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 13, 2023, the registrant had shares of common stock, $.001 par value, outstanding.
2
Part I - Financial Information
Item 1 - Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | ||||||||
| 2023 (Unaudited) | December 31, 2022 | |||||||
| 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 | ||||||||
| Deferred tax asset | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Litigation settlement obligation | ||||||||
| Contract liabilities | ||||||||
| Loss reserve | ||||||||
| Current portion of line of credit | ||||||||
| Current portion of long-term debt | ||||||||
| Operating lease liabilities, current | ||||||||
| Income tax payable | ||||||||
| Total Current Liabilities | ||||||||
| Line of credit, net of current portion | ||||||||
| Long-term operating lease liabilities | ||||||||
| Long-term debt, net of current portion | ||||||||
| Total Liabilities | ||||||||
| Shareholders’ Equity: | ||||||||
| Common stock - $ par value; authorized shares, and shares, respectively, issued and outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Shareholders’ Equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Income from operations | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income before provision for income taxes | ||||||||||||||||
| Provision for income taxes | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Income per common share, basic: | ||||||||||||||||
| Income per common share-unrestricted shares | $ | $ | $ | $ | ||||||||||||
| Income per common share-restricted shares | $ | $ | $ | $ | ||||||||||||
| Income per common share, diluted | $ | $ | $ | $ | ||||||||||||
| Shares used in computing income per common share, basic: | ||||||||||||||||
| Unrestricted shares | ||||||||||||||||
| Restricted shares | ||||||||||||||||
| Total shares | ||||||||||||||||
| Shares used in computing income per common share, diluted | ||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
4
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)
| Common Stock Shares | Common Stock Amount | Additional Paid-in Capital | Accumulated Deficit | Total Shareholders’ Equity (Deficit) | ||||||||||||||||
| 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 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Balance at January 1, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net Income | — | |||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net Income | — | |||||||||||||||||||
| Common stock forfeited | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net Income | — | |||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
See Notes to Condensed Consolidated Financial Statements
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| For the Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt issuance cost | ||||||||
| Stock-based compensation | ||||||||
| Deferred income taxes | ||||||||
| Bad debt expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Increase in accounts receivable | ( | ) | ( | ) | ||||
| Decrease (increase) in insurance receivable | ( | ) | ||||||
| (Increase) decrease in contract assets | ( | ) | ||||||
| Decrease in inventory | ||||||||
| Decrease in prepaid expenses and other assets | ||||||||
| Increase in refundable income taxes | ( | ) | ||||||
| Decrease in operating right-of-use assets | ||||||||
| Increase in accounts payable and accrued expenses | ||||||||
| Increase (decrease) in contract liabilities | ( | ) | ||||||
| (Decrease) increase in settlement of litigation obligation | ( | ) | ||||||
| Decrease in lease liabilities | ( | ) | ( | ) | ||||
| Increase (decrease) in income taxes payable | ( | ) | ||||||
| Decrease in loss reserve | ( | ) | ( | ) | ||||
| Net cash provided by 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 debt | ( | ) | ( | ) | ||||
| Debt issuance costs paid | ( | ) | ||||||
| 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 Condensed Consolidated Financial Statements
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
| 1. | INTERIM FINANCIAL STATEMENTS |
Basis of Presentation
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”, “we”, “us”, or “our”).
The condensed consolidated interim financial statements of the Company as of September 30, 2023 and for the nine months ended September 30, 2023 and 2022 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, 2022 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, 2022 (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.
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 for purposes of making operating decisions and assessing financial performance. The Company has determined that it has a single operating and reportable segment.
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, 2023, the Company had $
Recently Issued Accounting Standards - Adopted
In the first quarter of 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), using a modified retrospective method, which did not result in a significant impact on the Company’s financial statements.
| 2. | REVENUE RECOGNITION |
The Company recognizes revenue in accordance with Accounting Standards Codification Topic 606 (“ASC 606”). 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 as well 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 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.
7
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 typically 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. Contract gross profit margins are calculated using the estimated costs for either the individual contract or the portfolio as applicable. 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 total estimated costs expected at completion 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 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.
8
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, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Aerostructures | $ | $ | $ | $ | ||||||||||||
| Aerosystems | ||||||||||||||||
| Kitting and Supply Chain Management | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue recognized using over time revenue recognition model | $ | $ | $ | $ | ||||||||||||
| Revenue recognized using point in time revenue recognition model | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Transaction Price Allocated to Remaining Performance Obligations
As
of September 30, 2023, the aggregate amount of transaction price allocated to the remaining performance obligations was approximately
$
| 3. | CONTRACT ASSETS AND LIABILITIES |
Contract assets represent revenue recognized on contracts in excess of amounts invoiced to the customers and the Company’s right to consideration is conditional on something other than the passage of time. Amounts may not exceed their net realizable value. Under the typical payment terms of our government as well as military contractor contracts, the customer retains a portion of the contract price until completion of the contract, as a measure of protection for the customer. Our government and military contractor contracts therefore typically result in revenue recognized in excess of billings, which we present as contract assets. Contract assets are classified as current assets. 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 liabilities.
