Item
1 – Consolidated Financial Statements
CONSOLIDATED
BALANCE SHEETS
|
|
June
30,
|
|
December
31,
|
|
|
2019
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
(Note
1)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
752,607
|
|
|
$
|
4,128,142
|
|
Restricted
cash
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
Accounts
receivable, net of allowance for doubtful accounts of $275,000 as of June 30, 2019 and December 31, 2018
|
|
|
8,399,920
|
|
|
|
8,623,329
|
|
Contract
assets
|
|
|
120,254,379
|
|
|
|
113,333,491
|
|
Inventory
|
|
|
11,956,006
|
|
|
|
9,711,997
|
|
Refundable
income taxes
|
|
|
435,000
|
|
|
|
435,000
|
|
Prepaid
expenses and other current assets
|
|
|
1,118,620
|
|
|
|
1,972,630
|
|
Total
current assets
|
|
|
144,916,532
|
|
|
|
140,204,589
|
|
|
|
|
|
|
|
|
|
|
Operating
lease right-of-use assets
|
|
|
4,626,916
|
|
|
|
—
|
|
Property
and equipment, net
|
|
|
3,362,084
|
|
|
|
2,545,192
|
|
Refundable
income taxes
|
|
|
—
|
|
|
|
435,000
|
|
Deferred
income taxes
|
|
|
488,319
|
|
|
|
279,318
|
|
Other
assets
|
|
|
230,258
|
|
|
|
249,575
|
|
Total
assets
|
|
$
|
153,624,109
|
|
|
$
|
143,713,674
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
11,540,234
|
|
|
$
|
9,902,481
|
|
Accrued
expenses
|
|
|
927,672
|
|
|
|
1,558,160
|
|
Contract
liabilities
|
|
|
3,488,823
|
|
|
|
3,805,106
|
|
Current
portion of long-term debt
|
|
|
2,507,060
|
|
|
|
2,434,981
|
|
Operating
lease liabilities
|
|
|
1,637,869
|
|
|
|
—
|
|
Line
of credit
|
|
|
25,738,685
|
|
|
|
24,038,685
|
|
Income
tax payable
|
|
|
453,828
|
|
|
|
115,000
|
|
Total
current liabilities
|
|
|
46,294,171
|
|
|
|
41,854,413
|
|
|
|
|
|
|
|
|
|
|
Long-term
operating lease liabilities
|
|
|
3,464,146
|
|
|
|
—
|
|
Long-term
debt, net of current portion
|
|
|
2,981,869
|
|
|
|
3,876,238
|
|
Deferred
income taxes
|
|
|
2,638,415
|
|
|
|
4,028,553
|
|
Other
liabilities
|
|
|
—
|
|
|
|
531,124
|
|
Total
liabilities
|
|
|
55,378,601
|
|
|
|
50,290,328
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
stock - $.001 par value; authorized 50,000,000 shares, 11,820,390 and 11,718,246 shares, respectively, issued and outstanding
|
|
|
11,813
|
|
|
|
11,715
|
|
Additional
paid-in capital
|
|
|
71,104,425
|
|
|
|
70,651,416
|
|
Retained
earnings
|
|
|
27,129,270
|
|
|
|
22,760,215
|
|
|
|
|
|
|
|
|
|
|
Total
Shareholders’ Equity
|
|
|
98,245,508
|
|
|
|
93,423,346
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
153,624,109
|
|
|
$
|
143,713,674
|
|
See
Notes to Consolidated Financial Statements
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
|
For
the Three Months Ended
June 30,
|
|
For
the Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Revenue
|
|
$
|
23,158,251
|
|
|
$
|
20,261,239
|
|
|
$
|
48,741,782
|
|
|
$
|
38,452,862
|
|
Cost of
revenue
|
|
|
18,202,069
|
|
|
|
15,676,421
|
|
|
|
38,369,790
|
|
|
|
29,818,176
|
|
Gross
profit
|
|
|
4,956,182
|
|
|
|
4,584,818
|
|
|
|
10,371,992
|
|
|
|
8,634,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
2,709,313
|
|
|
|
2,557,759
|
|
|
|
5,515,756
|
|
|
|
4,607,599
|
|
Income
from operations
|
|
|
2,246,869
|
|
|
|
2,027,059
|
|
|
|
4,856,236
|
|
|
|
4,027,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
575,412
|
|
|
|
416,834
|
|
|
|
1,086,181
|
|
|
|
864,097
|
|
Income
before provision for (benefit from) income taxes
|
|
|
1,671,457
|
|
|
|
1,610,225
|
|
|
|
3,770,055
|
|
|
|
3,162,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for (benefit from) income taxes
|
|
|
(1,039,000
|
)
|
|
|
353,000
|
|
|
|
(599,000
|
)
|
|
|
649,000
|
|
Net
income
|
|
|
2,710,457
|
|
|
|
1,257,225
|
|
|
|
4,369,055
|
|
|
|
2,513,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income net of tax- Change in unrealized loss on interest rate swap
|
|
|
—
|
|
|
|
20,600
|
|
|
|
—
|
|
|
|
14,800
|
|
Comprehensive
income
|
|
$
|
2,710,457
|
|
|
$
|
1,277,825
|
|
|
$
|
4,369,055
|
|
|
$
|
2,528,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per
common share – basic
|
|
$
|
0.23
|
|
|
$
|
0.14
|
|
|
$
|
0.37
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per
common share – diluted
|
|
$
|
0.23
|
|
|
$
|
0.14
|
|
|
$
|
0.37
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in computing income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,607,415
|
|
|
|
8,938,331
|
|
|
|
11,710,357
|
|
|
|
8,913,394
|
|
Diluted
|
|
|
11,644,768
|
|
|
|
8,980,155
|
|
|
|
11,747,711
|
|
|
|
8,953,321
|
|
See
Notes to Consolidated Financial Statements
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
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,257,225
|
|
|
|
—
|
|
|
|
1,257,225
