UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the
quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to __________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction | (IRS Employer Identification Number) |
| of incorporation or organization) |
| (Address of principal executive offices) | (Zip code) |
(Registrant’s telephone number including area code)
| Securities registered pursuant to Section 12(b) of the Act: | ||
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of November 18, 2022, the registrant had shares of common stock, $.001 par value, outstanding.
INDEX
Page No.
2
Part I - Financial Information
Item 1 – Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
| September 30, 2022 (Unaudited) | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Insurance recovery receivable | ||||||||
| Contract assets | ||||||||
| Inventory | ||||||||
| Refundable income taxes | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Property and equipment, net | ||||||||
| Intangibles, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Litigation settlement obligation | ||||||||
| Contract liabilities | ||||||||
| Loss reserve | ||||||||
| Current portion of long-term debt | ||||||||
| Operating lease liabilities | ||||||||
| Income tax payable | ||||||||
| Total current liabilities | ||||||||
| Line of credit | ||||||||
| Long-term operating lease liabilities | ||||||||
| Long-term debt, net of current portion | ||||||||
| Total liabilities | ||||||||
| Shareholders’ Deficit: | ||||||||
| Common stock - $ par value; authorized shares, and shares, respectively, issued and outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Shareholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Shareholders’ Deficit | $ | $ | ||||||
See Notes to Consolidated Financial Statements
3
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Income from operations | ||||||||||||||||
| Other income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income before provision for income taxes | ||||||||||||||||
| Provision for income taxes | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Income per common share – basic | $ | $ | $ | $ | ||||||||||||
| Income per common share – diluted | $ | $ | $ | $ | ||||||||||||
| Shares used in computing loss per common share: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT (UNAUDITED)
| Common Stock Shares | Common Stock Amount | Additional Paid-in Capital | Accumulated Deficit | Total Shareholders’ Deficit | ||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net Income | — | |||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Balance at March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||
| Net Income | — | |||||||||||||||||||
| Common stock forfeited | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net Income | — | |||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | ( | ) | ( | ) | |||||||||||||
| Net Loss | — | ( | ) | ( | ) | |||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net Income | — | |||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net Income | — | |||||||||||||||||||
| Common stock forfeited | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
See Notes to Consolidated Financial Statements
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt issuance cost | ||||||||
| Cash expended less than (in excess) of rent expense | ( | ) | ||||||
| Stock-based compensation | ||||||||
| Bad debt expense | ||||||||
| Forgiveness of PPP loan | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Increase in accounts receivable | ( | ) | ( | ) | ||||
| (Decrease) increase in contract assets | ( | ) | ||||||
| Decrease in inventory | ||||||||
| Increase in prepaid expenses and other assets | ( | ) | ||||||
| Increase in refundable income taxes | ( | ) | ||||||
| Increase (decrease) in accounts payable and accrued expenses | ( | ) | ||||||
| Decrease in contract liabilities | ( | ) | ||||||
| Increase in insurance receivable | ( | ) | ( | ) | ||||
| Increase in settlement of litigation obligation | ||||||||
| (Decrease) increase in income taxes payable | ( | ) | ||||||
| Decrease in loss reserve | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payments on long-term debt | ( | ) | ( | ) | ||||
| Proceeds from line of credit | ||||||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net decrease in cash | ( | ) | ( | ) | ||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
See Notes to Consolidated Financial Statements
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 1. | INTERIM FINANCIAL STATEMENTS |
The Company consists of CPI Aerostructures, Inc. (“CPI Aero”), Welding Metallurgy, Inc. (“WMI”), a wholly owned subsidiary of CPI Aero, and Compac Development Corporation, 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. The Company has determined that it has a single operating and reportable segment.
The consolidated financial statements of the Company as of September 30, 2022 and for the nine months ended September 30, 2022 and 2021 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and notes normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations. The consolidated balance sheet at December 31, 2021 has been derived from audited consolidated financial statements, but does not include all of the information and notes required by U.S. GAAP. The Company believes that the disclosures are adequate to make the information presented not misleading.
All adjustments that, in the opinion of the 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, 2021 (the “Form 10-K”). 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 September 30, 2022, the Company had $
Certain balances have been reclassified to conform to presentation requirements, including consistent presentation of the components of inventory (Note 4).
The Company currently has a shareholders’
deficit and has experienced losses from operations and negative cash flows from operations in prior periods that collectively represent
significant risk to the Company to continue to operate as a going concern. To address this risk, the Company has (i) negotiated and executed
a further amendment to its Amended and Restated Credit Agreement with the lenders named therein and BankUnited N.A. as Sole Arranger,
Agent and Collateral Agent (as amended from time to time, the “Credit Agreement” or the “BankUnited Facility”),
effective November 10, 2022 which extended the maturity date of the credit facility to
7
Our business and operations and the industries in which we operate have been impacted by public and private sector policies and initiatives in the U.S. to address the transmission of COVID-19, such as the imposition of travel restrictions and the adoption of remote work. The COVID-19 pandemic has contributed to a general slowdown in the global economy, has adversely impacted the businesses of certain of our customers and suppliers, and could adversely impact our results of operations and financial condition. In response to the COVID-19 impact on our business, we have been taking actions to preserve capital and protect the long-term needs of our businesses, including negotiating progress payments with our customers and reducing discretionary spending. For more information on the current and potential impact of the COVID-19 pandemic on our business, see Risk Factors included in Part I, Item 1A of our Form 10-K.
| 2. | REVENUE RECOGNITION |
The Company recognizes revenue when it transfers control of a promised good or service to a customer in an amount that reflects the consideration it expects to be entitled to in exchange for the good or service. The majority of the Company’s performance obligations are satisfied over time as the Company (i) sells products with no alternative use to the Company and (ii) has an enforceable right to recover costs incurred plus a reasonable profit margin for work completed to date. Under the over time revenue recognition model, revenue and gross profit are recognized over the contract period as work is performed based on actual costs incurred and an estimate of costs to complete and resulting total estimated costs at completion.
The Company also has contracts that are considered point in time. Under the point in time revenue recognition model, revenue is recognized when control of the components has transferred to the customer; in most cases this will be based on shipping terms.
Contracts with Customers and Performance Obligations
The majority of the Company’s revenues are from long-term contracts with the U.S. government, military and commercial contractors. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. For the Company, the contract under Accounting Standards Codification Topic 606 (“ASC 606”) is typically established upon execution of a purchase order either in accordance with a long-term customer contract or on a standalone basis.
To determine the proper revenue recognition for our contracts, we must evaluate whether two or more contracts should be combined and accounted for as a single contract, and whether the combined or single contract should be accounted for as one performance obligation or more than one performance obligation. This evaluation requires significant judgment, and the decision to combine a group of contracts or to separate a contract into multiple performance obligations could change the amount of revenue and profit recorded in a period. A performance obligation is a promise within a contract to transfer a distinct good or service to the customer in exchange for payment and is the unit of account for recognizing revenue. The Company’s performance obligations in its contracts with customers are typically the sale of each individual product contemplated in the contract or a single performance obligation representing a series of products when the contract contains multiple products that are substantially the same. The Company has elected to account for shipping performed after control over a product has transferred to a customer as fulfillment activities. When revenue is recognized in advance of incurring shipping costs, the costs related to the shipping are accrued. Shipping costs are included in costs of sales. The Company provides warranties on many of its products; however, since customers cannot purchase such warranties separately and they do not provide services beyond standard assurances, warranties are not separate performance obligations.
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when or as the performance obligation is satisfied. For contracts with more than one performance obligation, the Company allocates the transaction price to each performance obligation based on its estimated standalone selling price. When standalone selling prices are not available, the transaction price is allocated using an expected cost plus margin approach as pricing for such contracts is typically negotiated on the basis of cost.
The contracts with the U.S. government and military contractors are subject to the Federal Acquisition Regulation, 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 contracts is based on the specific negotiations with each customer and any taxes imposed by governmental authorities are excluded from revenue. The transaction price is primarily comprised of fixed consideration as the customer typically pays a fixed fee for each product sold. The Company does not adjust the amount of revenue to be recognized under a customer contract for the effects of the time value of money when the timing difference between receipt of payment and transferring the good or service is less than one year.
The majority of the Company’s performance obligations are satisfied over time as the Company (i) sells products with no alternative use to the Company and (ii) has an enforceable right to recover costs incurred plus a reasonable profit margin for work completed to date. The Company uses the cost-to-cost input method to measure progress for its performance obligations because it best depicts the transfer of control to the customer which occurs as the Company incurs costs on its contracts.
The Company generally utilizes the portfolio approach to estimate the amount of revenue to recognize for its contracts and groups contracts together that have similar characteristics. Significant judgment is used to determine which contracts are grouped together to form a portfolio. The portfolio approach is utilized only when the result of the accounting is not expected to be materially different than if applied to individual contracts.
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. The effect of a contract modification on the transaction price, and the measure of progress for the performance obligation to which it relates, are recognized prospectively when the remaining goods or services are distinct and on a cumulative catch-up basis when the remaining goods or services are not distinct.
The Company also has contracts that are considered point in time. Under the point in time revenue recognition model, revenue is recognized when control of the components has transferred to the customer; in most cases this will be based on shipping terms.
8
Contract Estimates
Certain contracts contain forms of variable consideration, such as price discounts and performance penalties. The Company generally estimates variable consideration using the most likely amount based on an assessment of all available information (i.e., historical experience, current and forecasted performance) and only to the extent it is probable that a significant reversal of revenue recognized will not occur when the uncertainty is resolved.
In applying the cost-to-cost input method, the Company compares the actual costs incurred relative to the total estimated costs expected at completion to determine its progress towards satisfying its performance obligation and to calculate the corresponding amount of revenue to recognize. For any costs incurred that do not depict the Company’s performance in transferring control of goods or services to the customer, the Company excludes such costs from its input method measure of progress as the amounts are not reflected in the price of the contract. Costs that are inputs to the satisfaction of a performance obligation include labor, materials and subcontractors’ costs, other direct costs and an allocation of indirect costs.
Changes to the original estimates may be required during the life of the contract. Estimates are reviewed quarterly and the effect of any change in the estimated gross margin percentage for a contract is reflected in revenue in the period the change becomes known. ASC 606 involves considerable use of estimates and judgment in determining revenues, costs and profits and in assigning the amounts to accounting periods. For instance, management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from the customer, and overhead cost rates, among other variables. The Company continually evaluates all of the factors 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 which will affect estimates at completion, the Company is required to adjust revenue in the period the change is determined.
When changes are required for the estimated total revenue on a contract, these changes are recognized on a cumulative catch-up basis in the current period. A significant change in one or more estimates could affect the profitability of one or more of our performance obligations. If estimates of total costs to be incurred exceed estimates of total consideration the Company expects to receive, a provision for the remaining loss on the contract is recorded in the period in which the loss becomes evident.
Capitalized Contract Acquisition Costs and Fulfillment Costs
Contract acquisition costs are those incremental costs that the Company incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. The Company does not typically incur contract acquisition costs or contract fulfillment costs that are subject to capitalization in accordance with the guidance in Accounting Standards Codification Subtopic 340-40, “Other Assets and Deferred Costs—Contracts with Customers.”
Disaggregation of Revenue
The following tables present the Company’s revenue disaggregated by contract type and revenue recognition method:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Aerostructures | $ | $ | $ | $ | ||||||||||||
| Aerosystems | ||||||||||||||||
| Kitting and Supply Chain Management | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue recognized using over time revenue recognition model | $ | $ | $ | $ | ||||||||||||
| Revenue recognized using point in time revenue recognition model | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Transaction Price Allocated to Remaining Performance Obligations
Our backlog represents the estimated transaction
prices on performance obligations to our customers for which work remains to be performed. Backlog is converted into revenue in
future periods as work is performed. As of September 30, 2022, the aggregate amount of transaction price allocated to the remaining
performance obligations was approximately $
9
| 3. | CONTRACT ASSETS AND CONTRACT LIABILITIES |
Contract assets represent revenue recognized on contracts in excess of amounts invoiced to the customers and the where the Company’s right to consideration is conditional on something other than the passage of time. Amounts may not exceed their net realizable value. Our government contracts therefore typically result in revenue recognized in excess of billings, which we present as contract assets. Contract assets are classified as current. The Company’s contract liabilities represent customer payments received or due from the customer in excess of revenue recognized. Contract liabilities are classified as current.