9
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Contract assets | $ | $ | ||||||
| Contract liabilities | ||||||||
| Net Contract assets | $ | $ | ||||||
Revenue
recognized for the nine months ended September 30, 2023 and 2022 that was included in the contract liabilities balance as of January 1,
2023 and 2022, respectively, was approximately $
| 4. | INVENTORY |
The components of inventory consisted of the following:
September 30, 2023 | December 31, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| Gross inventory | ||||||||
| Inventory reserves | ( | ) | ( | ) | ||||
| Inventory, net | $ | $ | ||||||
| 5. | STOCK-BASED COMPENSATION |
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Cost of sales | $ | $ | $ | $ | ||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
The Company grants restricted stock units (“RSUs”) to its board of directors as partial compensation. These RSUs vest quarterly on a straight-line basis over a one-year period.
The Company grants shares of common stock (“Restricted Stock Awards”) to select employees. In the event that the employee’s employment is voluntarily terminated prior to certain vesting dates, portions of the shares may be forfeited. In addition, if certain Company performance criteria are not achieved, portions of these shares may be forfeited. shares were forfeited during the nine months ended September 30, 2022, resulting in a reduction to stock-based compensation expense for the nine months ended September 30, 2022 in selling, general and administrative expense of .
10
| Restricted Stock Awards | Weighted Average Grant Date Fair Value of Restricted Stock Awards | RSUs | Weighted Average Grant Date Fair Value of RSUs | ||||||||||||||
| Non-vested – January 1, 2023 | $ | $ | |||||||||||||||
| Granted | $ | $ | |||||||||||||||
| Vested | ( | ) | $ | ( | ) | $ | |||||||||||
| Forfeited | ( | ) | $ | ( | ) | $ | |||||||||||
| Non-vested – September 30, 2023 | $ | $ | |||||||||||||||
As of September 30, 2023, unamortized stock-based compensation costs related to restricted share arrangements was $.
| 6. | FAIR VALUE |
Fair Value
At September 30, 2023 and December 31, 2022, 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, 2023 | ||||||||
Carrying Amount |
Fair Value | |||||||
| Debt | ||||||||
| Short-term borrowings and long-term debt | $ | $ | ||||||
| December 31, 2022 | ||||||||
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 |
The Company complies with the accounting and disclosure requirements of FASB ASC Topic 260, “Earnings Per Share” and uses the two-class method in the calculation of earnings per share. Net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. During the three months and nine months ended September 30, 2023 and 2022, respectively, and as of September 30, 2023 and 2022, respectively, the Company had restricted shares of common stock that were considered participating securities and unrestricted shares of common stock outstanding. Earnings and losses are shared pro rata.
Basic and diluted income per common share is computed using the weighted average number of common shares outstanding. Diluted income per common share is adjusted for the incremental shares attributed to unvested RSUs. Incremental shares of were used in the calculation of diluted income per common share for both the three and nine months ended September 30, 2023.
11
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Income per common share, basic: | ||||||||||||||||
| Income per common share-unrestricted shares | $ | $ | $ | $ | ||||||||||||
| Income per common share-restricted shares | $ | $ | $ | $ | ||||||||||||
| Income per common share, diluted | $ | $ | $ | $ | ||||||||||||
| Shares used in computing income per common share, basic: | ||||||||||||||||
| Unrestricted shares | ||||||||||||||||
| Restricted shares | ||||||||||||||||
| Total shares | ||||||||||||||||
| Shares used in computing income per common share, diluted | ||||||||||||||||
| 8. | DEBT |
On
March 24, 2016, the Company entered into the 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 BankUnited Facility originally provided for a revolving credit loan commitment of $
On
March 23, 2023, the Company entered into a Twelfth Amendment to the Credit Agreement (the “Twelfth Amendment”). Under
the Twelfth Amendment, the parties amended the Credit Agreement by: (a) extending the maturity date of the Company’s existing
revolving line of credit and its existing term loan to
The
Credit Agreement, as amended, requires us to maintain the following financial covenants: (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 bear interest at
the Prime Rate +
12
As
of September 30, 2023 and December 31, 2022, the Company had $
The
Term Loan was fully repaid as of September 30, 2023 as compared to an aggregate principal amount outstanding as of December 31,
2022 of $
The
Company has cumulatively paid approximately $
Also
included in long-term debt are financing leases of $
| For the Year Ending December 31, | |||||
| Remainder of 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| Total | $ | ||||
| 9. | MAJOR CUSTOMERS |
During
the nine months ended September 30, 2023, our four largest customers accounted for
At
September 30, 2023,
At
September 30, 2023,
| 10. | LEASES |
The
Company leases manufacturing and office space under an agreement classified as an operating lease. On November 10, 2021, the Company
executed the second amendment to the lease agreement for its manufacturing and office space, which extends the lease agreement’s
expiration date to
The Company also leases office equipment in agreements classified as operating leases.