|
|
Change
in unrealized loss from interest rate swap
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,600
|
|
|
|
20,600
|
|
Stock-based
compensation expense
|
|
|
14,646
|
|
|
|
16
|
|
|
|
155,760
|
|
|
|
—
|
|
|
|
—
|
|
|
|
155,776
|
|
Balance
at June 30, 2018
|
|
|
8,938,491
|
|
|
$
|
8,935
|
|
|
$
|
54,276,175
|
|
|
$
|
23,062,642
|
|
|
$
|
—
|
|
|
$
|
77,347,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,710,457
|
|
|
|
—
|
|
|
|
2,710,457
|
|
Costs
related to stock offering
|
|
|
—
|
|
|
|
—
|
|
|
|
(55,200
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(55,200
|
)
|
Common
stock issued as employee compensation
|
|
|
4,950
|
|
|
|
5
|
|
|
|
32,319
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,324
|
|
Stock-based
compensation expense
|
|
|
79,054
|
|
|
|
72
|
|
|
|
209,495
|
|
|
|
—
|
|
|
|
—
|
|
|
|
209,567
|
|
Balance
at June 30, 2019
|
|
|
11,820,390
|
|
|
$
|
11,813
|
|
|
$
|
71,104,425
|
|
|
$
|
27,129,270
|
|
|
$
|
—
|
|
|
$
|
98,245,508
|
|
See
Notes to Consolidated Financial Statements
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
For
the Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,369,055
|
|
|
$
|
2,513,990
|
|
Adjustments
to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
483,982
|
|
|
|
333,276
|
|
Debt
issuance costs
|
|
|
44,317
|
|
|
|
42,785
|
|
Non-cash
lease expense
|
|
|
(56,024
|
)
|
|
|
(35,384
|
)
|
Stock-based
compensation
|
|
|
540,354
|
|
|
|
459,716
|
|
Common
stock issued as employee compensation
|
|
|
32,324
|
|
|
|
45,913
|
|
Adjustment
for maturity of interest rate swap
|
|
|
—
|
|
|
|
20,600
|
|
Deferred
income taxes
|
|
|
(1,599,139
|
)
|
|
|
755,500
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in accounts receivable
|
|
|
223,409
|
|
|
|
(10,724
|
)
|
Increase
in contract assets
|
|
|
(6,920,888
|
)
|
|
|
(4,021,904
|
)
|
Increase
in inventory
|
|
|
(2,244,009
|
)
|
|
|
(125,526
|
)
|
Decrease
in refundable income taxes
|
|
|
435,000
|
|
|
|
—
|
|
Decrease
(increase) in prepaid expenses and other assets
|
|
|
645,522
|
|
|
|
(158,636
|
)
|
Increase
(decrease) in accounts payable and accrued expenses
|
|
|
1,007,265
|
|
|
|
(3,619,073
|
)
|
(Decrease)
increase in contract liabilities
|
|
|
(694,408
|
)
|
|
|
337,250
|
|
Decrease
in other liabilities
|
|
|
—
|
|
|
|
(10,976
|
)
|
Increase
(decrease) in income taxes payable
|
|
|
338,828
|
|
|
|
(109,327
|
)
|
Net
cash used in operating activities
|
|
|
(3,394,412
|
)
|
|
|
(3,582,520
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(314,462
|
)
|
|
|
(369,738
|
)
|
Net
cash used in investing activities
|
|
|
(314,462
|
)
|
|
|
(369,738
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments
on long-term debt
|
|
|
(1,222,090
|
)
|
|
|
(946,521
|
)
|
Proceeds
from line of credit
|
|
|
2,000,000
|
|
|
|
4,500,000
|
|
Payments
on line of credit
|
|
|
(300,000
|
)
|
|
|
—
|
|
Stock
offering costs paid
|
|
|
(119,571
|
)
|
|
|
—
|
|
Debt
issue costs paid
|
|
|
(25,000
|
)
|
|
|
—
|
|
Net
cash provided by financing activities
|
|
|
333,339
|
|
|
|
3,553,479
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and restricted cash
|
|
|
(3,375,535
|
)
|
|
|
(398,779
|
)
|
Cash
and restricted cash at beginning of period
|
|
|
6,128,142
|
|
|
|
1,430,877
|
|
Cash
and restricted cash at end of period
|
|
$
|
2,752,607
|
|
|
$
|
1,032,098
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,329,678
|
|
|
$
|
1,047,457
|
|
Income
taxes
|
|
$
|
141,702
|
|
|
$
|
—
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Equipment
acquired under financing lease
|
|
$
|
399,800
|
|
|
$
|
497,602
|
|
See
Notes to Consolidated Financial Statements
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 June 30, 2019 and for the three and six months ended June 30, 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 June 30, 2019, the Company had $1,034,488 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 2 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 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 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)
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 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 June 30, 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 provided the parties 30 days to come to an agreement on the working
capital adjustment. The Company and Air Industries could not come to an agreement within the time specified and as such have submitted
the issues to BDO USA, LLP for a binding resolution. The working capital purchase price adjustment is expected to be finalized
not later than the third quarter of 2019.
