Quarterly Report (10-q)

Date : 05/10/2019 @ 7:17PM
Source : Edgar (US Regulatory)
Stock : Cpi Aerostructures, Inc. (CVU)
Quote : 7.69  -0.21 (-2.66%) @ 8:59PM

Quarterly Report (10-q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

 

OR

 

☐     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to __________

 

Commission File Number: 1-11398

 

CPI AEROSTRUCTURES, INC.

(Exact name of registrant as specified in its charter)

 

New York 11-2520310
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)  

 

91 Heartland Blvd., Edgewood, NY 11717
(Address of principal executive offices) (zip code)

 

(631) 586-5200

(Registrant’s telephone number including area code)

 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading symbol(s) Name of each exchange on which registered
Common stock, $0.001 par value per share CVU NYSE American

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer  ☐ Accelerated filer  ☒
Non-accelerated filer  ☐ Smaller reporting company ☐
  Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

As of May 3, 2019, the number of shares of common stock, par value $.001 per share, outstanding was 11,819,481.

 

 

 


 

INDEX

 

 

Part I - Financial Information  
   
Item 1 – Consolidated Financial Statements  
   
Consolidated Balance Sheets as of March 31, 2019 (Unaudited) and December 31, 2018 3
   
Consolidated Statements of Income and Comprehensive Income for the Three Months ended March 31, 2019 (Unaudited) and 2018 (Unaudited)

4

   
Consolidated Statements of Shareholders’ Equity for the Three Months ended March 31, 2019 (Unaudited) and 2018 (Unaudited) 5
   
Consolidated Statements of Cash Flows for the Three Months ended March 31, 2019 (Unaudited) and 2018 (Unaudited) 6
 
Notes to Consolidated Financial Statements (Unaudited) 7
   
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
   
Item 3 – Quantitative and Qualitative Disclosures About Market Risk 26
   
Item 4 – Controls and Procedures 26
   
Part II - Other Information  
   
Item 1 – Legal Proceedings 27
   
Item 1A – Risk Factors 27
   
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds 27
   
Item 3 – Defaults Upon Senior Securities 27
   
Item 4 – Mine Safety Disclosures 27
   
Item 5 – Other Information 27
   
Item 6 – Exhibits 27
   
Signatures 28
   
Exhibits 29

 

2  

 

 

Part I - Financial Information

 

Item 1 – Consolidated Financial Statements

CONSOLIDATED BALANCE SHEETS

 

 

   

March 31, 2019

   

December 31, 2018

 
      (Unaudited)       (Note 1)  
ASSETS                
Current Assets:                
Cash   $ 617,161     $ 4,128,142  
Restricted cash     2,000,000       2,000,000  
Accounts receivable, net of allowance for doubtful accounts of $275,000 as of March 31, 2019 and December 31, 2018     6,583,155       8,623,329  
Contract assets     120,749,918       113,333,491  
Inventory     11,090,995       9,711,997  
Refundable income taxes     435,000       435,000  
Prepaid expenses and other current assets     1,205,297       1,972,630  
Total current assets     142,681,526       140,204,589  
                 
Operating lease right-of-use assets     4,927,810        
Property and equipment, net     3,533,038       2,545,192  
Refundable income taxes           435,000  
Deferred income taxes     486,664       279,318  
Other assets     229,552       249,575  
Total assets   $ 151,858,590     $ 143,713,674  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current Liabilities:                
Accounts payable   $ 12,364,039     $ 9,902,481  
Accrued expenses     1,089,803       1,558,160  
Contract liabilities     3,496,449       3,805,106  
Current portion of long-term debt     2,506,099       2,434,981  
Operating lease liabilities     1,593,243        
Line of credit     23,738,685       24,038,685  
Income tax payable     253,798       115,000  
Total current liabilities     45,042,116       41,854,413  
                 
Long-term operating lease liabilities     3,837,678        
Long-term debt, net of current portion     3,601,883       3,876,238  
Deferred income taxes     4,028,553       4,028,553  
Other liabilities           531,124  
Total liabilities     56,510,230       50,290,328  
                 
Shareholders’ Equity:                
Common stock - $.001 par value; authorized 50,000,000 shares, 11,736,386 and 11,718,246 shares, respectively, issued and outstanding     11,736       11,715  
Additional paid-in capital     70,917,811       70,651,416  
Retained earnings     24,418,813       22,760,215  
Total Shareholders’ Equity     95,348,360       93,423,346  
                 
Total Liabilities and Shareholders’ Equity   $ 151,858,590     $ 143,713,674  

 

See Notes to Consolidated Financial Statements

 

3  

 

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

 

     

For the Three Months Ended

March 31,

 
   

2019

     

2018

 
   

(Unaudited)

 
                 
Revenue   $ 25,583,531     $ 18,191,623  
Cost of revenue     20,167,721       14,141,755  
Gross profit     5,415,810       4,049,868  
                 
Selling, general and administrative expenses     2,806,443       2,049,840  
Income from operations     2,609,367       2,000,028  
                 
Interest expense     510,769       447,263  
Income before provision for income taxes     2,098,598       1,552,765  
                 
Provision for income taxes     440,000       296,000  
Net income   $ 1,658,598     $ 1,256,765  
                 
Other comprehensive loss net of tax- Change in unrealized loss on interest rate swap           (5,800 )
Comprehensive income   $ 1,658,598     $ 1,250,965  
                 
Income per common share – basic   $ 0.14     $ 0.14  
                 
Income per common share – diluted   $ 0.14     $ 0.14  
                 
Shares used in computing income per common share:                
Basic     11,736,305       8,888,179  
Diluted     11,792,818       8,940,385  

 

See Notes to Consolidated Financial Statements

4  

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

 

   

Common

Stock

Shares

  Amount  

Additional

Paid-in

Capital

 

Retained

Earnings

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

Shareholders’

Equity

 

                             
Balance at January 1, 2018     8,864,319     $ 8,863     $ 53,770,618     $ 20,548,652     $ (14,800 )   $ 74,313,333  
Net income                       1,256,765             1,256,765  
Change in unrealized loss from interest rate swap                             (5,800 )     (5,800 )
Common stock issued as employee compensation     5,130       5       45,908                   45,913  
Stock-based compensation expense     54,396       51       303,889                   303,940  
Balance at March 31, 2018     8,923,845     $ 8,919     $ 54,120,415     $ 21,805,417     $ (20,600 )   $ 75,914,151  
                                                 
