CPI Aero(CVU) - 2020 Q3 - Quarterly Report

Part I - Financial Information This part provides the unaudited consolidated financial statements and related notes, detailing the company's financial performance and position Item 1 – Consolidated Financial Statements (Unaudited) This section presents the company's unaudited consolidated financial statements, including balance sheets, operations, shareholders' deficit, and cash flows, with detailed notes Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and shareholders' deficit at specific reporting dates Consolidated Balance Sheet Highlights | Metric | Sep 30, 2020 (Unaudited) ($) | Dec 31, 2019 (Note 1) ($) | | :------------------------------------ | :----------------------- | :-------------------- | | Total Assets | $47,687,612 | $44,339,580 | | Total Liabilities | $57,344,504 | $52,079,820 | | Total Shareholders' Deficit | $(9,656,892) | $(7,740,240) | - Total assets increased by $3.35 million, driven by increases in current assets such as contract assets and inventory[9] - Total liabilities increased by $5.26 million, primarily due to higher accounts payable and the current portion of long-term debt[9] Consolidated Statements of Operations This section presents the company's revenues, costs, and net income or loss over specific periods, reflecting operational performance Consolidated Statements of Operations Highlights | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | 9 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2019 ($) | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue | $25,576,718 | $22,689,762 | $62,175,872 | $64,779,858 | | Gross profit | $4,182,475 | $1,932,113 | $7,460,364 | $6,659,171 | | Income (loss) from operations | $1,131,831 | $(874,385) | $(1,498,622) | $(1,600,774) | | Net income (loss) | $815,209 | $(1,255,051) | $(2,594,141) | $(3,070,934) | | Income (loss) per common share – basic | $0.07 | $(0.11) | $(0.22) | $(0.26) | - Net income for the three months ended September 30, 2020, was $815,209, a significant improvement from a net loss of $(1,255,051) in the prior year period[10] - For the nine months ended September 30, 2020, the net loss decreased to $(2,594,141) from $(3,070,934) year-over-year[10] Consolidated Statements of Shareholders' Deficit This section details changes in the company's shareholders' deficit, reflecting impacts from net losses and equity transactions Shareholders' Deficit Evolution | Metric | January 1, 2020 ($) | September 30, 2020 ($) | | :-------------------------- | :-------------- | :----------------- | | Total Shareholders' Deficit | $(7,740,240) | $(9,656,892) | - The total shareholders' deficit increased from $(7,740,240) at January 1, 2020, to $(9,656,892) at September 30, 2020[13] - This change was primarily influenced by net losses incurred during the period, partially offset by net income in the third quarter and stock-based compensation expenses[13] Consolidated Statements of Cash Flows This section outlines the company's cash inflows and outflows from operating, investing, and financing activities over specific periods Consolidated Statements of Cash Flows Highlights (9 Months Ended Sep 30) | Cash Flow Activity | 2020 ($) | 2019 ($) | | :------------------------------------ | :----------- | :----------- | | Net cash used in operating activities | $(3,283,377) | $(4,039,916) | | Net cash used in investing activities | $(11,888) | $(334,909) | | Net cash provided by financing activities | $2,832,251 | $715,219 | | Net decrease in cash and restricted cash | $(463,014) | $(3,659,606) | | Cash and restricted cash at end of period | $4,969,779 | $2,468,536 | - Net cash used in operating activities decreased by $756,539 for the nine months ended September 30, 2020, compared to the prior year[16] - Net cash provided by financing activities significantly increased, primarily due to $4.8 million in proceeds from the PPP loan[16] Notes to Consolidated Financial Statements (Unaudited) This section provides detailed explanations and disclosures supporting the unaudited consolidated financial statements Note 1. Interim Financial Statements This note describes the company's operating segments, going concern risks, the WMI acquisition settlement, and the impact of the COVID-19 pandemic - The Company operates as a single operating and reportable segment, comprising CPI Aerostructures, Inc., Welding Metallurgy, Inc. (WMI), and Compac Development Corporation[18][19] - Management identified significant going concern risks due to continuing losses and negative cash flows but believes mitigation plans (revised credit facility, exiting unprofitable programs, customer funding, inventory