The
Company is in the 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 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:
|
Three Months
Ended
|
|
Six Months
Ended
|
|
|
June 30, 2018
|
|
Revenue
|
$
|
24,163,306
|
|
|
|
$
|
44,897,706
|
|
Net
income
|
$
|
1,651,953
|
|
|
|
$
|
2,492,260
|
|
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 and six months ended June 30, 2019, that was included in the contract liabilities at January 1, 2019
was $0 and $0, respectively.
The
Company’s remaining performance obligations represent the transaction price of its long-term contracts for which work has
not been performed. As of June 30, 2019, the aggregate amount of transaction price allocated to the remaining performance obligations
was $132.7 million. The Company estimates that it expects to recognize approximately 33% of its remaining performance obligations
in 2019 and 67% revenue in 2020.
In
addition, the Company recognizes revenue for products manufactured by WMI and parts supplied for certain 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 contracts recognized at a point in time accounted for approximately
87% and 13%, respectively, for the six months ended June 30, 2019.
Revenue
from long-term contracts recognized over time and revenue from contracts recognized at a point in time accounted for approximately
86% and 14%, respectively, for the three months ended June 30, 2019.
Revenue
by long-term contract type for the three and six months ended June 30, 2019 and 2018 is as follows:
|
|
Three
months ended
June 30,
|
|
|
Six
months ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Government
subcontracts
|
|
$
|
14,586,860
|
|
|
$
|
10,573,932
|
|
|
$
|
31,262,152
|
|
|
$
|
18,711,658
|
|
Commercial
contracts
|
|
|
6,742,916
|
|
|
|
7,351,187
|
|
|
|
13,396,073
|
|
|
|
14,827,282
|
|
Prime
government contracts
|
|
|
1,828,475
|
|
|
|
2,336,120
|
|
|
|
4,083,557
|
|
|
|
4,913,922
|
|
|
|
$
|
23,158,251
|
|
|
$
|
20,261,239
|
|
|
$
|
48,741,782
|
|
|
$
|
38,452,862
|
|
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 manufacturing and 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 and six months ended June 30, 2019, the Company’s operating lease expense was $439,825 and $878,154, respectively.
Future
minimum lease payments under non-cancellable operating leases as of June 30, 2019 were as follows:
Twelve
months ending June 30,
|
|
|
|
2020
|
|
$
|
1,899,753
|
|
2021
|
|
|
1,942,915
|
|
2022
|
|
|
1,645,566
|
|
2023
|
|
|
73,405
|
|
2024
|
|
|
13,128
|
|
Thereafter
|
|
|
1,785
|
|
Total
undiscounted operating lease payments
|
|
|
5,576,552
|
|
Less
imputed interest
|
|
|
(474,537
|
)
|
Present
value of operating lease payments
|
|
$
|
5,102,015
|
|
The
following table sets forth the ROU assets and operating lease liabilities as of June 30, 2019:
Assets
|
|
|
|
ROU
Assets
|
|
$
|
4,626,916
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current
operating lease liabilities
|
|
$
|
1,637,869
|
|
Long-term
operating lease liabilities
|
|
|
3,464,146
|
|
Total
ROU liabilities
|
|
$
|
5,102,015
|
|
The
Company’s weighted average remaining lease term for its operating leases is 2.6 years.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
5.