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Contract assets | $ | $ | ||||||
| Contract liabilities | ||||||||
| Net Contract assets | $ | $ | ||||||
Revenue recognized for the periods ended
September 30, 2022 and 2021 that was included in the contract liabilities balance as of January 1, 2022 and 2021, respectively,
was approximately $
| 4. | INVENTORY |
The components of inventory consisted of the following:
September 30, 2022 | December 31, 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| Gross inventory | ||||||||
| Inventory reserves | ( | ) | ( | ) | ||||
| Inventory, net | $ | $ | ||||||
| 5. | 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. The Company recognized a net total of $ and $ of stock-based compensation expense for the three months ended September 30, 2022 and 2021, respectively, and a net total of $ and $ of stock- based compensation expense for the nine months ended September 30, 2022 and 2021, respectively.
During the three and nine months ended September 30, 2022, the Company granted and restricted stock units (“RSUs”), respectively, to its board of directors as partial compensation for the 2022 year, and during the three and nine months ended September 30, 2021, the Company granted and RSUs, respectively, to its board of directors as partial compensation for the 2021 year. RSUs vest quarterly on a straight-line basis over a one-year period. For the three and nine months ended September 30, 2022, $ and $, respectively, of non-cash compensation expense related to the RSU grants to the board of directors are included selling, general and administrative expenses, and for the three and nine months ended September 30, 2021, $ and $, respectively, of non-cash compensation expense related to the RSU grants to the board of directors are included in selling, general and administrative expenses.
During the three and nine months ended September 30, 2022, the Company granted and shares of common stock (“Restricted Stock”) to employees. In the event that this employee’s employment is voluntarily terminated prior to certain dates, portions of the shares may be forfeited. For the three and nine months ended September 30, 2022, $ and $, respectively, of compensation expense are included in selling, general and administrative expenses, which includes forfeitures during the three months ended March 31, 2022 of shares totaling of credit. For the three and nine months ended September 30, 2022, $ and $, respectively, of compensation expense are included in cost of sales for shares of common stock granted to employees between 2018 and 2022. For the three and nine months ended September 30, 2021, $ and $, respectively, of compensation expense are included in selling, general and administrative expenses and $ and $, respectively, of compensation expense are included in cost of sales for shares of common stock granted to employees between 2016 and 2020. During the three and nine months ended September 30, 2021, shares were forfeited.
| 6. | FAIR VALUE |
Fair Value
At September 30, 2022 and December 31, 2021, the fair values of cash, accounts receivable and accounts payable approximated their carrying values because of the short-term nature of these instruments.
| September 30, 2022 | ||||||||
| Carrying Amount | Fair Value | |||||||
| Debt | ||||||||
| Short-term borrowings and long-term debt | $ | $ | ||||||
| December 31, 2021 | ||||||||
| Carrying Amount | Fair Value | |||||||
| Debt | ||||||||
| Short-term borrowings and long-term debt | $ | $ | ||||||
We estimated the fair value of debt using market quotes and calculations based on market rates.
| 7. | INCOME PER COMMON SHARE |
Basic and diluted income per common share for the three and six months ended September 30, 2022 and 2021 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 were used in the calculation of diluted income per common share in the three and nine months ended September 30, 2022. Incremental shares of were used in the calculation of diluted income per common share in the three and nine months ended September 30, 2021.
10
| 8. | DEBT |
Credit Facility
On March 24, 2016, the Company entered
into the Credit Agreement. The BankUnited Facility originally provided for a revolving credit loan commitment of $
On May 11, 2021, the Company entered into
the Seventh Amendment to the Credit Agreement (the “Seventh Amendment”). Under the Seventh Amendment, the parties amended
the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to
On October 28, 2021, the Company entered
into a Waiver and Eighth Amendment to the Credit Agreement (the “Eighth Amendment”). Under the Eighth Amendment, the
parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to
On April 12, 2022 the Company entered into
a Consent, Wavier and Ninth Amendment to the Credit Agreement (the “Ninth Amendment”). Under the Ninth Amendment, the
parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to
On August 19,
2022, the Company entered into a Consent, Waiver and Tenth Amendment to the Credit Agreement (the “Tenth Amendment”).
Under the Tenth Amendment, the parties amended the Credit Agreement by (a) increasing the maximum leverage ratio applicable for
the fiscal quarter ending September 30, 2022 to
On November 10,
2022, the Company entered into an Eleventh Amendment to the Credit Agreement (the “Eleventh Amendment”). Under the
Eleventh Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term
Loan to
The Credit Agreement, as amended, requires
us to maintain the following financial covenants (subject to the exclusions provided for in the previous paragraph): (a) minimum
debt service coverage ratio of no less than
The BankUnited Facility is secured by all
of the Company’s assets and both the Revolving Loan and Term Loan bore interest at the rate of
As of September 30, 2022, the Company had
$
The Term Loan, as amended by the Eleventh
Amendment, had an aggregate principal amount of $
There is currently no availability for borrowings under the Revolving Loan and the Company finances its operations from internally generated cash flow.
PPP Loan
On April 10, 2020, we entered into the
Paycheck Protection Program loan (“PPP Loan”), with BNB Bank (now part of Dime Community Bank (“Dime”)) as
the lender, in an aggregate principal amount of $
11
On November 2, 2020, the Company applied to the lender for full forgiveness of the PPP Loan as calculated in accordance with the terms of the CARES Act, as modified by the Paycheck Protection Flexibility Act. All amounts have been classified as current or long term in accordance with the Note terms.
On July 13, 2021, the Company received notification through Dime that the PPP Loan and accrued interest thereon had been fully forgiven by the SBA and that the forgiveness payment date was July 1, 2021. The forgiveness of the PPP Loan was recognized as other income during the Company’s third fiscal quarter ending September 30, 2021. The SBA reserves the right to audit any PPP Loan, for eligibility and other criteria, regardless of size. These audits may occur after forgiveness has been granted. In accordance with the CARES Act, all borrowers are required to maintain their PPP loan documentation for six years after the PPP Loan was forgiven and to provide that documentation to the SBA upon request.
The maturities of long-term debt (excluding unamortized debt issuance costs) are as follows:
| Twelve months ending September 30, | |||||
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Total | $ | ||||
Included in the long-term debt are financing
leases and other notes payable of $
The Company has cumulatively paid $
| 9. | MAJOR CUSTOMERS |
During the nine months ended September
30, 2022, the Company’s three largest customers accounted for
At September 30, 2022,
At September 30, 2022,
| 10. | LEASES |
The Company leases a building and equipment. Under ASC 842, at contract inception we determine whether the contract is or contains a lease and whether the lease should be classified as an operating or a financing lease. Operating leases are included in ROU (right-of-use) 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, as amended, expires
on
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 nine months ended September
30, 2022, the Company’s operating lease expense was $
Future minimum lease payments under non-cancellable operating leases as of September 30, 2022 were as follows:
| Twelve months ending September 30, | |||||
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Total undiscounted operating lease payments | |||||
| Less imputed interest (between | ( | ) | |||
| Present value of operating lease payments | $ | ||||
The following table sets forth the ROU assets and operating lease liabilities as of September 30, 2022:
| Assets | ||||
| ROU assets-net | $ | |||
| Liabilities | ||||
| Current operating lease liabilities | $ | |||
| Long-term operating lease liabilities | ||||
| Total ROU liabilities | $ | |||
The Company’s weighted average remaining
lease term for its operating leases is
12
| 11. | INCOME TAXES |
Income taxes are accounted for under the asset and liability method whereby deferred tax assets and liabilities are recognized for future tax consequences attributable to the temporary differences between the consolidated financial statements carrying amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company’s policy is to record estimated interest and penalties related to uncertain tax positions in income tax expense.
The provision for income tax for the three
months ended September 30, 2022 and 2021 was $
The difference between the Company’s statutory tax rate and its effective rate is due to the valuation allowance taken on the Company’s net operating loss carryforwards.
| 12. | COMMITMENTS AND CONTINGENCIES |
Class Action Lawsuit
As previously disclosed, a consolidated class action lawsuit (captioned Rodriguez v. CPI Aerostructures, Inc., et al., No. 20-cv-00982) has been filed in the U.S. District Court for the Eastern District of New York against the Company, Douglas McCrosson; the Company’s former Chief Executive Officer; Vincent Palazzolo, the Company’s former Chief Financial Officer; and the two underwriters of the Company’s October 16, 2018 offering of common stock, Canaccord Genuity LLC and B. Riley FBR. The Amended Complaint in the action asserts claims on behalf of two plaintiff classes: (i) purchasers of the Company’s common stock issued pursuant to and/or traceable to the Company’s offering conducted on or about October 16, 2018; and (ii) purchasers of the Company’s common stock between March 22, 2018 and February 14, 2020. The Amended Complaint alleges that the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended (the “Securities Act”), by negligently permitting false and misleading statements to be included in the registration statement and prospectus supplements issued in connection with its October 16, 2018 securities offering. The Amended Complaint also alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated by the SEC, by making false and misleading statements in the Company’s periodic reports filed between March 22, 2018 and February 14, 2020. Plaintiff seeks unspecified compensatory damages, including interest; rescission or a rescissory measure of damages; unspecified equitable or injunctive relief; and costs and expenses, including attorney’s fees and expert fees. On February 19, 2021, the Company moved to dismiss the Amended Complaint. Plaintiff submitted a brief in opposition to the motion to dismiss on April 23, 2021.
On May 20, 2021,
the parties reached a settlement in the amount of $
At September 30, 2022, in order to reflect
the amounts owed from our directors’ and officers’ insurance carrier and to the Plaintiffs, we have recorded to our
balance sheet a litigation settlement obligation of $
Shareholder Derivative Action
Four shareholder derivative actions, each based on substantially the same facts as those alleged in the class action discussed above, have been filed against certain of our current and former directors and officers.
The first action (captioned Moulton v. McCrosson, et.al., No. 20-cv-02092) was filed in the United States District Court for the Eastern District of New York. It purports to assert derivative claims against the individual defendants for violations of Section 10(b) and 21D of the Exchange Act, breach of fiduciary duty and unjust enrichment, and seeks to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct. The complaint also seeks declaratory, equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs. On October 26, 2020, the plaintiff filed an amended complaint. On January 27, 2021, the Court stayed the action pursuant to a joint stipulation filed by the parties.
The second action (captioned Woodyard v. McCrosson, et al., Index No. 613169/2020) was filed on September 17, 2020, in the Supreme Court of the State of New York (Suffolk County). It purports to assert derivative claims against the individual defendants for breach of fiduciary duty and unjust enrichment, and seeks to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct, along with declaratory, equitable, injunctive and monetary relief, as well as attorneys’ fees and other costs. On December 22, 2020, the parties filed a joint stipulation staying the action pending further developments in the class action.
The third action (captioned Berger v. McCrosson, et al., No. 1:20-cv-05454) was filed on November 10, 2020, in the United States District Court for the Eastern District of New York. The complaint, which is based in part on the shareholder’s inspection of certain corporate books and records, purports to assert derivative claims against the individual defendants for breach of fiduciary duty and unjust enrichment, and seeks to implement reforms to the Company’s corporate governance and internal procedures and to recover on behalf of the Company an unspecified amount of monetary damages. The complaint also seeks equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs.
On March 19, 2021, the parties to the Moulton and Berger actions filed a joint stipulation consolidating the actions (under the caption In re CPI Aerostructures Stockholder Derivative Litigation, No. 20-cv-02092) and staying the consolidated action pending further developments in the class action.
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The fourth action (captioned Wurst v. Bazaar, et al., Index No. 605244/2021) was filed on March 24, 2021, in the Supreme Court of the State of New York (Suffolk County). The complaint purports to assert derivative claims against the individual defendants for breach of fiduciary duty, unjust enrichment, and waste of corporate assets, and seeks to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct. The complaint also seeks declaratory, equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs. On April 12, 2021, the parties filed a joint stipulation staying the action pending further developments in the class action.
On June 13, 2022, the plaintiffs in the consolidated federal action informed the Court that the Company (as nominal defendant) and all individual defendants had reached an agreement in principle with all plaintiffs to settle the four shareholder derivative lawsuits described above. On June 16, 2022, the plaintiffs in the consolidated federal action filed an unopposed motion for preliminary approval of the settlement. On July 22, 2022, the Court referred the motion to the magistrate judge; the motion remains pending. The magistrate judge held a conference on September 9, 2022 in the consolidated federal action. The settlement is subject to Court approval and, if approved, will result in the dismissal of the shareholder derivative lawsuits. As part of the proposed settlement, the Company has agreed to undertake (or confirm that it has undertaken already) certain corporate governance reforms and to pay attorneys’ fees to plaintiffs’ counsel.
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 “SEC”), 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 Part I, Item 1A – Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Form 10-K”). We undertake no obligation to publicly update any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.