reduction, military segment focus, strong backlog) are sufficient[23] - The WMI acquisition dispute was settled on December 23, 2020, resulting in the release of $1.38 million from escrow to the Company[27] - The COVID-19 pandemic has led to anticipated supply chain disruptions, employee absenteeism, and reduced commercial aircraft orders, though the Company is classified as an essential business[29][30] Note 2. Revenue Recognition This note details the company's revenue recognition policies, primarily for long-term contracts, and disaggregates revenue by contract type - The majority of revenue is recognized over time for long-term contracts, primarily with the U.S. government, using the cost-to-cost input method[31][39] Revenue Disaggregation by Contract Type (3 Months Ended Sep 30) | Contract Type | 2020 ($) | 2019 ($) | | :------------------------------------ | :------- | :------- | | Aerostructures | 8,855,694 | 9,351,578 | | Aerosystems | 4,303,930 | 7,721,955 | | Kitting and Supply Chain Management | 12,417,094 | 5,616,229 | | Total | 25,576,718 | 22,689,762 | Revenue Disaggregation by Contract Type (9 Months Ended Sep 30) | Contract Type | 2020 ($) | 2019 ($) | | :------------------------------------ | :------- | :------- | | Aerostructures | 25,353,015 | 30,121,858 | | Aerosystems | 7,814,912 | 22,267,233 | | Kitting and Supply Chain Management | 29,007,945 | 12,390,767 | | Total | 62,175,872 | 64,779,858 | - The aggregate transaction price allocated to remaining performance obligations was approximately $190 million as of September 30, 2020, with 15% expected to be recognized in fiscal year 2020 and the remainder by fiscal year 2022[51] Note 3. Leases This note describes the company's operating leases for manufacturing, office space, and equipment, including associated expenses and liabilities - The Company leases manufacturing and office space, and office equipment, classified as operating leases[53][54] Operating Lease Expenses and Liabilities | Metric | Amount ($) | | :------------------------------------ | :----------- | | Operating lease expense (9 months ended Sep 30, 2020) | $1,324,831 | | Operating lease expense (3 months ended Sep 30, 2020) | $441,610 | | ROU assets (Sep 30, 2020) | $2,730,567 | | Total ROU liabilities (Sep 30, 2020) | $3,033,709 | - The weighted average remaining lease term for operating leases is 1.6 years[58] Note 4. Reconciliation of Cash and Restricted Cash This note reconciles cash and restricted cash balances, detailing changes and the nature of restricted funds Cash and Restricted Cash Reconciliation | Metric | Sep 30, 2020 ($) | Dec 31, 2019 ($) | | :------------------------------------ | :----------- | :----------- | | Cash | $3,589,095 | $4,052,109 | | Restricted cash | $1,380,684 | $1,380,684 | | Total cash and restricted cash | $4,969,779 | $5,432,793 | - Total cash and restricted cash decreased by $463,014 from December 31, 2019, to September 30, 2020[59] - Restricted cash remained constant at $1,380,684, related to the WMI acquisition escrow[59] Note 5. Inventory This note provides a breakdown of inventory components and analyzes changes in inventory levels Inventory Components | Component | Sep 30, 2020 ($) | Dec 31, 2019 ($) | | :------------------------------------ | :----------- | :----------- | | Raw materials | $1,948,486 | $881,761 | | Work in progress | $2,973,107 | $1,916,209 | | Finished goods | $3,820,500 | $3,093,416 | | Total | $8,742,093 | $5,891,386 | - Total inventory increased by $2,850,707 (48.4%) from December 31, 2019, to September 30, 2020, with significant increases across all categories[60] Note 6. Stock-Based Compensation This note details stock-based compensation expenses, including RSU grants, common stock grants, and forfeitures - In August 2020, the Company granted 2,617 RSUs to a board member, resulting in approximately $17,600 of non-cash compensation expense for the nine months ended September 30, 2020[64] - Also in August 2020, 84,383 shares of common stock were granted to employees, leading to approximately $46,300 in SG&A and $14,800 in cost of sales compensation expense for the nine months ended September 30, 2020[65] - Shares granted in prior years (2016-2019) totaling 31,757 were forfeited in August 2020 due to the Company's failure to achieve certain performance criteria for the year ended December 31, 2019[67] Note 7. Fair Value This note discusses the fair value of financial instruments, including cash, receivables, payables, and debt - The fair values of cash, accounts receivable, and accounts payable approximated their carrying values due to their short-term nature[68] Fair Value of Debt | Debt Type | Sep 30, 2020 