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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
For
the quarterly period ended
OR
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. Yes ☐
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). Yes ☐
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.
Yes ☐ No ☒
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of May 11, 2022, the registrant had shares of common stock, $.001 par value, outstanding.
INDEX
2
Part I - Financial Information
Item 1 – Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
September 30,
2021
(Unaudited) | December 31, 2020
(As Restated - see Note 14) | |||||||
| 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, | |||||||||||||||
| 2021 | 2020 (As Restated – See Note 14) | 2021 | 2020 (As Restated – See Note 14) | |||||||||||||
| Revenue | $ | $ | $ | |||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ||||||||||||||
| Other income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) before provision for income taxes | ( | ) | ||||||||||||||
| Provision for income taxes | ||||||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ) | ||||||||||
| Income (loss) per common share – basic | $ | $ | $ | $ | ( | ) | ||||||||||
| Income (loss) per common share – diluted | $ | $ | $ | $ | ( | ) | ||||||||||
| Shares used in computing income (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 | Total Shareholders’ Deficit | ||||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net Loss (As Restated - See Note 14) | — | ( | ) | ( | ) | |||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Balance at March 31, 2020 (As Restated - see Note 14) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net Loss (As Restated - See Note 14) | — | ( | ) | ( | ) | |||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Balance at June 30, 2020 (As Restated - see Note 14) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
Net Income (As Restated - See Note 14) | — | |||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Balance at September 30, 2020 (As Restated - see Note 14) | ( | ) | ( | ) | ||||||||||||||||
| Balance at January 1, 2021 (As Restated - see Note 14) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| 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 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
See Notes to Consolidated Financial Statements
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| For the Nine Months Ended September 30, | ||||||||
| 2020 | ||||||||
| 2021 | (As Restated - see Note 14) | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt issuance cost | ||||||||
| Insurance receivable | ( | ) | ||||||
| Settlement of litigation obligation | ||||||||
| Cash expended in excess of rent expense | ( | ) | ( | ) | ||||
| Stock-based compensation | ||||||||
| Bad debt expense (recovery) | ( | ) | ||||||
| Forgiveness of PPP loan | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Increase in accounts receivable | ( | ) | ( | ) | ||||
| Increase in contract assets | ( | ) | ( | ) | ||||
| Decrease (increase) in inventory | ( | ) | ||||||
| (Increase) decrease in prepaid expenses and other assets | ( | ) | ||||||
| Decrease in refundable income taxes | ||||||||
| (Decrease) increase in accounts payable and accrued expenses | ( | ) | ||||||
| Increase (decrease) in contract liabilities | ( | ) | ||||||
| Increase in income taxes payable | ||||||||
| Decrease in loss reserve | ( | ) | ( | ) | ||||
| Net cash 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 PPP loan | ||||||||
| Proceeds from line of credit | ||||||||
| Debt issuance costs | ( | ) | ||||||
| Net cash (used) provided by financing activities | ( | ) | ||||||
| Net decrease in cash and restricted cash | ( | ) | ( | ) | ||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid (received) 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, 2021 and for the three and nine months ended September 30, 2021 and 2020 (as restated) 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, 2020 (as restated) has been derived from audited consolidated financial statements, as restated (see Note 14 for more information on the effect of the restatement), 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 comprehensive Annual Report on Form 10-K/A for the year ended December 31, 2020 (the “Comprehensive Form 10-K/A”), as restated. 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, 2021, the Company had $
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 April 12, 2022 which extended the maturity date of the credit
facility to September 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, (iv) remained focused
on its military segment which has proven to be less susceptible to COVID-19 related impacts and (v) maintained a strong (approximately
$
The outbreak of the COVID-19 coronavirus was declared a pandemic by the World Health Organization during our first quarter of 2020. During the latter part of our first quarter and subsequent to our quarter end, the COVID-19 pandemic grew, causing non-essential businesses to shut down and many people to observe the shelter-in-place directive from our state government. Our business and operations and the industries in which we operate have been impacted by public and private sector policies and initiatives in the United States (“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, if it continues for an extended period of time, it could adversely impact our results of operations and financial condition. In response to the COVID-19 impact on our business, we have been and continue to actively mitigate costs. We have also 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 “The impact of the coronavirus (COVID-19) pandemic on our operations, supply chain, and customers has impacted and could continue to have a material adverse effect on our business, financial position, results of operations and/or cash flows” included in Part I, Item 1A of our Comprehensive Form 10-K/A.
| 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.
7
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 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 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. 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.
8
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:
| Three
months ended September 30, | Nine
months ended September 30, | |||||||||||||||
| 2021 | 2020
(As Restated – see Note 14) | 2021 | 2020
(As Restated – see Note 14) | |||||||||||||
| Aerostructures | $ | $ | $ | $ | ||||||||||||
| Aerosystems | ||||||||||||||||
| Kitting and Supply Chain Management | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
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, 2021, the aggregate
amount of transaction price allocated to the remaining performance obligations was approximately $
| 3. | CONTRACT ASSETS AND CONTRACT 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 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 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, 2021 and 2020 that was included in the contract liabilities balance as of January
1, 2021 and 2020, respectively, was approximately $
| 4. | INVENTORY |
The components of inventory consisted of the following:
September 30, 2021 | December 31, 2020 (As Restated) | |||||||
| Raw materials | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods (includes completed components) | ||||||||
| 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 total of $ and $ of stock-based compensation expense for the three months ended September 30, 2021 and 2020, respectively, and a total of $ and $ of stock- based compensation expense for the nine months ended September 30, 2021 and 2020, respectively.
During the three and nine months ended September 30, 2021, the Company granted and restricted stock units (“RSUs”), respectively, to its board of directors as partial compensation for the 2021 year, and during the three and nine months ended September 30, 2020, the Company granted and RSUs, respectively, to its board of directors as partial compensation for the 2020 year. RSUs vest quarterly on a straight-line basis over a one-year period. For the three and nine months ended September 30, 2021, approximately $ 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, and for the three and nine months ended September 30, 2020, approximately $ and $, respectively, of non-cash compensation expense related to the RSU grants to the board of directors are included selling, general and administrative expenses.
9
During the three and nine months ended September 30, 2021, the Company granted and shares of common stock to employees. In the event that any of these employees voluntarily terminates their employment prior to certain dates, portions of the shares may be forfeited. In addition, if certain Company performance criteria are not achieved, portions of these shares may be forfeited. For the three and nine months ended September 30, 2021, approximately $ and $, respectively, of compensation expense are included in selling, general and administrative expenses and approximately $ and $, respectively, of compensation expense are included in cost of sales for the three and nine months ended September 30, 2021, respectively, for shares of common stock granted to employees between 2016 and 2020. For the three and nine months ended September 30, 2020, approximately $ and $, respectively, of compensation expense are included in selling, general and administrative expenses and approximately $ and $, respectively, of compensation expense are included in cost of sales for shares of common stock granted to employees between 2015 and 2019. During the three and nine months ended September 30, 2021, shares were forfeited.
| 6. | FAIR VALUE |
Fair Value
At September 30, 2021 and December 31, 2020, the fair values of cash, accounts receivable, accounts payable and accrued expenses approximated their carrying values because of the short-term nature of these instruments.
| September 30, 2021 | ||||||||
| Carrying Amount | Fair Value | |||||||
| Debt | ||||||||
| Short-term borrowings and long-term debt | $ | $ | ||||||
| December 31, 2020 | ||||||||
| 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 (LOSS) PER COMMON SHARE |
Basic and diluted income (loss) per common share for the three and nine months ended September 30, 2021 and September 30, 2020 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, 2021. Incremental shares of were not used in the calculation of diluted income per common share in the three and nine months ended September 30, 2020, respectively, as the Company is in a loss position for those periods and these shares would be considered anti-dilutive.
| 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
August 24, 2020, the Company entered into a Sixth Amendment and Waiver to the Credit Agreement (the “Sixth Amendment”).
Under the Sixth Amendment, the parties amended the Credit Agreement by extending the maturity date of the Revolving Loan and Term
Loan to
On
May 11, 2021, the Company entered into a Waiver and Seventh Amendment (“Seventh Amendment”) to the Credit Agreement.
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 (the “Eighth Amendment”) to the Credit Agreement.
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, 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 $
The
Credit Agreement, as amended, requires us to maintain the following financial covenants: (a) minimum debt service coverage ratio
of no less than
10
The
BankUnited Facility is secured by all of the Company’s assets and both the Revolving Loan and Term Loan bear interest at
the
As of September 30, 2021 the Company had $
The
Term Loan, as amended by the Ninth Amendment, had an aggregate principal amount of $
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 $
Long Term Debt Maturities
The maturities of long-term debt (excluding unamortized debt issuance costs) are as follows:
| Twelve months ending September 30, | |||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Total | $ | ||||
Included
in the long-term debt are financing leases and other notes payable of $
The
Company has cumulatively paid approximately $
11
| 9. | MAJOR CUSTOMERS |
During
the nine months ended September 30, 2021, the Company’s four largest customers accounted for
At
September 30, 2021,
At
September 30, 2021,
| 10. | LEASES |
The Company leases a building and equipment. Under Accounting Standards Codification Topic 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, 2021, the Company’s operating lease expense was $
Future minimum lease payments under non-cancellable operating leases as of September 30, 2021 were as follows:
Twelve months ending September 30,
| |||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 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, 2021:
| 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
| 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, 2021 and 2020 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-01026) 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 through 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 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 through 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.