|
Reconciliation
of Cash and Restricted cash
|
The following table provides a reconciliation of cash and restricted
cash reported within the statement of cash flows that sum to the total of the same such amounts shown in the statement of cash
flows:
|
|
June 30, 2019
|
|
June 30, 2018
|
Cash
|
|
$
|
752,607
|
|
|
$
|
1,032,098
|
|
Restricted cash
|
|
|
2,000,000
|
|
|
|
—
|
|
Total cash and restricted cash shown in the statement of cash flow
|
|
$
|
2,752,607
|
|
|
$
|
1,032,098
|
|
The
components of inventory consist of the following:
|
|
June
30, 2019
|
|
|
December
31, 2018
|
|
Raw
materials
|
|
$
|
1,431,995
|
|
|
$
|
3,379,986
|
|
|
|
|
|
|
|
|
|
|
Work in progress
|
|
|
7,929,175
|
|
|
|
4,495,980
|
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
|
2,594,836
|
|
|
|
1,836,031
|
|
|
|
$
|
11,956,006
|
|
|
$
|
9,711,997
|
|
|
7.
|
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 six months
ended June 30, 2019 and 2018 includes approximately $380,000 and $415,000, 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
June 2019 a board member retired and 7,326 of his unvested RSUs were forfeited which were valued at approximately $47,000.
In
addition, in April 2019, the Company granted 6,677 RSUs to one of its board members as partial compensation for the 2019
year. RSUs vest quarterly on a straight-line basis over a one-year period. The Company’s net income for the six months ended
June 30, 2019 includes approximately $15,000 of non-cash compensation expense related to the RSU grants to the board member.
I
n June 2019, two board members were granted an additional 2,725 RSUs
as partial compensation
for the 2019 year
.
The Company’s net income for the six months ended June 30, 2019
includes approximately $7,000 of non-cash compensation expense related to the RSU grants to the board of directors.
In
April 2019, the Company granted 4,950 shares of common stock to various employees. For the six months ended June 30, 2019, approximately
$6,000 of compensation expense is included in selling, general and administrative expenses and approximately $26,000 of compensation
expense is included in cost of revenue for this grant. In January 2018, the Company granted 5,130 shares of common stock to various
employees. For the six months ended June 30, 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 six months ended June 30, 2019, approximately $140,000 of
compensation expense is included in selling, general and administrative expenses and approximately $27,000 of compensation expense
is included in cost of revenue for this grant.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED
)
In
April 2019, the Company granted 94,972 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 2023 based upon the service and performance thresholds. For the six months ended June 30, 2019, approximately $69,000 of
compensation expense is included in selling, general and administrative expenses and approximately $21,000 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
April 2019, 11,193, 8,299 and 8,593 of the shares granted in 2016, 2017 and 2018, respectively, were forfeited because the
Company failed to achieve certain performance criteria for the year ended December 31, 2018. In addition, on April 2, 2019,
these employees returned 9,806 common shares, valued at approximately $64,000, 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.
A
summary of the status of the Company’s stock option plans as of June 30, 2019 and changes during the six months ended June
30, 2019 is as follows:
|
|
Options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
contractual
term (in years)
|
|
|
Aggregate
intrinsic value
|
|
Outstanding at beginning
of period
|
|
|
41,772
|
|
|
$
|
7.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised during the
period
|
|
|
35,000
|
|
|
$
|
6.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited during the
period
|
|
|
6,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and vested
at end of period
|
|
|
—
|
|
|
$
|
0.00
|
|
|
|
0.0
|
|
|
$
|
0
|
|
During
the six months ended June 30, 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 six months ended June 30, 2018, no stock options were granted or exercised.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Fair
Value
At
June 30, 2019 and December 31, 2018, the fair values of cash, accounts receivable and accounts payable approximated their
carrying values because of the short-term nature of these instruments.
|
|
June
30, 2019
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Debt
|
|
|
|
|
|
|
Short-term
borrowings and long-term debt
|
|
$
|
31,227,614
|
|
|
$
|
31,227,614
|
|
|
|
December
31, 2018
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Debt
|
|
|
|
|
|
|
Short-term
borrowings and long-term debt
|
|
$
|
30,349,904
|
|
|
$
|
30,349,904
|
|
We
estimated the fair value of debt using market quotes and calculations based on market rates.
|
9.