Carrying Amount ($) | Sep 30, 2020 Fair Value ($) | Dec 31, 2019 Carrying Amount ($) | Dec 31, 2019 Fair Value ($) | | :------------------------------------ | :--------------------------- | :---------------------- | :--------------------------- | :---------------------- | | Short-term borrowings, PPP loan, long-term debt | $33,927,711 | $33,927,711 | $30,987,918 | $30,987,918 | - The fair value of debt was estimated using market quotes and calculations based on market rates, matching its carrying amount for both periods[69] Note 8. Contract Assets and Contract Liabilities This note defines and explains contract assets and liabilities, including revenue recognized from contract liabilities - Contract assets represent revenue recognized in excess of amounts invoiced, where the right to consideration is conditional on factors other than the passage of time[72] - Contract liabilities represent customer payments received or due in excess of revenue recognized[72] - Revenue recognized from contract liabilities was approximately $3.6 million for the nine months ended September 30, 2020, compared to $5.2 million for the same period in 2019[73] Note 9. Income (Loss) Per Common Share This note describes the computation of basic and diluted income (loss) per common share - Basic and diluted income (loss) per common share are computed using the weighted average number of common shares outstanding, adjusted for incremental shares from options and unvested RSUs[74] - No incremental shares were used in the calculation of diluted income (loss) per common share for the three and nine months ended September 30, 2020, as the Company was in a loss position[74] Note 10. Debt This note details changes to the company's credit agreement, including loan conversions, maturity extensions, amended covenants, and the PPP loan - On August 24, 2020, the Company entered into a Sixth Amendment to its Credit Agreement with BankUnited, converting $6 million of the Revolving Loan into the Term Loan[76][77] - The Revolving Loan commitment was permanently reduced to $24 million, and the maturity date for both the Revolving Note and Term Note was extended to May 2, 2022[77][78] - Financial covenants were amended, including changes to the fixed charge coverage ratio, leverage covenant waiver, and reduced minimum quarterly EBITDA to $1 million. The Company was in compliance with all covenants as of September 30, 2020[78] - The Company obtained a $4.8 million PPP Loan on April 10, 2020, bearing 1% interest, and applied for full forgiveness on October 16, 2020[84] Long-Term Debt Maturities (Excluding Debt Issuance Costs) | Period (Twelve months ending Sep 30) | Amount ($) | | :------------------------------------ | :----------- | | 2021 | $5,377,559 | | 2022 | $7,641,681 | | 2023 | $132,220 | | 2024 | $37,566 | | Total | $13,189,026 | Note 11. Major Customers This note identifies the company's major customers and their respective contributions to revenue, contract assets, and accounts receivable - For the nine months ended September 30, 2020, the Company's three largest customers accounted for 39%, 12%, and 10% of revenue, respectively[86] - As of September 30, 2020, 32%, 23%, and 15% of contract assets were from the Company's three largest customers[86] - At September 30, 2020, 47% and 21% of accounts receivable were from the Company's two largest customers[87] Note 12. Income Taxes This note outlines the company's accounting policies for income taxes, including deferred taxes, valuation allowances, and uncertain tax positions - Income taxes are accounted for under the asset and liability method, recognizing deferred tax assets and liabilities for temporary differences and operating loss/tax credit carryforwards[90] - A valuation allowance is applied when it is not more likely than not that some portion or all of the deferred tax assets will be realized[90] - Estimated interest and penalties related to uncertain tax positions are recorded in income tax expense[90] Note 13. Subsequent Events This note discloses significant events occurring after the reporting period, including NYSE compliance and a stock plan amendment - The Company expects to regain compliance with NYSE American's timely filing criteria upon filing this Quarterly Report, after receiving an extension until January 15, 2021, for previous delinquencies[91] - On October 6, 2020, stockholders approved an amendment to the 2016 Long-Term Incentive Plan, increasing the total shares available for issuance by 800,000 to 1,400,000 shares[92] Note 14. Commitments and Contingencies This note details the company's legal proceedings, including class action lawsuits, shareholder derivative