For
the nine months ended September 30, 2023 and 2022, the Company’s operating lease expense was $
Future minimum lease payments under non-cancellable operating leases as of September 30, 2023 were as follows:
| For the Year Ending December 31, | |||||
| Remainder of 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total undiscounted operating lease payments | |||||
| Less imputed interest | ( |
) | |||
| Present value of operating lease payments | $ | ||||
13
The following table sets forth the Right of Use assets and operating lease liabilities as of:
| September
30, 2023 |
December
31, 2022 |
|||||||
| Assets | ||||||||
| Right of Use assets, net | $ | $ | ||||||
| Liabilities | ||||||||
| Current operating lease liabilities | $ | $ | ||||||
| Long-term operating lease liabilities | ||||||||
| Total lease liabilities | $ | $ | ||||||
The
Company’s weighted average remaining lease term for its operating leases is
| 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 nine months ended September 30, 2023 and 2022 was $
The
effective income tax rate for the nine months ended September 30, 2023 is
| 12. | COMMITMENTS AND CONTINGENCIES |
Class Action Lawsuit
A consolidated class action lawsuit (captioned Rodriguez v. CPI Aerostructures, Inc., et al., No. 20-cv-01026) was 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 asserted 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 alleged 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 Company’s registration statement and prospectus supplements issued in connection with the Company’s October 16, 2018 securities offering. The Amended Complaint also alleged 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 sought 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.
14
On
May 20, 2021, the parties reached a settlement in the amount 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 current and former members of our board of directors and certain of our current and former officers.
The first action (captioned Moulton v. McCrosson, et.al., No. 20-cv-02092) was filed on May 7, 2020, in the U.S. 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, 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 U.S. District Court for the Eastern District of New York. The complaint, which is based 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, et al. 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, plaintiffs in the consolidated federal action informed the court that the Company and all defendants had reached an agreement in principle with all plaintiffs to settle the shareholder derivative lawsuits described above. On June 16, 2022, 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 magistrate judge held a conference on September 9, 2022 in the consolidated federal action. On February 14, 2023, the magistrate judge recommended that the court grant the motion in its entirety. On March 6, 2023, the court granted preliminary approval of the proposed settlement.
On May 17, 2023, plaintiffs in the consolidated federal action filed an unopposed motion for final approval of the settlement. The magistrate judge held a final approval hearing on June 7, 2023. On October 27, 2023, the magistrate judge recommended that the Court grant the final approval motion in its entirety. The final approval motion remains pending.
The
terms of the proposed settlement are set forth in the stipulation of settlement agreed to by the Company and plaintiffs. Should
the proposed settlement receive final approval from the Court, it 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. In addition, the Company and/or its insurer have agreed to pay a total of $
15
Litigation Settlement Obligation and Insurance Recovery Receivable Pertaining to the Class Action Lawsuit and Shareholder Derivative Action
The
attorneys’ fees for both the class action lawsuit and the shareholder derivative actions were covered and paid by our directors’
and officers’ insurance carrier, after satisfaction of our $
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, 2022 (the “Form 10-K”). We have no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.
Business Operations
We are engaged in the contract production of structural aircraft parts for fixed wing aircraft and helicopters in both the commercial and defense markets. We also have a strong and growing presence in the aerosystems sector 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 (“OEMs”) or a Tier 2 subcontractor to major Tier 1 manufacturers. We also are a prime contractor to the United States Department of Defense (“DOD”), primarily the United States Air Force (“USAF”). In conjunction with our assembly operations, we provide engineering, program management, supply chain management and kitting, and maintenance, repair and overhaul (“MRO”) 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
None.