Business Operations
We are engaged in the contract production of structural aircraft parts for fixed wing aircraft and helicopters in both the defense and commercial markets. We also have a strong and growing presence in the aerosystems segment of the market, with our production of various reconnaissance pod structures and fuel panel systems. Within the global aerostructure and aerosystem supply chain, we are either a Tier 1 supplier to aircraft Original Equipment Manufacturers 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 U.S. Air Force. In conjunction with our assembly operations, we provide engineering, program management, supply chain management and kitting, and maintenance repair and overhaul services.
Impact of COVID-19
Our business and operations and the industries in which we operate have been impacted by public and private sector policies and initiatives in the U.S. to address the transmission of COVID-19, such as the imposition of travel restrictions and the adoption of remote work. The COVID-19 pandemic has contributed to a general slowdown in the global economy, has adversely impacted the businesses of certain of our customers and suppliers, and could adversely impact our results of operations and financial condition. In response to the COVID-19 impact on our business, we have been taking actions to preserve capital and protect the long-term needs of our businesses, including negotiating progress payments with our customers and reducing discretionary spending. For more information on the current and potential impact of the COVID-19 pandemic on our business, see Risk Factors included in Part I, Item 1A of our Form 10-K.
Recent Developments
NYSE American Trading Resumption and Delinquency Notice
On May 19, 2022, the NYSE American exchange (the “Exchange”) announced the suspension of trading of our common stock due to non-compliance with the SEC annual and quarterly report timely filing criteria provided for in Section 1007 of the Exchange’s Company Guide (the “Company Guide”) and announced that it was initiating proceedings to delist our common stock. On September 29, 2022, we became current with our SEC reports upon the filing of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2022. On September 30, 2022, we were informed by the Exchange that the Exchange terminated its proceeding to delist our common stock. Trading of our common stock recommenced on the Exchange on October 5, 2022, under the symbol “CVU.”
14
On September 17, 2021, we received notice from the Exchange indicating that the Company does not meet the continued listing standards set forth in Part 10 of the Company Guide. The Company is not in compliance with Section 1003(a)(i) of the Company Guide since it has stockholders’ equity of less than $2.0 million and losses from continuing operations and/or net losses in two of its three most recent fiscal years and Section 1003(a)(ii) of the Company Guide since it has stockholders’ equity of less than $4.0 million and losses from continuing operations and/or net losses in three of its four most recent fiscal years. The Company is therefore subject to the procedures and requirements of Section 1009 of the Company Guide and was required to, and timely did, submit a plan to the Exchange addressing how the Company intends to regain compliance with the continued listing standards by March 17, 2023 (the “Plan”). On November 19, 2021, we received notice from the Exchange that it accepted the Plan, subject to periodic review, including quarterly monitoring, for compliance with the Plan. If the Company (i) does not make progress consistent with the Plan during the plan period or (ii) is not in compliance with the continued listing standards by March 17, 2023, the Exchange staff may initiate delisting proceedings as appropriate.
Amendment and Waiver to our BankUnited Credit Facility
On April 12, 2022 the Company entered into the Ninth Amendment (defined below) to the Credit Agreement (defined below). Under the Ninth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to September 30, 2023, (b) providing for the repayment of an additional $750,000 of the principal balance of the Term Loan in three installments of $250,000 on September 30, 2022, December 31, 2022 and March 31, 2023 in addition to $200,000 regular monthly principal payments through December 31, 2022 and (c) increasing the interest on the Revolving Loan, Term Loan, and the Amendment Fee (defined below) provided for in the Eighth Amendment (defined below) as follows: through June 30, 2022, Prime Rate (as defined in the Credit Agreement) plus 2.5%; from July 1, 2022 through August 31, 2022, Prime Rate plus 5%; from September 1, 2022 through October 31, 2022, Prime Rate plus 6%; from November 1, 2022 through December 31, 2022, Prime Rate plus 7%; and from January 1, 2023 through September 30, 2023, Prime Rate plus 8%. Additionally, under the Ninth Amendment, the Credit Agreement financial covenants were amended. BankUnited also waived or consented to certain covenant non-compliance, waived temporarily or consented to, late delivery of certain financial information and waived permanently late delivery of certain pro-forma budget information.
On August 19, 2022, we entered into the Tenth Amendment (defined below). Under the Tenth Amendment, the parties amended the Credit Agreement by (a) increasing the maximum leverage ratio applicable for the fiscal quarter ending September 30, 2022 to 5.0, (b) waiving and/or consenting to the exclusion from the Company’s covenant compliance requirements for the fiscal quarters ended December 31, 2021, March 31, 2022, June 30, 2022 and September 30, 2022 up to (i) $566,024.81 of losses incurred and reserves taken under the Borrower’s welded product contracts, and (ii) $367,044.51 of reserves taken with respect to the Borrower’s welded product inventory, and (c) waiving and/or consenting to the exclusion from the Company’s covenant compliance requirements for the fiscal quarters ended March 31, 2022, June 30, 2022, September 30, 2022 and December 31, 2022 up to $795,997.06 of accrued severance and COBRA costs and employer taxes incurred by the Company during the fiscal quarter ending March 31, 2022. Additionally, under the Tenth Amendment, BankUnited waived or consented to late delivery of certain financial information required by the Credit Agreement.
On November 10, 2022, the Company entered into the Eleventh Amendment(defined below). Under the Eleventh Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to November 30, 2023 or with respect to the Term Loan, if earlier, until the outstanding principal balance is paid in full (the “Term Loan Maturity Date”), (b) providing for regular monthly principal payments of $200,000 on the Term Loan from January 1, 2023 through the Term Loan Maturity Date (in addition to the Company’s existing obligation to make two principal payments on the Term Loan of $250,000 on each of December 31, 2022 and March 31, 2023) and (c) decreasing the interest on the Revolving Loan, the Term Loan and the Amendment Fee to the Prime Rate plus 3.5%, effective as of November 1, 2022.
The Credit Agreement, as amended, requires us to maintain the following financial covenants (subject to the exclusions provided for in the previous paragraph): (a) minimum debt service coverage ratio of no less than 1.5 to 1.0 for the trailing four quarter period ended March 31, 2022, 0.95 to 1.0 for the trailing four quarter period ended June 30, 2022, and 1.5 to 1.0 for the trailing four quarter period ended September 30, 2022 and for the trailing four quarter periods ended thereafter; (b) maximum leverage ratio of no less than 7.30 to 1.0 for the trailing four quarter period ended March 31, 2022, 6.30 to 1.0 for the trailing four quarter period ended June 30, 2022, 5.0 to 1.0 for the trailing four quarter period ended September 30, 2022 and 4.0 to 1 for the trailing four quarter periods thereafter; (c) minimum net income after taxes as of the end of each fiscal quarter being no less than $1.00 commencing June 30, 2022; and (d) a minimum adjusted EBITDA at the end of each quarter of no less than $1.0 million (waived for the quarter ended March 31, 2022). The additional principal payments, increase in interest and the Amendment Fee provided for in the Eight Amendment and Ninth Amendment are excluded for purposes of calculating compliance with each of the financial covenants.
Settlement of Class Action
As previously disclosed, a consolidated class action lawsuit has been filed against the Company, Douglas McCrosson, the Company’s former Chief Executive Officer, Vincent Palazzolo, the Company’s former Chief Financial Officer, and the two underwriters of the Company’s October 16, 2018 offering of common stock, Canaccord Genuity LLC and B. Riley FBR. The Amended Complaint in the action asserts claims on behalf of two plaintiff classes: (i) purchasers of the Company’s common stock issued pursuant to and/or traceable to the Company’s offering conducted on or about October 16, 2018; and (ii) purchasers of the Company’s common stock between March 22, 2018 and February 14, 2020. The Amended Complaint alleges that the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act by negligently permitting false and misleading statements to be included in the registration statement and prospectus supplements issued in connection with its October 16, 2018 securities offering. The Amended Complaint also alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated by the SEC, by making false and misleading statements in the Company’s periodic reports filed between March 22, 2018 and February 14, 2020. Plaintiff seeks unspecified compensatory damages, including interest; rescission or a rescissory measure of damages; unspecified equitable or injunctive relief; and costs and expenses, including attorney’s fees and expert fees. On February 19, 2021, the Company moved to dismiss the Amended Complaint. Plaintiff submitted a brief in opposition to the motion to dismiss on April 23, 2021.
15
On May 20, 2021, the parties reached a settlement in the amount of $3,600,000, subject to court approval. On July 9, 2021, Plaintiff filed an unopposed motion for preliminary approval of the settlement. On November 10, 2021, a magistrate judge recommended that the Court grant the motion for preliminary approval in its entirety. The Court adopted the recommendation on May 27, 2022, and entered an order granting preliminary approval of the settlement on June 7, 2022. On August 5, 2022, the Plaintiff filed an unopposed motion for final approval. The magistrate judge held a hearing on September 9, 2022, and is now deciding whether to grant final approval of the settlement. After satisfaction of our $750,000 retention, the Settlement Amount will be covered and paid by our directors’ and officers’ insurance carrier. As of September 30, 2022, we have previously paid and accrued to our financial statements covered expenses totaling $750,000, and have therefore met our directors’ and officers’ retention requirement, which caps the Company’s expenses pertaining to the class action suit.
At September 30, 2022, in order to reflect the amounts owed from our directors’ and officers’ insurance carrier and to the Plaintiffs, we have recorded to our balance sheet a litigation settlement obligation of $3,600,000 and an insurance recovery receivable of $3,600,000 to reflect the liability owed by the Company to the Plaintiffs as well as the amount receivable owing from the Company’s insurance carrier to the Company with respect to the settlement obligation.
Backlog
We produce custom assemblies pursuant to long-term contracts and customer purchase orders. Funded backlog consists of aggregate funded values under such contracts and purchase orders, excluding the portion previously included in operating revenues pursuant to Accounting Standards Codification Topic 606 (“ASC 606”). Unfunded backlog is the estimated amount of future orders under the expected duration of the programs. 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 September 30, 2022 and December 31, 2021 was as follows:
| Backlog (Total) |
September
30, 2022 |
December
31, 2021 |
||||||
| Funded | $ | 118,135,000 | $ | 134,722,000 | ||||
| Unfunded | 382,757,000 | 366,997,000 | ||||||
| Total | $ | 500,892,000 | $ | 501,719,000 | ||||
Approximately 98% of the total amount of our backlog at September 30, 2022 was attributable to government contracts. Our backlog attributable to government contracts at September 30, 2022 and December 31, 2021 was as follows:
| Backlog
(Government) |
September
30, 2022 |
December
31, 2021 |
||||||
| Funded | $ | 115,358,000 | $ | 132,499,000 | ||||
| Unfunded | 375,342,000 | 358,133,000 | ||||||
| Total | $ | 490,700,000 | $ | 490,632,000 | ||||
Our backlog attributable to commercial contracts at September 30, 2022 and December 31, 2021 was as follows:
| Backlog (Commercial) |
September
30, 2022 |
December
31, 2021 |
||||||
| Funded | $ | 2,777,000 | $ | 2,223,000 | ||||
| Unfunded | 7,415,000 | 8,864,000 | ||||||
| Total | $ | 10,192,000 | $ | 11,087,000 | ||||
The total backlog at September 30, 2022 is primarily comprised of long-term programs with Raytheon (Next Generation Jammer – Mid Band Pod), Raytheon (Advanced Tactical Pod), USAF (T-38), Boeing (A-10 Main Landing Gear Pod), Lockheed Martin F-16 RI/DCC, Raytheon (B-52 Radar Rack), Collins Aerospace (MS-110 Pod), Sikorsky UH-60 Gunner Window, Stabilator MRO and IR Module Assembly (HIRSS) and Embraer Phenom 300 Inlets. Funded backlog is primarily from purchase orders under long-term contracts with USAF (T-38), Boeing (A-10 Main Landing Gear Pod), Raytheon (Next Generation Jammer – Mid Band Pod), Northrop Grumman (E-2D), Lockheed Martin F-16 Rudder Island and Sikorsky IR Module Assembly (HIRSS).
Critical Accounting Policies
We make a number of significant estimates, assumptions and judgments in the preparation of our financial statements. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K, for a discussion of our critical accounting policies. There have been no significant changes to the application of our critical accounting policies during the quarter ended September 30, 2022.
Results of Operations
Revenue
Total Revenue for the three months ended September 30, 2022 was $20,196,913 compared to $23,898,748 for the same period last year, a decrease of $3,701,835 or 15.5%. The decrease was primarily related to decreases in revenue from the Northrop Grumman E2D MYP II.
16
Total Revenue for the nine months ended September 30, 2022 was $59,257,416 compared to $77,018,684 for the same period last year, a decrease of $17,761,268 or 23.1%. The decrease was primarily related to decreases in the Raytheon NGJ MB Pods, Northrop Grumman E2D MYP II and Northrop Grumman E2D WOWP programs partly offset by increases in the Sikorsky HIRRS and the Raytheon NGJ Mid-band LRIP programs.