actions, an SEC investigation, and a settlement agreement - The Company is a defendant in a consolidated class action lawsuit alleging securities law violations related to false/misleading statements in financial reports and offering documents[93] - Multiple shareholder derivative actions have been filed against current and former directors/officers for breach of fiduciary duty and other claims, seeking recovery on behalf of the Company[96][97] - The SEC Division of Enforcement issued a subpoena on May 22, 2020, seeking documents related to financial statement errors, restatement, the 2018 equity offering, and former CFO separations[99] - A Settlement and Release Agreement was entered into with Honda Aircraft Company, Inc. on December 23, 2020, terminating an unprofitable program and requiring HACI to purchase approximately $0.6 million of inventory[100] Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operational results, discussing business activities, COVID-19 impact, backlog, and liquidity Business Operations and COVID-19 Impact This section describes the company's core business in aerospace manufacturing and the operational impacts and mitigation strategies related to the COVID-19 pandemic - The Company is engaged in contract production of structural aircraft parts and aerosystems for both commercial and defense markets, serving as a Tier 1/Tier 2 supplier and prime contractor to the U.S. Department of Defense[104] - Despite being classified as an 'essential business,' the COVID-19 pandemic has caused supply chain disruptions, employee absenteeism, and reductions in commercial aircraft orders, primarily affecting approximately 10% of total business[105][106] - Mitigating steps include curtailing discretionary spending, deferring business travel, implementing a hiring freeze, and managing material flow to preserve cash[106] Recent Developments This section highlights key recent events, including a PPP loan, credit facility amendment, backlog reduction, and a working capital dispute settlement - The Company received a $4.8 million PPP Loan on April 10, 2020, and applied for full forgiveness on October 16, 2020[108] - A Sixth Amendment to the BankUnited Credit Facility on August 24, 2020, converted $6 million of revolving loan balance to term loan, reduced revolving availability to $24 million, and extended maturity to May 2, 2022[109][110] - The Gulfstream G650 program experienced $3.6 million in backlog reduction due to COVID-19 related cancellations by Triumph Group, but Gulfstream Aerospace intends to continue purchasing components[111] - The working capital dispute with Air Industries Group was settled on December 23, 2020, resulting in the release of $1.38 million cash from escrow to the Company[112] Backlog This section presents the company's total and funded backlog, highlighting changes and the proportion attributable to government contracts Total Backlog | Backlog Type | Sep 30, 2020 ($) | Dec 31, 2019 ($) | | :------------------------------------ | :----------- | :----------- | | Funded | $189,600,000 | $147,647,000 | | Unfunded | $347,300,000 | $414,231,000 | | Total | $536,900,000 | $561,878,000 | - Total backlog decreased by $24.98 million, while funded backlog increased by $41.95 million, primarily driven by government contracts[114][115] - Approximately 89% of the total backlog at September 30, 2020, was attributable to government contracts[115] Critical Accounting Policies This section confirms that there have been no significant changes to the company's critical accounting policies during the reporting quarter - There have been no significant changes to the application of the Company's critical accounting policies during the quarter ended September 30, 2020[117] Results of Operations This section analyzes the company's financial performance, including detailed discussions of revenue, cost of sales, gross profit, SG&A, income before taxes, and net income Revenue Analysis This section analyzes revenue performance, highlighting increases in government contracts and decreases in commercial subcontracts Revenue Performance | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | Change (%) | | :------------------------------------ | :-------------------------- | :-------------------------- | :--------- | | Total Revenue | $25,576,718 | $22,689,762 | 12.7% | | Government subcontracts | $20,887,968 | $16,179,389 | 29.0% | | Direct military contracts | $3,778,686 | $1,702,951 | 121.9% | | Commercial subcontracts | $910,064 | $4,807,422 | -81.1% | - Total revenue for the three months ended September 30, 2020, increased by 12.7% primarily due to new multi-year awards for the Northrop Grumman