                                                 
Balance at January 1, 2019     11,718,246     $ 11,715     $ 70,651,416     $ 22,760,215     $     $ 93,423,346  
Net income                       1,658,598             1,658,598  
Costs related to stock offering                 (64,371 )                 (64,371 )
Common stock issued upon exercise of options     521                                
Stock-based compensation expense     17,619       21       330,766                   330,787  
Balance at March 31, 2019     11,736,386     $ 11,736     $ 70,917,811     $ 24,418,813     $     $ 95,348,360  

 

See Notes to Consolidated Financial Statements

 

5  

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

      For the Three Months Ended March 31,  
    2019       2018  
Cash flows from operating activities:                
Net income   $ 1,658,598     $ 1,256,765  
Adjustments to reconcile net income to net                
cash used in operating activities:                
Depreciation and amortization     209,261       153,297  
Debt issuance costs     20,024       21,392  
Non-cash lease expense     (28,012 )     (17,692 )
Stock-based compensation     330,787       303,940  
Common stock issued as employee compensation           45,913  
Deferred income taxes     (207,346 )     405,000  
Changes in operating assets and liabilities:                
Decrease in accounts receivable     2,040,174       1,395,407  
Increase in contract assets     (7,416,427 )     (2,865,025 )
Increase in inventory     (1,378,998 )     (49,100 )
Decrease in refundable income taxes     435,000        
Decrease in prepaid expenses and other assets     558,845       98,683  
Increase (decrease) in accounts payable and accrued expenses     1,993,200       (3,247,776 )
(Decrease) increase in contract liabilities     (686,782 )     35,198  
Increase (decrease) in income taxes payable     138,798       (109,327 )
Net cash used in operating activities     (2,332,878 )     (2,573,325 )
                 
Cash flows used in investing activities:                
                 
Purchase of property and equipment     (210,695 )     (156,006 )
Net cash used in investing activities     (210,695 )     (156,006 )
                 
Cash flows from financing activities:                
                 
Payments on long-term debt     (603,037 )     (418,306 )
Proceeds from line of credit           2,000,000  
Payments on line of credit     (300,000 )      
Stock offering costs paid     (64,371 )      
Net cash (used in) provided by financing activities     (967,408 )     1,581,694  
                 
Net decrease in cash and restricted cash     (3,510,981 )     (1,147,637 )
Cash and restricted cash at beginning of period     6,128,142       1,430,877  
Cash and restricted cash at end of period   $ 2,617,161     $ 283,240  
                 
Supplemental disclosures of cash flow information:                
                 
Noncash investing and financing activities:                
Cash paid during the period for:                
Interest   $ 551,635     $ 429,614  
Income taxes   $ 90,202     $  
                 
Equipment acquired under financing lease   $ 399,800     $  

 

See Notes to Consolidated Financial Statements

 

6  

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

1.       INTERIM FINANCIAL STATEMENTS 

 

The Company consists of CPI Aerostructures, Inc. (“CPI”) and Welding Metallury, Inc. (“WMI”), a wholly owned subsidiary acquired on December 20, 2018 and Compac Development Corporation (“Compac”), a wholly owned subsidiary of WMI, collectively the “Company.” 

 

An operating segment, in part, is a component of an enterprise whose operating results are regularly reviewed by the chief operating decision maker (the “CODM”) to make decisions about resources to be allocated to the segment and assess its performance. Operating segments may be aggregated only to a limited extent. The Company’s CODM, the Chief Executive Officer, reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues for purposes of making operating decisions and assessing financial performance. Accordingly, the Company has determined that it has a single operating and reportable segment.

 

The consolidated financial statements of the Company as of March 31, 2019 and for the three months ended March 31, 2019 and 2018 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

 

The consolidated balance sheet at December 31, 2018 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. All adjustments that, in the opinion of management, are necessary for a fair presentation for the periods presented have been reflected. Such adjustments are of a normal, recurring nature. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The results of operations for interim periods are not necessarily indicative of the operating results to be expected for the full year or any other interim period.

 

The Company maintains its cash in four financial institutions. The balances are insured by the Federal Deposit Insurance Corporation. From time to time, the Company’s balances may exceed insurance limits. As of March 31, 2019, the Company had $511,170 of uninsured balances. The Company limits its credit risk by selecting financial institutions considered to be highly creditworthy.

 

The Company applied business combination accounting for the WMI acquisition in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations” (“ASC 805”). Business combination accounting requires that the assets acquired and liabilities assumed be recorded at their respective estimated fair values at the date of acquisition. The excess purchase price over fair value of the net assets acquired is recorded as goodwill. In determining estimated fair values, we are required to make estimates and assumptions that affect the recorded amounts, including, but not limited to, expected future cash flows, discount rates, remaining useful lives of long-lived assets, useful lives of identified intangible assets, replacement or reproduction costs of property and equipment and the amounts to be recovered in future periods from acquired net operating losses and other deferred tax assets. Our estimates in this area impact, among other items, the amount of depreciation and amortization, impairment charges in certain instances if the asset becomes impaired, and income tax expense or benefit that we report. Our provisional estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain. See Note 3 for a summary and status of the application of business combination accounting.

 

7  

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Effective January 1, 2018, the Company adopted ASC Topic 606 Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective method for all of its contracts. ASC 606 requires sales and gross profit to be recognized over the contract period 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 as an asset captioned “Contract assets.” Contracts where billings to date have exceeded recognized revenues are recorded as a liability captioned “Contract liabilities.” Changes to the original estimates may be required during the life of the contract. Estimates are reviewed monthly and the effect of any change in the estimated gross margin percentage for a contract is reflected in revenue in the period the change becomes known. ASC 606 involves considerable use of estimates in determining revenues, costs 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 tax purposes) as reported and actual cash received during any reporting period. The Company continually evaluates all of the issues related to the assumptions, risks and uncertainties inherent with the process; however, it cannot be assured that estimates will be accurate. If estimates are not accurate or a contract is terminated, the Company is required to adjust revenue in later periods. Furthermore, even if estimates are accurate, there may be a shortfall in cash flow and the Company may need to borrow money, or seek access to other forms of liquidity, to fund its work in process or to pay taxes until the reported earnings materialize as actual cash receipts.

 

When changes are required for the estimated total revenue on a contract, these changes are recognized with an inception-to-date effect in the current period. Also, when estimates of total costs to be incurred exceed estimates of total revenue to be earned, a provision for the entire loss on the contract is recorded in the period in which the loss is determined.