|
Contract
assets and contract liabilities
|
Net
contract assets consist of the following:
|
|
June
30, 2019
|
|
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
Commercial
|
|
|
Total
|
|
Contract
assets
|
|
$
|
50,056,686
|
|
|
$
|
70,197,693
|
|
|
$
|
120,254,379
|
|
Contract
liabilities
|
|
|
(3,486,110
|
)
|
|
|
(2,713
|
)
|
|
|
(3,488,823
|
)
|
Net
contract assets
|
|
$
|
46,570,576
|
|
|
$
|
70,194,980
|
|
|
$
|
116,765,556
|
|
|
|
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 from January 1, 2019 to June 30, 2019 was primarily due to costs incurred
on newer programs, such as the new design of the HondaJet engine inlet ($1.5 million increase), for which the Company has not
begun billing on a steady rate and the Raytheon Next Generation Jammer pod 2.0 ($5.0 million increase). Additionally, contract
assets on the Company’s F-35 Lock Assembly program increased $0.9 million. This has been partially offset by a decrease
in contract assets on our E-2D program ($3.5 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 six months ended June 30, 2019, the effect of such revisions in total estimated contract profits resulted
in an increase to the total gross profit to be earned on the contracts of approximately $326,000 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 six months
ended June 30, 2018, the effect of such revisions was a decrease to total gross profit of approximately $275,000.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
|
10.
|
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 and six months ended June 30, 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 37,354 were used in the calculation of diluted income per common share in the three and six months
ended June 30, 2019. Incremental shares of 64,287 were used in the calculation of diluted income per common share in the three
and six months ended June 30, 2018. Incremental shares of 45,249 were not used in the calculation of diluted income per common
share in the three and six months ended June 30, 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.
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 a lender and Citizens Bank N.A. as
a lender (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. On June 25, 2019, the Credit Agreement was
amended and the Company and the banks entered into an assignment and acceptance agreement whereby Citizens Bank N.A.’s
interest in the BankUnited Facility was transferred to BNB Bank. Additionally, the Revolving Loan and Term Loan maturity date
was extended to June 30, 2021.
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 June 30, 2019, the Company had $25.7 million outstanding under the Revolving Loan bearing interest at 5.87%.
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 $488,000 of total debt issuance costs in connection with the BankUnited Facility, of which approximately
$122,000 is included in other assets and $30,000 is a reduction of long-term debt at June 30, 2019.
The
Term Loan had an initial amount of $10 million, payable in monthly installments, as defined in the agreement, which originally
matured on June 30, 2020.
The
maturities of long-term debt (excluding unamortized debt issuance costs) are as follows:
Twelve
months ending June 30,
|
|
|
|
|
2020
|
|
|
$
|
2,507,060
|
|
2021
|
|
|
|
2,567,767
|
|
2022
|
|
|
|
197,819
|
|
2023
|
|
|
|
156,578
|
|
Thereafter
|
|
|
|
59,705
|
|
|
|
|
$
|
5,488,929
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As
of June 30, 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 $1,135,234, including a current
portion of $407,060.
In
February 2019, the Company received information that the net operating loss carryback that was generated in 2014 and carried
back to 2012-13 was under examination and could possibly be disallowed by the IRS. The Company had not received a written
notice or tax assessment related to the possible disallowance of the net operating loss carryback. Although the Company had
not received any formal documentation or notice of such disallowance, in accordance with ASC 740-10 “Accounting for
Uncertainty in Tax Positions,” the Company recorded a liability of approximately $3.1 million in the year ended
December 31, 2018 for this uncertainty. The liability represents the maximum net tax adjustment for the disallowance of the
net operating loss carryback, computed at the pre-2018 tax rates, and tax savings of recording a net operating loss
carryforward, calculated at the current tax rates.
In
May 2019, the Company received further information from the IRS related to the possible disallowance of our net operating loss
carryback. Based on the new IRS communication, the liability related to this uncertain tax position was reduced by approximately
$1.4 million in the three months ended June 30, 2019, which results in a benefit from income taxes of $1,039,000 and $599,000
for the three and six months ended June 30, 2019, respectively, compared to provision for income taxes of $353,000 and $649,000
for the three and six months ended June 30, 2018, respectively.
The
Company has not yet received an assessment of additional tax related to this matter. If the Company receives an official tax assessment
we have the ability to appeal the disallowance, as well as go to tax court to challenge the notice.
During
the six months ended June 30, 2019, the Company’s four largest commercial customers accounted for 25% 15%, 14% and 11% of
revenue. During the six months ended June 30, 2018, the Company’s four largest commercial customers accounted for 27%, 13%,
13% and 10% of revenue. In addition, during the six months ended June 30, 2019 and 2018, 8% and 13% of revenue, respectively,
was directly from the U.S. government.
At
June 30, 2019, 38%, 13%, 13% and 10% 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
June 30, 2019 and December 31, 2018, 2% and 2%, respectively, of contract assets were directly from the U.S. government.
At
June 30, 2019, 31%, 20%, 11% 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.
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.
Recent
defense industry consolidation may result in leaner supply chains across the industry, a decrease in the number of preferred suppliers,
and new priorities for consolidated OEMs, increasing competition for the programs and contracts that we supply. In addition, vertical
consolidation may mean that our major customers may choose not to outsource production of products that we currently supply.