E2D program and increases in T-38 Pacer, Northrop Grumman WOWP, and F16 Rudder Island programs[118][120] - Year-to-date revenue decreased by 4% to $62,175,872, mainly driven by declines in the Raytheon NGJ Pod and G650 programs[119] - Commercial subcontract revenue saw a significant decrease of 81.1% for the quarter and 55.9% year-to-date, primarily from lower G650 and Embraer program revenue[124][125] Cost of Sales Analysis This section analyzes changes in cost of sales components, including procurement, labor, and factory overhead, and their impact on margins Cost of Sales Components (3 Months Ended Sep 30) | Component | 2020 ($) | 2019 ($) | Change (%) | | :------------------------------------ | :----------- | :----------- | :--------- | | Procurement | $17,478,009 | $11,941,699 | 46.3% | | Labor | $1,670,761 | $1,967,144 | -15.2% | | Factory OH | $4,596,516 | $5,164,788 | -11.0% | | Inventory Change | $(1,083,585) | $1,647,414 | -165.8% | | Other | $(1,267,458) | $36,604 | -3561.9% | | Total Cost of Sales | $21,394,243 | $20,757,649 | 3.1% | - Cost of sales for the three months ended September 30, 2020, increased by 3.1%, which was substantially less than the revenue increase, indicating improved margin contribution from higher-margin defense programs[127] - Procurement costs increased significantly by 46.3% for the quarter, primarily due to the E2D and WOWP programs, while labor costs decreased by 15% due to lower requirements on certain programs[129][131] - Year-to-date cost of sales decreased by 5.8% to $54,715,508, also attributed to more margin contribution from higher margin defense programs[128] Gross Profit Analysis This section analyzes gross profit performance, highlighting significant increases driven by a favorable mix of higher-margin defense programs Gross Profit Performance | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | Change (%) | | :------------------------------------ | :-------------------------- | :-------------------------- | :--------- | | Gross Profit | $4,182,475 | $1,932,113 | 116.5% | | Metric | 9 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2019 ($) | Change (%) | | :------------------------------------ | :-------------------------- | :-------------------------- | :--------- | | Gross Profit | $7,460,363 | $6,659,171 | 12.0% | - Gross profit for the three months ended September 30, 2020, increased by 116.5%, primarily due to increased revenue from higher margin defense programs[139] - Year-to-date gross profit increased by 12%, driven by a favorable mix of higher margin defense programs, despite lower overall revenue[140] - Net adjustments to gross profit from changes in estimates for the nine months ended September 30, 2020, resulted in an unfavorable impact of $(736,267), compared to a favorable impact of $190,233 in the prior year[141] Selling, General and Administrative Expenses This section analyzes the increase in SG&A expenses, primarily attributed to higher professional fees related to financial restatements SG&A Expenses | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | Change (%) | | :------------------------------------ | :-------------------------- | :-------------------------- | :--------- | | SG&A Expenses | $3,050,644 | $2,806,498 | 8.7% | | Metric | 9 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2019 ($) | Change (%) | | :------------------------------------ | :-------------------------- | :-------------------------- | :--------- | | SG&A Expenses | $8,958,986 | $8,259,945 | 8.5% | - SG&A expenses increased by 8.7% for the three months and 8.5% for the nine months ended September 30, 2020, primarily due to higher professional fees related to the restatement of prior period financial statements[143][144] Income (Loss) Before Provision for Income Taxes This section analyzes the company's income or loss before taxes, highlighting improvements driven by gross profit and lower interest expense Income (Loss) Before Provision for Income Taxes | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | Change ($) | | :------------------------------------ | :-------------------------- | :-------------------------- | :--------- | | Income (Loss) Before Taxes | $822,823 | $(1,252,580) | $2,075,403 | | Metric | 9 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2019 ($) | Change ($) | | :------------------------------------ | :-------------------------- | :-------------------------- | :--------- | | Income (Loss) Before Taxes | $(2,584,427) | $(3,065,150) | $480,723 | - Income before taxes for the three months ended September 30, 2020, significantly improved by $2,075,403, driven by increased gross profit and lower interest expense, despite