 

Following the adoption of ASC 606, the Company’s revenue recognition for all of its contracts remained materially consistent with historical practice and there was no material impact on the consolidated financial statements upon adoption.

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (“ASC 842”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. On January 1, 2019, the Company adopted the new lease standard using the optional transition method under which comparative financial information will not be restated and continue to apply the provisions of the previous lease standard in its annual disclosures for the comparative periods. In addition, the new lease standard provides a number of optional practical expedients in transition. The Company elected the package of practical expedients. As such, the Company did not have to reassess whether expired or existing contracts are or contain a lease and did not have to reassess the lease classifications or reassess the initial direct costs associated with expired or existing leases.

 

ASC 842 also provides practical expedients for an entity's ongoing accounting. The Company elected the short-term lease recognition exemption under which the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing Right-of-Use (“ROU”) assets or lease liabilities for existing short-term leases. The Company elected the practical expedient to not separate lease and non-lease components for certain classes of assets (office buildings).

 

On January 1, 2019, the Company recognized ROU assets and lease liabilities of approximately $5.3 million and $5.8 million, respectively, on its consolidated balance sheet using an estimated incremental borrowing rate of 6%.

 

 

8  

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

2.        Business Combinations

 

As discussed in Note 1, the Company completed the WMI acquisition on December 20, 2018. The acquisition was accounted for as a business combination in accordance with ASC Topic 805. Accordingly, the Company is required to determine and record the fair value of the assets acquired, including any potential intangible assets, and liabilities assumed at the date of acquisition. The acquisition was considered a stock purchase for tax purposes.

 

The purchase price for the acquisition was $7.9 million, which is subject to a post-closing working capital adjustment. Two million dollars of the purchase price was placed in escrow at closing and may be released after the completion of the working capital adjustment and for the indemnification contingencies. The escrowed amount is shown as restricted cash on the consolidated balance sheet as of March 31, 2019. The working capital adjustment is based on the historical values of components of working capital as defined in the Stock Purchase Agreement. We have calculated a post-closing working capital adjustment. Air Industries formally objected to our calculation. The Stock Purchase Agreement now provides the parties 30 days to come to an agreement on the working capital adjustment. Any areas of disagreement exceeding the 30 days will be submitted for a binding resolution to EisnerAmper LLP. EisnerAmper LLP will have a period of 30 days to resolve the disputes and determine the final working capital adjustment. The working capital purchase price adjustment is expected to be finalized not later than the third quarter of 2019.

 

The Company is in process of determining the fair values of the assets and liabilities acquired and has recorded provisional estimates as of the acquisition date. As the Company completes this process and additional information becomes known concerning the acquired assets and assumed liabilities, management will likely make adjustments to the fair value of the amounts provisionally recorded in the opening balance sheet of WMI during the measurement period, which is no longer than a one-year period following the acquisition date. The determination of the fair values of the acquired assets and liabilities assumed (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. If the final aggregate fair value of the net assets acquired is less than the final purchase price paid then the Company may be required to record goodwill. Conversely, if the final aggregate fair value of the net assets acquired is in excess of the final purchase price paid then the Company may potentially conclude that the purchase of WMI was a “bargain purchase.”

 

As stated above, the Company has determined the following provisional estimates of the fair value of the assets acquired and liabilities assumed from WMI:

 

   

 

Provisional

Fair Values

 

Other current assets   $ 1,049,000  
Accounts receivable     1,522,000  
Inventory     7,969,000  
Property and equipment, net     586,000  
Current liabilities     (5,174,000 )
Total   $ 5,952,000  

 

The following table presents the unaudited pro forma revenue and net income for the period presented as if the WMI acquisition had occurred on January 1, 2018, based on the provisional estimates of the fair value of the net assets acquired:

 

    March 31, 2018  
Revenue   $ 20,734,400  
Net income   $ 840,307  

 

9  

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

3. REVENUE RECOGNITION

 

The majority of the Company’s revenues are from long-term contracts with the U.S. government and commercial contractors. The contracts with the U.S. government typically are subject to the Federal Acquisition Regulation (“FAR”) which provides guidance on the types of costs that are allowable in establishing prices for goods and services provided under U.S. government contracts. The pricing for commercial contractors is based on the specific negotiations with each customer.

 

The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, and payment terms are identified.

 

To determine the proper revenue recognition method, the Company evaluates whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period.

 

All of the Company’s current long-term contracts have a single performance obligation as the promise to transfer the goods or services are not separately identifiable from other promises in the contracts and, therefore, not distinct. The Company’s contracts are often modified to account for changes in contract specifications and requirements. The Company considers contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. All of the Company’s contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price, and the measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.

 

Revenues for the Company’s long-term contracts are recognized over time as the Company performs its obligations because of continuous transfer of control to the customer. The continuous transfer of control to the customer is supported by clauses in contracts that either allow the customer to unilaterally terminate the contract for convenience, pay the Company for costs incurred plus a reasonable profit and the products and services have no alternative use or the customer controls the work in progress.

 

Because of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. The Company uses the cost-to-cost input method to measure progress for its contracts because it best depicts the transfer of assets to the customer which occurs as the Company incurs costs on its contracts.

 

In applying the cost-to-cost input method, the Company compares the actual costs incurred relative to the total estimated costs to determine its progress towards contract completion and to calculate the corresponding amount of estimated revenue and estimated gross profit recognized. For any costs incurred that do not contribute to a performance obligation, the Company excludes such costs from its input methods of revenue recognition as the amounts are not reflective in transferring control of the asset to the customer. Costs to fulfill a performance obligation include labor, materials and subcontractors’ costs, other direct costs and an allocation of indirect costs.

 

10  

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

Changes to the original estimates may be required during the life of the contract. Estimates are reviewed monthly and the effect of any change in the estimated gross margin for a contract is reflected in revenue in the period the change becomes known. Contract estimates involve considerable use of judgement in determining revenues, profits and in assigning the amounts to accounting periods. As a result, there can be a significant disparity between earnings (both for accounting and tax purposes) as reported and actual cash received during any reporting period. The Company continually evaluates all of the issues related to the assumptions, risks and uncertainties inherent with the application of the cost-to-cost input method; however, it cannot be assured that estimates will be accurate. If estimates are not accurate or a contract is terminated, the Company is required to adjust revenue in later periods. Furthermore, even if estimates are accurate, there may be a shortfall in cash flow and the Company may need to borrow money, or seek access to other forms of liquidity, to fund its work in process or to pay taxes until the reported earnings materialize as actual cash receipts.