The provision for income tax for the nine
months ended September 30, 2021 and 2020 was
12
On
May 20, 2021, the parties reached a settlement in the amount of $
As
of September 30, 2021, 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 have been filed against current 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 in the United States District Court for the Eastern District of New York, and purports to assert derivative claims against the individual defendants for violations of Section 10(b) and 21(d) of the Exchange Act and breach of fiduciary duty, unjust enrichment, and contribution, 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), and 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, and purports to assert derivative claims against current and former members of our board of directors, and certain of our current and former officers. 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 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), and purports to assert derivative claims against the Company’s current and former executive officers, certain board members, and the Company as a nominal defendant. 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.
Each of these derivative actions is based substantially on the same facts alleged in the class action complaint summarized above.
SEC Investigation
On May 22, 2020, the Company received a subpoena from the SEC Division of Enforcement (the “Division”) seeking documents and information relating, among other things, to previously disclosed errors in and restatement of the Company’s financial statements, the Company’s October 16, 2018 equity offering and the recent separation of the Company’s former Chief Financial Officers. By letter dated March 12, 2021, the Division Staff notified the Company that the Division has concluded its investigation and, based on the information the Division has as of such date, it does not intend to recommend an enforcement action by the SEC against the Company. The Division’s notice was provided under the guidelines described in the final paragraph of Securities Act Release No. 5310 which states in part that the notice “must in no way be construed as indicating that the party has been exonerated or that no action may ultimately result from the staff’s investigation.”
13
| 13. | SUBSEQUENT EVENTS |
Restatement due to Inventory Costing Errors and Insufficient Reserves
As
previously reported, on June 4, 2021, the audit and finance committee (the “Audit and Finance Committee”) of the board
of directors of the Company determined, based on the recommendation of management and in consultation with CohnReznick LLP (“CohnReznick”),
then the Company’s independent registered public accounting firm, that the Company’s financial statements which were
included in its Annual Report on Form 10-K for the year ended December 31, 2020 and Quarterly Reports on Form 10-Q for the quarters
ended March 31, 2020, June 30, 2020, and September 30, 2020 as filed with the SEC should no longer be relied upon due to errors
in such financial statements relating to the recording and reporting of inventory costing and related internal controls (the “Inventory
Costing Errors”) and that management’s reports on the effectiveness of internal control over financial reporting,
press releases, and investor communications describing the Company’s financial statements for such periods should no longer
be relied upon. The Company’s management identified the Inventory Costing Errors during its inventory testing procedures
for the preparation of the Company’s financial statements for the quarterly period ended March 31, 2021.
The correction of the Inventory Costing Errors resulted in the determination that certain contracts were in a loss position and certain inventory items required additional reserves. The Company reevaluated the sufficiency of its provisions for loss contracts and inventory reserves that it had previously recorded and concluded that increases to these reserves were required. The insufficient reserves resulting from such reserve increases are referred to as “Additional Inventory Reserves” and “Loss Contract Reserve” and are together referred to as the “Insufficient Reserves.” It was further determined by management that the appropriate starting point for increasing the Insufficient Reserves was during the fourth quarter of 2019.
On November 16, 2021, the Audit and Finance Committee determined, based on the analysis and recommendation of management and in consultation with CohnReznick, that the Company’s financial statements as of and for the period ended December 31, 2019 which were included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 should no longer be relied upon due to errors in such financial statements relating to the recording and reporting of the Insufficient Reserves, that, similarly, management’s reports on the effectiveness of internal control over financial reporting, press releases, and investor communications describing the Company’s financial statements for such period should no longer be relied upon, and stated that the Company expected to restate its Annual Report on Form 10-K for the years ended December 31, 2020 and December 31, 2019, and its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020, June 30, 2020, and September 30, 2020 as filed with the SEC (the “Original Forms 10-Q”) by filing a Comprehensive Form 10-K/A.
The
Company, upon conducting an analysis of the impact of the Insufficient Reserves on previously reported financial results, determined
that net loss for the years ended December 31, 2020 and 2019 was $
Considering
both the Inventory Costing Errors and the Insufficient Reserves, the Company determined that the net loss for the years ended
December 31, 2020 and 2019 was $
The
Inventory Costing Errors resulted from software processing and coding errors, inconsistent units of measure being used for quantities
ordered and quantities received of certain purchased parts, incorrect accruals to accounting periods of the cost of certain goods
received and the Company not having a procedure to address over- or under-absorbed overhead costs at the end of accounting periods.
The Inventory Costing Errors affected the income reported with respect to the Company’s product lines for which revenue
is recognized when a product ships to customers, which accounted for approximately
Management has considered the effect of the Inventory Costing Errors and the Insufficient Reserves on the Company’s prior conclusions of the adequacy of its internal control over financial reporting and disclosure controls and procedures as of the end of each of the applicable periods. As a result of the Inventory Costing Errors and the Insufficient Reserves, management determined that a material weakness existed in the Company’s internal control over financial reporting as of the end of the quarterly periods ended March 31, 2020, June 30, 2020, September 30, 2020 and for the years ended December 31, 2020 and 2019. See Part II Item 9A – Controls and Procedures included in the Comprehensive Form 10-K/A for a description of these matters.
As
a result of the restatement caused by the Inventory Costing Errors and Insufficient Reserves, the Company reported net loss for
the years ended December 31, 2020 and December 31, 2019 which was $
The Comprehensive Form 10-K/A contains our audited restated annual financial statements as of and for the years ended December 31, 2020 and 2019, as well as our unaudited restated quarterly financial statements as of and for the quarters ended March 31, 2020, June 30, 2020 and September 30, 2020. The restatement is discussed in more detail within Part II, Item 8 Note 17, “Restatement of Previously Issued Consolidated Financial Statements” in the notes to the consolidated financial statements included in our Comprehensive Form 10-K/A.
14
Amendments to BankUnited Facility
On
May 11, 2021, we entered into 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, we entered into 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 $
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 $
The
Credit Agreement, as amended, requires us to maintain the following financial covenants: (a) minimum debt service coverage ratio
of no less than
NYSE American Delinquency Notices; NYSE American Exchange Delisting Proceedings
On May 25, 2021, we received a notice from NYSE American LLC (the “Exchange”) stating that our failure to timely file our Quarterly Report on Form 10-Q for the three months ended March 31, 2021 caused us to be out of compliance with the Exchange’s continued listing standards under the timely filing criteria included in Section 1007 of the NYSE American Company Guide (the “Company Guide”). Also, our failure to timely file our (i) Quarterly Report on Form 10-Q for the three months ended June 30, 2021 and Quarterly Report on Form 10-Q for the three months ended September 30, 2021 constituted and (ii) Annual Report on Form 10-K for the year ended December 31, 2021 remains, additional noncompliance with the Exchange’s continued listing standards under the timely filing criteria included in Section 1007 of the Company Guide.
In accordance with Section 1007 of the Company Guide, the Company was provided a six-month initial period to regain compliance with the timely filing criteria. On November 17, 2021, the Company submitted a request for additional time in which to file the delayed filings, which included a plan to regain compliance with Section 1007 of the Company Guide. On November 23, 2021, the Company was notified that the Exchange had accepted the Company’s plan to regain compliance with the continued listing standards and was granted a period through April 14, 2022 in which to file the delayed filings and any subsequently delayed filings. On March 25, 2022, the Company requested and on April 8, 2022 the Exchange granted an additional extension up to the maximum cure period ending on May 24, 2022. The Company does not believe it will complete the filings of its Annual Report on Form 10-K for the year ended December 31, 2021 or its Quarterly Report on Form 10-Q for the three months ended March 31, 2022 by the end of the cure period. The notices the Company has received from the Exchange indicate that if the Company does not complete these filings by May 24, 2022, the Exchange staff will initiate delisting proceedings as appropriate.
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’s common stock is not delisted from the Exchange as a result of the Company’s delayed filings as described above and (i) the Company is not in compliance with the continued listing standards by March 17, 2023 or (ii) the Company does not make progress consistent with the Plan during the plan period, the Exchange staff may initiate delisting proceedings as appropriate.
See Part II, Item 1A Risk Factors “If our common stock is delisted from the NYSE American exchange, our business, financial condition, results of operations and stock price could be adversely affected, and the liquidity of our stock and our ability to obtain financing could be impaired.”
Extension of Lease Agreement on Corporate Headquarters, Manufacturing and Office Space
On November 10, 2021, the Company executed a second amendment to the lease agreement for its manufacturing and office space, which extends the lease agreement’s expiration date to April 30, 2026.
Cost reduction initiative
During the first quarter of 2022, the Company began a cost reduction initiative designed to improve operational efficiency and reduce costs during fiscal year 2022. Management is reallocating resources and reducing operating and general administrative expenses to more properly align the Company’s costs to anticipated near-term revenue given the timing differences between the conclusion of certain mature programs and the commencement of new programs in 2022. The Company executed a headcount reduction and furlough action in March 2022 and is implementing cost controls and cuts during the balance of fiscal year 2022. The Company anticipates recording severance costs related to the headcount reduction in its first fiscal quarter of 2022 and the cost reductions of these actions are anticipated to positively impact the financial results of the Company beginning in the second fiscal quarter of 2022.
| 14. | RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS |
As
previously reported, on June 4, 2021, the Audit and Finance Committee determined, based on the recommendation of management and
in consultation with CohnReznick that the Company’s financial statements which were included in its Annual Report on Form
10-K for the year ended December 31, 2020 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020, June 30, 2020,
and September 30, 2020 as filed with the SEC should no longer be relied upon due to the Inventory Costing Errors and that management’s
reports on the effectiveness of internal control over financial reporting, press releases, and investor communications describing
the Company’s financial statements for such periods should no longer be relied upon. The Company’s management identified
the Inventory Costing Errors during its inventory testing procedures for the preparation of the Company’s financial statements
for the quarterly period ended March 31, 2021.