Revenue from government subcontracts was $17,213,747 for the three months ended September 30, 2022 compared to $21,873,152 for the three months ended September 30, 2021, a decrease of $4,659,405 or 21.3%. The decrease was primarily to decreases in the Northrop Grumman E2D MYP II, the Northrop Grumman E2D WOWP, the Sikorsky Weapons Pylon and the Raytheon Missile Wings programs partly offset by an increase in the Raytheon NGJ MB Pods program.
Revenue from government subcontracts was $49,930,578 for the nine months ended September 30, 2022 compared to $70,167,598 for the nine months ended September 30, 2021, a decrease of $20,237,020 or 28.8%. The decrease was primarily related to decreases in the Raytheon NGJ MB Pods, the Northrop Grumman E2D OWP MYP II and Northrop Grumman E2D WOWP, partly offset by increases in the Sikorsky HIRRS program.
Revenue from direct military contracts was $1,660,913 for the three months ended September 30, 2022 compared to $922,443 for the three months ended September 30, 2021, an increase of $738,470 or 80.1%. The increase is primarily related to an increase in the T-38 Pacer Classic program.
Revenue from direct military contracts was $5,077,459 for the nine months ended September 30, 2022 compared to $2,820,981 for the nine months ended September 30, 2021, an increase of $2,256,478 of 80.0%. The increase revenue is primarily related to an increase in the T-38 Pacer Classic program.
Revenue from commercial subcontracts was $1,322,253 for the three months ended September 30, 2022 compared to $1,103,153 for the three months ended September 30, 2021, an increase of $219,100 or 19.9%. The increase is primarily related to an increase in the Embraer Inlets program, partly offset by a decrease in the Gulfstream G650 program.
Revenue from commercial subcontracts was $4,249,379 for the nine months ended September 30, 2022 compared to $4,030,104 for the nine months ended September 30, 2021, an increase of $219,275 or 5.4%. The increase is primarily the result of an increase in the Embraer Inlets program, partly offset by decrease in the Gulfstream G650 program and the Sikorsky S-92 Kits program.
Cost of Sales
Total Cost of Sales for the three months ended September 30, 2022 and 2021 was $14,869,100 and $20,246,764, respectively, a decrease of $5,377,664 or 26.6%. This decrease is the result of the comparable decrease in revenue and the specific program related factors noted below.
Total Cost of Sales for the nine months ended September 30, 2022 and 2021 was $46,835,304 and $64,850,010, respectively, a decrease of $18,014,706 or 27.8%. This decrease is the result of the comparable decrease in revenue and the specific program related factors noted below.
The components of the cost of sales were as follows:
| Three months ended | Nine months ended | |||||||||||||||
| September
30, 2022 |
September
30, 2021 |
September
30, 2022 |
September
30, 2021 |
|||||||||||||
| Procurement | $ | 9,867,224 | $ | 14,373,181 | $ | 31,455,680 | $ | 47,709,154 | ||||||||
| Labor | 1,561,910 | 2,055,353 | 5,255,245 | 5,945,219 | ||||||||||||
| Factory overhead | 3,785,304 | 4,860,469 | 11,794,369 | 14,934,140 | ||||||||||||
| Other cost of sales | (345,338 | ) | (1,042,239 | ) | (1,669,990 | ) | (3,738,503 | ) | ||||||||
| Cost of sales | $ | 14,869,100 | $ | 20,246,764 | $ | 46,835,304 | $ | 64,850,010 | ||||||||
Procurement for the three months ended September 30, 2022 was $9,867,224 compared to $14,373,181 for the three months ended September 30, 2021, a decrease of $4,505,957 or 31.3%. This decrease is primarily related to decreases in the Northrop Grumman E2D MYP II, Raytheon NGJ MB Pods and Northrop Grumman E2D WOWP programs.
Procurement for the nine months ended September 30, 2022 was $31,455,680 compared to $47,709,154 for the nine months ended September 30, 2021, a decrease of $16,253,474 or 34.1%. This decrease is primarily related to decreases in the Northrop Grumman E2D MYP II, Raytheon NGJ MB Pods and Northrop Grumman E2D WOWP programs.
Labor costs for the three months ended September 30, 2022 were $1,561,910 compared to $2,055,353 for the three months ended September 30, 2021, a decrease of $493,443 or 24%. This decrease is primarily related to decreases in the Raytheon NGJ MB Pods program.
Labor costs for the nine months ended September 30, 2022 were $5,255,245 compared to $5,945,219 for the nine months ended September 30, 2021, a decrease of $689,974 or 11.6%. This decrease is primarily related to decreases in the Raytheon NGJ MB Pods program.
Factory overhead for the three months ended September 30, 2022 was $3,785,304 compared to $4,860,469 for the three months ended September 30, 2021, a decrease of $1,075,165 or 22.1%. This decrease is primarily the result of lower salary and benefit costs.
Factory overhead for the nine months ended September 30, 2022 was $11,794,369 compared to $14,934,140 for the nine months ended September 30, 2021, a decrease of $3,139,771 or 21.0%. This decrease is primarily the result of lower salary and benefit costs, partially offset by a $134,628 severance charge recorded in the first quarter of 2022.
17
Other cost of sales relates to items that can increase or decrease cost of sales such as changes in inventory levels, changes in inventory valuation, changes to inventory reserves, changes in loss contract provisions, absorption variances and direct charges to cost of sales. Other costs (credit), net for the three months ended September 30, 2022 were $(345,338) compared to $(1,042,239) for the three months ended September 30, 2021, a decrease of the credit of $696,901, or 66.9%. The change in the three months ended September 30, 2022 is primarily due to changes in inventory levels, reductions in the inventory reserves and reductions in the loss reserve.
Other costs (credit), net for the nine months ended September 30, 2022 were $(1,669,990) compared to $(3,738,503) for the nine months ended September 30, 2021, a decrease of the credit of $2,068,513, or 55.3%. The change in the nine months ended September 30, 2022 is primarily due to changes in inventory levels, reductions in the inventory reserves and reductions in the loss reserve.
Gross Profit
Gross profit for the three months ended September 30, 2022 was $5,327,813 compared to $3,651,984 for the three months ended September 30, 2021, an increase of $1,675,829, or 45.9% for the reasons noted above. Gross profit percentage (“gross margin”) for the three months ended September 30, 2022 was 26.4% compared to 15.3% for three months ended September 30, 2021. The increase in gross margin was primarily due to a favorable job mix and operating efficiencies during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.
Gross profit for the nine months ended September 30, 2022 was $12,422,112 compared to $12,168,674 for the nine months ended September 30, 2021, an increase of $253,438, or 2.1% for the reasons noted above. Gross profit percentage (“gross margin”) for the nine months ended September 30, 2022 was 21.0% compared to 15.8% for the nine months ended September 30, 2021. The increase in gross margin was primarily due to a favorable job mix and operating efficiencies during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.
Favorable (Unfavorable) Adjustments to Gross Profit
During the nine months ended September 30, 2022 and 2021, circumstances required that we make changes in estimates to various contracts. Such changes in estimates resulted in changes in total gross profit as follows:
| Nine months ended | ||||||||
| September
30, 2022 |
September
30, 2021 |
|||||||
| Favorable adjustments | $ | 4,710,232 | $ | 3,116,037 | ||||
| Unfavorable adjustments | (2,646,510 | ) | (3,366,056 | ) | ||||
| Net adjustments | $ | 2,063,721 | $ | (250,019 | ) | |||
For the nine months ended September 30, 2022, we evaluated all contractual data and revised estimated gross profit percentages accordingly. We had 29 contracts with favorable adjustments and 24 contracts with unfavorable adjustments, all due to changes in estimates.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended September 30, 2022 were $2,744,265 compared to $2,765,849 for the three months ended September 30, 2021, a decrease of $21,584 or 0.8%.
Selling, general and administrative expenses for the nine months ended September 30, 2022 were $8,579,314 compared to $8,834,343 for the nine months ended September 30, 2022, a decrease of $255,029 or 2.9%. This decrease was primarily driven by lower legal fees, partly offset by increases in insurance expenses and higher salaries expense as a result of a $637,206 severance charge recorded in the first quarter of 2022.
Income Before Provision for Income Taxes
Income before provision for income taxes for the three months ended September 30, 2022 was $1,862,502 compared to $5,428,629 for the same period last year, a decrease of $3,566,127 or 65.7% for the reasons noted above.
Income before provision for income taxes for the nine months ended September 30, 2022 was $2,354,707 compared to $7,288,651 for the same period last year, a decrease of $4,933,944 or 67.7% for the reasons noted above.
Provision for Income Taxes
Provision for income taxes was $3,750 for the three months ended September 30, 2022, compared to a provision for income taxes of $3,374 for the three months ended September 30, 2021, an increase of $376 or 11.1%.
Provision for income taxes was $11,250 the nine months ended September 30, 2022, compared to a provision for income taxes of $7,702 for the nine months ended September 30, 2021, an increase of $3,548 or 46.1%.
Net Income
Net income for the three months ended September 30, 2022 was $1,858,752 or $0.15 per basic share, compared to net income of $5,425,255 or $0.44 per basic share for the same period last year. Diluted income per share was $0.15 for the three months ended September 30, 2022 calculated utilizing 12,349,283 weighted average shares outstanding versus diluted income per share of $0.44 for the same period last year calculated utilizing 12,320,588 weighted average shares outstanding.
Net income for the nine months ended September 30, 2022 was $2,343,457 or $0.19 per basic share, compared to net income of $7,820,949 or $0.60 per basic share for the same period last year. Diluted income per share was $0.19 for the nine months ended September 30, 2022 calculated utilizing 12,410,491 weighted average shares outstanding versus diluted income per share of $0.60 for the same period last year calculated utilizing 12,187,714 weighted average shares outstanding.
Excluding the $771,834 severance charge recorded in the first quarter of 2022 as referred to above under Cost of Sales and Selling, General and Administrative Expenses, our net income for the nine months ended September 30, 2022 was $3,115,291, a decrease over the prior year of $4,705,658 or 60.2%. Excluding the aforementioned severance charge, our basic and diluted earnings per share was $0.25 for the nine months ended September 30, 2022 as compared to the $0.60 income per basic and diluted share for the nine months ended September 30, 2021.
18
Liquidity and Capital Resources
General
At September 30, 2022, we had working capital of $13,618,489 compared to working capital of $12,175,776 at December 31, 2021, an increase of $1,442,713 or 11.8%.
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.
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.
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 and results of operations.
We continue to work to obtain better payment terms with our customers, including accelerated progress payment arrangements, as well as exploring alternate funding sources.
At September 30, 2022, we had a cash balance of $4,627,379 compared to $6,308,866 at December 31, 2021, a decrease of $1,681,487, or 26.7%. The decrease was comprised of $2,463,625 in debt paydowns and $25,317 in purchase of property and equipment, partly offset by cash provided by operating activities of $807,455.
Bank Credit Facilities
On March 24, 2016, the Company entered into an Amended and Restated Credit Agreement with the lenders named therein and BankUnited N.A. as Sole Arranger, Agent and Collateral Agent (as amended from time to time, the “Credit Agreement” or the “BankUnited Facility”). The Credit Agreement originally provided 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 as defined in the Credit Agreement.
On May 11, 2021, the Company entered into a Waiver and Seventh Amendment to the Credit Agreement (the “Seventh Amendment”). Under the Seventh Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the $24 million Revolving Loan and $6.36 million Term Loan to July 31, 2022, and (b) amending the leverage ratio covenant for the fiscal quarters ending on and after March 31, 2021, to 4.0 to 1.0, determined at the end of each fiscal quarter for the trailing four-quarter period then ended (or, in the case of the fiscal quarter ended March 31, 2021, determined on an annualized basis for the three-quarter period then ended). Additionally, under the Seventh Amendment, BankUnited waived late delivery of certain financial information.