 

For the Company’s uncompleted contracts, contract assets include unbilled amounts when the estimated revenues recognized exceed the amount billed to the customer and right to payment is not just subject to the passage of time. Amounts may not exceed their net realizable value. Contract assets are classified as current. The Company’s contract liabilities consist of billings in excess of estimated revenues recognized and contract losses. Contract liabilities are classified as current. The Company’s contract assets and liabilities are reported on a contract-by-contract basis at the end of each reporting period.

 

Revenue recognized for the three months ended March 31, 2019, that was included in the contract liabilities at January 1, 2019 was zero.

 

The Company’s remaining performance obligations represent the transaction price of its long-term contracts for which work has not been performed. As of March 31, 2019, the aggregate amount of transaction price allocated to the remaining performance obligations was $99.3 million. The Company estimates that it expects to recognize approximately 78% of its remaining performance obligations in 2019 and 22% revenue in 2020.

 

In addition, the Company recognizes revenue for products manufactured by WMI and parts supplied for certain maintenance, repair and overhaul (“MRO”) contracts at a point in time following the transfer of control to the customer, which typically occurs upon shipment or delivery, depending on the terms of the underlying contract.

 

Revenue from long-term contracts recognized over time and revenue from MRO contracts recognized at a point in time accounted for approximately 88% and 12%, respectively, for the three months ended March 31, 2019.

 

Revenue by long-term contract type for the three months ended March 31, 2019 and 2018 is as follows:

 

    March 31,
    2019   2018
Government subcontracts   $ 16,675,292     $ 8,137,726  
Commercial contracts     6,653,157       7,476,095  
Prime government contracts     2,255,082       2,577,802  
    $ 25,583,531     $ 18,191,623  

 

11  

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

 

4. lEases

 

The Company leases a building and equipment. Under ASC 842, at contract inception we determine whether the contract is or contains a lease and whether the lease should be classified as an operating or a financing lease. Operating leases are included in ROU assets and operating lease liabilities in our consolidated balance sheets.

 

The Company leases office space under an agreement classified as an operating lease.

 

The lease agreement expires on April 30, 2022 and does not include any renewal options. The agreement provides for an initial monthly base amount plus annual escalations through the term of the lease.

 

In addition to the monthly base amounts in the lease agreement, the Company is required to pay real estate taxes and operating expenses during the lease terms.

 

The Company also leases office equipment in agreements classified as operating leases.

 

For the three months ended March 31, 2019, the Company’s operating lease expense was $438,328.

 

Future minimum lease payments under non-cancellable operating leases as of March 31, 2019 were as follows:

 

Twelve months ending March 31,  

   
2020     $ 1,875,995  
2021       1,918,838  
2022       1,951,687  
2023       222,922  
2024       6,028  
      Total undiscounted operating lease payments       5,975,470  
Less imputed interest       544,549  
Present value of operating lease payments     $ 5,430,921  

 

The following table sets forth the ROU assets and operating lease liabilities as of March 31, 2019:

 

Assets    
ROU Assets   $ 4,927,810  
         
Liabilities        
Current operating lease liabilities   $ 1,593,243  
Long-term operating lease liabilities     3,837,678  
      Total ROU liabilities   $ 5,430,921  

 

The Company’s weighted average remaining lease term for its operating leases is 3.4 years.

 

12  

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  (UNAUDITED )

 

 

5. inventory

 

The components of inventory consisted of the following:

 

    March 31, 2019     December 31, 2018  
Raw materials   $ 2,867,039     $ 3,379,986  
Work in progress     5,940,866       4,495,980  
Finished goods     2,283,090       1,836,031  
    $ 11,090,995     $ 9,711,997  

 

6. stock-based compensation

 

The Company accounts for stock-based compensation based on the fair value of the stock or stock-based instrument on the date of grant.

 

In January 2019, the Company granted 75,353 restricted stock units (“RSUs”) to its board of directors as partial compensation for the 2019 year. In January 2018, the Company granted 58,578 RSUs to its board of directors as partial compensation for the 2018 year. RSUs vest quarterly on a straight-line basis over a one-year period. The Company’s net income for the three months ended March 31, 2019 and 2018 includes approximately $250,000 and $273,000, respectively, of non-cash compensation expense related to the RSU grants to the board of directors. This expense is recorded as a component of selling, general and administrative expenses.

 

In January 2018, the Company granted 5,130 shares of common stock to various employees. For the three months ended March 31, 2018, approximately $10,000 of compensation expense is included in selling, general and administrative expenses and approximately $36,000 of compensation expense is included in cost of revenue for this grant. 

 

In March 2018, the Company granted 68,764 shares of common stock to various employees. In the event that any of these employees voluntarily terminates their employment prior to certain dates, portions of the shares may be forfeited. In addition, if certain Company performance criteria are not achieved, portions of these shares may be forfeited. These shares will be expensed during various periods through March 2022 based upon the service and performance thresholds. For the three months ended March 31, 2019, approximately $85,000 of compensation expense is included in selling, general and administrative expenses and approximately $16,100 of compensation expense is included in cost of revenue for this grant. For the three months ended March 31, 2018, approximately $76,600 of compensation expense is included in selling, general and administrative expenses and approximately $16,100 of compensation expense is included in cost of revenue for this grant.

 

On February 12, 2019, these employees returned 1,221 common shares, valued at approximately $7,893, to pay the employees’ withholding taxes.

 

In March 2018, 12,330 and 9,130 of the shares granted in 2016 and 2017, respectively, were forfeited because the Company failed to achieve certain performance criteria for the year ended December 31, 2017. In addition, on March 22, 2018, these employees returned 7,552 common shares, valued at approximately $62,000, to pay the employees’ withholding taxes.

 

13

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  (UNAUDITED)

 

 

A summary of the status of the Company’s stock option plans as of March 31, 2019 and changes during the three months ended March 31, 2019 is as follows:

 

                Weighted        
          Weighted     average        
          average     remaining        
          exercise     contractual     Aggregate  
    Options     price     term (in years)     intrinsic value  
Outstanding at beginning of period     41,772     $ 7.58                  
                                 
Exercised during the period     35,000     $ 6.60                  
                                 
Outstanding and vested at end of period     6,772     $ 12.67       0.25     $ 0  

 

During the three months ended March 31, 2019, 35,000 stock options were exercised, pursuant to the provisions of the stock option plan, where the company received no cash, and 34,478 shares of its common stock in exchange for the 35,000 shares issued in the exercise. The 34,478 shares that the Company received were valued at $231,003, the fair market value of the shares on the date of exercise. During the three months ended March 31, 2018, no stock options were granted or exercised.