15
The correction of the Inventory Costing Errors resulted in the determination that certain contracts were in a loss position and certain inventory items required additional reserves. The Company re-evaluated the sufficiency of its provisions for loss contracts and inventory reserves that it had previously recorded and concluded that increases to these reserves were required. It was further determined by management that the appropriate starting point for increasing the Insufficient Reserves was during the fourth quarter of 2019.
On November 16, 2021, the Audit and Finance Committee determined, based on the analysis and recommendation of management and in consultation with CohnReznick, that the Company’s financial statements as of and for the period ended December 31, 2019 which were included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 should no longer be relied upon due to errors in such financial statements relating to the recording and reporting of the Insufficient Reserves, that, similarly, management’s reports on the effectiveness of internal control over financial reporting, press releases, and investor communications describing the Company’s financial statements for such period should no longer be relied upon, and stated that the Company expected to restate its Annual Report on Form 10-K for the years ended December 31, 2020 and December 31, 2019, and its Original Forms 10-Q by filing a Comprehensive Form 10-K/A.
The
Company, upon conducting an analysis of the impact of the Insufficient Reserves on previously reported financial results, determined
that net loss for the years ended December 31, 2020 and 2019 was $
Considering
both the Inventory Costing Errors and the Insufficient Reserves, the Company determined that the net loss for the years ended
December 31, 2020 and 2019 was $
The Inventory Costing Errors resulted from software processing and coding errors, inconsistent units of measure being used for quantities ordered and quantities received of certain purchased parts, incorrect accruals to accounting periods of the cost of certain goods received and the Company not having a procedure to address over- or under-absorbed overhead costs at the end of accounting periods. The Inventory Costing Errors affected the income reported with respect to the Company’s Non-POC Contracts. The Inventory Costing Errors did not affect income reported with respect to the Company’s POC Contracts. The Loss Contract Reserve and the Additional Inventory Reserves also only affected the income reported with respect to the Company’s Non-POC Contracts, and did not affect the income reported with respect to the Company’s POC Contracts. The Inventory Costing Errors and the Insufficient Reserves did not affect either prior reported revenue or cash flow for fiscal 2020 and 2019.
Management has considered the effect of the Inventory Costing Errors and the Insufficient Reserves on the Company’s prior conclusions of the adequacy of its internal control over financial reporting and disclosure controls and procedures as of the end of each of the applicable periods. As a result of the Inventory Costing Errors and the Insufficient Reserves, management has determined that a material weakness existed in the Company’s internal control over financial reporting as of the end of the quarterly periods ended March 31, 2020, June 30, 2020, September 30, 2020 and for the years ended December 31, 2020 and 2019. See Part II Item 9A – Controls and Procedures within the Comprehensive Form 10-K/A for a description of these matters.
As
a result of the restatement included caused by the Inventory Costing Errors and Insufficient Reserves, the Company reported net
loss for the years ended December 31, 2020 and December 31, 2019 which was $
2020 and 2019 Restatement
The following is a discussion of the restatement adjustments that were made to the Company’s previously issued December 31, 2020 and December 31, 2019 consolidated financial statements due to the Inventory Costing Errors, Loss Contract Reserve and Additional Inventory Reserves.
(a) Inventory Costing Errors
The Company determined that the Inventory Costing Errors resulted in incorrectly reported inventory values and reported income for the annual periods ended December 31, 2020 and December 31, 2019, and the quarterly periods ended March 31, 2020, June 30, 2020 and September 30, 2020. The Inventory Costing Errors were comprised of the following:
1) Labor costs for work in process were overstated in the detailed inventory records due to an automated reversing entry not processing correctly;
2) A customized IT program to calculate weighted average cost was not tested thoroughly enough, which allowed errors in average cost calculations to occur in certain situations;
3) Units of measure were not consistent between quantities ordered and quantities received for certain classes of purchased parts, which resulted in overstatements of inventory values due to units of measure not being consistent with unit prices on purchase orders to suppliers;
4) The cost of goods received which had not yet processed through the Company’s quality inspection process at the time of the period-end accounting closes were not properly accrued to the period financial statements;
5) The Company did not have a process to address over-absorbed or under-absorbed overhead costs at the end of each accounting period.
16
(b) Loss Contract Reserve
After correcting its financial statements for the Inventory Costing Errors, the Company determined that is was a party to some contracts to deliver product upon which the Company would lose money, and thus the Company’s Loss Contract Reserve was increased accordingly for the year ended December 31, 2020 and December 31, 2019, and for the quarterly periods ended March 31, 2020, June 30, 2020 and September 30, 2020.
(c) Additional Inventory Reserves
After correcting its financial statements for the Inventory Costing Errors, the Company determined that its inventory required additional reserves to reflect current market value and demand, and thus the Company’s Inventory Reserves were increased accordingly for the year ended December 31, 2020 and December 31, 2019, and for the quarterly periods ended March 31, 2020, June 30, 2020 and September 30, 2020.
(d) Income taxes
There were no material tax adjustments to the Company’s provision for/(benefit from) income taxes or net deferred tax assets (liabilities) related to the impact of the 2020 and 2019 restatement.
17
The following tables present the impact of the restatement on the Company’s previously reported financial statements as of December 31, 2020 and September 30, 2020:
Impact on Consolidated Balance Sheets
The effect of the Restatement described above on the accompanying consolidated balance sheet as of December 31, 2020 is as follows:
| Consolidated Balance Sheet as at December 31, 2020 | ||||||||||||||||||||
| As Previously Reported | Inventory Costing Errors | Loss Contract Reserve | Additional Inventory Reserve | As Restated | ||||||||||||||||
| ASSETS | ||||||||||||||||||||
| Current Assets: | ||||||||||||||||||||
| Cash | $ | $ | $ | $ | $ | |||||||||||||||
| Accounts receivable, net | ||||||||||||||||||||
| 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 | ||||||||||||||||||||
| Contract liabilities | ||||||||||||||||||||
| Loss reserve | ||||||||||||||||||||
| Current portion of long-term debt | ||||||||||||||||||||
| Operating lease liabilities | ||||||||||||||||||||
| Income taxes 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 | ||||||||||||||||||||
| Additional paid-in capital | ||||||||||||||||||||
| Accumulated deficit | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Total Shareholders’ Deficit | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Total Liabilities and Shareholders’ Deficit | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||
18
The effect of the Restatement described above on the accompanying consolidated statement of operations for the three and nine months ended September 30, 2020 is as follows:
| Consolidated Statement of Operation For the three months ended September 30, 2020 (Unaudited) | ||||||||||||||||||||
| As Previously Reported | Inventory Costing Errors | Loss Contract Reserve | Inventory Reserve | As Restated | ||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of sales | ( | ) | ||||||||||||||||||
| Gross profit | ( | ) | ( | ) | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||||||
| Profit from operations | ( | ) | ( | ) | ||||||||||||||||
| Other expense: | ||||||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||||||
| Income before provision for income taxes | ( | ) | ( | ) | ||||||||||||||||
| Provision for income taxes | ||||||||||||||||||||
| Net Income | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||
| Income per common share - basic | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||
| Income per common share - diluted | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||
| Basic | ||||||||||||||||||||
| Diluted | ||||||||||||||||||||
| Consolidated Statement of Operation For the nine months ended September 30, 2020 (Unaudited) | ||||||||||||||||||||
| As Previously Reported | Inventory Costing Errors | Loss Contract Reserve | Inventory Reserve | As Restated | ||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of sales | ( | ) | ||||||||||||||||||
| Gross profit | ( | ) | ( | ) | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Other expense: | ||||||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||||||
| Loss before provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Provision for income taxes | ||||||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||
| Loss per common share - basic | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||
| Loss per common share - diluted | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ( | ) | ||||||||
| Basic | ||||||||||||||||||||
| Diluted | ||||||||||||||||||||
19
Cumulative Effect of Prior Period Adjustments
The following table presents the impact of the Restatement on the Company’s shareholders’ deficit as of December 31, 2019 (as restated), March 31, 2020 (as restated), June 30, 2020 (as restated), September 30, 2020 (as restated) and December 31, 2020 (as restated):
| Common Stock Shares | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Shareholders’ Deficit | ||||||||||||||||
| Balance, December 31, 2019 (As Restated) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net Loss (as previously reported) | $ | ( | ) | $ | ( | ) | ||||||||||||||
| Inventory Costing Errors | ( | ) | ( | ) | ||||||||||||||||
| Loss Contract Reserve | — | — | — | ( | ) | ( | ) | |||||||||||||
| Inventory Reserve | — | — | — | ( | ) | ( | ) | |||||||||||||
| Cumulative restatement adjustments | — | — | — | ( | ) | ( | ) | |||||||||||||