16
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, 2023 and December 31, 2022 was as follows:
| Backlog (Total) |
September
30, 2023 |
December
31, 2022 |
||||||
| Funded | $ | 123,604,000 | $ | 122,148,000 | ||||
| Unfunded | 379,336,000 | 392,352,000 | ||||||
| Total | $ | 502,940,000 | $ | 514,500,000 | ||||
Approximately 98% of the total amount of our backlog at September 30, 2023 was attributable to government and military contractor contracts. Our backlog attributable to government and military contractor contracts at September 30, 2023 and December 31, 2022 was as follows:
| Backlog
(Government/Military Contractors) |
September
30, 2023 |
December
31, 2022 |
||||||
| Funded | $ | 120,559,000 | $ | 119,133,000 | ||||
| Unfunded | 371,575,000 | 384,652,000 | ||||||
| Total | $ | 492,134,000 | $ | 503,785,000 | ||||
Our backlog attributable to commercial contracts at September 30, 2023 and December 31, 2022 was as follows:
| Backlog (Commercial) |
September
30, 2023 |
December
31, 2022 |
||||||
| Funded | $ | 3,045,000 | $ | 3,015,000 | ||||
| Unfunded | 7,760,000 | 7,700,000 | ||||||
| Total | $ | 10,805,000 | $ | 10,715,000 | ||||
The total backlog at September 30, 2023 is primarily comprised of long-term programs with Raytheon (Next Generation Jammer (“NGJ”) – Mid Band Pods), Raytheon (Advanced Tactical Pods), USAF (T-38 Classic Structural Modification Kits), Lockheed Martin (F-16 RI/DCC’s), Collins Aerospace (Pods), Raytheon (B-52 Radar Racks), Sikorsky (CH-53K Welded Tubes), Sikorsky (UH-60 BLACKHAWK Gunner Windows), Embraer (Phenom 300 Engine Inlets), Sikorsky (S-92 Structural Modification Kits), Boeing (A-10 Main Landing Gear Pods) and Sikorsky (UH-60 BLACKHAWK Stabilator MRO).
The funded backlog is primarily from purchase orders under long-term contracts with Raytheon (NGJ – Mid Band Pods), USAF (T-38 Classic Structural Modification Kits), Lockheed Martin (F-16 RI/DCC’s), Collins Aerospace (Pods), Boeing (A-10 Main Landing Gear Pods), Sikorsky (CH-53K Welded Tubes), Raytheon (Advanced Tactical Pods), Sikorsky (UH-60 BLACKHAWK Gunner Windows) and Northrop Grumman (E-2D Advanced Hawkeye).
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, 2023.
Results of Operations
Revenue
Total Revenue for the three months ended September 30, 2023 was $20,399,369 compared to $20,196,913 for the same period last year, an increase of $202,456 or 1.0%. The increase was primarily related to increases in USAF T-38 Pacer Classic Structural Modification Kits, partly offset by decreases in Sikorsky UH-60 BLACKHAWK Hover Infrared Suppression System (“HIRSS”) Module Assemblies. Additionally, supply chain technical challenges negatively impacted revenue during the three months ended September 30, 2023.
17
Total Revenue for the nine months ended September 30, 2023 was $62,963,592 compared to $59,257,416 for the same period last year, an increase of $3,706,176 or 6.3%. The increase was primarily related to increases in Raytheon NGJ Pods and USAF T-38 Pacer Classic Structural Modification Kits, partly offset by decreases in Sikorsky UH-60 BLACKHAWK HIRSS Module Assemblies.
Revenue from military subcontracts was $15,375,337 for the three months ended September 30, 2023 compared to $17,213,747 for the three months ended September 30, 2022, a decrease of $1,838,410 or 10.7%. The decrease was primarily related to Sikorsky UH-60 BLACKHAWK HIRSS Module Assemblies
Revenue from military subcontracts was $50,550,256 for the nine months ended September 30, 2023 compared to $49,930,578 for the nine months ended September 30, 2022, an increase of $619,678 or 1.2%. The increase was primarily related to increases in Raytheon NGJ Pods, partly offset by decreases in Sikorsky UH-60 BLACKHAWK HIRSS Module Assemblies.
Revenue from government military contracts was $3,943,723 for the three months ended September 30, 2023 compared to $1,660,913 for the three months ended September 30, 2022, an increase of $2,282,810 or 137.4%. The increase was primarily related to USAF T-38 Pacer Classic Structural Modification Kits.
Revenue from government military contracts was $8,062,682 for the nine months ended September 30, 2023 compared to $5,077,459 for the nine months ended September 30, 2022, an increase of $2,985,223 or 58.8%. The increase was primarily related to USAF T-38 Pacer Classic Structural Modification Kits.
Revenue from commercial subcontracts was $1,080,309 for the three months ended September 30, 2023 compared to $1,322,253 for the three months ended September 30, 2022, a decrease of $241,944 or 18.3%. The decrease was primarily related to Embraer Phenom Engine Inlet Assemblies.