higher SG&A[145] - The year-to-date loss before taxes decreased by $480,723, attributed to a favorable program mix and lower interest expense, offset by increased SG&A[146] Provision for Income Taxes This section details the provision for income taxes, primarily related to state minimum and franchise taxes Provision for Income Taxes (9 Months Ended Sep 30) | Metric | 2020 ($) | 2019 ($) | | :------------------------------------ | :----------- | :----------- | | Provision for Income Taxes | $9,714 | $5,784 | - The provision for income taxes for the nine months ended September 30, 2020, was $9,714, primarily related to state minimum and franchise taxes[148] Net Income (Loss) This section presents the company's net income or loss and earnings per share, highlighting improvements over prior periods Net Income (Loss) and EPS | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | 9 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2019 ($) | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Income (Loss) | $815,209 | $(1,255,051) | $(2,594,141) | $(3,070,934) | | Basic EPS | $0.07 | $(0.11) | $(0.22) | $(0.26) | - The Company reported net income of $815,209 ($0.07 per basic share) for the three months ended September 30, 2020, a significant improvement from a net loss in the prior year[149] - The year-to-date net loss decreased to $(2,594,141) ($(0.22) per basic share) from $(3,070,934) ($(0.26) per basic share) in the prior year[150] Liquidity and Capital Resources This section assesses the company's liquidity position, including working capital, cash flow, credit facilities, and contractual obligations General Liquidity This section discusses working capital changes and potential cash flow shortfalls due to revenue recognition disparities and program delays Working Capital | Metric | Sep 30, 2020 ($) | Dec 31, 2019 ($) | Change (%) | | :------------------------------------ | :----------- | :----------- | :--------- | | Working Capital | $12,485,031 | $13,851,719 | -9.9% | - Working capital decreased by 9.9% to $12,485,031 at September 30, 2020[151] - The Company notes potential cash flow shortfalls due to disparities between reported earnings (ASC 606 estimates) and actual cash receipts, and risks impairment charges for unrecoverable up-front costs on delayed/cancelled programs[153][154] Cash Flow Analysis This section analyzes cash and restricted cash balances, including the impact of a government receipt and the release of restricted funds Cash and Restricted Cash Balances | Metric | Sep 30, 2020 ($) | Dec 31, 2019 ($) | | :------------------------------------ | :----------- | :----------- | | Cash balance | $3,589,095 | $4,052,109 | | Restricted cash | $1,380,684 | $1,380,684 | - The cash balance decreased to $3,589,095 at September 30, 2020, excluding a $2.6 million U.S. Government receipt received on October 5, 2020[157] - Restricted cash of $1,380,684 was released to the Company on December 28, 2020, following a settlement[157] - Management believes existing resources, including $3.3 million of availability under the BankUnited Facility, will be sufficient to meet working capital needs for at least the next 12 months[158] Bank Credit Facilities This section details the BankUnited Credit Agreement amendments, covenant compliance, and outstanding loan balances - The Sixth Amendment to the BankUnited Credit Agreement waived covenant violations for late financial statement delivery and past financial covenants, with testing resuming for the quarter ending September 30, 2020[160] - As of September 30, 2020, the Company was in compliance with all tested covenants[160] - The Company had $20.7 million outstanding under the Revolving Loan (4% interest) and a Term Loan with an aggregate principal of $7.93 million, both maturing on May 2, 2022[161] Contractual Obligations This section refers to the Annual Report on Form 10-K for detailed information concerning contractual obligations - For detailed information concerning contractual obligations, the Company refers to its Annual Report on Form 10-K for the year ended December 31, 2019[162] Item 3 – Quantitative and Qualitative Disclosures About Market Risk This section states that there are no quantitative or qualitative disclosures about market risk applicable to the company for the reporting period - This item is not applicable to the Company[163] Item 4 – Controls and Procedures This section details management's evaluation of disclosure controls and procedures, identifying material weaknesses and outlining remediation efforts Evaluation of Disclosure Controls and Procedures This section presents management's conclusion on the ineffectiveness of