| Net Loss (as restated) | ( | ) | ( | ) | ||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Balance, March 31, 2020 (As Restated) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net Loss (as previously reported) | $ | ( | ) | $ | ( | ) | ||||||||||||||
| Inventory Costing Errors | — | — | — | ( | ) | ( | ) | |||||||||||||
| Loss Contract Reserve | — | — | — | ( | ) | ( | ) | |||||||||||||
| Inventory Reserve | — | — | — | ( | ) | ( | ) | |||||||||||||
| Cumulative restatement adjustments | — | — | — | ( | ) | ( | ) | |||||||||||||
| Net Loss (as restated) | ( | ) | ( | ) | ||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Balance, June 30, 2020 (As Restated) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net Income (as previously reported) | $ | $ | ||||||||||||||||||
| Inventory Costing Errors | — | — | — | ( | ) | ( | ) | |||||||||||||
| Loss Contract Reserve | — | — | — | |||||||||||||||||
| Inventory Reserve | — | — | — | ( | ) | ( | ) | |||||||||||||
| Cumulative restatement adjustments | — | — | — | |||||||||||||||||
| Net Income (as restated) | ||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Balance, September 30, 2020 (As Restated) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net Income | $ | $ | ||||||||||||||||||
| Inventory Costing Errors | — | — | — | ( | ) | ( | ) | |||||||||||||
| Loss Contract Reserve | — | — | — | |||||||||||||||||
| Inventory Reserve | — | — | — | ( | ) | ( | ) | |||||||||||||
| Cumulative restatement adjustments | — | — | — | ( | ) | ( | ) | |||||||||||||
| Net Income (as restated) | ||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Balance, December 31, 2020 (As Restated) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
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Impact on Consolidated Statement of Cash Flows
The effect of the Restatement described above on the accompanying consolidated statement of cash flows for the nine months ended September 30, 2020 is as follows:
| Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 (Unaudited) | ||||||||||||||||||||
| As Previously Reported | Inventory Costing Errors | Loss Contract Reserve | Inventory Reserve | As Restated | ||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||
| Amortization of debt issuance cost | ||||||||||||||||||||
| Cash expended in excess of rent expense | ( | ) | ( | ) | ||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Bad debt expense | ( | ) | ( | ) | ||||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||
| Increase in accounts receivable | ( | ) | ( | ) | ||||||||||||||||
| Increase in contract assets | ( | ) | ( | ) | ||||||||||||||||
| Increase in inventory | ( | ) | ( | ) | ||||||||||||||||
| Decrease in prepaid expenses and other current assets | ||||||||||||||||||||
| Decrease in refundable income taxes | ||||||||||||||||||||
| Increase in accounts payable and accrued expenses | ||||||||||||||||||||
| Decrease in contract liabilities | ( | ) | ( | ) | ||||||||||||||||
| Decrease in loss reserve | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net cash 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: | ||||||||||||||||||||
| Proceeds from PPP loan | ||||||||||||||||||||
| Payments on long-term debt | ( | ) | ( | ) | ||||||||||||||||
| Debt issuance costs | ( | ) | ( | ) | ||||||||||||||||
| Net cash provided by financing activities | ||||||||||||||||||||
| Net decrease in cash and restricted cash | ( | ) | ( | ) | ||||||||||||||||
| Cash and restricted cash at beginning of year | ||||||||||||||||||||
| Cash and restricted cash at end of year | $ | $ | $ | $ | $ | |||||||||||||||
| Supplemental schedule of cash flow information: | ||||||||||||||||||||
| Cash paid during the year for interest | $ | $ | $ | $ | $ | |||||||||||||||
| Cash (received) from income taxes | $ | ( | ) | $ | $ | $ | $ | ( | ) | |||||||||||
21
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 comprehensive Annual Report on Form 10-K/A for the year ended December 31, 2020 (the “Comprehensive Form 10-K/A”) and Part II, Item 1-A – Risk Factors of this report. 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 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
The impact that the recent COVID-19 pandemic will have on our business remains uncertain.
During late 2020, we began to experience an increased rate of employees testing positive for COVID-19 and we took steps to mitigate virus transmission within the workplace. These steps included adding a second manufacturing shift to lessen employee density on the manufacturing floor and to require most non-manufacturing personnel to work from home. These measures continued into 2021. Despite these measures, during the first three months of 2021 we experienced a relatively high level of absenteeism directly or indirectly related to COVID-19. We have taken mitigating steps in an attempt to reduce the adverse effects of COVID-19 on our business. For example, we have curtailed discretionary spending and business travel, and taken other steps to preserve cash. We have also taken action to more closely manage the flow of materials to be more responsive to unanticipated changes in customer delivery schedules. Since May 2021 and through the date of this Quarterly Report on Form 10-Q, we have experienced a decrease in the impact of COVID-19. Most non-manufacturing personnel have returned to their regular in-person work schedules and we have returned to a single day shift manufacturing operation, although we do continue to experience employees and business partners with new COVID-19 diagnoses on an intermittent basis and we take needed steps to mitigate these impacts on the Company’s operation as they occur.
Recent Developments
NYSE American Delinquency Notices; NYSE American Exchange Delisting Proceedings
On May 25, 2021, we received a notice from NYSE American LLC (the “Exchange”) stating that our failure to timely file our Quarterly Report on Form 10-Q for the three months ended March 31, 2021 caused us to be out of compliance with the Exchange’s continued listing standards under the timely filing criteria included in Section 1007 of the NYSE American Company Guide (the “Company Guide”). Also, our failure to timely file our (i) Quarterly Report on Form 10-Q for the three months ended June 30, 2021 and Quarterly Report on Form 10-Q for the three months ended September 30, 2021 constituted and (ii) Annual Report on Form 10-K for the year ended December 31, 2021 remains, additional noncompliance with the Exchange’s continued listing standards under the timely filing criteria included in Section 1007 of the Company Guide.
In accordance with Section 1007 of the Company Guide, the Company was provided a six-month initial period to regain compliance with the timely filing criteria. On November 17, 2021, the Company submitted a request for additional time in which to file the delayed filings, which included a plan to regain compliance with Section 1007 of the Company Guide. On November 23, 2021, the Company was notified that the Exchange had accepted the Company’s plan to regain compliance with the continued listing standards and was granted a period through April 14, 2022 in which to file the delayed filings and any subsequently delayed filings. On March 25, 2022, the Company requested and on April 8, 2022 the Exchange granted an additional extension up to the maximum cure period ending on May 24, 2022. The Company does not believe it will complete the filings of its Annual Report on Form 10-K for the year ended December 31, 2021 or its Quarterly Report on Form 10-Q for the three months ended March 31, 2022 by the end of the cure period. The notices the Company has received from the Exchange indicate that if the Company does not complete these filings by May 24, 2022, the Exchange staff will initiate delisting proceedings as appropriate.
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’s common stock is not delisted from the Exchange as a result of the Company’s delayed filings as described above and (i) the Company is not in compliance with the continued listing standards by March 17, 2023 or (ii) the Company does not make progress consistent with the Plan during the plan period, the Exchange staff may initiate delisting proceedings as appropriate.
See Part II, Item 1A Risk Factors “If our common stock is delisted from the NYSE American exchange, our business, financial condition, results of operations and stock price could be adversely affected, and the liquidity of our stock and our ability to obtain financing could be impaired.”
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Restatement due to Inventory Costing Errors and Insufficient Reserves
As previously reported, on June 4, 2021, the audit and finance committee (the “Audit and Finance Committee”) of the board of directors of the Company determined, based on the recommendation of management and in consultation with CohnReznick LLP (“CohnReznick”), the Company’s independent registered public accounting firm, that the Company’s financial statements which were included in its Annual Report on Form 10-K for the year ended December 31, 2020 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020, June 30, 2020, and September 30, 2020 as filed with the SEC should no longer be relied upon due to errors in such financial statements relating to the recording and reporting of inventory costing and related internal controls (the “Inventory Costing Errors”) and that management’s reports on the effectiveness of internal control over financial reporting, press releases, and investor communications describing the Company’s financial statements for such periods should no longer be relied upon. The Company’s management identified the Inventory Costing Errors during its inventory testing procedures for the preparation of the Company’s financial statements for the quarterly period ended March 31, 2021. At the time of the June 2021 disclosure, the Company estimated and disclosed that the Inventory Costing Errors were expected to increase 2020 net loss reported on the Annual Report on Form 10-K for the year ended December 31, 2020 by $1.9 million to $2.3 million. The Company has determined that the Inventory Costing Errors increased 2020 net loss by $2,010,084.
The correction of the Inventory Costing Errors resulted in the determination that certain contracts were in a loss position and certain inventory items required additional reserves. The Company reevaluated the sufficiency of its provisions for loss contracts and inventory reserves that it had previously recorded and concluded that increases to these reserves were required. The insufficient reserves resulting from such reserve increases are referred to as “Additional Inventory Reserves” and “Loss Contract Reserve” and are together referred to as the “Insufficient Reserves.” It was further determined by management that the appropriate starting point for increasing the Insufficient Reserves was during the fourth quarter of 2019.