We
have positioned our Company to take advantage of opportunities in the military aerospace market to a broad customer base, which
we believe will reduce the potential impact of industry consolidation. Our success as a subcontractor to defense prime contractors
has provided us with opportunities to act as a subcontractor to prime contractors in the production of commercial aircraft structures,
which we believe will also reduce our exposure to defense industry consolidation, government spending decisions, and other defense
industry risks.
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 June 30, 2019 and December 31, 2018 was as follows:
Backlog
(Total)
|
|
June
30,
2019
|
|
|
December
31,
2018
|
|
Funded
|
|
$
|
94,050,000
|
|
|
$
|
94,474,000
|
|
Unfunded
|
|
|
353,519,000
|
|
|
|
362,906,000
|
|
Total
|
|
$
|
447,569,000
|
|
|
$
|
457,380,000
|
|
Approximately
86% of the total amount of our total backlog at June 30, 2019 was attributable to government contracts. Our backlog attributable
to government contracts at June 30, 2019 and December 31, 2018 was as follows:
Backlog
(Government)
|
|
June
30,
2019
|
|
|
December
31,
2018
|
|
Funded
|
|
$
|
82,483,000
|
|
|
$
|
80,812,000
|
|
Unfunded
|
|
|
302,840,000
|
|
|
|
305,582,000
|
|
Total
|
|
$
|
385,323,000
|
|
|
$
|
386,394,000
|
|
Our
backlog attributable to commercial contracts at June 30, 2019 and December 31, 2018 was as follows:
Backlog
(Commercial)
|
|
June
30,
2019
|
|
|
December
31,
2018
|
|
Funded
|
|
$
|
11,567,000
|
|
|
$
|
13,662,000
|
|
Unfunded
|
|
|
50,679,000
|
|
|
|
57,324,000
|
|
Total
|
|
$
|
62,246,000
|
|
|
$
|
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, Blackhawk helicopters, 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.
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 building).
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 sheets using an estimated incremental borrowing rate of 6%.
Item
2 – Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Results
of Operations
Revenue
Revenue
for the three months ended June 30, 2019 was $23,158,251 compared to $20,261,239 for the same period last year, an increase of
$2,897,012 or 14.3%. Approximately $1.8 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 $3.1 million because of the increasing production rates of the Next
Generation Jammer pod program. These increases were offset by a decrease in revenue on the G650 program.
Revenue
for the six months ended June 30, 2019 was $48,741,782 compared to $38,452,862 for the same period last year, an increase of $10,288,920
or 26.8%. Approximately $3.9 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 $7.4 million because of the increasing production rates of the Next Generation
Jammer pod program.
Revenue
from government subcontracts was $14,586,860 for the three months ended June 30, 2019 compared to $10,573,932 for the three months
ended June 30, 2018, an increase of $4,012,928 or 38.0%. The increase in revenue is predominately the result of the increasing
production rates of the Next Generation Jammer pod program as described above.
Revenue
from government subcontracts was $31,262,152 for the six months ended June 30, 2019 compared to $18,711,658 for the six months
ended June 30, 2018, an increase of $12,550,494 or 67.1%. The increase in revenue is predominately the result of the increasing
production rates of the Next Generation Jammer pod program as described above.
Revenue
from direct military was $1,828,475 for the three months ended June 30, 2019 compared to $2,336,120 for the three months ended
June 30, 2018, a decrease of $507,645 or 21.7%. The decrease in revenue is primarily driven by a decrease in revenue from T-38
kits, offset by an increase in revenue because of F-16 sales and the addition of WMI.
Revenue
from direct military was $4,083,557 for the six months ended June 30, 2019 compared to $4,913,922 for the six months ended June
30, 2018, a decrease of $830,365 or 16.9%. The decrease in revenue is primarily driven by a decrease in revenue from T-38 kits,
offset by an increase in revenue of F-16 sales and the addition of WMI.
Revenue
from commercial subcontracts was $6,742,916 for the three months ended June 30, 2019 compared to $7,351,187 for the three months
ended June 30, 2018, a decrease of $608,271 or 8.3%. The decrease is predominately the result of lower revenue on the G650 program
of approximately $0.8 million, offset by the increase in revenue from HondaJet program of approximately $0.1 million.
Revenue
from commercial subcontracts was $13,396,073 for the six months ended June 30, 2019 compared to $14,827,282 for the six months
ended June 30, 2018, a decrease of $1,431,209 or 9.7%. The decrease is predominately the result of lower revenue on the G650 program
of approximately $2.7 million, offset by the increase in revenue from HondaJet program of approximately $0.8 million.
Inflation
historically has not had a material effect on our operations.
Cost
of sales
Cost
of sales for the three months ended June 30, 2019 and 2018 was $18,202,069 and $15,676,421, respectively, an increase of $2,525,648
or 16.1%. This increase is the result of the comparable increase in revenue.