internal control over financial reporting and disclosure controls due to material weaknesses - Management concluded that the Company's internal control over financial reporting was not effective as of December 31, 2019, December 31, 2018, and September 30, 2020, due to material weaknesses[168][187] - Disclosure controls and procedures were also concluded to be not effective as of September 30, 2020, due to these material weaknesses[179][187] - The evaluation excluded the WMI acquisition for the first year subsequent to acquisition, in accordance with SEC guidance[168] Material Weaknesses This section identifies material weaknesses in the control environment, risk assessment, control activities, monitoring, revenue recognition, and IT general controls - Material weaknesses were identified in the control environment, risk assessment, control activities, and monitoring, stemming from insufficient personnel knowledge, lack of technical proficiency, and inadequately documented policies/procedures[171] - Deficiencies in revenue recognition accounting controls led to material errors and the restatement of prior financial statements, specifically regarding proper determination of contract performance period/value and constraining revenue to funded contract values[170][172] - A material weakness existed in accounting for significant, non-routine, complex transactions due to a lack of controls and qualified external resources[173] - Ineffective Information Technology General Controls (ITGCs) were identified in areas such as access to programs/data, program change-management, and computer operations[175] Remediation Efforts This section outlines the company's remediation efforts, including hiring finance professionals, updating revenue recognition policies, and redesigning internal controls - The Company hired experienced professionals for key finance leadership positions (CFO, Controller, Director of Financial Planning & Analysis) to enhance technical proficiency and oversight[178] - Revenue recognition policies and procedures were reviewed and updated in Q2 2020, now constraining revenue recognition to funded contract values[178] - Ongoing efforts include redesigning and implementing internal controls, evaluating and revising the SOX Program, and establishing a policy to engage experienced professionals for future complex transactions[178] - An improved 404 compliant ITGC testing program will be implemented for years subsequent to 2019 with assistance from experienced professionals[178] Changes in Internal Control Over Financial Reporting This section confirms that no material changes occurred in internal control over financial reporting during the quarter, apart from ongoing remediation - Other than the ongoing remediation efforts, there were no changes in internal control over financial reporting during the quarter ended September 30, 2020, that materially affected or are reasonably likely to materially affect the controls[181] Part II - Other Information This part includes disclosures on legal proceedings, risk factors, equity sales, defaults, mine safety, and other relevant information Item 1 – Legal Proceedings This section refers to Footnote 14 – Commitments and Contingencies in the financial statements for details regarding legal proceedings - For information regarding legal proceedings, refer to Footnote 14 – Commitments and Contingencies[182] Item 1A – Risk Factors This section outlines various material risks that could significantly impact the company's business, operating results, liquidity, and financial condition Risks Related to Financial Restatement and Internal Controls This section details risks associated with financial restatements and internal control weaknesses, including impacts on investor confidence, litigation, and regulatory scrutiny - The restatement of prior financial statements and identified material weaknesses have eroded investor confidence, negatively impacted stock price, hindered capital raising, and led to stockholder litigation and regulatory investigations[185] - Ongoing remediation efforts for internal control weaknesses are costly, divert management attention, and do not guarantee future effectiveness, potentially impacting financial reporting accuracy and timeliness[189][192][194] - Past covenant violations under the BankUnited credit facility due to financial errors were waived, but future non-compliance could lead to default and adverse financial consequences[196][197] - The Company is ineligible to use Form S-3 for 12 months after regaining current filer status, increasing future capital raising costs and time[199] - Risk of delisting from the NYSE American exchange if