On November 16, 2021, the Audit and Finance Committee determined, based on the analysis and recommendation of management and in consultation with CohnReznick, that the Company’s financial statements as of and for the period ended December 31, 2019 which were included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 should no longer be relied upon due to errors in such financial statements relating to the recording and reporting of the Insufficient Reserves, that, similarly, management’s reports on the effectiveness of internal control over financial reporting, press releases, and investor communications describing the Company’s financial statements for such period should no longer be relied upon, and stated that the Company expected to restate its Annual Report on Form 10-K for the years ended December 31, 2020 and December 31, 2019, and its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020, June 30, 2020, and September 30, 2020 as filed with the SEC (the “Original Forms 10-Q”) by filing a comprehensive Form 10-K/A.
The Company, upon conducting an analysis of the impact of the Insufficient Reserves on previously reported financial results, determined that net loss for the years ended December 31, 2020 and 2019 was $324,231 and $2,189,728, respectively, greater than the net loss reported in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Considering both the Inventory Costing Errors and the Insufficient Reserves, the Company determined that the net loss for the years ended December 31, 2020 and 2019 was $2,334,315 and $2,300,083, respectively, greater than the net loss reported in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and net loss for the quarters ended March 31, 2020, June 30, 2020 was $544,836 and $763,730, respectively, greater than the net loss reported in the respective Quarterly Reports on Form 10-Q for such periods and the net income for the quarter ended September 30, 2020 was $24,556 more than the net income reported in the Quarterly Report for such period.
The Inventory Costing Errors resulted from software processing and coding errors, inconsistent units of measure being used for quantities ordered and quantities received of certain purchased parts, incorrect accruals to accounting periods of the cost of certain goods received and the Company not having a procedure to address over- or under-absorbed overhead costs at the end of accounting periods. The Inventory Costing Errors affected the income reported with respect to the Company’s Non-POC Contracts. The Inventory Costing Errors did not affect income reported with respect to the Company’s POC Contracts. The Loss Contract Reserve and the Additional Inventory Reserves also only affected the income reported with respect to the Company’s Non-POC Contracts, and did not affect the income reported with respect to the Company’s POC Contracts. The Inventory Costing Errors and the Insufficient Reserves did not affect either prior reported revenue or cash flow for fiscal 2020 and 2019.
Management has considered the effect of the Inventory Costing Errors and the Insufficient Reserves on the Company’s prior conclusions of the adequacy of its internal control over financial reporting and disclosure controls and procedures as of the end of each of the applicable periods. As a result of the Inventory Costing Errors and the Insufficient Reserves, management has determined that a material weakness existed in the Company’s internal control over financial reporting as of the end of the quarterly periods ended March 31, 2020, June 30, 2020, September 30, 2020 and for the years ended December 31, 2020 and 2019. See Part II Item 9A – Controls and Procedures within the Comprehensive Form 10-K/A for a description of these matters.
As a result of the restatement caused by the Inventory Costing Errors and Insufficient Reserves, the Company reported net loss for the years ended December 31, 2020 and December 31, 2019 which was $2,334,315 and $2,300,083, respectively, greater than the net loss reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “Original Form 10-K”) and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, net loss for the quarters ended March 31, 2020 and June 30, 2020 which was $544,836 and $763,730, respectively, greater than the net loss reported in the respective Original Forms 10-Q, and net income for the quarter ended September 30, 2020 which was $24,556 greater than the net income reported in the Original Form 10-Q. The Inventory Costing Errors and the Insufficient Reserves did not affect reported revenue or cash flows for the years ended December 31, 2020 or December 31, 2019, or for the quarters ended March 31, June 30 and September 30, 2020.
The Comprehensive Form 10-K/A contains our audited restated annual financial statements as of and for the years ended December 31, 2020 and 2019, as well as our unaudited restated quarterly financial statements as of and for the quarters ended March 31, 2020, June 30, 2020 and September 30, 2020. The restatement is discussed in more detail within Part II, Item 8 Note 17, “Restatement of Previously Issued Consolidated Financial Statements” in the notes to the consolidated financial statements included in the Comprehensive Form 10-K/A.
23
Amendment and Waiver to our BankUnited Credit Facility
On May 11, 2021, we entered into a Seventh Amendment and Waiver (“Seventh Amendment”) to that certain Amended and Restated Credit Agreement with the Lenders named therein and BankUnited, N.A. (“BankUnited”) as Sole Arranger, Agent and Collateral Agent, dated as of March 24, 2016 (as amended from time to time, the “Credit Agreement”). Under the Seventh Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Company’s existing $24 million revolving line of credit and its existing $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, we entered into an Eighth Amendment and Waiver (“Eighth Amendment”) to the Credit Agreement. 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 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.
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 as set forth in the following paragraph. 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.
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 the trailing four quarter period ended June 30, 2021 and December 31, 2021, 0.90 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 4.75 to 1.0 for the trailing four quarter period ended June 30, 2021, 5.35 to 1.0 for the trailing four quarter period ended September 30, 2021, 4.65 to 1.0 for the trailing four quarter period ended December 31, 2021, 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 4.0 to 1.0 for the trailing four quarter period ended September 30, 2022 and 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.
Paycheck Protection Program (PPP) Loan
As previously reported, on April 10, 2020, we obtained a loan from Dime Community Bank (formerly BNB Bank) as the lender (“Dime”), in the principal amount of $4,795,000 (“PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security (CARES) Act as administered by the U.S. Small Business Administration (“SBA”). The Company submitted its PPP Loan forgiveness application and the loan necessity questionnaire to the SBA through Dime.
On July 13, 2021, the Company received notification through Dime that the PPP Loan and accrued interest thereon have been fully forgiven by the SBA and that the forgiveness payment date was July 1, 2021. The forgiveness of the PPP Loan has been recognized 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 Coronavirus Aid, Relief and Economic Security (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.
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 through 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 through 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. After satisfaction of our $750,000 retention, the Settlement Amount will be covered and paid by our directors’ and officers’ insurance carrier. As of March 31, 2021, we have previously paid or 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.
As of September 30, 2021, 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 $3,206,133 and an insurance recovery receivable of $2,850,000; this obligation and receivable will be relieved from our balance sheet upon the payment of the Settlement Amount to the Plaintiff by our directors’ and officers’ insurance carrier.
24
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.
| Backlog | September 30, | December 31, | |||||||
| (Total) | 2021 | 2020 | |||||||
| Funded | $ | 137,699,000 | $ | 169,567,000 | |||||
| Unfunded | 267,770,000 | 306,618,000 | |||||||
| Total | $ | 405,469,000 | $ | 476,185,000 | |||||
25
Approximately 96% of the total amount of our backlog at September 30, 2021 was attributable to government contracts. Our backlog attributable to government contracts at September 30, 2021 and December 31, 2020 was as follows:
| Backlog | September 30, | December 31, | |||||||
| (Government) | 2021 | 2020 | |||||||
| Funded | $ | 135,395,000 | $ | 166,156,000 | |||||
| Unfunded | 254,333,000 | 290,632,000 | |||||||
| Total | $ | 389,728,000 | $ | 456,788,000 | |||||
Our backlog attributable to commercial contracts at September 30, 2021 and December 31, 2020 was as follows:
| Backlog | September 30, | December 31, | |||||||
| (Commercial) | 2021 | 2020 | |||||||
| Funded | $ | 2,304,000 | $ | 3,411,000 | |||||
| Unfunded | 13,437,000 | 15,986,000 | |||||||
| Total | $ | 15,741,000 | $ | 19,397,000 | |||||
The total backlog at September 30, 2021 is primarily comprised of long-term programs with Raytheon (Next Generation Jammer – Mid Band Pod), USAF (T-38), Boeing (A-10), Sikorsky IR Module Assembly (HIRSS) and Northrop Grumman (E-2D). Funded backlog is primarily from purchase orders under long-term contracts with USAF (T-38), Boeing A-10, Sikorsky IR Module Assembly (HIRSS), Northrop Grumman (E-2D), Lockheed Martin F-16 Rudder Island, and Raytheon (Next Generation Jammer – Mid Band Pod).
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 Comprehensive Form 10-K/A, 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, 2021.
26
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Revenue
Revenue for the three months ended September 30, 2021 was $23,898,748 compared to $25,576,718 (restated) for the same period last year, a decrease of $1,677,970 or 6.6%. The decrease was primarily related to decreases in the USAF T-38 Pacer Classic Kits, and the Northrop Grumman E-2D Wing Panel Kitting Program for the U.S. Navy, offset by increases in the Lockheed Martin drive shaft assemblies for the F-35 Lightening multi-role fighter, and the Raytheon Next Generation Jammer – Mid Band (“NGJ-MB”).
Revenue for the nine months ended September 30, 2021 was $77,018,684 compared to $62,175,872 (restated) for the same period last year, an increase of $14,842,812 or 23.9%. The year to date increase was driven by the Raytheon Next Generation Jammer – Mid Band (“NGJ-MB”), the Lockheed Martin drive shaft assemblies for the F-35 Lightening multi-role fighter, and the Northrop Grumman E-2D Wing Panel Kitting Program for the U.S. Navy.
Revenue from government subcontracts was $21,873,152 for the three months ended September 30, 2021 compared to $20,887,968 (restated) for the three months ended September 30, 2020, an increase of $985,184 or 4.7%. The increase in government subcontract revenue is primarily due to the programs referred to above for the increase in total revenue for the same period.
Revenue from government subcontracts was $70,167,598 for the nine months ended September 30, 2021 compared to $47,829,529 (restated) for the nine months ended September 30, 2020, an increase of $22,338,069 or 46.7%. The increase in government subcontract revenue was primarily related to the programs referred to above for the increase in total revenue for the same period.