Cost
of sales for the six months ended June 30, 2019 and 2018 was $38,369,790 and $29,818,176, respectively, an increase of $8,551,614
or 28.7%. This increase is the result of the comparable increase in revenue.
Item
2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
components of the cost of sales were as follows:
|
|
Three
months ended
|
|
Six
months ended
|
|
|
June
30,
2019
|
|
June
30,
2018
|
|
June
30,
2019
|
|
June
30,
2018
|
Procurement
|
|
$
|
12,295,771
|
|
|
$
|
10,299,378
|
|
|
$
|
26,870,132
|
|
|
$
|
18,944,987
|
|
Labor
|
|
|
1,929,761
|
|
|
|
1,589,576
|
|
|
|
3,909,520
|
|
|
|
3,247,295
|
|
Factory
overhead
|
|
|
4,907,050
|
|
|
|
3,687,518
|
|
|
|
9,923,603
|
|
|
|
7,628,882
|
|
Other
contract costs (credit), net
|
|
|
(65,502
|
)
|
|
|
99,949
|
|
|
|
(89,456
|
)
|
|
|
(2,988
|
)
|
Inventory
change
|
|
|
(865,011
|
)
|
|
|
—
|
|
|
|
(2,244,009
|
)
|
|
|
—
|
|
Cost
of Sales
|
|
$
|
18,202,069
|
|
|
$
|
15,676,421
|
|
|
$
|
38,369,790
|
|
|
$
|
29,818,176
|
|
Other
contract costs (credit), net for the three months ended June 30, 2019 were $(65,502) compared to $99,949, an increase of the credit
of $165,451. Other contract costs (credit), net for the six months ended June 30, 2019 were $(89,456) compared to $(2,988), an
increase of the credit of $86,468. Other contract costs relate to expenses recognized for changes in estimates and expenses predominately
associated with loss contracts. In the three months ended June 30, 2019 and six months ended June 30, 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.
Procurement
for the three months ended June 30, 2019 was $12,295,771 compared to $10,299,378, an increase of $1,996,393 or 19.4%. This
increase is predominately the result of a $2.1 million increase in procurement related to the Raytheon Next Generation Jammer
pod program as described above. Additionally, WMI accounted for approximately $1.2 million of procurement. Procurement for
the six months ended June 30, 2019 was $26,870,132 compared to $18,944,987, an increase of $7,925,145 or 41.8%. The increase
in procurement for the months ended June 30, 2019 was a result of the same programs as described above.
Labor
costs for the three months ended June 30, 2019 were $1,929,761 compared to $1,589,576, an increase of $340,185 or 21.4%. The increase
is predominantly the result of labor associated with the Next Generation Jammer pod program, which is very labor intensive.
Labor
costs for the six months ended June 30, 2019 were $3,909,520 compared to $3,247,295, an increase of $662,225 or 20.4%. 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 June 30, 2019 was $4,907,050 compared to $3,687,518, an increase of $1,219,532 or 33.1%. The
increase in factory overhead is predominately the result of an increase of additional costs in the current year related to WMI.
Factory
overhead for the six months ended June 30, 2019 was $9,923,603 compared to $7,628,882, an increase of $2,294,721 or 30.1%. 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 June 30, 2019 was $4,956,182 compared to $4,584,818 for the three months ended June 30, 2018,
an increase of $371,364 or 8.1%, predominately the result of higher volume.
Gross
profit for the six months ended June 30, 2019 was $10,371,992 compared to $8,634,686 for the six months ended June 30, 2018, an
increase of $1,737,306 or 20.1%, predominately the result of higher volume.
Item
2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Favorable/Unfavorable
Adjustments to Gross Profit (Loss)
During
the six months ended June 30, 2019 and 2018, circumstances required that we make changes in estimates to various contracts. Such
changes in estimates resulted in changes in total gross profit as follows:
|
|
Six
months ended
|
|
|
June
30,
2019
|
|
June
30,
2018
|
Favorable
adjustments
|
|
$
|
733,000
|
|
|
$
|
266,000
|
|
Unfavorable adjustments
|
|
|
(407,000
|
)
|
|
|
(539,000
|
)
|
Net adjustments
|
|
$
|
326,000
|
|
|
$
|
(273,000
|
)
|
During
the six months ended June 30, 2019, we had one contract that had a $375,000 favorable adjustment, caused by the completion of
the program at a favorable rate. Also, we had one contract that had a $241,000 unfavorable adjustment caused by excess overhead
and material costs incurred. There were no other material changes favorable or unfavorable during the six months ended June 30,
2019.
