth can occur if estimates to complete a
contract increase due to technical challenges or if initial estimates used for calculating the contract price were incorrect. The
cost estimation process requires significant judgment and expertise. Reasons for cost growth may include unavailability and productivity
of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the
effect of any delays in performance, availability and timing of funding from the customer, natural disasters, pandemics, and the
inability to recover any claims included in the estimates to complete. A significant increase in cost estimates on one or more
programs could have a material adverse effect on our financial position or results of operations.
We use estimates when accounting
for contracts. Changes in estimates may affect our profitability and our overall financial position.
We primarily recognize revenue from our
contracts over the contractual period pursuant to ASC 606. Pursuant to ASC 606, revenue and gross profit are recognized as work
is performed based on the relationship between actual costs incurred and total estimated costs at the completion of the contract.
Recognized revenues that will not be billed under the terms of the contract until a later date are recorded on our consolidated
balance sheet as an asset captioned “Contract assets.” Contracts where billings to date have exceeded recognized revenues
are recorded on our consolidated balance sheet as a liability captioned “Contract liabilities.” Changes to the original
estimates may be required during the term of the contract. Estimates are reviewed quarterly and the effect of any change in the
estimated gross margin percentage for a contract is reflected in the consolidated financial statements in the period the change
becomes known. ASC 606 requires the use of considerable estimates in determining revenues and profits and in assigning the amounts
to accounting periods. As a result, there can be a significant disparity between earnings (both for accounting and taxes) as reported
and actual cash received by us during any reporting period.
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We continually evaluate all of the issues
related to the assumptions, risks and uncertainties inherent with the application of ASC 606; however, there is no assurance that
our estimates will be accurate. If our estimates are not accurate or a contract is terminated, we will be forced to adjust revenue
in later periods. Furthermore, even if our estimates are accurate, we may have a shortfall in our cash flow and we may need to
borrow money to pay for costs until the reported earnings materialize to actual cash receipts.
If the contracts associated
with our backlog were terminated, our financial condition and results of operations would be adversely affected.
The maximum contract value specified under
each contract that we enter into is not necessarily indicative of the revenues that we will realize under that contract. Because
we may not receive the full amount we expect under a contract, we may not accurately estimate our backlog because the earnings
of revenues on programs included in backlog may never occur or may change. Cancellations of pending contracts or terminations or
reductions of contracts in progress would have a material adverse effect on our business, prospects, financial condition or results
of operations.
We may be unable to attract
and retain personnel who are key to our operations.
Our success, among other things, is dependent
on our ability to attract and retain highly qualified senior officers and engineers. Competition for key personnel is intense.
Our ability to attract and retain senior officers and experienced, top rate engineers is dependent on a number of factors, including
prevailing market conditions and compensation packages offered by companies competing for the same talent and our reputation in
the industry. If our reputation is adversely affected, for instance due to our handling of the COVID-19 pandemic, we may be unable
to recruit, hire, and retain talented personnel. The inability to hire and retain these persons may adversely affect our production
operations and other aspects of our business.
We are subject to the cyclical nature
of the commercial aerospace industry, and any future downturn in the commercial aerospace industry or general economic conditions,
including related to COVID-19, could adversely impact the demand for our products.
Our business may be affected by certain
characteristics and trends of the commercial aerospace industry or general economic conditions that affect our customers, such
as fluctuations in the aerospace industry’s business cycle, varying fuel and labor costs, intense price competition and regulatory
scrutiny, certain trends, including a possible decrease in aviation activity and a decrease in outsourcing by aircraft manufacturers
or the failure of projected market growth to materialize or continue. In the event that these characteristics and trends adversely
affect customers in the commercial aerospace industry, they may reduce the overall demand for our products. For example, the COVID-19
pandemic has significantly impacted, and continues to impact, the commercial aerospace industry, as described above.
Our working capital requirements
may negatively affect our liquidity and capital resources.
Our working capital requirements can vary
significantly, depending in part on the timing of new program awards and the payment terms with our customers and suppliers. If
our working capital needs exceed our cash flows from operations, we would look to our cash balances and availability for borrowings
under the BankUnited Facility to satisfy those needs, as well as potential sources of additional capital, which may not be available
on satisfactory terms and in adequate amounts, if at all.
We incur risks associated with new programs.
New programs with new technologies typically
carry risks associated with design changes, development of new production tools, increased capital and funding commitments, ability
to meet customer specifications, delivery schedules and unique contractual requirements, supplier performance, ability of the customer
to meet its contractual obligations to us, and our ability to accurately estimate costs associated with such programs. In addition,
any new program may not generate sufficient demand or may experience technological problems or significant delays in the regulatory
or other certification or manufacturing and delivery schedule. If we were unable to perform our obligations under new programs
to the customer’s satisfaction, if we were unable to manufacture products at our estimated costs, or if a new program in
which we had made a significant investment was terminated or experienced weak demand, delays or technological problems, then our
business, financial condition and results of operations could be materially adversely affected. This risk includes the potential
for default, quality problems, or inability to meet specifications, as well as our inability to negotiate final pricing for program
changes, and could result in low margin or forward loss contracts, and the risk of having to write-off contract assets if they
were deemed to be unrecoverable. In addition, beginning new work on existing programs also carries risk associated with the transfer
of technology, knowledge and tooling.