 

7. Fair Value

 

Fair Value

 

At March 31, 2019 and December 31, 2018, the fair values of cash, accounts receivable, accounts payable and accrued expenses approximated their carrying values because of the short-term nature of these instruments.

 

    March 31, 2019  
    Carrying Amount     Fair Value  
Debt            
Short-term borrowings and long-term debt   $ 29,846,667     $ 29,846,667  

 

    December 31, 2018  
    Carrying Amount     Fair Value  
Debt            
Short-term borrowings and long-term debt   $ 30,349,903     $ 30,349,903  

 

We estimated the fair value of debt using market quotes and calculations based on market rates.

 

14

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

8. Contract assets and contract liabilities

 

Net contract assets (liabilities) consist of the following:

 

    March 31, 2019  
    U.S.              
    Government     Commercial     Total  
Contract assets   $ 51,201,427     $ 69,548,491     $ 120,749,918  
Contract liabilities     (3,468,415 )     (28,034 )     (3,496,449 )
Net contract assets   $ 47,733,012     $ 69,520,457     $ 117,253,469  

 

    December 31, 2018  
      U.S.                  
    Government     Commercial     Total  
Contract assets   $ 48,358,481     $ 64,975,010     $ 113,333,491  
Contract liabilities     (3,780,866 )     (24,240 )     (3,805,106 )
Net contract assets   $ 44,577,615     $ 64,950,770     $ 109,528,385  

 

The increase in the Company’s net contract assets (liabilities) from January 1, 2019 to March 31, 2019 was primarily due to costs incurred on newer programs, like the new design of the HondaJet engine inlet ($1.0 million increase), for which the Company has not begun billing on a steady rate and the Raytheon Next Generation Jammer pod 2.0 ($4.6 million increase). Additionally, contract assets on the Company’s T-38 Pacer Classic program increased $0.8 million and the Company’s F-35 Lock Assembly program increased $0.7 million. This has been partially offset by a decrease in contract assets on our E-2D program ($2.0 million decrease) which is shipping on a regular schedule.

 

U.S. government contracts includes contracts directly with the U.S. government and government subcontractors.

 

Revisions in the estimated gross profits on contracts and contract amounts are made in the period in which the circumstances requiring the revisions occur. During the three months ended March 31, 2019, the effect of such revisions in total estimated contract profits resulted in a increase to the total gross profit to be earned on the contracts of approximately $391,000 from that which would have been reported had the revised estimates been used as the basis of recognition of contract profits in prior years. During the three months ended March 31, 2018, the effect of such revisions was a decrease to total gross profit of approximately $320,000.

 

Although management believes it has established adequate procedures for estimating costs to uncompleted open contracts, it is possible that additional significant costs could occur on contracts prior to completion.

 

9. income PER COMMON SHARE

 

Basic income per common share is computed using the weighted average number of common shares outstanding. Diluted income per common share for the three months ended March 31, 2019 and 2018 is computed using the weighted-average number of common shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock, as well as unvested RSUs. Incremental shares of 56,513 were used in the calculation of diluted income per common share in the three months ended March 31, 2019. Incremental shares of 6,772 were not used in the calculation of diluted income per common share in the three months ended March 31, 2019, as their exercise price was in excess of the Company’s average stock price for the respective period and, accordingly, these shares are not assumed to be exercised for the diluted earnings per share calculation, as they would be anti-dilutive. Incremental shares of 78,933 were used in the calculation of diluted income per common share in the three months ended March 31, 2018. Incremental shares of 45,249 were not used in the calculation of diluted income per common share in the three months ended March 31, 2018, as their exercise price was in excess of the Company’s average stock price for the respective period and, accordingly, these shares are not assumed to be exercised for the diluted earnings per share calculation, as they would be anti-dilutive.

 

15

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  (UNAUDITED)

 

 

10.

Debt

 

On March 24, 2016, the Company entered into a Credit Agreement (as amended, the “Credit Agreement”) with BankUnited, N.A. as the sole arranger, administrative agent and collateral agent and Citizens Bank N.A. (the “BankUnited Facility”). The BankUnited Facility provides for a revolving credit loan commitment of $30 million (the “Revolving Loan”) and a $10 million term loan (“Term Loan”). The Revolving Loan bears interest at a rate based upon a pricing grid, as defined in the agreement. The Revolving Loan and Term Loan each mature on June 30, 2020.

 

Under the Credit Agreement, upon the consummation of a public offering of common stock that results in gross proceeds of $7 million or more, (A) the Company will prepay the loans in an amount equal to 25% of net proceeds of the offering (with $1.2 million applied to the term loan and the remainder applied to the revolving line of credit) and (B) the Company will maintain a minimum of $3 million in either unrestricted cash in an account with BankUnited, N.A., or in availability under the Revolving Loan.

 

As of March 31, 2019, the Company had $23.7 million outstanding under the Revolving Loan bearing interest at 6.25%.

 

The Company paid to BankUnited, N.A. commitment and agent fees in the amount of $201,666, together with out-of-pocket costs, expenses, and reasonable attorney’s fees incurred by BankUnited, N.A. in connection with the Amendment.

 

The Company paid approximately $463,000 of total debt issuance costs in connection with the BankUnited Facility, of which approximately $121,000 is included in other assets and $37,000 is a reduction of long-term debt at March 31, 2019.

 

The Term Loan had an initial amount of $10 million, payable in monthly installments, as defined in the agreement, which matures on June 30, 2020.

 

The maturities of long-term debt (excluding unamortized debt issuance costs) are as follows:

Twelve months ending March 31,    
2020 $ 2,506,099  
2021   3,131,789  
2022   204,065  
2023   179,055  
Thereafter   86,974  
  $ 6,107,982  

 

As of March 31, 2019, the Company was in compliance with all of the financial covenants contained in the BankUnited Facility, as amended.

 

The BankUnited Facility is secured by all of the Company’s assets.

 

In addition to the Term Loan, included in long-term debt are capital leases and notes payable of $1,236,697, including a current portion of $406,099.

 

16

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

11. MAJOR CUSTOMERS

 

During the three months ended March 31, 2019, the Company’s four largest commercial customers accounted for 25% 13%, 13% and 12% of revenue. During the three months ended March 31, 2018, the Company’s four largest commercial customers accounted for 30%, 14%, 12% and 10% of revenue. In addition, during the three months ended March 31, 2019 and 2018, 9% and 14% of revenue, respectively, was directly from the U.S. government.

