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.
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%.
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
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED
)
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.
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.
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.
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.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.