Revenue from commercial subcontracts was $4,350,654 for the nine months ended September 30, 2023 compared to $4,249,379 for the nine months ended September 30, 2022, an increase of $101,275 or 2.4%. The increase was primarily the result of higher revenue recognized on Embraer Phenom 300 Engine Inlet Assemblies, partly offset by lower revenue recognized on the Gulfstream G650 Wing Fixed Leading Edges.
Cost of Sales
Total Cost of Sales for the three months ended September 30, 2023 and 2022 was $16,693,279 and $14,869,100, respectively, an increase of $1,824,179 or 12.3%. Additionally, the supply chain technical challenges referred to above under Revenue negatively impacted cost of sales during the three months ended September 30, 2023.
Total Cost of Sales for the nine months ended September 30, 2023 and 2022 was $49,990,986 and $46,835,304, respectively, an increase of $3,155,682 or 6.7%.
The components of the cost of sales were as follows:
| Three months ended | Nine months ended | |||||||||||||||
| September
30, 2023 |
September
30, 2022 |
September
30, 2023 |
September
30, 2022 |
|||||||||||||
| Procurement | $ | 10,715,249 | $ | 9,867,224 | $ | 32,445,782 | $ | 31,455,680 | ||||||||
| Labor | 1,580,290 | 1,561,910 | 5,302,436 | 5,255,245 | ||||||||||||
| Factory overhead | 4,036,825 | 3,785,304 | 12,083,270 | 11,794,369 | ||||||||||||
| Other cost of sales | 360,915 | (345,338 | ) | 159,498 | (1,669,990 | ) | ||||||||||
| Cost of sales | $ | 16,693,279 | $ | 14,869,100 | $ | 49,990,986 | $ | 46,835,304 | ||||||||
Procurement for the three months ended September 30, 2023 was $10,715,249 compared to $9,867,224 for the three months ended September 30, 2022, an increase of $848,025 or 8.6%. The increase was primarily related to USAF T-38 Pacer Classic Structural Modification Kits.
Procurement for the nine months ended September 30, 2023 was $32,445,782 compared to $31,455,680 for the nine months ended September 30, 2022, an increase of $990,102 or 3.1%. The increase was primarily related to increases in Raytheon NGJ Pods and USAF T-38 Pacer Classic Structural Modification Kits, partly offset by decreases in Sikorsky UH-60 BLACKHAWK HIRSS Module Assemblies.
18
Labor costs for the three months ended September 30, 2023 were $1,580,290 compared to $1,561,910 for the three months ended September 30, 2022, an increase of $18,380 or 1.2%. The increase was primarily related to USAF T-38 Pacer Classic Structural Modification Kits.
Labor costs for the nine months ended September 30, 2023 were $5,302,436 compared to $5,255,245 for the nine months ended September 30, 2022, an increase of $47,191 or 0.9%. The increase was primarily related to Raytheon NGJ Pods
Factory overhead for the three months ended September 30, 2023 was $4,036,825 compared to $3,785,304 for the three months ended September 30, 2022, an increase of $251,521 or 6.6%. This increase was primarily the result of higher salary and benefit costs.
Factory overhead for the nine months ended September 30, 2023 was $12,083,270 compared to $11,794,369 (which included a $134,628 severance charge recorded in factory overhead during the nine months ended September 30, 2022) for the nine months ended September 30, 2022, an increase of $288,901, or 2.4%. Excluding the $134,628 severance charge recorded during the nine months ended September 30, 2022, the factory overhead for the nine months ended September 30, 2023 increased $423,529 or 3.6% from the factory overhead for the nine months ended September 30, 2022. This increase was primarily the result of higher salary and benefit costs, partly offset by lower delivery service and building maintenance.
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 cost of sales for the three months ended September 30, 2023 was $360,915 compared to a credit of ($345,338) for the three months ended September 30, 2022, an increase to cost of $706,253 or 204.5%. The increase is primarily the result of a lower level of inventory and loss contract reserve reductions for the for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.
Other cost of sales for the nine months ended September 30, 2023 was $159,498 compared to a credit of ($1,669,990) for the nine months ended September 30, 2022, an increase to cost of $1,829,488 or 109.6%. The increase is primarily the result of changes in inventory levels and a lower level of loss contract reserve reduction for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.
Gross Profit
Gross profit and gross profit percentage (“gross margin”) for the three months ended September 30, 2023 was $3,706,090 and 18.2%, respectively, compared to $5,327,813 and 26.4%, respectively, for the three months ended September 30, 2022, a decrease of $1,621,723 and 820 basis points, respectively, for the reasons noted above and due to the fact that the gross profit and gross margin for three months ended September 30, 2022 benefited from a favorable contract negotiation and mix.