 

At March 31, 2019, 37%, 13%, 13% and 12% of contract assets were from the Company’s four largest commercial customers. At December 31, 2018, 39%, 14%, 13% and 13% of contract assets were from the Company’s four largest commercial customers.

 

At March 31, 2019 and December 31, 2018, 2% and 2%, respectively, of contract assets were directly from the U.S. government.

 

At March 31, 2019, 24%, 16%, 15% and 10% of our accounts receivable were from our four largest commercial customers. At December 31, 2018, 20%, 18%, and 17% of accounts receivable were from our three largest commercial customers. 

 

17

 

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
 

 

The following discussion should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in this report.

 

Forward Looking Statements

 

When used in this Form 10-Q and in future filings by us with the Securities and Exchange Commission, the words or phrases “will likely result,” “management expects” or “we expect,” “will continue,” “is anticipated,” “estimated” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The risks are included in Item 1A - Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2018 and Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q. We have no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.

 

Business Operations

 

We are a manufacturer of structural aircraft parts for fixed wing aircraft and helicopters in both the commercial and defense markets. Within the global aerostructure supply chain, we are either a Tier 1 supplier to aircraft Original Equipment Manufacturers (“OEMs”) or a Tier 2 subcontractor to major Tier 1 manufacturers. We also are a prime contractor to the U.S. Department of Defense, primarily the Air Force. In conjunction with our assembly operations, we provide engineering, program management, supply chain management, and Maintenance Repair & Overhaul (“MRO”) services.

 

18

 

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Backlog

 

We produce custom assemblies pursuant to long-term contracts and customer purchase orders. Backlog consists of aggregate values under such contracts and purchase orders, excluding the portion previously included in operating revenues pursuant to ASC 606, and including estimates of future contract price escalation. 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. Our total backlog as of March 31, 2019 and December 31, 2018 was as follows:

 

Backlog
(Total)
  March 31,
2019
   

December 31,

2018

 
Funded   $ 85,669,000     $ 94,474,000  
Unfunded     367,206,000       362,906,000  
Total   $ 452,875,000     $ 457,380,000  

 

Approximately 84% of the total amount of our total backlog at March 31, 2019 was attributable to government contracts. Our backlog attributable to government contracts at March 31, 2019 and December 31, 2018 was as follows:

 

Backlog
(Government)
  March 31,
2019
   

December 31,

2018

 
Funded   $ 78,512,000     $ 80,812,000  
Unfunded     305,466,000       305,582,000  
Total   $ 383,978,000     $ 386,394,000  

 

Our backlog attributable to commercial contracts at March 31, 2019 and December 31, 2018 was as follows:

 

Backlog
(Commercial)
  March 31,
2019
   

December 31,

2018

 
Funded   $ 7,157,000     $ 13,662,000  
Unfunded     61,740,000       57,324,000  
Total   $ 68,897,000     $ 70,986,000  

 

Our unfunded backlog is primarily comprised of the long-term contracts for the Gulfstream G650, Northrop Grumman E-2D, F-16 Falcon, T-38C trainer aircraft for the U.S. government, Lockheed F-35, HondaJet Light Business Jet, Bell AH-1Z, Sikorsky S-92, Embraer Phenom 300 and Raytheon Next Generation Jammer pod. These long-term contracts are expected to have yearly orders, which will be funded in the future.

 

The low level of funded backlog on commercial programs is the result of customers placing funded orders based upon expected lead time. These programs are under long-term agreements with our customers, and as such, we are protected by termination liability provisions.

 

19

 

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Critical Accounting Policies

 

Revenue Recognition

 

Effective January 1, 2018, the Company adopted Accounting Standards Codification Topic 606 Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective method for all of its contracts. ASC 606 requires sales and gross profit to be recognized over the contract period 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 as an asset captioned “Contract assets.” Contracts where billings to date have exceeded recognized revenues are recorded as a liability captioned “Contract liabilities.” Changes to the original estimates may be required during the life of the contract. Estimates are reviewed monthly and the effect of any change in the estimated gross margin percentage for a contract is reflected in cost of sales in the period the change becomes known. ASC 606 involves considerable use of estimates in determining revenues, costs 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 tax purposes) as reported and actual cash received during any reporting period. The Company continually evaluates all of the issues related to the assumptions, risks and uncertainties inherent with the process; however, it cannot be assured that estimates will be accurate. If estimates are not accurate or a contract is terminated, the Company is required to adjust revenue in later periods. Furthermore, even if estimates are accurate, there may be a shortfall in cash flow and the Company may need to borrow money, or seek access to other forms of liquidity, to fund its work in process or to pay taxes until the reported earnings materialize as actual cash receipts.

 

When changes are required for the estimated total revenue on a contract, these changes are recognized with an inception-to-date effect in the current period. Also, when estimates of total costs to be incurred exceed estimates of total revenue to be earned, a provision for the entire loss on the contract is recorded in the period in which the loss is determined.

 

Following the adoption of ASC 606, the Company’s revenue recognition for all of its contracts remained materially consistent with historical practice and there was no impact in the three months ended March 31, 2018 consolidated financial statements upon adoption.

 

Leases

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASC 842”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. On January 1, 2019, the Company adopted the new lease standard using the optional transition method under which comparative financial information will not be restated and continue to apply the provisions of the previous lease standard in its annual disclosures for the comparative periods. In addition, the new lease standard provides a number of optional practical expedients in transition. The Company elected the package of practical expedients. As such, the Company did not have to reassess whether expired or existing contracts are or contain a lease; did not have to reassess the lease classifications or reassess the initial direct costs associated with expired or existing leases.

 

ASC 842 also provides practical expedients for an entity's ongoing accounting. The Company elected the short-term lease recognition exemption under which the Company will not recognize Right-of-use (“ROU”) assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases. The Company elected the practical expedient to not separate lease and non-lease components for certain classes of assets (office buildings).

 

On January 1, 2019, the Company recognized ROU assets and lease liabilities of approximately $5.3 and $5.8 million, respectively, on its consolidated balance sheets using an estimated incremental borrowing rate of 6%.