During
the six months ended June 30, 2018, we had one contract which had approximately $376,000 of an unfavorable adjustment caused by
changing estimates on a long-term program, for which we are working with the customer to agree to contract extensions and are
adjusting our long-term margin estimates. Also, we had one contract that had an $117,000 unfavorable adjustment caused by excess
overhead and material costs incurred. In addition, we had one contract that had an $113,000 unfavorable adjustment caused by excess
overhead and material costs incurred. There were no other material changes favorable or unfavorable during the six months ended
June 30, 2018.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses for the three months ended June 30, 2019 were $2,709,313 compared to $2,557,759 for the three
months ended June 30, 2018, an increase of $151,554, or 5.9%. This change was predominately the result of an increase of additional
costs in the current year related to WMI and approximately $247,000 in salaries.
Selling,
general and administrative expenses for the six months ended June 30, 2019 were $5,515,756 compared to $4,607,599 for the six
months ended June 30, 2018, an increase of $908,157, or 19.7%. This change was predominately the result of an increase of additional
costs in the current year related to WMI and approximately $190,000 in salaries.
Income
Before Provision for (Benefit from) Income Taxes
Income
before provision for (benefit from) income taxes for the three months ended June 30, 2019 was $1,671,457 compared to
$1,610,225 for the same period last year, an increase of $61,232 or 3.8%, predominately the result of higher government
subcontractor revenue. Income before provision for (benefit from) income taxes for the six months ended June 30, 2019 was
$3,770,055 compared to $3,162,990 for the same period last year, an increase of $607,065 or 19.2%, predominately the result
of higher government subcontractor revenue.
Item
2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Provision
for (Benefit from) Income Taxes
In
February 2019, the Company received information that the net operating loss carryback that was generated in 2014 and carried back
to 2012-13 was under examination and could possibly be disallowed by the IRS. The Company had not received a written notice or
tax assessment related to the possible disallowance of our net operating loss carryback. Although the Company had not received
any formal documentation or notice of such disallowance, in accordance with ASC 740-10 “Accounting for Uncertainty in Tax
Positions,” the Company recorded a liability of approximately $3.1 million in the year ended December 31, 2018 for this uncertainty.
The liability represents the maximum net tax adjustment for the disallowance of the net operating loss carryback, computed at
the pre-2018 tax rates, and tax savings of recording a net operating loss carryforward, calculated at the current tax rates.
In
May 2019, we received further information from the IRS related to the possible disallowance of our net operating loss carryback.
Based on the new IRS communication, the liability related to this uncertain tax position was reduced by approximately $1.4 million
in the three months ended June 30, 2019, which results in a benefit from income taxes of $1,039,000 and $599,000 for the three
and six months ended June 30, 2019, respectively, compared to provision for income taxes of $353,000 and $649,000 for the three
and six months ended June 30, 2018, respectively.
We
have not yet received an assessment of additional tax related to this matter. If we receive an official tax assessment we have
the ability to appeal the disallowance, as well as go to tax court to challenge the notice.
Net
Income
Net
income for the three months ended June 30, 2019 was $2,710,457 or $0.23 per basic share, compared to $1,257,225 or $0.14 per basic
share, for the same period last year. Diluted income per share was $0.23 for the three months ended June 30, 2019 calculated utilizing
11,644,768 weighted average shares outstanding. Diluted income per share was $0.14 for the three months ended June 30, 2018 calculated
utilizing 8,980,155 weighted average shares outstanding.
Net
income for the six months ended June 30, 2019 was $4,369,055 or $0.37 per basic share, compared to $2,513,990 or $0.28 per basic
share, for the same period last year. Diluted income per share was $0.37 for the six months ended June 30, 2019 calculated utilizing
11,747,711 weighted average shares outstanding. Diluted income per share was $0.28 for the six months ended June 30, 2018 calculated
utilizing 8,953,321 weighted average shares outstanding.
Net income for the three and six months
ended June 30, 2019 includes an approximate $0.09 adjustment for the reversal of tax liability described above.
Liquidity
and Capital Resources
General
At
June 30, 2019, we had working capital of $98,622,361 compared to $98,350,176 at December 31, 2018, an increase of $272,185 or
0.3%.
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.
Item
2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Because
ASC 606 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
June 30, 2019, we had a cash balance of $752,607 compared to $4,128,142 at December 31, 2018. Additionally, at June 30, 2019 and
December 31, 2018, 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 $6.9 million during the six months ended June 30, 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 a lender Citizens Bank, N.A. as a lender
(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. On June 25, 2019, the Credit Agreement was amended
and the Company and the banks entered into an assignment and acceptance agreement whereby Citizens Bank N.A.’s interest
in the BankUnited Facility was transferred to BNB Bank. Additionally, the Revolving Loan and Term Loan maturity date was
extended to June 30, 2021.
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 June 30, 2019, the Company had $25.7 million outstanding under the Revolving Loan bearing interest at 5.87%.
The
Term Loan had an initial amount of $10 million, payable in monthly installments, as defined in the agreement, which matures on
June 30, 2021. The maturities of the Term Loan are included in the maturities of long-term debt.
As
of June 30, 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.
Item
2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.