On October 28, 2021, the Company entered into a Waiver and Eighth Amendment to the Credit Agreement (the “Eighth Amendment”). Under the Eighth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to December 31, 2022, (b) reducing the aggregate revolving line of credit from $24 million to $21 million while eliminating the requirement to maintain a minimum $3.0 million in a combination of line of credit availability and unrestricted cash, (c) providing for the repayment of an additional $750,000 of the principal balance of the term loan in three installments of $250,000 on November 30, 2021, December 31, 2021 and March 31, 2022 in addition to $200,000 regular monthly principal payments through maturity, (d) amending the minimum debt service coverage ratio covenant for the fiscal quarters ending on and after June 30, 2021 to provide for a ratio of 1.5 to 1.0, and (e) amending the maximum leverage ratio covenant as follows: for the fiscal quarter ending on March 31, 2021 - 5.0 to 1.0; for the fiscal quarter ending June 30, 2021 - 4.75 to 1.0; for the fiscal quarter ending September 30, 2021 - 4.25 to 1.0 and for the fiscal quarter ended December 31, 2021 and thereafter - 4.0 to 1.0, determined at the end of each fiscal quarter for the trailing four-quarter period then ended (or, in the case of the fiscal quarter ended March 31, 2021, determined on an annualized basis for the three-quarter period then ended). Additionally, under the Eighth Amendment, BankUnited waived certain covenant non-compliance and waived temporarily, late delivery of certain financial information. In connection with the Eighth Amendment, a $250,000 amendment fee (the “Amendment Fee”) was earned by the lenders on December 31, 2021 which the Company elected to pay in kind and accrue and capitalize rather than pay in cash. As at December 31, 2021, the Amendment Fee payable was posted by BankUnited to the Revolving Loan and on February 11, 2022, in agreement with the Company, the Amendment Fee was reclassified by BankUnited to the Term Loan. The Company has recorded this payable to its financial statements accordingly.
On April 12, 2022 the Company entered into a Consent, Waiver and Ninth Amendment (the “Ninth Amendment”) to the Credit Agreement. Under the Ninth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to September 30, 2023, (b) providing for the repayment of an additional $750,000 of the principal balance of the Term Loan in three installments of $250,000 on September 30, 2022, December 31, 2022 and March 31, 2023 in addition to $200,000 regular monthly principal payments through December 31, 2022 and (c) increasing the interest on the Revolving Loan, Term Loan, and the Amendment Fee as follows: through June 30, 2022, Prime Rate (as defined in the Credit Agreement) plus 2.5%; from July 1, 2022 through August 31, 2022, Prime Rate plus 5%; from September 1, 2022 through October 31, 2022, Prime Rate plus 6%; from November 1, 2022 through December 31, 2022, Prime Rate plus 7%; and from January 1, 2023 through September 30, 2023, Prime Rate plus 8%. Additionally, under the Ninth Amendment, the Credit Agreement financial covenants were amended. BankUnited also waived or consented to certain covenant non-compliance, waived temporarily or consented to, late delivery of certain financial information and waived permanently late delivery of certain pro-forma budget information.
On August 19, 2022, we entered into a Consent, Waiver and Tenth Amendment to the Credit Agreement (the “Tenth Amendment”). Under the Tenth Amendment, the parties amended the Credit Agreement by (a) increasing the maximum leverage ratio applicable for the fiscal quarter ending September 30, 2022 to 5.0, (b) waiving and/or consenting to the exclusion from the Company’s covenant compliance requirements for the fiscal quarters ended December 31, 2021, March 31, 2022, June 30, 2022 and September 30, 2022 up to (i) $566,024.81 of losses incurred and reserves taken under the Borrower’s welded product contracts, and (ii) $367,044.51 of reserves taken with respect to the Borrower’s welded product inventory, and (c) waiving and/or consenting to the exclusion from the Company’s covenant compliance requirements for the fiscal quarters ended March 31, 2022, June 30, 2022, September 30, 2022 and December 31, 2022 up to $795,997.06 of accrued severance and COBRA costs and employer taxes incurred by the Company during the fiscal quarter ending March 31, 2022. Additionally, under the Tenth Amendment, BankUnited waived or consented to late delivery of certain financial information required by the Credit Agreement.
On November 10, 2022, the Company entered into an Eleventh Amendment to the Credit Agreement (the “Eleventh Amendment”). Under the Eleventh Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to November 30, 2023 or with respect to the Term Loan, if earlier, until the outstanding principal balance is paid in full (the “Term Loan Maturity Date”), (b) providing for regular monthly principal payments of $200,000 on the Term Loan from January 1, 2023 through the Term Loan Maturity Date (in addition to the Company’s existing obligation to make two principal payments on the term loan of $250,000 on each of December 31, 2022 and March 31, 2023) and (c) decreasing the interest on the Revolving Loan, the Term Loan and the Amendment Fee to the Prime Rate plus 3.5%, effective as of November 1, 2022.
19
The Credit Agreement, as amended, requires us to maintain the following financial covenants (subject to the exclusions provided for in the previous paragraph): (a) minimum debt service coverage ratio of no less than 1.5 to 1.0 for the trailing four quarter period ended March 31, 2022, 0.95 to 1.0 for the trailing four quarter period ended June 30, 2022, and 1.5 to 1.0 for the trailing four quarter period ended September 30, 2022 and for the trailing four quarter periods ended thereafter; (b) maximum leverage ratio of no less than 7.30 to 1.0 for the trailing four quarter period ended March 31, 2022, 6.30 to 1.0 for the trailing four quarter period ended June 30, 2022, 5.0 to 1.0 for the trailing four quarter period ended September 30, 2022 and 4.0 to 1 for the trailing four quarter periods thereafter; (c) minimum net income after taxes as of the end of each fiscal quarter being no less than $1.00 commencing June 30, 2022; and (d) a minimum adjusted EBITDA at the end of each quarter of no less than $1.0 million (waived for the quarter ended March 31, 2022). The additional principal payments, increase in interest and the Amendment Fee provided for in the Eight Amendment and Ninth Amendment are excluded for purposes of calculating compliance with each of the financial covenants.
The BankUnited Facility is secured by all of the Company’s assets and both the Revolving Loan and Term Loan bore interest at the rate of 12.25% (the Prime Rate of 6.25% + 6.00%) as of September 30, 2022.
As of September 30, 2022, the Company had $21,000,000 outstanding under the Revolving Loan as compared to $21,250,000 as of December 31, 2021.
The Term Loan, as amended by the Eleventh Amendment, had an aggregate principal amount of $2,433,333, payable in monthly installments, as defined in the agreement, as of September 30, 2022 as compared to an aggregate principal amount outstanding as of December 31, 2021 of $4,483,333.
There is currently no availability for borrowings under the Revolving Loan and the Company finances its operations from internally generated cash flow.
PPP Loan
On April 10, 2020, we entered into the PPP Loan with Dime as the Lender, in an aggregate principal amount of $4,795,000, pursuant to the Paycheck Protection Program under the CARES Act. The PPP Loan was evidenced by a promissory note (“Note”). Subject to the terms of the Note, the PPP Loan bore interest at a fixed rate of one percent (1%) per annum, with the first six months of interest deferred, had an initial term of two years, and was unsecured and guaranteed by the SBA. The Note provided for customary events of default including, among other things, cross-defaults on any other loan with the Lender. The PPP Loan could have been accelerated upon the occurrence of an event of default.
On November 2, 2020, the Company applied to the Lender for full forgiveness of the PPP Loan as calculated in accordance with the terms of the CARES Act, as modified by the Paycheck Protection Flexibility Act. On July 13, 2021, the Company received notification through Dime that the PPP Loan and accrued interest thereon had been fully forgiven by the SBA and that the forgiveness payment date was July 1, 2021. The forgiveness of the PPP Loan was recognized during the Company’s third fiscal quarter ending September 30, 2021.
Liquidity
We believe that our existing resources as of September 30, 2022 will be sufficient to meet our current working capital needs for at least the next 12 months from the date of issuance of our consolidated financial statements. However, our working capital requirements can vary significantly, depending in part on the timing of new program awards and the payment terms with our customers and suppliers. If our working capital needs exceed our cash flows from operations, we would look to our cash balances and availability for borrowings under our borrowing arrangement to satisfy those needs, as well as potential sources of additional capital, which may not be available on satisfactory terms and in adequate amounts, if at all.
Contractual Obligations
For information concerning our contractual obligations, see Contractual Obligations under Item 7 of 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, 2021.
| Item 3 – Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
| Item 4 – Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were not effective due to the material weaknesses described below.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that:
| ● | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
20
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on criteria established in Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In connection with this evaluation of the Company’s internal control over financial reporting, management identified deficiencies that constituted a material weakness in our internal control over financial reporting as of December 31, 2021. For more information on these deficiencies, see Item 9A. Controls and Procedures, included in our Annual Report on Form 10-K.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
During 2021, the Company did, and during 2022, intends to continue to implement new controls designed to remediate the aforementioned 2021 material weaknesses.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II - Other Information
| Item 1 – Legal Proceedings |
See Footnote 12 – Commitments and Contingencies.
| Item 1A – Risk Factors |
“Item 1A. Risk Factors” of our Form 10-K for the year ended December 31, 2021, includes a discussion of significant factors known to us that could materially adversely affect our business, financial condition, or results of operations.
| Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Item 3 – Defaults Upon Senior Securities |
None.
| Item 4 – Mine Safety Disclosures |
Not applicable.
| Item 5 – Other Information |
None.
| Item 6 – Exhibits |
Exhibit No. |
Description |
| 10.1 | Consent, Waiver and Tenth Amendment to Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 19, 2022). |
| 10.2 | Eleventh Amendment to Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 10, 2022). |
| 31.1* | Section 302 Certification by Chief Executive Officer and President |
| 31.2* | Section 302 Certification by Chief Financial Officer (Principal Accounting Officer) |
| 32.1** | Section 906 Certification by Chief Executive Officer and Chief Financial Officer |
| 101.INS* | Inline XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| 104* | Cover Page Interactive Data File. The cover page XBRL tags are embedded within the Inline XBRL document. |
* Filed herewith
** Furnished herewith
Attached as Exhibit 101 to this report are the following formatted in Inline XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2022 and 2021 (ii) Condensed Consolidated Balance Sheet as of September 30, 2022 and December 31, 2021, (iii) Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2022 and 2021, (iv) Condensed Consolidated Statement of Changes in Shareholders’ Deficit for the three and nine months ended September 30, 2022 and 2021 and (v) Notes to Condensed Consolidated Financial Statements.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CPI AEROSTRUCTURES, INC. | ||
| Dated: November 21, 2022 | By. | /s/ Dorith Hakim |
| Dorith Hakim | ||
Chief Executive Officer and President (Principal Executive Officer) | ||
| Dated: November 21, 2022 | By. | /s/ Andrew L. Davis |
| Andrew L. Davis | ||
Chief Financial Officer (Principal Financial and Accounting Officer) | ||
EXHIBIT 31.1
CERTIFICATION
PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
I, Dorith Hakim, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of CPI Aerostructures, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and to the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: November 21, 2022 | CPI AEROSTRUCTURES, INC. | |
| (Registrant) | ||
| By: | /s/ Dorith Hakim | |
| Dorith Hakim | ||
Chief Executive Officer, President and Director (Principal Executive Officer) | ||
EXHIBIT 31.2
CERTIFICATION
PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
I, Andrew L. Davis, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of CPI Aerostructures, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and to the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: November 21, 2022 | CPI AEROSTRUCTURES, INC. | |
| (Registrant) | ||
| By: | /s/ Andrew L. Davis | |
| Andrew L. Davis | ||
Chief Financial Officer and Secretary (Principal financial and accounting officer) | ||
EXHIBIT 32.1
CERTIFICATION
PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CPI Aerostructures, Inc. (the “Company”) on Form 10-Q for the quarter ended September 31, 2022 as filed with the Securities and Exchange Commission (the “Report”), the undersigned, in the capacities and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. |
| Dated: November 21, 2022 | CPI AEROSTRUCTURES, INC. | |
| (Registrant) | ||
| By: | /s/ Dorith Hakim | |
| Dorith Hakim | ||
| Chief Executive Officer, President and Director | ||
| (Principal executive officer) | ||
| Dated: November 21, 2022 | CPI AEROSTRUCTURES, INC. | |
| (Registrant) | ||
| By: | /s/ Andrew L. Davis | |
| Andrew L. Davis | ||
| Chief Financial Officer and Secretary | ||
| (Principal financial and accounting officer) | ||
CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - $ / shares |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Common stock, par value (in dollars per share) | $ 0.001 | $ 0.001 |
| Common stock, authorized | 50,000,000 | 50,000,000 |
| Common stock, issued | 12,325,360 | 12,335,683 |
| Common stock, outstanding | 12,325,360 | 12,335,683 |
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Income Statement [Abstract] | ||||
| Revenue | $ 20,196,913 | $ 23,898,748 | $ 59,257,416 | $ 77,018,684 |
| Cost of sales | 14,869,100 | 20,246,764 | 46,835,304 | 64,850,010 |
| Gross profit | 5,327,813 | 3,651,984 | 12,422,112 | 12,168,674 |
| Selling, general and administrative expenses | 2,744,265 | 2,765,849 | 8,579,314 | 8,834,343 |
| Income from operations | 2,583,548 | 886,135 | 3,842,798 | 3,334,331 |
| Other income | 4,795,000 | 4,795,000 | ||
| Interest expense | (721,046) | (252,506) | (1,488,091) | (840,680) |
| Income before provision for income taxes | 1,862,502 | 5,428,629 | 2,354,707 | 7,288,651 |
| Provision for income taxes | 3,750 | 3,374 | 11,250 | 7,702 |
| Net income | $ 1,858,752 | $ 5,425,255 | $ 2,343,457 | $ 7,280,949 |
| Income per common share – basic | $ 0.15 | $ 0.44 | $ 0.19 | $ 0.60 |
| Income per common share – diluted | $ 0.15 | $ 0.44 | $ 0.19 | $ 0.60 |
| Shares used in computing loss per common share: | ||||
| Basic | 12,301,752 | 12,286,712 | 12,362,960 | 12,153,838 |
| Diluted | 12,349,283 | 12,320,588 | 12,410,491 | 12,187,714 |
INTERIM FINANCIAL STATEMENTS |
9 Months Ended | ||
|---|---|---|---|
Sep. 30, 2022 | |||
| Accounting Policies [Abstract] | |||
| INTERIM FINANCIAL STATEMENTS |
The Company consists of CPI Aerostructures, Inc. (“CPI Aero”), Welding Metallurgy, Inc. (“WMI”), a wholly owned subsidiary of CPI Aero, and Compac Development Corporation, 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. The Company has determined that it has a single operating and reportable segment.