 

20

 

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Results of Operations

 

Revenue

 

Revenue for the three months ended March 31, 2019 was $25,583,531 compared to $18,191,623 for the same period last year, an increase of $7,391,908 or 40.6%. Approximately $2.1 million of this increase is the result of the inclusion of WMI revenue, which we acquired in December of 2018. Additionally, there was an increase of $4.3 million because of the increasing production rates of the Next Generation Jammer pod program as we continue work on pod version 2.0. We also had increases of approximately $0.7 million on the Company’s E-2D program, $0.7 million on the F-35 Lock program and $0.7 million on the Company’s HondaJet program, as these programs are increasing production in 2019.

 

Revenue from government subcontracts was $16,675,292 for the three months ended March 31, 2019 compared to $8,137,726 for the three months ended March 31, 2018, an increase of $8,537,566 or 104.9%. The increase in revenue is predominately the result of the increasing production rates of the Next Generation Jammer pod program, E-2D program and F-35 program as described above.

 

Revenue from direct military was $2,255,082 for the three months ended March 31, 2019 compared to $2,577,802 for the three months ended March 31, 2018, a decrease of $322,720 or 12.5%. The decrease in revenue is primarily driven by a decrease in revenue from T-38 kits and a decrease in F-16 sales, due do timing, offset by an increase in revenue because of the addition of WMI.

 

Revenue from commercial subcontracts was $6,653,157 for the three months ended March 31, 2019 compared to $7,476,095 for the three months ended March 31, 2018, a decrease of $822,938 or 11%. The decrease is predominately the result of lower revenue on the G650 program of approximately $2.0 million, offset by the increase in revenue from HondaJet described above.

 

Inflation historically has not had a material effect on our operations.

 

Cost of sales

 

Cost of sales for the three months ended March 31, 2019 and 2018 was $20,167,721 and $14,141,755, respectively, an increase of $6,025,966 or 42.6%. This increase is the result of the comparable increase in revenue.

 

The components of the cost of sales were as follows:

 

    Three months ended  
   

March 31,

2019

   

March 31,

2018

 
             
Procurement   $ 13,195,363     $ 8,645,609  
Labor     1,979,759       1,657,719  
Factory overhead     5,016,553       3,941,364  
Other contract costs (credit), net     (23,954 )     (102,937 )
Cost of Sales   $ 20,167,721     $ 14,141,755  

 

Other contract costs (credit), net for the three months ended March 31, 2019 were $(23,954) compared to $(102,937), a decrease of the credit of $78,983. Other contract costs relate to expenses recognized for changes in estimates and expenses predominately associated with loss contracts. In the three months ended March 31, 2019 and 2018, other contract costs are a credit, as we have incurred actual expenses on our A-10 program that had been previously recognized as part of the change in estimate charge.

 

21

 

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Procurement for the three months ended March 31, 2019 was $13,195,363 compared to $8,645,609 an increase of $4,549,754 or 52.6%. This increase is predominately the result of a $2.8 million increase in procurement related to the Raytheon Next Generation Jammer pod program as described above. Additionally, WMI accounted for approximately $0.8 million of procurement.

 

Labor costs for the three months ended March 31, 2019 were $1,979,759 compared to $1,657,719, an increase of $322,040 or 19.4%. The increase is lower than the corresponding increase in revenue, because a portion of our direct employees were used to facilitate the move of WMI to CPI’s building during the quarter.

 

Factory overhead for the three months ended March 31, 2019 was $5,016,553 compared to $3,941,364, an increase of $1,075,189 or 27.3%. The increase in factory overhead is predominately the result of an increase of additional costs in the current year related to WMI.

 

Gross Profit

 

Gross profit for the three months ended March 31, 2019, was $5,415,810 compared to $4,049,868 for the three months ended March 31, 2018, an increase of $1,365,942 or 33.7%, predominately the result of higher volume.

 

Favorable/Unfavorable Adjustments to Gross Profit (Loss)

 

During the three months ended March 31, 2019 and 2018, circumstances required that we make changes in estimates to various contracts. Such changes in estimates resulted in decreases in total gross profit as follows:

 

    Three months ended  
    March 31,
2019
    March 31,
2018
 
Favorable adjustments   $ 680,000     $ 175,000  
Unfavorable adjustments     (289,000 )     (495,000 )
Net adjustments   $ 391,000     $ (320,000 )

 

During the three months ended March 31, 2019, we had one contract that had a $330,000 favorable adjustment, caused by the completion of the program at a favorable rate. There were no other material changes favorable or unfavorable during the three months ended March 31, 2019.

 

22

 

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

During the three months ended March 31, 2018, we had one contract which had approximately a $241,000 unfavorable adjustment caused by changing estimates on a long-term program, that we are working with the customer to agree to contract extensions and expect to have to decrease our selling price. Also, we had one contract that had a $128,000 unfavorable adjustment caused by excess overhead and material costs incurred. There were no other material changes favorable or unfavorable during the three months ended March 31, 2018.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the three months ended March 31, 2019 were $2,806,443 compared to $2,049,840 for the three months ended March 31, 2018, an increase of $756,603, or 36.9%. This change was predominately the result of an increase of additional costs in the current year related to WMI and approximately $110,000 in professional fees, predominately related to additional professional fees for the WMI audit and reporting requirements.

 

Income Before Provision for Income Taxes

 

Income before provision for income taxes for the three months ended March 31, 2019 was $2,098,598 compared to $1,552,765 for the same period last year, an increase of $545,833 or 35%, predominately the result of higher government subcontractor revenue.

 

Provision for Income Taxes

 

Provision for income taxes was $440,000 for the three months ended March 31, 2019, respectively, compared to provision for income taxes of $296,000 for the three months ended March 31, 2018, respectively. The effective tax rate at March 31, 2019 and 2018 was 21% and 19%, respectively.

 

Net Income

 

Net income for the three months ended March 31, 2019 was $1,658,599 or $0.14 per basic share, compared to $1,256,765 or $0.14 per basic share, for the same period last year. Diluted income per share was $0.14 for the three months ended March 31, 2019 calculated utilizing 11,792,818 weighted average shares outstanding. Diluted income per share was $0.14 for the three months ended March 31, 2018 calculated utilizing 8,940,385 weighted average shares outstanding.

 

Liquidity and Capital Resources

 

General

 

At March 31, 2019, we had working capital of $97,639,410 compared to $98,350,176 at December 31, 2018, a decrease of $710,766 or 0.7%.

 

Cash Flow

 

A large portion of our cash flow is used to pay for materials and processing costs associated with contracts that are in process and which do not provide for progress payments. Costs for which we are not able to bill on a progress basis are components of “Contract Assets” on our consolidated balance sheets and represent the aggregate costs and related earnings for uncompleted contracts for which the customer has not yet been billed. These costs and earnings are recovered upon shipment of products and presentation of billings in accordance with contract terms.