Revenue from direct military contracts was $922,443 for the three months ended September 30, 2021 compared to $3,778,686 (restated) for the three months ended September 30, 2020, a decrease of $2,856,243 or 75.6%. The decrease in revenue is primarily driven by a decrease in revenue from the T-38 Pacer Classic program.
Revenue from direct military contracts was $2,820,981 for the nine months ended September 30, 2021 compared to $7,947,977 (restated) for the nine months ended September 30, 2020, a decrease of $5,126,996 or 64.5%. The decrease in revenue is primarily due to timing of the Northrop Grumman E-2D Wing Panel Kitting Program for the U.S. Navy
Revenue from commercial subcontracts was $1,103,153 for the three months ended September 30, 2021 compared to $910,064 (restated) for the three months ended September 30, 2020, an increase of $193,089 or 21.2%. The increase is primarily the result of higher revenue from the Gulfstream G650 wing fixed leading edge (FLE) and the Embraer inlet program partly offset by the HondaJet engine inlet program that we exited at the end of 2020.
Revenue from commercial subcontracts was $4,030,104 for the nine months ended September 30, 2021 compared to $6,398,366 (restated) for the nine months ended September 30, 2020, a decrease of $2,368,262 or 37.0%. The decrease was driven by lower revenues on the Gulfstream G650 FLE program and the HondaJet engine inlet program that we exited at the end of 2020.
Cost of Sales
Cost of sales for the three months ended September 30, 2021 and 2020 was $20,246,764 and $21,369,687 (restated), respectively, a decrease of $1,122,923 or 5.3%. This decrease is the result of the comparable decrease in revenue and the specific program related factors noted below.
Cost of sales for the nine months ended September 30, 2021 and 2020 was $64,850,010 and $55,999,518 (restated), respectively, an increase of $8,850,492 or 15.8%. This increase is the result of the comparable increase in revenue and the specific program related factors noted below.
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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
The components of the cost of sales were as follows:
| Three months ended | Nine months ended | |||||||||||||||
September 30, 2021 | September 30, 2020 (restated) | September 30, 2021 | September 30, 2020 (restated) | |||||||||||||
| Procurement | $ | 14,373,181 | $ | 17,422,838 | $ | 47,709,154 | $ | 39,301,649 | ||||||||
| Labor | 2,055,353 | 1,670,257 | 5,945,219 | 4,919,711 | ||||||||||||
| Factory overhead | 4,860,469 | 4,715,955 | 14,934,140 | 15,032,135 | ||||||||||||
| Other | (1,042,239 | ) | (2,439,363 | ) | (3,738,503 | ) | (3,253,977 | ) | ||||||||
| Cost of sales | $ | 20,246,764 | $ | 21,369,687 | $ | 64,850,010 | $ | 55,999,518 | ||||||||
Procurement for the three months ended September 30, 2021 was $14,373,181 compared to $17,422,838 (restated) for the three months ended September 30, 2020, a decrease of $3,049,657 or 17.5%. This decrease is primarily the result of a decrease in procurement for components used in our decreases in the USAF T-38 Pacer Classic Kits, and the Northrop Grumman E-2D Wing Panel Kitting Program for the U.S. Navy.
Procurement for the nine months ended September 30, 2021 was $47,709,154 compared to $39,301,649 (restated) for the nine months ended September 30, 2020, an increase of $8,407,505 or 21.4%. This increase is primarily the result of an increase in procurement related to the Raytheon NGJ-MB pod program, the Lockheed Martin drive shaft assemblies for the F-35 Lightening multi-role fighter program, and the Multi-Purpose Booster Development Wing Assembly program.
Labor costs for the three months ended September 30, 2021 were $2,055,353 compared to $1,670,257 (restated) for the three months ended September 30, 2020, an increase of $385,096 or 23.1%. The increase is primarily the result of higher direct labor requirements to support a higher build rate on the Raytheon NGJ-MB pod program.
Labor costs for the nine months ended September 30, 2021 were $5,945,219 compared to $4,919,711 (restated) for the nine months ended September 30, 2020, an increase of $1,025,508 or 20.8%. The increase is primarily the result of higher direct labor requirements to support a higher build rate on the Raytheon NGJ-MB pod program, and additional labor required for the Northrop Grumman Tubes.
Factory overhead for the three months ended September 30, 2021 was $4,860,469 compared to $4,715,955 (restated) for the three months ended September 30, 2020, an increase of $144,514 or 3.1%. This increase is primarily due to a decrease in indirect labor costs as we tightened controls on spending and we improved manufacturing efficiency.
Factory overhead for the nine months ended September 30, 2021 was $14,934,140 compared to $15,032,135 (restated) for the nine months ended September 30, 2020, a decrease of $97,995 or 0.7%. This decrease is primarily due to a decrease in indirect labor costs as we tightened controls on spending and we improved manufacturing efficiency.
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, 2021 were $(1,042,239) compared to $(2,439,363) (restated) for the three months ended September 30, 2020, a decrease of the credit of $1,397,124. The change in the three months ended September 30, 2021 is primarily due to changes in inventory levels and reductions in the loss reserve.
Other costs (credit), net for the nine months ended September 30, 2021 were $(3,738,503) compared to $(3,253,977) (restated) for the nine months ended September 30, 2020, an increase of the credit of $484,526. The change in the nine months ended September 30, 2021 is primarily due to changes in inventory levels, reductions in the loss reserve and reductions in the inventory reserves.
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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Gross Profit
Gross profit for the three months ended September 30, 2021 was $3,651,984 compared to $4,207,031 (restated) for the three months ended September 30, 2020, a decrease of $555,047 or 13.2%, primarily the result of the lower revenue and a less favorable program mix.
Gross profit for the nine months ended September 30, 2021 was $12,168,674 compared to $6,176,354 (restated) for the nine months ended September 30, 2020, an increase of $5,992,320 or 97%, primarily driven by the higher revenue and a more favorable program mix.
Favorable/Unfavorable Adjustments to Gross Profit (Loss)
During the nine months ended September 30, 2021 and 2020, 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, 2021 | September 30, 2020 (restated) | |||||||
| Favorable adjustments | $ | 3,116,037 | $ | 1,670,388 | ||||
| Unfavorable adjustments | (3,366,056 | ) | (2,831,947 | ) | ||||
| Net adjustments | $ | (250,019 | ) | $ | (1,161,559 | ) | ||
For the nine months ended September 30, 2021, we evaluated all contractual data and revised estimated gross profit percentages accordingly. We had 27 contracts with favorable adjustments and 18 contracts with unfavorable adjustments, all due to changes in estimates.
For the nine months ended September 30, 2020, we evaluated all contractual data and revised estimated gross profit percentages accordingly. We had 19 contracts with favorable adjustments and 18 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, 2021 were $2,765,849 compared to $3,050,644 (restated) for the three months ended September 30, 2020, a decrease of $284,795 or 9.3%. This decrease was primarily driven by a decrease in professional fees and payroll related expenses, partly offset by an increase in business insurance.
Selling, general and administrative expenses for the nine months ended September 30, 2021 were $8,834,343 compared to $8,958,986 (restated) for the nine months ended September 30, 2020, a decrease of $124,643 or 1.4%. This decrease was primarily driven by a decrease in professional fees and payroll related expenses, partly offset by an increase in business insurance.
Income (loss) Before Provision for Income Taxes
Income before provision for income taxes for the three months ended September 30, 2021 was $5,428,629 compared to $847,379 (restated) for the same period last year, an increase of $4,581,250 or 541%. The increase in income was driven by the forgiveness by BNB Bank (now part of Dime Community Bank (“Dime”)) and the Small Business Association on July 1, 2021 of the Paycheck Protection Program loan (“PPP Loan”) that had been made to the Company on November 2, 2020, pursuant to the CARES Act, as modified by the Paycheck Protection Flexibility Act, in the amount of $4,795,000, as well as the lower SGA expenses, partly offset by the lower gross profit as disclosed above, and lower interest expense.
Income (loss) before provision for income taxes for the nine months ended September 30, 2021 was $7,288,651 compared to $(3,868,437) (restated) for the same period last year, an increase in income of $11,157,088 or 288.4%. The increase in income is primarily a result of the increase to gross profit as disclosed above, the forgiveness by BNB Bank (now part of Dime Community Bank (“Dime”)) and the Small Business Association on July 1, 2021 of the Paycheck Protection Program loan (“PPP Loan”) that had been made to the Company on November 2, 2020, pursuant to the CARES Act, as modified by the Paycheck Protection Flexibility Act, in the amount of $4,795,000, the decrease in SGA expenses as disclosed above and lower interest expense.
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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Provision for Income Taxes
Provision for income taxes was $3,374 for the three months ended September 30, 2021, compared to a provision for income taxes of $7,614 (restated) for the three months ended September 30, 2020.
Provision for income taxes was $7,702 for the nine months ended September 30, 2021, compared to a provision for income taxes of $9,714 (restated) for the nine months ended September 30, 2020.