compliance with listing standards is not maintained, which would adversely affect stock liquidity and capital access[201][203] Risks Related to COVID-19 This section outlines risks from the COVID-19 pandemic, including supply chain disruptions, reduced commercial demand, liquidity challenges, and PPP loan forgiveness uncertainty - The COVID-19 pandemic has caused and could continue to cause disruptions in the supply chain, increased costs, delays, and limitations on customer performance, including timely payments[205] - Reduced demand in the commercial air industry due to lower aircraft deliveries is impacting the Company's commercial business[205] - Liquidity could be adversely affected by slower production schedules and potential customer payment delays, possibly necessitating additional funding which may be difficult to obtain[206] - There is no assurance that the $4.8 million PPP Loan will be fully forgiven; if not, it must be repaid over two years[210] Risks Related to Legal Proceedings This section details risks from ongoing class action and shareholder derivative lawsuits, as well as an SEC investigation, potentially leading to significant expenses and penalties - The Company faces ongoing class action and shareholder derivative lawsuits related to financial restatements and internal control issues, which could result in significant expenses and diversion of management attention[211] - An SEC investigation is underway, seeking documents related to financial errors, restatement, and executive changes, with unpredictable length, scope, and potential impact, including regulatory penalties[212] General Business Risks This section covers general business risks, including dependence on government contracts, competitive bidding, industry consolidation, regulatory compliance, supplier performance, and revenue recognition estimates - The Company heavily depends on government contracts, which are subject to congressional budget authorization, appropriation processes, and potential termination for convenience or default, impacting future sales and financial stability[214][215][218] - Risks associated with competitive bidding include unforeseen technological difficulties, cost overruns, substantial bid preparation efforts for unawarded contracts, and insufficient profitability[219] - Industry consolidation among customers, competitors, and suppliers could adversely affect business by delaying contracts, increasing competition, and raising supply costs[220] - Non-compliance with extensive environmental and FAA regulations could result in fines, remediation expenses, and disqualification from contracts[222][224] - Failure of subcontractors or suppliers to perform contractual obligations could materially and adversely impact contract performance, future business, and profitability[226] - Fixed contract pricing exposes the Company to reduced profitability and potential loss of future business if contract costs increase due to technical challenges or incorrect initial estimates[227] - The use of estimates in revenue recognition (ASC 606) involves significant judgment, and inaccurate estimates or contract terminations could affect profitability and cash flow[229][231] - The Company's ability to utilize its net operating loss (NOL) carryforwards may be substantially limited if it fails to generate sufficient income or experiences an 'ownership change' as defined by Section 382 of the Internal Revenue Code[244][245] Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds This section indicates that there were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds to report[246] Item 3 – Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities to report[247] Item 4 – Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company - This item is not applicable to the Company[248] Item 5 – Other Information This section states that there is no other information to report for the period - No other information to report[250] Item 6 – Exhibits This section lists all exhibits filed with the Form 10-Q, including various certifications and Inline XBRL documents - Includes Section 302 Certifications by Chief Executive Officer and President, and Chief Financial Officer[251] - Includes Section 906 Certification by Chief Executive Officer and Chief Financial Officer[251] - Attached as Exhibit 101 are various financial statements and notes formatted in Inline XBRL[251] Signatures This section contains the required signatures for the Form 10-Q, certifying its submission - The report was signed by Douglas J. McCrosson, Chief Executive Officer and President, and Thomas Powers, Acting Chief Financial Officer, on December 31, 2020[255]