 

23

 

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

Because ASC606 requires us to use estimates in determining revenue, costs and profits and in assigning the amounts to accounting periods, there can be a significant disparity between earnings (both for accounting and tax purposes) as reported and actual cash that we receive during any reporting period. Accordingly, it is possible that we may have a shortfall in our cash flow and may need to borrow money, or to raise additional capital, until the reported earnings materialize into actual cash receipts.

 

At March 31, 2019, we had a cash balance of $617,161 compared to $4,128,142 at December 31, 2018. Additionally, at March 31, 2019, we have $2,000,000 of restricted cash, which is cash held in escrow pursuant to the WMI acquisition and the determination of a final working capital adjustment.

 

Our contract assets increased by approximately $7.4 million during the three months ended March 31, 2019.

 

Several of our programs require us to expend up-front costs that may have to be amortized over a portion of production units. In the case of significant program delays and/or program cancellations, we could be required to bear impairment charges which may be material, for costs that are not recoverable. Such charges and the loss of up-front costs could have a material impact on our liquidity.

 

We continue to work to obtain better payment terms with our customers, including accelerated progress payment arrangements, as well as exploring alternative funding sources.

 

We believe that our existing resources, together with the availability under our credit facility and the commitment that we have from BankUnited to extend our credit facility, will be sufficient to meet our current working capital needs for at least 12 months from the date of this filing.

 

Credit Facilities

 

Credit Agreement and Term Loan

 

On March 24, 2016, the Company entered into a Credit Agreement (as amended, the “Credit Agreement”) with BankUnited, N.A. as the sole arranger, administrative agent and collateral agent and Citizens Bank, N.A. (the “BankUnited Facility”). The BankUnited Facility provides for a revolving credit loan commitment of $30 million (the “Revolving Loan”) and a $10 million term loan (“Term Loan”). The Revolving Loan bears interest at a rate based upon a pricing grid, as defined in the agreement. The Revolving Loan and Term Loan each mature on June 30, 2020.

 

Under the Credit Agreement, upon the consummation of a public offering of common stock that results in gross proceeds of $7 million or more, (A) the Company will prepay the loans in an amount equal to 25% of net proceeds of the offering (with $1.2 million applied to the term loan and the remainder applied to the revolving line of credit) and (B) the Company will maintain a minimum of $3 million in either unrestricted cash in an account with BankUnited, N.A., or in availability under the Revolving Loan.

 

As of March 31, 2019, the Company had $23.7 million outstanding under the Revolving Loan bearing interest at 6.25%.

 

The Term Loan had an initial amount of $10 million, payable in monthly installments, as defined in the agreement, which matures on June 30, 2020. The maturities of the Term Loan are included in the maturities of long-term debt.

 

24

 

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

As of March 31, 2019, the Company was in compliance with all of the financial covenants contained in the BankUnited Facility, as amended.

 

The BankUnited Revolving Facility is secured by all of our assets.

 

Contractual Obligations

 

For information concerning our contractual obligations, see Contractual Obligations under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2018.

 

25

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

 

 

Not applicable.

 

Item 4 – Controls and Procedures

 

   

Evaluation of Disclosure Controls and Procedures

 

We maintain a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, as appropriate, to allow timely decisions regarding required disclosures. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, and Board of Directors, as appropriate, to allow timely decisions regarding required disclosure.

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2019. Based on this evaluation and considering the material weakness in internal control over financial reporting described below, we concluded as of March 31, 2019, that our disclosure controls and procedures were not effective at the reasonable assurance level.

 

A material weakness is a control deficiency or combination of control deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness in the Company’s internal control over financial reporting was identified subsequent to September 30, 2018 and still exists as of March 31, 2019: that the review control procedures failed to identify, in a timely manner, the miscoding of an invoice in the Company’s records and the resulting overstatement of revenue. Because the foregoing material weakness in the Company’s internal control over financial reporting had not been remediated by or before the filing of the Form 10-Q for the three and nine months ended September 30, 2018 as originally filed with the SEC on November 13, 2018, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2018. The Company has reviewed its financial closing process and has identified the corrective action to remediate the control failure that was the cause of this error and has implemented this control as well as certain other procedures in the first quarter of 2019. The Company believes that the corrective action and implementation of the new control procedures will provide reasonable assurance that this type of error will not occur in the future; however, we have not concluded our evaluation because we have not fully tested the new control.

 

Our evaluation excluded WMI which was acquired on December 20, 2018. As of and for the three months ended March 31, 2019, WMI represented approximately 8% of total assets and 8% of revenue. In accordance with guidance issued by the SEC, companies are allowed to exclude acquisitions from their assessment of internal control over financial reporting during the first year subsequent to the acquisition while integrating with acquired operations.

Changes in Internal Control Over Financial Reporting

 

There has been no change in our internal control over financial reporting during the quarter ended March 31, 2019 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting other than as described above.

 

26

 

 

Part II: Other Information

 

Item 1 – Legal Proceedings

 

 

None.

 

Item 1A – Risk Factors

 

 

Material risks related to our business, financial condition and results of operations are disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on April 1, 2019.  There have been no material changes to such risk factors.  The risk factors disclosed in our Annual Report 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.

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

 

 

There have been no sales of unregistered equity securities for the three months ended March 31, 2019.

 

Item 3 – Defaults Upon Senior Securities

 

 

None.

 

Item 4 – Mine Safety Disclosures

 

 

Not applicable.

 

Item 5 – Other Information

 

 

None.

 

Item 6 – Exhibits

 

 

  Exhibit 31.1 Section 302 Certification by Chief Executive Officer and President
  Exhibit 31.2 Section 302 Certification by Chief Financial Officer (Principal Accounting Officer)
  Exhibit 32 Section 906 Certification by Chief Executive Officer and Chief Financial Officer
  Exhibit 101 The following financial information from CPI Aerostructures, Inc. Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2019 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheet, (ii) the Consolidated Statements of Operations and Comprehensive Income, (iii) the Consolidated Statement of Shareholder’s Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements

 

27

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    CPI AEROSTRUCTURES, INC.
     
Dated: May 10, 2019 By. /s/ Douglas J. McCrosson
    Douglas J. McCrosson
    Chief Executive Officer and President
     
Dated: May 10, 2019 By. /s/ Vincent Palazzolo
    Vincent Palazzolo
    Chief Financial Officer (Principal Accounting Officer)

 

28

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