Net Income (Loss)
Net income for the three months ended September 30, 2021 was $5,425,255 or $0.44 per basic share, compared to $839,765 (restated) or $0.07 per basic share, for the same period last year. Diluted income per share was $0.44 for the three months ended September 30, 2021 calculated utilizing 12,320,588 weighted average shares outstanding. Diluted income per share was $0.07 (restated) for the three months ended September 30, 2020 calculated utilizing 11,917,149 weighted average shares outstanding. The increase in net income was driven by the forgiveness by BNB Bank (now part of Dime Community Bank (“Dime”)) and the Small Business Association on July 1, 2021 of the Paycheck Protection Program loan (“PPP Loan”) that had been made to the Company on November 2, 2020, pursuant to the CARES Act, as modified by the Paycheck Protection Flexibility Act, in the amount of $4,795,000, as well as the lower SGA expenses, partly offset by the lower gross profit as disclosed above, and lower interest expense.
Net income for the nine months ended September 30, 2021 was $7,280,949 or $0.60 per basic share, compared to a net loss of $(3,878,151) (restated) or $(0.33) per basic share, for the same period last year. Diluted income per share was $0.60 for the nine months ended September 30, 2021 calculated utilizing 12,187,714 weighted average shares outstanding. Diluted loss per share was $(0.33) (restated) for the nine months ended September 30, 2020 calculated utilizing 11,862,506 weighted average shares outstanding. The increase in net income is primarily a result of the increase to gross profit as disclosed above, the forgiveness by BNB Bank (now part of Dime Community Bank (“Dime”)) and the Small Business Association on July 1, 2021 of the Paycheck Protection Program loan (“PPP Loan”) that had been made to the Company on November 2, 2020, pursuant to the CARES Act, as modified by the Paycheck Protection Flexibility Act, in the amount of $4,795,000, the decrease in SGA expenses as disclosed above and lower interest expense.
Liquidity and Capital Resources
General
At September 30, 2021, we had working capital of $13,129,495 compared to working capital of $7,674,974 at December 31, 2020, an increase of $5,454,521 or 71.1%, driven mainly by higher accounts receivable and contract assets, partly offset by lower inventory.
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, 2021, we had a cash balance of $3,110,581 compared to $6,033,537 at December 31, 2020.
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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
We believe that our existing resources, together with the availability under the BankUnited Facility, 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.
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 August 24, 2020, the Company entered into a Sixth Amendment and Waiver (the “Sixth Amendment”) to the Credit Agreement. Under the Sixth Amendment, the parties amended the Credit Agreement by extending the maturity date of the Revolving Loan and Term Loan to May 2, 2022 and making conforming changes to the repayment schedule of the Term Loan, by increasing the Term Loan by $6.0 million and reducing the Revolving Loan by $6.0 million. The maturities of the Term Loan are included in the maturities of long-term debt. The BankUnited Facility, as amended by the Sixth Amendment, required us to maintain the following financial covenants: (a) maintain a Fixed Cost (Debt Service) coverage ratio of no less than 1.5 to 1.0 at December 31, 2020 and no less than 1.25 to 1.0 for the trailing four quarter period at the end of each quarter thereafter; (b) maintain a minimum net income, after taxes, of no less than $1.00; (c) effective March 31, 2021, maintain a maximum leverage ratio at the end of each quarter for the trailing four quarter period of no more than 4.0 to 1.0; (d) maintain a minimum adjusted EBITDA at the end of each quarter of no less than $1 million; and (e) maintain a minimum liquidity of $3 million at all times. As of December 31, 2020, the Company was in compliance with all of the covenants contained in the BankUnited Facility as amended by the Eighth Amendment as described below. As of December 31, 2020 and December 31, 2019, the Company had $20.7 million and $26.7 million, respectively, outstanding under the BankUnited Facility.
On May 11, 2021, the Company entered into 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. See Part II, Item 8, Note 18, “Subsequent Events” in the notes to the consolidated financial statements in the Comprehensive Form 10-K/A for a discussion of the Seventh Amendment.
On October 28, 2021, the Company entered into 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 December 31, 2022, (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. See Part II, Item 8, Note 18, “Subsequent Events” in the notes to the consolidated financial statements in our Comprehensive Form 10-K/A for the year ended December 31, 2020 for a discussion of the Eighth Amendment. 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.
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 as set forth in the following paragraph. 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.
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 the trailing four quarter period ended June 30, 2021 and December 31, 2021, 0.90 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 4.75 to 1.0 for the trailing four quarter period ended June 30, 2021, 5.35 to 1.0 for the trailing four quarter period ended September 30, 2021, 4.65 to 1.0 for the trailing four quarter period ended December 31, 2021, 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 4.0 to 1.0 for the trailing four quarter period ended September 30, 2022 and 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.
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 may be 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 have been fully forgiven by the SBA and that the forgiveness payment date was July 1, 2021. The forgiveness of the PPP Loan has been recognized 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 Coronavirus Aid, Relief and Economic Security (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.
We believe that our existing resources 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.
Liquidity
We believe that our existing resources as of September 30, 2021 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. We presently finance our operations through the cash flow generated by operations. If our working capital needs exceed our cash flows from operations, we would look to our cash balances 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.
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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 Comprehensive Form 10-K/A for the year ended December 31, 2020.
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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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.
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”). Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective at the reasonable assurance level as of December 31, 2020 and December 31, 2019 because of the material weakness described below.
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.
In connection with management’s evaluation of the Company’s internal control over financial reporting described above, management has identified the deficiencies described below that constitute a material weakness in our internal control over financial reporting as of December 31, 2020 and December 31, 2019. One of these deficiencies led to material errors in our previously issued consolidated financial statements, which in turn led to the restatement of those previously issued consolidated financial statements, as described in Part II, Item 8, Note 17 “Restatement of Previously Issued Consolidated Financial Statements” in the notes to the consolidated financial statements included in the Comprehensive Form 10-K/A.
Control Environment, Risk Assessment, Control Activities and Monitoring
We did not maintain effective internal control over financial reporting related to control environment, risk assessment, control activities and monitoring:
| ● | There were insufficiently documented Company accounting policies and insufficiently detailed Company procedures to put policies into effective action. |
| ● | The design and implementation of internal controls related to cut-off procedures were not sufficient to ensure proper accounting for in-transit items. |
| ● | The design and implementation of internal controls related to monitoring and review of inventory costing were not sufficient to ensure proper valuation of appropriately stated inventory costs. |
| ● | The design and implementation of internal controls related to the establishment of loss contract and excess and obsolete reserves were not sufficient to ensure proper accounting for the associated reserves. |
| ● | The information technology general controls associated with proper change management were not sufficient to ensure the accuracy and adequacy of the resulting changes. |
| ● | The design and implementation of internal controls related to preparation and review of financial statement disclosures were not sufficient to ensure the completeness and accuracy of required disclosures. |
Accounting for Inventory and related IT environment
During the first quarter of 2021, we identified material weaknesses from the month end closing process and INFORXA module used by the Company to maintain the perpetual inventory reporting. The following issues were identified which led to the need to restate the financial results for the twelve months ended December 31, 2020 and December 31, 2019, and the financial results for the three months ended March 31, 2020, June 30, 2020 and September 30, 2020:
| ● | Double Labor and Overhead: The Company’s perpetual inventory system did not work as intended to ensure the correct amount of labor incurred is accounted for in inventory, and it did not include any control or reporting to detect that a reversing transaction in the coding was not occurring, which resulted in duplicate labor applied to inventory. The Company did not have a control in place to adequately review and approve the reasonableness of the entries posted to the general ledger to record differences in cost of goods sold for the differences between general ledger inventory and the perpetual inventory system’s balances. |
| ● | Unit of measure: As part of the first quarter 2021 closing process, we identified that that the perpetual inventory included some unit of measure errors which were not detected and corrected within the 2020 general ledger. Units of Measure (“UM”) were not consistent between quantities ordered and quantities received for certain classes of purchased parts. This resulted in overstatements of inventory values due to UM’s not being consistent with unit prices on purchase orders to suppliers. Errors occurred when the need for corrections to unit costs went undetected until a subsequent quarter as a result of (a) only having a detective control in place to scan for apparent UM issues that stand out when our accounting department reviews the month-end perpetual inventory reports, and (b) not having a comprehensive enough list of the commodity codes in the UM conversion tables within the perpetual inventory system. |
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| ● | Average Cost: The pre-implementation testing that was performed in the test environment on an INFORXA Software Patch that was written and went live into the system in July 2020 did not detect that the system as patched would erroneously omit the reset of one field used by the system in calculating the average cost per unit correctly, thus causing the live system as patched to perform incorrect average cost calculations on some parts. |
| ● | Inventory Accrual: The monthly journal entry log used to manage the month end close process did not contain the requirement to determine and post a month end QC01 (inventory received in-house awaiting quality inspection) inventory accrual. An automated accrual for goods received, not yet in inventory does not occur until after the parts have passed QC. Until the parts pass QC, they are in the warehouse location “QC01”. Therefore, the Company needs to record an accrual to increase its purchases of inventory for those goods in QC01 at each balance sheet date since there is no automated accrual performed by the perpetual inventory system. |
| ● | Deferral of Under-Absorbed Overhead in the Balance Sheet: The monthly journal entry log used to manage the month end close process did not contain the requirement to determine and post a full absorption adjustment (under/over absorbed overhead deferral into inventory). As such, the Company did not have a process to record over-or under-absorbed overhead at the end of each quarter. |
| ● | Loss Contract Reserve for Non-POC Contracts: There was no evaluation of Non-POC Contracts to determine if a loss reserve should be established and maintained for Non-POC Contracts which management has reason to believe may result in losses. |
| ● | Excess and Obsolete Inventory Reserve: There was no process for evaluating and recording reserves against inventory for excess and obsolete inventory. |
Remediation efforts underway for the 2020 and First Quarter 2021 Material Weaknesses
During 2021, we began to implement new controls designed to remediate the 2020 material weaknesses described above under Control Environment, Risk Assessment, Control Activities and Monitoring and Accounting for Inventory related IT environment, such as:
| ● | The recruitment and hiring of a new Chief Financial Officer |
| ● | The recruitment and hiring of a new Controller |
| ● | Newly designed month-end accruals for in-transit inventory |
| ● | Diagnosis, design, testing and implementation of software changes to our perpetual inventory system to correct the Inventory Costing Errors |
| ● | The implementation of new operating procedures related to inventory management and costing |
| ● | The implementation of new accounting procedures related to ensure sufficient reserves are established and maintained for: |
| ○ | any anticipated contract losses |
| ○ | any reductions in the market values of inventory below cost |
| ○ | any excess or obsolete inventory |
Remediation of Previously Reported 2019 Material Weakness
In connection with management’s evaluation of the Company’s internal control over financial reporting described above, management has concluded that the material weaknesses reported in its Annual Report on Form 10-K for the period ended December 31, 2019 had been remediated and that internal controls put in place to prevent future occurrences of these material weaknesses were effective as of December 31, 2020.