Gross profit and gross profit percentage (“gross margin”) for the nine months ended September 30, 2023 was $12,972,606 and 20.6%, respectively, compared to $12,422,112 and 21.0%, respectively, for the nine months ended September 30, 2022, an increase of $550,494 and a decrease of 40 basis points, respectively, for the reasons noted above.
Favorable/Unfavorable Adjustments to Gross Profit
During the nine months ended September 30, 2023 and 2022, 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, 2023 |
September
30, 2022 |
|||||||
| Favorable adjustments | $ | 2,383,071 | $ | 4,710,232 | ||||
| Unfavorable adjustments | (3,396,171 | ) | (2,646,510 | ) | ||||
| Net adjustments | $ | (1,013,100 | ) | $ | 2,063,721 | |||
19
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended September 30, 2023 were $2,535,065 compared to $2,744,265 for the three months ended September 30, 2022, a decrease of $209,200 or 7.6%. The decrease was primarily the result of lower insurance and legal expenses.
Selling, general and administrative expenses for the nine months ended September 30, 2023 were $8,210,603 compared to $8,579,314 (which included a $637,206 severance charge recorded in selling, general and administrative expenses during the nine months ended September 30, 2022) for the nine months ended September 30, 2022, a decrease of $368,711 or 4.3%. The decrease was primarily the result of lower insurance expenses. Excluding the aforementioned $637,206 severance charge recorded during the nine months ended September 30, 2022, the selling, general and administrative expenses for the nine months ended September 30, 2023 increased $268,495 or 3.4% from the selling, general and administrative expenses for the nine months ended September 30, 2022. This increase was primarily the result of increased salary and benefits partly offset by lower insurance and legal expenses.
Interest expense
Interest expense for the three months ended September 30, 2023 was $663,857, compared to $721,046 for the three months ended September 30, 2022, a decrease of $57,189 or 7.9%. The decrease was the result of a year-over-year decrease in the amount of our outstanding debt under the Credit Agreement, partially offset by higher year-over-year interest rates charged on our outstanding debt under the Credit Agreement.
Interest expense for the nine months ended September 30, 2023 was $1,816,408, compared to $1,488,091 for the nine months ended September 30, 2022, an increase of $328,317 or 22.1%. The increase was the result of higher year-over-year interest rates charged on our outstanding debt under the Credit Agreement, partially offset by a year-over-year decrease in the amount of our outstanding debt under the Credit Agreement.
Income Before Provision for Income Taxes
Income before provision for income taxes for the three months ended September 30, 2023 was $507,168 compared to $1,862,502 for the three months ended September 30, 2022, a decrease of $1,355,334 or 72.8% for the reasons noted above.
Income before provision for income taxes for the nine months ended September 30, 2023 was $2,945,595 compared to $2,354,707 for the nine months ended September 30, 2022, an increase of $590,888 or 25.1% for the reasons noted above.
Provision for Income Taxes
Provision for income taxes for the three months ended September 30, 2023 was $205,804 compared to $3,750 for the three months ended September 30, 2022, an increase of $202,054. The increase in the provision for income tax is the result of the Company’s valuation allowance on its deferred tax asset being partially released at December 31, 2022, resulting in the change in the deferred tax asset for the three months ending September 30, 2023 being recorded through the Company’s statement of operations for the three months ending September 30, 2023. For the three months ending September 30, 2022, the company’s deferred tax assets were fully offset by the valuation allowance, therefore there was only minimum state tax income expense recorded to the Company’s statement of operations during the three months ending September 30, 2022.
The effective income tax rate for the three months ended September 30, 2023 is 41%. The difference between the effective income tax rate for the three months ended September 30, 2023 and the statutory income tax rate of 21% for the three months ended September 30, 2023 is primarily due to an increase in the amount of accrued income tax expense being recorded to the three months ended September 2023 in order to maintain the effective tax rate recorded by the Company for the nine months ended September 30, 2023 at the Company’s effective income tax rate of approximately 17% following the recording of a partial release of the Company’s valuation allowance on its deferred tax asset during the three months ended June 30, 2023 of an approximate $121,000.
Provision for income taxes for the nine months ended September 30, 2023 was $503,850 compared to $11,250 for the nine months ended September 30, 2022, an increase of $492,600. The increase in the provision for income tax is the result of the Company’s valuation allowance on its deferred tax asset being partially released at December 31, 2022, resulting in the change in the deferred asset for the nine months ending September 30, 2023 being recorded through the Company’s statement of operations for the nine months ending September 30, 2023. For the nine months ending September 30, 2022, the company’s deferred tax assets were fully offset by the valuation allowance, therefore there was only minimum state tax income expense recorded to the Company’s statement of operations during the nine months ending September 30, 2022.