The consolidated financial statements of the Company as of September 30, 2022 and for the nine months ended September 30, 2022 and 2021 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and notes normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations. The consolidated balance sheet at December 31, 2021 has been derived from audited consolidated financial statements, but does not include all of the information and notes required by U.S. GAAP. The Company believes that the disclosures are adequate to make the information presented not misleading.
All adjustments that, in the opinion of the 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, 2021 (the “Form 10-K”). 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 September 30, 2022, the Company had $4,576,645 of uninsured balances. The Company limits its credit risk by selecting financial institutions considered to be highly creditworthy.
Certain balances have been reclassified to conform to presentation requirements, including consistent presentation of the components of inventory (Note 4).
The Company currently has a shareholders’ deficit and has experienced losses from operations and negative cash flows from operations in prior periods that collectively represent significant risk to the Company to continue to operate as a going concern. To address this risk, the Company has (i) negotiated and executed a further amendment to its Amended and Restated Credit Agreement with the lenders named therein and BankUnited N.A. as Sole Arranger, Agent and Collateral Agent (as amended from time to time, the “Credit Agreement” or the “BankUnited Facility”), effective November 10, 2022 which extended the maturity date of the credit facility to November 30, 2023, (ii) obtained and is seeking additional progress payment and advance payment customer contract funding provisions, (iii) maintained procedures to reduce investments in inventory and contract assets and (iv) remained focused on its military segment and maintained a strong (approximately $118 million) backlog of funded orders, 98% of which are for military programs. Based upon management’s assessment of the identified significant risks and the execution of the plans described above, management believes that substantial risk does not exist as to whether the Company’s liquidity and debt resources will be sufficient to meet its obligations as a going concern through a year and a day from the date of this filing.
Our business and operations and the industries in which we operate have been impacted by public and private sector policies and initiatives in the U.S. to address the transmission of COVID-19, such as the imposition of travel restrictions and the adoption of remote work. The COVID-19 pandemic has contributed to a general slowdown in the global economy, has adversely impacted the businesses of certain of our customers and suppliers, and could adversely impact our results of operations and financial condition. In response to the COVID-19 impact on our business, we have been taking actions to preserve capital and protect the long-term needs of our businesses, including negotiating progress payments with our customers and reducing discretionary spending. For more information on the current and potential impact of the COVID-19 pandemic on our business, see Risk Factors included in Part I, Item 1A of our Form 10-K. |
REVENUE RECOGNITION |
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| Revenue from Contract with Customer [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| REVENUE RECOGNITION |
The Company recognizes revenue when it transfers control of a promised good or service to a customer in an amount that reflects the consideration it expects to be entitled to in exchange for the good or service. The majority of the Company’s performance obligations are satisfied over time as the Company (i) sells products with no alternative use to the Company and (ii) has an enforceable right to recover costs incurred plus a reasonable profit margin for work completed to date. Under the over time revenue recognition model, revenue and gross profit are recognized over the contract period as work is performed based on actual costs incurred and an estimate of costs to complete and resulting total estimated costs at completion.
The Company also has contracts that are considered point in time. Under the point in time revenue recognition model, revenue is recognized when control of the components has transferred to the customer; in most cases this will be based on shipping terms.
Contracts with Customers and Performance Obligations
The majority of the Company’s revenues are from long-term contracts with the U.S. government, military and commercial contractors. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. For the Company, the contract under Accounting Standards Codification Topic 606 (“ASC 606”) is typically established upon execution of a purchase order either in accordance with a long-term customer contract or on a standalone basis.
To determine the proper revenue recognition for our contracts, we must evaluate whether two or more contracts should be combined and accounted for as a single contract, and whether the combined or single contract should be accounted for as one performance obligation or more than one performance obligation. This evaluation requires significant judgment, and the decision to combine a group of contracts or to separate a contract into multiple performance obligations could change the amount of revenue and profit recorded in a period. A performance obligation is a promise within a contract to transfer a distinct good or service to the customer in exchange for payment and is the unit of account for recognizing revenue. The Company’s performance obligations in its contracts with customers are typically the sale of each individual product contemplated in the contract or a single performance obligation representing a series of products when the contract contains multiple products that are substantially the same. The Company has elected to account for shipping performed after control over a product has transferred to a customer as fulfillment activities. When revenue is recognized in advance of incurring shipping costs, the costs related to the shipping are accrued. Shipping costs are included in costs of sales. The Company provides warranties on many of its products; however, since customers cannot purchase such warranties separately and they do not provide services beyond standard assurances, warranties are not separate performance obligations.
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when or as the performance obligation is satisfied. For contracts with more than one performance obligation, the Company allocates the transaction price to each performance obligation based on its estimated standalone selling price. When standalone selling prices are not available, the transaction price is allocated using an expected cost plus margin approach as pricing for such contracts is typically negotiated on the basis of cost.
The contracts with the U.S. government and military contractors are subject to the Federal Acquisition Regulation, 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 contracts is based on the specific negotiations with each customer and any taxes imposed by governmental authorities are excluded from revenue. The transaction price is primarily comprised of fixed consideration as the customer typically pays a fixed fee for each product sold. The Company does not adjust the amount of revenue to be recognized under a customer contract for the effects of the time value of money when the timing difference between receipt of payment and transferring the good or service is less than one year.
The majority of the Company’s performance obligations are satisfied over time as the Company (i) sells products with no alternative use to the Company and (ii) has an enforceable right to recover costs incurred plus a reasonable profit margin for work completed to date. The Company uses the cost-to-cost input method to measure progress for its performance obligations because it best depicts the transfer of control to the customer which occurs as the Company incurs costs on its contracts.
The Company generally utilizes the portfolio approach to estimate the amount of revenue to recognize for its contracts and groups contracts together that have similar characteristics. Significant judgment is used to determine which contracts are grouped together to form a portfolio. The portfolio approach is utilized only when the result of the accounting is not expected to be materially different than if applied to individual contracts.
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. The effect of a contract modification on the transaction price, and the measure of progress for the performance obligation to which it relates, are recognized prospectively when the remaining goods or services are distinct and on a cumulative catch-up basis when the remaining goods or services are not distinct.
The Company also has contracts that are considered point in time. Under the point in time revenue recognition model, revenue is recognized when control of the components has transferred to the customer; in most cases this will be based on shipping terms.
Contract Estimates
Certain contracts contain forms of variable consideration, such as price discounts and performance penalties. The Company generally estimates variable consideration using the most likely amount based on an assessment of all available information (i.e., historical experience, current and forecasted performance) and only to the extent it is probable that a significant reversal of revenue recognized will not occur when the uncertainty is resolved.
In applying the cost-to-cost input method, the Company compares the actual costs incurred relative to the total estimated costs expected at completion to determine its progress towards satisfying its performance obligation and to calculate the corresponding amount of revenue to recognize. For any costs incurred that do not depict the Company’s performance in transferring control of goods or services to the customer, the Company excludes such costs from its input method measure of progress as the amounts are not reflected in the price of the contract. Costs that are inputs to the satisfaction of a performance obligation include labor, materials and subcontractors’ costs, other direct costs and an allocation of indirect costs.
Changes to the original estimates may be required during the life of the contract. Estimates are reviewed quarterly and the effect of any change in the estimated gross margin percentage for a contract is reflected in revenue in the period the change becomes known. ASC 606 involves considerable use of estimates and judgment in determining revenues, costs and profits and in assigning the amounts to accounting periods. For instance, management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from the customer, and overhead cost rates, among other variables. The Company continually evaluates all of the factors 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 which will affect estimates at completion, the Company is required to adjust revenue in the period the change is determined.
When changes are required for the estimated total revenue on a contract, these changes are recognized on a cumulative catch-up basis in the current period. A significant change in one or more estimates could affect the profitability of one or more of our performance obligations. If estimates of total costs to be incurred exceed estimates of total consideration the Company expects to receive, a provision for the remaining loss on the contract is recorded in the period in which the loss becomes evident.
Capitalized Contract Acquisition Costs and Fulfillment Costs
Contract acquisition costs are those incremental costs that the Company incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. The Company does not typically incur contract acquisition costs or contract fulfillment costs that are subject to capitalization in accordance with the guidance in Accounting Standards Codification Subtopic 340-40, “Other Assets and Deferred Costs—Contracts with Customers.”
Disaggregation of Revenue
The following tables present the Company’s revenue disaggregated by contract type and revenue recognition method:
Transaction Price Allocated to Remaining Performance Obligations
Our backlog represents the estimated transaction prices on performance obligations to our customers for which work remains to be performed. Backlog is converted into revenue in future periods as work is performed. As of September 30, 2022, the aggregate amount of transaction price allocated to the remaining performance obligations was approximately $118 million. This represents the amount of revenue the Company expects to recognize in the future on contracts with unsatisfied or partially satisfied performance obligations as of September 30, 2022. The Company estimates that it will recognize approximately 21% of this amount in fiscal year 2022 and the remainder by 2030. |
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CONTRACT ASSETS AND CONTRACT LIABILITIES |
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| CONTRACT ASSETS AND CONTRACT LIABILITIES |
Contract assets represent revenue recognized on contracts in excess of amounts invoiced to the customers and the where the Company’s right to consideration is conditional on something other than the passage of time. Amounts may not exceed their net realizable value. Our government contracts therefore typically result in revenue recognized in excess of billings, which we present as contract assets. Contract assets are classified as current. The Company’s contract liabilities represent customer payments received or due from the customer in excess of revenue recognized. Contract liabilities are classified as current.
Revenue recognized for the periods ended September 30, 2022 and 2021 that was included in the contract liabilities balance as of January 1, 2022 and 2021, respectively, was approximately $3.6 million and $1.6 million, respectively. |
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INVENTORY |
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| Inventory Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INVENTORY |
The components of inventory consisted of the following:
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STOCK-BASED COMPENSATION |
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| Share-Based Payment Arrangement [Abstract] | |||
| 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. The Company recognized a net total of $ and $ of stock-based compensation expense for the three months ended September 30, 2022 and 2021, respectively, and a net total of $ and $ of stock- based compensation expense for the nine months ended September 30, 2022 and 2021, respectively.
During the three and nine months ended September 30, 2022, the Company granted and restricted stock units (“RSUs”), respectively, to its board of directors as partial compensation for the 2022 year, and during the three and nine months ended September 30, 2021, the Company granted and RSUs, respectively, to its board of directors as partial compensation for the 2021 year. RSUs vest quarterly on a straight-line basis over a one-year period. For the three and nine months ended September 30, 2022, $ and $, respectively, of non-cash compensation expense related to the RSU grants to the board of directors are included selling, general and administrative expenses, and for the three and nine months ended September 30, 2021, $ and $, respectively, of non-cash compensation expense related to the RSU grants to the board of directors are included in selling, general and administrative expenses.
During the three and nine months ended September 30, 2022, the Company granted and shares of common stock (“Restricted Stock”) to employees. In the event that this employee’s employment is voluntarily terminated prior to certain dates, portions of the shares may be forfeited. For the three and nine months ended September 30, 2022, $ and $, respectively, of compensation expense are included in selling, general and administrative expenses, which includes forfeitures during the three months ended March 31, 2022 of shares totaling of credit. For the three and nine months ended September 30, 2022, $ and $, respectively, of compensation expense are included in cost of sales for shares of common stock granted to employees between 2018 and 2022. For the three and nine months ended September 30, 2021, $ and $, respectively, of compensation expense are included in selling, general and administrative expenses and $ and $, respectively, of compensation expense are included in cost of sales for shares of common stock granted to employees between 2016 and 2020. During the three and nine months ended September 30, 2021, shares were forfeited. |
FAIR VALUE |
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| Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| FAIR VALUE |
Fair Value
At September 30, 2022 and December 31, 2021, the fair values of cash, accounts receivable and accounts payable approximated their carrying values because of the short-term nature of these instruments.