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In order to perform on new programs, we
may be required to expend up-front costs which may not have been negotiated in our selling price. Additionally, we may have made
margin assumptions related to those costs, that in the case of significant program delays and/or program cancellations, or if we
are not successful in negotiating favorable margin on scope changes, could cause us to experience margin degradation which may
be material, for costs that are not recoverable. Such charges and the loss of up-front costs could have a material adverse impact
on our liquidity.
We are presently classified as a
small business and the loss of our small business status may adversely affect our ability to compete for government contracts.
We are presently classified as a small
business under certain of the codes under the North American Industry Classification Systems (“NAICS”) industry and
product specific codes that are regulated in the United States by the Small Business Administration. We are not considered a small
business under all NAICS codes. While we do not presently derive a substantial portion of our business from contracts that are
set-aside for small businesses, we are able to bid on small business set-aside contracts as well as contracts that are open to
non-small business entities. As the NAICS codes are periodically revised, it is possible that we may lose our status as a small
business. The loss of small business status would adversely affect our eligibility for special small business programs and limit
our ability to collaborate with other business entities which are seeking to team with small business entities as may be required
under a specific contract.
Cyber security attacks, internal
system or service failures may adversely impact our business and operations.
Any system or service disruptions,
including those caused by projects to improve our information technology systems, if not anticipated and appropriately mitigated,
could disrupt our business and impair our ability to effectively provide products and related services to our customers and could
have a material adverse effect on our business. We could also be subject to systems failures, including network, software or hardware
failures, whether caused by us, third-party service providers, intruders or hackers, computer viruses, natural disasters, power
shortages or terrorist attacks. Cyber security threats are evolving and include, but are not limited to, malicious software, phishing
and other unauthorized attempts to gain access to sensitive, confidential or otherwise protected information related to us or our
products, customers or suppliers, or other acts that could lead to disruptions in our business. The COVID-19 pandemic has forced
many of our non-manufacturing employees to shift to work-from-home arrangements, which increases our vulnerability to email phishing,
social engineering or “hacking” through our remote networks, and similar cyber-attacks aimed at employees working remotely.
Because the techniques used by cyber-attackers to access or sabotage networks change frequently and may not be recognized until
launched against a target, we may be unable to anticipate these tactics. Any such failures to prevent or mitigate cyber-attacks
could cause loss of data and interruptions or delays in our business, cause us to incur remediation costs or subject us to claims
and damage our reputation. In addition, the failure or disruption of our communications or utilities could cause us to interrupt
or suspend our operations or otherwise adversely affect our business. Although we utilize various procedures and controls to monitor
and mitigate the risk of these threats, including contracting with an outside cyber security firm to provide constant monitoring
of our systems, and training our employees to recognize attacks, there can be no assurance that these procedures and controls will
be sufficient. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur
as a result of any system or operational failure or disruption which would adversely affect our business, results of operations
and financial condition. Moreover, expenditures incurred in implementing cyber security and other procedures and controls could
adversely affect our results of operations and financial condition.
Our financial results
may be adversely impacted by the failure to successfully execute or integrate acquisitions and joint ventures.
The Company may evaluate potential
acquisitions or joint ventures that align with our strategic objectives. The success of such activity depends, in part, upon our
ability to identify suitable sellers or business partners, perform effective assessments prior to contract execution, negotiate
contract terms, and, if applicable, obtain customer and government approval. These activities may present certain financial, managerial,
staffing and talent, and operational risks, including diversion of management's attention from existing core businesses, difficulties
integrating or separating businesses from existing operations, and challenges presented by acquisitions or joint ventures which
may not achieve sales levels and profitability that justify the investments made. If the acquisitions or joint ventures are not
successfully implemented or completed, there could be a negative impact on our financial condition, results of operations and cash
flows.
21
Our ability to utilize our tax benefits could be substantially
limited if we fail to generate sufficient income or if we experience an “ownership change.”
As of December 31, 2020, we
had approximately $92.9 million of gross net operating losses (“NOLs”) for federal tax purposes and approximately $38.4
million of post-apportionment NOLs for state tax purposes. As a result of the Tax Cuts and Jobs Act of 2017 and the Coronavirus
Aid, Relief, and Economic Security Act of 2020, NOLs arising before January 1, 2018, and NOLs arising after January 1, 2018, are
subject to different rules. Our pre-2018 NOLs totaled approximately $78.8 million; these NOLs will expire in varying amounts from
2030 through 2039, if not utilized, and can offset 100% of future taxable income for regular tax purposes. Our NOLs arising in
2018, 2019 and 2020 can generally be carried back five years, carried forward indefinitely and can offset 100% of future taxable
income for tax years before January 1, 2021 and up to 80% of future taxable income for tax years after December 31, 2020. Any NOLs
arising on or after January 1, 2021, cannot be carried back, can generally be carried forward indefinitely and can offset up to
80% of future taxable income.
Our ability to fully recognize
the benefits from our NOLs is dependent upon our ability to generate sufficient income prior to their expiration. In addition,
our NOL carryforwards may be limited if we experience an ownership change as defined by Section 382 of the Internal Revenue Code
(“Section 382”). In general, an ownership change under Section 382 occurs if 5% shareholders increase their collective
ownership of the aggregate amount of our outstanding shares by more than 50 percentage points over a relevant lookback period.
For the year ended December 31, 2020 we have determined that no ownership change occurred during the relevant lookback period that
would limit our ability to use our NOLs, however the sale of additional equity securities in the future may trigger an ownership
change under Section 382 which could significantly limit our ability to utilize our tax benefits.
Item 1B. UNRESOLVED STAFF COMMENTS
Not applicable.