The effective income tax rate for the nine months ended September 30, 2023 is 17.1%. The difference between the effective income tax rate for the nine months ended September 30, 2023 and the statutory income tax rate of 21% for the nine months ended September 30, 2023 is primarily due to the estimated R&D credit, the partial release of approximately $1,500 of the Company’s valuation allowance on its deferred tax asset, state income taxes and permanent tax differences.
20
Net Income and Earnings per Share
Net income for the three months ended September 30, 2023 of $301,364 or $0.02 per basic and diluted share, compared to $1,858,752 or $0.15 per basic and diluted share for the three months ended September 30, 2022, a decrease of $1,557,388 or 83.8% for the reasons noted above. Basic and diluted income per share for the three months ended September 30, 2023 was calculated using 12,759,971 and 12,793,133 weighted average basic and diluted shares outstanding, respectively. Basic and diluted income per share for the three months ended September 30, 2022 was calculated using 12,301,752 and 12,349,283 weighted average basic and diluted shares outstanding, respectively.
Net income for the nine months ended September 30, 2023 of $2,441,745 or $0.19 per basic and diluted share, compared to $2,343,457 or $0.19 per basic and diluted share for the nine months ended September 30, 2022, an increase of $98,288 or 4.2% for the reasons noted above. Basic and diluted income per share for the nine months ended September 30, 2023 was calculated using 12,613,899 and 12,647,061 weighted average basic and diluted shares outstanding, respectively. Basic and diluted income per share for the nine months ended September 30, 2022 was calculated using 12,362,960 and 12,410,491 weighted average basic and diluted shares outstanding, respectively.
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, net income for the nine months ended September 30, 2023 decreased $673,546 or 21.6% from net income for the nine months ended September 30, 2022 for the reasons noted above.
Excluding the aforementioned severance charge, basic and diluted earnings per share for the nine months ended September 30, 2023 decreased $0.06 from basic and diluted earnings per share for the nine months ended September 30, 2022 for the reasons noted above.
Liquidity and Capital Resources
General
At September 30, 2023, we had working capital of $15,172,459 compared to $12,896,602 at December 31, 2022, an increase of $2,978,413 or 17.6%. This increase was primarily the result of an increase in accounts receivable and contract assets, partly offset by an increase in accounts payable and accrued expenses, partly offset by a decrease in inventory and current portion of long-term debt.
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 and related earnings for which we do not bill on a progress basis, and which, as a result, we bill upon shipment of products, 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 take steps to defer cash outflows until the reported earnings materialize into actual cash receipts.
Some 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 experience margin degradation, 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 continuously work to improve our payment terms from our customers, including accelerated progress payment arrangements, as well as exploring alternate funding sources.
At September 30, 2023, we had cash of $2,609,693 compared to $3,847,225 at December 31, 2022, a decrease of $1,237,532 or 32.2%. This decrease was primarily the result of repayment of debt, partly offset by cash flow from operations.
21
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 March 23, 2023, the Company entered into a Twelfth Amendment to the Credit Agreement (the “Twelfth Amendment”). Under the Twelfth Amendment, the parties amended the Credit Agreement by: (a) extending the maturity date of the Company’s existing revolving line of credit and its existing Term Loan to November 30, 2024 (under the terms of the Credit Agreement, the outstanding principal balance of the Term Loan was repaid by June 30, 2023); (b) providing for reduction of the aggregate maximum principal amount of all revolving line of credit loans to $20,520,000 from October 1, 2023 through December 31, 2023, $19,800,000 from January 1, 2024 through June 30, 2024, $19,080,000 from April 1, 2024 through June 30, 2024, $18,360,000 from July 1, 2024 through September 30, 2024, and $17,640,000 from October 1, 2024 and thereafter, and for payments to be made by the Company to comply therewith (if any such payments are necessary), on the first day of each such period; and (c) payment of a $250,000 capitalized fee incurred in connection with the Eighth Amendment to the Credit Agreement, which the Company entered into on October 28, 2021 (the “Eighth Amendment”) in two installments, the first installment paid on June 1, 2023 in the amount of $116,667 and the second installment paid July 1, 2023 in the amount of $133,333, together with all unpaid interest accrued at the Term Loan interest rate on the capitalized fee through each such date (the installments and interest accrued were paid on such dates).