We estimated the fair value of debt using market quotes and calculations based on market rates. |
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INCOME PER COMMON SHARE |
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| Earnings Per Share [Abstract] | |||
| INCOME PER COMMON SHARE |
Basic and diluted income per common share for the three and six months ended September 30, 2022 and 2021 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 were used in the calculation of diluted income per common share in the three and nine months ended September 30, 2022. Incremental shares of were used in the calculation of diluted income per common share in the three and nine months ended September 30, 2021. |
DEBT |
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| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||
| DEBT |
Credit Facility
On March 24, 2016, the Company entered into the Credit Agreement. The BankUnited Facility originally provided 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 Credit Agreement.
On May 11, 2021, the Company entered into the Seventh Amendment to the Credit Agreement (the “Seventh Amendment”). Under the Seventh Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to July 31, 2022, and (b) amending the leverage ratio covenant. Additionally, under the Seventh Amendment, BankUnited waived late delivery of certain financial information.
On October 28, 2021, the Company entered into a Waiver and Eighth Amendment to the Credit Agreement (the “Eighth Amendment”). Under the Eighth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to December 31, 2022, (b) reducing the availability under the Revolving Loan from $24 million to $21 million while eliminating the requirement to maintain a minimum $3.0 million in a combination of Revolving Loan availability and unrestricted cash, (c) providing for the repayment of an additional $750,000 of the principal balance of the Term Loan in three installments of $250,000 on November 30, 2021, December 31, 2021 and March 31, 2022 in addition to $200,000 regular monthly principal payments through December 31, 2022, (d) amending the minimum debt service coverage ratio covenant, (e) amending the maximum leverage ratio covenant. Additionally, under the Eighth Amendment, BankUnited waived certain covenant non-compliance and waived temporarily, late delivery of certain financial information. In connection with the Eighth Amendment, a $250,000 amendment fee (the “Amendment Fee”) was earned by the lenders on December 31, 2021 which the Company elected to pay in kind and accrue and capitalize rather than pay in cash. As at December 31, 2021, the Amendment Fee payable was posted by BankUnited to the Revolving Loan and on February 11, 2022, in agreement with the Company, the Amendment Fee was reclassified by BankUnited to the Term Loan. The Company has recorded this payable to its financial statements accordingly.
On April 12, 2022 the Company entered into a Consent, Wavier and Ninth Amendment to the Credit Agreement (the “Ninth Amendment”). Under the Ninth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to September 30, 2023, (b) providing for the repayment of an additional $750,000 of the principal balance of the Term Loan in three installments of $250,000 on September 30, 2022, December 31, 2022 and March 31, 2023 in addition to $200,000 regular monthly principal payments through December 31, 2022 and (c) increasing the interest on the Revolving Loan, Term Loan, and the Amendment Fee as follows: through June 30, 2022, Prime Rate (as defined in the Credit Agreement) plus 2.5%; from July 1, 2022 through August 31, 2022, Prime Rate plus 5%; from September 1, 2022 through October 31, 2022, Prime Rate plus 6%; from November 1, 2022 through December 31, 2022, Prime Rate plus 7%; and from January 1, 2023 through September 30, 2023, Prime Rate plus 8%. Additionally, under the Ninth Amendment, the Credit Agreement financial covenants were amended. BankUnited also waived or consented to certain covenant non-compliance, waived temporarily or consented to, late delivery of certain financial information and waived permanently late delivery of certain pro-forma budget information.
On August 19, 2022, the Company entered into a Consent, Waiver and Tenth Amendment to the Credit Agreement (the “Tenth Amendment”). Under the Tenth Amendment, the parties amended the Credit Agreement by (a) increasing the maximum leverage ratio applicable for the fiscal quarter ending September 30, 2022 to 5.0, (b) waiving and/or consenting to the exclusion from the Company’s covenant compliance requirements for the fiscal quarters ended December 31, 2021, March 31, 2022, June 30, 2022 and September 30, 2022 up to (i) $566,024.81 of losses incurred and reserves taken under the Borrower’s welded product contracts, and (ii) $367,044.51 of reserves taken with respect to the Borrower’s welded product inventory, and (c) waiving and/or consenting to the exclusion from the Company’s covenant compliance requirements for the fiscal quarters ended March 31, 2022, June 30, 2022, September 30, 2022 and December 31, 2022 up to $795,997.06 of accrued severance and COBRA costs and employer taxes incurred by the Company during the fiscal quarter ending March 31, 2022. Additionally, under the Tenth Amendment, BankUnited waived or consented to late delivery of certain financial information required by the Credit Agreement.
On November 10, 2022, the Company entered into an Eleventh Amendment to the Credit Agreement (the “Eleventh Amendment”). Under the Eleventh Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to November 30, 2023 or with respect to the Term Loan, if earlier, until the outstanding principal balance is paid in full (the “Term Loan Maturity Date”), (b) providing for regular monthly principal payments of $200,000 on the Term Loan from January 1, 2023 through the Term Loan Maturity Date (in addition to the Company’s existing obligation to make two principal payments on the term loan of $250,000 on each of December 31, 2022 and March 31, 2023) and (c) decreasing the interest rate on the Revolving Loan, the Term Loan and the Amendment Fee to the Prime Rate plus 3.5% effective as of November 1, 2022.
The Credit Agreement, as amended, requires us to maintain the following financial covenants (subject to the exclusions provided for in the previous paragraph): (a) minimum debt service coverage ratio of no less than 1.5 to 1.0 for the trailing four quarter period ended March 31, 2022, 0.95 to 1.0 for the trailing four quarter period ended June 30, 2022, and 1.5 to 1.0 for the trailing four quarter period ended September 30, 2022 and for the trailing four quarter periods ended thereafter; (b) maximum leverage ratio of no less than 7.30 to 1.0 for the trailing four quarter period ended March 31, 2022, 6.30 to 1.0 for the trailing four quarter period ended June 30, 2022, and 5.0 to 1.0 for the trailing four quarter period ended September 30, 2022 and 4.0 to 1.0 for the trailing four quarter periods thereafter; (c) minimum net income after taxes as of the end of each fiscal quarter being no less than $1.00 commencing June 30, 2022; and (d) a minimum adjusted EBITDA at the end of each quarter of no less than $1.0 million (waived for the quarter ended March 31, 2022). The additional principal payments, increase in interest and the Amendment Fee provided for in the Eight Amendment and Ninth Amendment are excluded for purposes of calculating compliance with each of the financial covenants.
The BankUnited Facility is secured by all of the Company’s assets and both the Revolving Loan and Term Loan bore interest at the rate of 12.25% (the Prime Rate of 6.25% + 6.00%) as of September 30, 2022.
As of September 30, 2022, the Company had $21,000,000 outstanding under the Revolving Loan as compared to $21,250,000 as of December 31, 2021.
The Term Loan, as amended by the Eleventh Amendment, had an aggregate principal amount of $2,433,333, payable in monthly installments, as defined in the agreement, as of September 30, 2022 as compared to an aggregate principal amount outstanding as of December 31, 2021 of $4,483,333.
There is currently no availability for borrowings under the Revolving Loan and the Company finances its operations from internally generated cash flow.
PPP Loan
On April 10, 2020, we entered into the Paycheck Protection Program loan (“PPP Loan”), with BNB Bank (now part of Dime Community Bank (“Dime”)) as the lender, in an aggregate principal amount of $4,795,000, pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The PPP Loan was evidenced by a promissory note (the “Note”). Subject to the terms of the Note, the PPP Loan bore interest at a fixed rate of one percent (1%) per annum, with the first six months of interest deferred, had an initial term of two years, and was unsecured and guaranteed by the Small Business Administration (“SBA”). The Note provided for customary events of default including, among other things, cross-defaults on any other loan with the lender. The PPP Loan could have been accelerated upon the occurrence of an event of default.
On November 2, 2020, the Company applied to the lender for full forgiveness of the PPP Loan as calculated in accordance with the terms of the CARES Act, as modified by the Paycheck Protection Flexibility Act. All amounts have been classified as current or long term in accordance with the Note terms.
On July 13, 2021, the Company received notification through Dime that the PPP Loan and accrued interest thereon had been fully forgiven by the SBA and that the forgiveness payment date was July 1, 2021. The forgiveness of the PPP Loan was recognized as other income during the Company’s third fiscal quarter ending September 30, 2021. The SBA reserves the right to audit any PPP Loan, for eligibility and other criteria, regardless of size. These audits may occur after forgiveness has been granted. In accordance with the CARES Act, all borrowers are required to maintain their PPP loan documentation for six years after the PPP Loan was forgiven and to provide that documentation to the SBA upon request.
The maturities of long-term debt (excluding unamortized debt issuance costs) are as follows:
Included in the long-term debt are financing leases and other notes payable of $258,970 and $422,595 at September 30, 2022 and December 31, 2021, respectively, including a current portion of $158,594 and $215,181, respectively.
The Company has cumulatively paid $908,000 of total debt issuance costs in connection with the BankUnited Facility, of which $174,219 is included in other assets at September 30, 2022. |
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MAJOR CUSTOMERS |
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| Risks and Uncertainties [Abstract] | ||||
| MAJOR CUSTOMERS |
During the nine months ended September 30, 2022, the Company’s three largest customers accounted for 38%, 14% and 12% of revenue. During the nine months ended September 30, 2021, the Company’s four largest customers accounted for 34%, 21%,11% and 10% of revenue.
At September 30, 2022, 34%, 22%, 10% and 10% of our contract assets were from four of our largest customers. At December 31, 2021, 34%, 16%, and 12% of our contract assets were from three of our largest customers.
At September 30, 2022, 27%, 17%, 16%, 12% and 12% of our accounts receivable were from our five largest customers. At December 31, 2021, 30%, 23%, and 18% of accounts receivable were from our three largest customers. |
LEASES |
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| Leases | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LEASES |
The Company leases a building and equipment. Under ASC 842, at contract inception we determine whether the contract is or contains a lease and whether the lease should be classified as an operating or a financing lease. Operating leases are included in ROU (right-of-use) 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, as amended, expires on April 30, 2026 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 nine months ended September 30, 2022, the Company’s operating lease expense was $529,004 and $1,579,879, respectively.
Future minimum lease payments under non-cancellable operating leases as of September 30, 2022 were as follows:
The following table sets forth the ROU assets and operating lease liabilities as of September 30, 2022:
The Company’s weighted average remaining lease term for its operating leases is 3.6 years. |
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INCOME TAXES |
9 Months Ended | ||
|---|---|---|---|
Sep. 30, 2022 | |||
| Income Tax Disclosure [Abstract] | |||
| INCOME TAXES |
Income taxes are accounted for under the asset and liability method whereby deferred tax assets and liabilities are recognized for future tax consequences attributable to the temporary differences between the consolidated financial statements carrying amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company’s policy is to record estimated interest and penalties related to uncertain tax positions in income tax expense.
The provision for income tax for the three months ended September 30, 2022 and 2021 was $3,750 and $3,374, respectively. The provision for income tax for the nine months ended September 30, 2022 and 2021 was $11,250 and $7,702, respectively.
The difference between the Company’s statutory tax rate and its effective rate is due to the valuation allowance taken on the Company’s net operating loss carryforwards. |
COMMITMENTS AND CONTINGENCIES |
9 Months Ended | ||
|---|---|---|---|
Sep. 30, 2022 | |||
| Commitments and Contingencies Disclosure [Abstract] | |||
| COMMITMENTS AND CONTINGENCIES |
Class Action Lawsuit
As previously disclosed, a consolidated class action lawsuit (captioned Rodriguez v. CPI Aerostructures, Inc., et al., No. 20-cv-00982) has been filed in the U.S. District Court for the Eastern District of New York against the Company, Douglas McCrosson; the Company’s former Chief Executive Officer; Vincent Palazzolo, the Company’s former Chief Financial Officer; and the two underwriters of the Company’s October 16, 2018 offering of common stock, Canaccord Genuity LLC and B. Riley FBR. The Amended Complaint in the action asserts claims on behalf of two plaintiff classes: (i) purchasers of the Company’s common stock issued pursuant to and/or traceable to the Company’s offering conducted on or about October 16, 2018; and (ii) purchasers of the Company’s common stock between March 22, 2018 and February 14, 2020. The Amended Complaint alleges that the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended (the “Securities Act”), by negligently permitting false and misleading statements to be included in the registration statement and prospectus supplements issued in connection with its October 16, 2018 securities offering. The Amended Complaint also alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated by the SEC, by making false and misleading statements in the Company’s periodic reports filed between March 22, 2018 and February 14, 2020. Plaintiff seeks unspecified compensatory damages, including interest; rescission or a rescissory measure of damages; unspecified equitable or injunctive relief; and costs and expenses, including attorney’s fees and expert fees. On February 19, 2021, the Company moved to dismiss the Amended Complaint. Plaintiff submitted a brief in opposition to the motion to dismiss on April 23, 2021.
On May 20, 2021, the parties reached a settlement in the amount of $3,600,000, subject to court approval. On July 9, 2021, Plaintiff filed an unopposed motion for preliminary approval of the settlement. On November 10, 2021, a magistrate judge recommended that the Court grant the motion for preliminary approval in its entirety. The Court adopted the recommendation on May 27, 2022, and entered an order granting preliminary approval of the settlement on June 7, 2022. On August 5, 2022, the Plaintiff filed an unopposed motion for final approval. The magistrate judge held a hearing on the final approval motion on September 9, 2022, and is now deciding whether to recommend final approval of the settlement. As of September 30, 2022, we have previously paid and accrued to our financial statements covered expenses totaling $750,000, and have therefore met our insurance carrier’s directors’ and officers’ retention requirement, which caps the Company’s expenses pertaining to the class action suit.
At September 30, 2022, in order to reflect the amounts owed from our directors’ and officers’ insurance carrier and to the Plaintiffs, we have recorded to our balance sheet a litigation settlement obligation of $3,600,000 and an insurance recovery receivable of $3,600,000 to reflect the liability owed by the Company to the Plaintiffs as well as the amount receivable owing from the Company’s insurance carrier to the Company with respect to the settlement obligation.
Shareholder Derivative Action
Four shareholder derivative actions, each based on substantially the same facts as those alleged in the class action discussed above, have been filed against certain of our current and former directors and officers.
The first action (captioned Moulton v. McCrosson, et.al., No. 20-cv-02092) was filed in the United States District Court for the Eastern District of New York. It purports to assert derivative claims against the individual defendants for violations of Section 10(b) and 21D of the Exchange Act, breach of fiduciary duty and unjust enrichment, and seeks to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct. The complaint also seeks declaratory, equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs. On October 26, 2020, the plaintiff filed an amended complaint. On January 27, 2021, the Court stayed the action pursuant to a joint stipulation filed by the parties.
The second action (captioned Woodyard v. McCrosson, et al., Index No. 613169/2020) was filed on September 17, 2020, in the Supreme Court of the State of New York (Suffolk County). It purports to assert derivative claims against the individual defendants for breach of fiduciary duty and unjust enrichment, and seeks to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct, along with declaratory, equitable, injunctive and monetary relief, as well as attorneys’ fees and other costs. On December 22, 2020, the parties filed a joint stipulation staying the action pending further developments in the class action.
The third action (captioned Berger v. McCrosson, et al., No. 1:20-cv-05454) was filed on November 10, 2020, in the United States District Court for the Eastern District of New York. The complaint, which is based in part on the shareholder’s inspection of certain corporate books and records, purports to assert derivative claims against the individual defendants for breach of fiduciary duty and unjust enrichment, and seeks to implement reforms to the Company’s corporate governance and internal procedures and to recover on behalf of the Company an unspecified amount of monetary damages. The complaint also seeks equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs.
On March 19, 2021, the parties to the Moulton and Berger actions filed a joint stipulation consolidating the actions (under the caption In re CPI Aerostructures Stockholder Derivative Litigation, No. 20-cv-02092) and staying the consolidated action pending further developments in the class action.
The fourth action (captioned Wurst v. Bazaar, et al., Index No. 605244/2021) was filed on March 24, 2021, in the Supreme Court of the State of New York (Suffolk County). The complaint purports to assert derivative claims against the individual defendants for breach of fiduciary duty, unjust enrichment, and waste of corporate assets, and seeks to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct. The complaint also seeks declaratory, equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs. On April 12, 2021, the parties filed a joint stipulation staying the action pending further developments in the class action.
On June 13, 2022, the plaintiffs in the consolidated federal action informed the Court that the Company (as nominal defendant) and all individual defendants had reached an agreement in principle with all plaintiffs to settle the four shareholder derivative lawsuits described above. On June 16, 2022, the plaintiffs in the consolidated federal action filed an unopposed motion for preliminary approval of the settlement. On July 22, 2022, the Court referred the motion to the magistrate judge; the motion remains pending. The magistrate judge held a conference on September 9, 2022 in the consolidated federal action. The settlement is subject to Court approval and, if approved, will result in the dismissal of the shareholder derivative lawsuits. As part of the proposed settlement, the Company has agreed to undertake (or confirm that it has undertaken already) certain corporate governance reforms and to pay attorneys’ fees to plaintiffs’ counsel. |
REVENUE RECOGNITION (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenue from Contract with Customer [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The following tables present the Company’s revenue disaggregated by contract type and revenue recognition method: | The following tables present the Company’s revenue disaggregated by contract type and revenue recognition method:
|
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CONTRACT ASSETS AND CONTRACT LIABILITIES (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Contract Assets And Contract Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of contract assets and liabilities |
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INVENTORY (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Inventory Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The components of inventory consisted of the following: | The components of inventory consisted of the following:
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FAIR VALUE (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| At September 30, 2022 and December 31, 2021, the fair values of cash, accounts receivable and accounts payable approximated their carrying values because of the short-term nature of these instruments. | At September 30, 2022 and December 31, 2021, the fair values of cash, accounts receivable and accounts payable approximated their carrying values because of the short-term nature of these instruments.
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DEBT (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2022 | |||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||
| The maturities of long-term debt (excluding unamortized debt issuance costs) are as follows: | The maturities of long-term debt (excluding unamortized debt issuance costs) are as follows:
|
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LEASES (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Leases | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Future minimum lease payments under non-cancellable operating leases as of September 30, 2022 were as follows: | Future minimum lease payments under non-cancellable operating leases as of September 30, 2022 were as follows:
|
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| The following table sets forth the ROU assets and operating lease liabilities as of September 30, 2022: | The following table sets forth the ROU assets and operating lease liabilities as of September 30, 2022:
|
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INTERIM FINANCIAL STATEMENTS (Details Narrative) - USD ($) |
Nov. 10, 2022 |
Sep. 30, 2022 |
|---|---|---|
| Line of Credit Facility [Line Items] | ||
| Cash uninsured amount | $ 4,576,645 | |
| Funded orders backlog | $ 118,000,000 | |
| Percentage of funded orders for military programs | 98.00% | |
| Bank United [Member] | Subsequent Event [Member] | ||
| Line of Credit Facility [Line Items] | ||
| Maturity date | Nov. 30, 2023 |
The following tables present the Company’s revenue disaggregated by contract type and revenue recognition method: (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Disaggregation of Revenue [Line Items] | ||||
| Revenue | $ 20,196,913 | $ 23,898,748 | $ 59,257,416 | $ 77,018,684 |
| Transferred over Time [Member] | ||||
| Disaggregation of Revenue [Line Items] | ||||
| Revenue | 18,462,027 | 21,672,578 | 53,522,920 | 69,604,228 |
| Transferred at Point in Time [Member] | ||||
| Disaggregation of Revenue [Line Items] | ||||
| Revenue | 1,734,886 | 2,226,170 | 5,734,496 | 7,414,456 |
| Aerostructure [Member] | ||||
| Disaggregation of Revenue [Line Items] | ||||
| Revenue | 9,365,065 | 8,709,511 | 28,371,760 | 25,591,865 |
| Aerosystems [Member] | ||||
| Disaggregation of Revenue [Line Items] | ||||
| Revenue | 8,249,935 | 7,391,645 | 20,920,808 | 23,563,365 |
| Kitting and Supply Chain Management [Member] | ||||
| Disaggregation of Revenue [Line Items] | ||||
| Revenue | $ 2,581,913 | $ 7,797,592 | $ 9,964,848 | $ 27,863,454 |
REVENUE RECOGNITION (Details Narrative) $ in Millions |
Sep. 30, 2022
USD ($)
|
|---|---|
| Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items] | |
| Remaining performance obligations | $ 118 |
| Fiscal Year 2022 [Member] | |
| Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items] | |
| Performance obligation recognition percentage | 21.00% |
Schedule of contract assets and liabilities (Details) - USD ($) |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Contract Assets And Contract Liabilities | ||
| Contract assets | $ 24,157,141 | $ 24,459,339 |
| Contract liabilities | 5,041,818 | 5,122,766 |
| Net Contract assets | $ 19,115,323 | $ 19,336,573 |
CONTRACT ASSETS AND CONTRACT LIABILITIES (Details Narrative) - USD ($) $ in Millions |
9 Months Ended | |
|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Contract Assets And Contract Liabilities | ||
| Revenue recognized that was included in contract liabilities | $ 3.6 | $ 1.6 |
The components of inventory consisted of the following: (Details) - USD ($) |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Inventory Disclosure [Abstract] | ||
| Raw materials | $ 1,843,761 | $ 2,033,216 |
| Work in progress | 1,078,677 | 1,413,672 |
| Finished goods | 3,202,658 | 3,568,192 |
| Gross inventory | 6,125,096 | 7,015,080 |
| Inventory reserves | (3,016,855) | (2,986,155) |
| Inventory, net | $ 3,108,241 | $ 4,028,925 |
At September 30, 2022 and December 31, 2021, the fair values of cash, accounts receivable and accounts payable approximated their carrying values because of the short-term nature of these instruments. (Details) - USD ($) |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Reported Value Measurement [Member] | ||
| Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items] | ||
| Short-term borrowings and long-term debt | $ 23,692,303 | $ 26,155,928 |
| Estimate of Fair Value Measurement [Member] | ||
| Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items] | ||
| Short-term borrowings and long-term debt | $ 23,692,203 | $ 26,155,928 |
INCOME PER COMMON SHARE (Details Narrative) - shares |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Earnings Per Share [Abstract] | ||||
| Incremental shares used in calculation of diluted income per common share | 47,531 | 33,876 | 47,531 | 33,876 |
The maturities of long-term debt (excluding unamortized debt issuance costs) are as follows: (Details) |
Sep. 30, 2022
USD ($)
|
|---|---|
| Debt Disclosure [Abstract] | |
| 2023 | $ 2,591,927 |
| 2024 | 66,311 |
| 2025 | 31,330 |
| 2026 | 2,735 |
| Total | $ 2,692,303 |
Future minimum lease payments under non-cancellable operating leases as of September 30, 2022 were as follows: (Details) |
Sep. 30, 2022
USD ($)
|
|---|---|
| 2023 | $ 2,055,806 |
| 2024 | 2,151,496 |
| 2025 | 2,202,321 |
| 2026 | 1,330,474 |
| 2027 | 60,416 |
| Total undiscounted operating lease payments | 7,800,513 |
| Less imputed interest (between 4.0% - 10.5%) | (725,887) |
| Present value of operating lease payments | $ 7,074,626 |
| Minimum [Member] | |
| Interest rate | 4.00% |
| Maximum [Member] | |
| Interest rate | 10.50% |
The following table sets forth the ROU assets and operating lease liabilities as of September 30, 2022: (Details) - USD ($) |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Leases | ||
| ROU assets-net | $ 6,736,441 | $ 7,796,768 |
| Current operating lease liabilities | 1,728,707 | 1,580,453 |
| Long-term operating lease liabilities | 5,345,919 | $ 6,445,728 |
| Total ROU liabilities | $ 7,074,626 |
LEASES (Details Narrative) |
3 Months Ended | 9 Months Ended |
|---|---|---|
|
Sep. 30, 2022
USD ($)
|
Sep. 30, 2022
USD ($)
|
|
| Leases | ||
| Lease expiration date | Apr. 30, 2026 | |
| Lease expense | $ 529,004 | $ 1,579,879 |
| Weighted average remaining lease term operating leases | 3 years 7 months 6 days | 3 years 7 months 6 days |
INCOME TAXES (Details Narrative) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Income Tax Disclosure [Abstract] | ||||
| Provision for income taxes | $ 3,750 | $ 3,374 | $ 11,250 | $ 7,702 |
COMMITMENTS AND CONTINGENCIES (Details Narrative) - USD ($) |
May 20, 2021 |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|---|
| Commitments and Contingencies Disclosure [Abstract] | |||
| Settlement amount | $ 3,600,000 | ||
| Directors and officers insurance retention amount | $ 750,000 | ||
| Litigation settlement obligation | 3,600,000 | $ 3,003,259 | |
| Insurance recovery receivable | $ 3,600,000 | $ 2,850,000 |
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