The Credit Agreement, as amended, requires us to maintain the following financial covenants: (a) minimum debt service coverage ratio of no less than 1.5 to 1.0 for trailing four fiscal quarter periods; (b) maximum leverage ratio of no less than 4.0 to 1.0 for trailing four fiscal quarter periods; (c) minimum net income after taxes as of the end of each fiscal quarter being no less than $1.00; and (d) a minimum adjusted EBITDA at the end of each fiscal quarter of no less than $1.0 million. The additional principal payments, increase in interest and the Amendment Fee provided for in the Eighth Amendment and Ninth Amendment to the Credit Agreement, which the Company entered into on April 12, 2022 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 bear interest at the Prime Rate + 3.50%. The Prime Rate was 8.50% as of September 30, 2023 and as such, the Company’s interest rate on both the Revolving Loan and Term Loan was 12.00% as of September 30, 2023.
As of September 30, 2023 and December 31, 2022, the Company had $20,760,000 and $21,000,000 outstanding under the Revolving Loan, respectively.
During July 2023, the Company finished paying off its Term Loan, and as such, as of September 30, 2023, the Term Loan had a balance of zero as compared to an aggregate principal amount outstanding as of December 31, 2022 of $1,583,333.
There is currently no availability for borrowings under the Revolving Loan and the Company finances its operations from internally generated cash flow.
Liquidity
We believe that our existing resources as of September 30, 2023 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, 2022.
Inflation
Inflation historically has not had a material effect on our operations, although the current inflationary environment in the U.S., and its impact on interest rates, the supply chain, the labor market and general economic conditions, are factors that the Company actively monitors in an attempt to mitigate and manage potential negative impacts on and risks faced by the Company. The majority of the Company’s long term contracts with its customers reflect fixed pricing and its long term contracts with its suppliers reflect fixed pricing. When bidding for work, the Company takes inflation risk and supply side pricing risk into account in its proposals.
22
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4 – Controls and Procedures
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.
Management conducted an evaluation of the effectiveness of internal control over financial reporting for the twelve months ended December 31, 2022 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, management identified deficiencies that constituted material weaknesses in our internal control over financial reporting as of December 31, 2022. For more information on these deficiencies, see Item 9A. Controls and Procedures, included in our Annual Report on Form 10-K. In addition, as previously disclosed, during the quarter ended June 30, 2023, management identified a deficiency that constituted another material weakness in our internal control over financial reporting as of June 30, 2023. Based on management’s evaluation of internal control over financial reporting for the twelve months ended December 31, 2022, and as of September 30, 2023, our disclosure controls and procedures were not effective as of September 30, 2023 due to the materials weaknesses described above.
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 2023, the Company has been implementing new controls designed to remediate the aforementioned 2022 material weaknesses.
Changes in Internal Control Over Financial Reporting
During the quarter ended September 30, 2023, we continued to implement additional internal controls designed to address the aforementioned material weaknesses. Testing of the operational effectiveness of these controls by the Company’s retained Sarbanes-Oxley and internal controls consulting firm began during the quarter ended September 30, 2023 and will continue during the quarters ended December 31, 2023 and March 31, 2024 to assist the Company in evaluating the effectiveness of internal control over financial reporting for the twelve months ended December 31, 2023 for reporting in its Annual Report on Form 10-K for the twelve months ended December 31, 2023.
Part II - Other Information
Item 1 – Legal Proceedings
Reference is made to Note 12 entitled “Commitments and Contingencies” to our unaudited condensed consolidated financial statements included in this Quarterly Report for a discussion of current legal proceedings, which discussion is incorporated herein by reference.
23
Item 1A – Risk Factors
“Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022, includes a discussion of significant factors known to us that could materially adversely affect our business, financial condition, or results of operations. There have been no material changes from the risk factors disclosed in the Annual Report.
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.
24
Item 6 – Exhibits
| Exhibit No. | Description |
| 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 months ended September 30, 2023 and 2022, (ii) Condensed Consolidated Balance Sheet as of September 30, 2023 and December 31, 2022, (iii) Condensed Consolidated Statement of Cash Flows for the three months ended September 30, 2023 and 2022, (iv) Condensed Consolidated Statement of Changes in Equity for the three months ended September 30, 2023 and 2022 and (v) Notes to Condensed Consolidated Financial Statements.
25
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 14, 2023 | By. | /s/ Dorith Hakim |
| Dorith Hakim | ||
Chief Executive Officer and President (Principal Executive Officer) | ||
| Dated: November 14, 2023 | By. | /s/ Andrew L. Davis |
| Andrew L. Davis | ||
Chief Financial Officer (Principal Financial and Accounting Officer) | ||
26