During the course of 2020, we implemented measures to remediate the underlying causes that gave rise to the previously disclosed material weaknesses and material errors. These measures include the Welding Metallurgy operations as they were incorporated into the Company’s operations as of December 31, 2019. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to further the overall objective to design and operate internal controls that mitigate identified risks and enable an effective system of internal control over external financial reporting.
The Company was a non-accelerated filer for 2020. As such, the Company was not subject to the requirement to have an auditor attestation report on internal control over financial reporting in the Annual Report on Form 10-K and Comprehensive Form 10-K/A filed in 2021 for 2020. Accordingly, based upon its internal testing which was performed by a national public accounting and advisory firm, management believed that as of December 31, 2020, it had successfully remediated the internal control weaknesses over financial reporting as of December 31, 2020 and December 31, 2019 which gave rise to the material errors in our previously issued, and now restated, financial statements.
| ● | Revenue Recognition Accounting: |
During 2020, Management, with advice from a leading global accounting and advisory firm, reviewed and updated its revenue recognition policies to be compliant with ASC Topic 606. In addition, the Company has updated its procedures and implemented new controls to remediate the identified weakness and to prevent the material error which occurred in prior periods with regards to revenue recognition wherein revenue and associated estimated margins were not constrained to firm orders received. Current procedures and controls now reconcile EAC revenue with firm funded purchase orders received from customers, which constrains revenue to firm funded orders as required by ASC Topic 606. Standardized templates have been developed to assist the evaluation process, based upon the overall updated policies and procedures including daily decision guidelines. Testing has shown that the previously identified Revenue Recognition material weakness has been remediated.
| ● | Accounting for Significant Non-Routine Complex Transactions: |
The Company has established a policy with regards to accounting for significant, non-routine, complex transactions which states that prior to any future requirement for accounting for significant, non-routine, complex transactions, the Company will engage experienced professionals and outline and execute a set of controls unique to each transaction to ensure that the non-routine complex transaction is recorded in a proper manner. In 2020 there were no non-routine complex transactions but the Company believes the controls and procedures implemented will allow for proper identification and accounting for those transaction.
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| ● | Information Technology General Controls (ITGC): |
For years subsequent to 2019, the Company has implemented an improved 404 compliant ITGC testing program. The Company has identified relevant ITGCs for key financial systems relating to Change Management, Logical Security, Physical Security, and Computer Operations. We have engaged a national public accounting and advisory firm to test the design, implementation and operating effectiveness of the controls.
Changes in Internal Control Over Financial Reporting
Other than the remediation efforts underway as referred to above, and the First Quarter 2021 Material Weaknesses referred to above, there were no changes in our internal control over financial reporting during the quarter ended September 30, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting other than as described above.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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Part
II: Other Information
Item 1 – Legal Proceedings
Reference is made to Note 12, 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.
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Item 1A – Risk Factors
“Part I Item 1A - Risk Factors” of our Comprehensive Form 10-K/A for the year ended December 31, 2020, 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 described in such report except as follows.
The following risk factors are amended and restated as below:
If our common stock is delisted from the NYSE American exchange, our business, financial condition, results of operations and stock price could be adversely affected, and the liquidity of our stock and our ability to obtain financing could be impaired.
On May 25, 2021, we received a notice from NYSE American LLC (the “Exchange”) stating that our failure to timely file our Quarterly Report on Form 10-Q for the three months ended March 31, 2021 caused us to be out of compliance with the Exchange’s continued listing standards under the timely filing criteria included in Section 1007 of the NYSE American Company Guide (the “Company Guide”). Also, our failure to timely file our (i) Quarterly Report on Form 10-Q for the three months ended June 30, 2021 and Quarterly Report on Form 10-Q for the three months ended September 30, 2021 constituted and (ii) Annual Report on Form 10-K of the year ended December 31, 2021 remains, an additional noncompliance with the Exchange’s continued listing standards under the timely filing criteria included in Section 1007 of the Company Guide.
In accordance with Section 1007 of the Company Guide, the Company was provided a six-month initial period to regain compliance with the timely filing criteria. On November 17, 2021, the Company submitted a request for additional time in which to file the delayed filings, which included a plan to regain compliance with Section 1007 of the Company Guide. On November 23, 2021, the Company was notified that the Exchange had accepted the Company’s plan to regain compliance with the continued listing standards and was granted a period through April 14, 2022 in which to file the delayed filings and any subsequently delayed filings. On March 25, 2022, the Company requested and on April 8, 2022 the Exchange granted an additional extension up to the maximum cure period ending on May 24, 2022. The Company does not believe it will complete the filings of its Annual Report on Form 10-K for the year ended December 31, 2021 or its Quarterly Report on Form 10-Q for the three months ended March 31, 2022 by the end of the cure period. The notices the Company has received from the Exchange indicate that if the Company does not complete these filings by May 24, 2022, the Exchange staff will initiate delisting proceedings as appropriate.
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’s common stock is not delisted from the Exchange as a result of the Company’s delayed filings as described above and (i) the Company is not in compliance with the continued listing standards by March 17, 2023 or (ii) the Company does not make progress consistent with the Plan during the plan period, the Exchange staff may initiate delisting proceedings as appropriate.
The delisting of our common stock from the NYSE American exchange would adversely affect our ability to attract new investors, decrease the liquidity of our outstanding shares of common stock, reduce our flexibility to raise additional capital, reduce the price at which our common stock trades, and increase the transaction costs inherent in trading such shares with overall negative effects for our stockholders.
We received waivers of and consents to non-compliance with certain covenants under our credit facility with BankUnited and there can be no assurance that we will not fall out of compliance with our covenants in the future.
The Company was not in compliance with certain financial covenants under its credit facility (the “BankUnited Facility”) with BankUnited, N.A. (“BankUnited”) for the year ended December 31, 2020 and the quarter ended March 31, 2021, and financial statement submission covenants for the year ended December 31, 2020, the quarters ended March 31, 2021, June 30, 2021 and September 30, 2021 and the year ended December 31, 2021 and obtained waivers of the non-compliance, as described in more detail in Note 8 to our consolidated financial statements included in Item 1. Part I. We cannot assure you that we will be in compliance with our covenants in the future or that BankUnited will grant further waivers if we fall out of compliance or consents to future non-compliance. If we fall out of compliance with our banking covenants, BankUnited may declare a default under the BankUnited Facility and, among other remedies, could declare the full amount of the BankUnited Facility immediately due and payable and could foreclose against our collateral. If this were to occur, we may be unable to secure outside financing, if needed, to fund ongoing operations and for other capital needs. Any sources of financing that may be available to us could also be at higher costs and require us to satisfy more restrictive covenants, which could limit or restrict our operations, cash flows and earnings. We cannot ensure that additional financing would be available to us, or be sufficient or available on satisfactory terms.
The following risk factors are added as below:
Our capital requirements, liquidity and financial condition raise significant risk as to our ability to continue as a going concern.
Our working capital requirements can vary significantly, depending in part on the timing of the conclusion of mature programs and new program awards and the payment terms with our customers and suppliers. There is currently no availability for borrowings under the Bank United Facility and the Company finances its operations from internally generated cash flow. Note 8 to our consolidated financial statements included in Part I - Item 1 includes a discussion regarding the BankUnited Facility and recent amendments thereto which provide, among other things, for increases in principal payments and the interest rate on the loans provided for therein. Also, the Company currently has a shareholders’ deficit and has experienced losses from operations and negative cash flows from operations in prior periods. These factors collectively represent significant risk to the Company’s ability to continue to operate as a going concern and management has assessed these risks. Based upon this assessment and the execution of the plans described in Note 1 to our consolidated financial statements included in Part 1 - Item 1, it is management’s estimation that there will likely not be any individual conditions or combination of events that will occur in the coming year which would cause the Company to be unable to meet its obligations or otherwise continue as a going concern. However, we cannot ensure that such plans will accomplish their intended goals.
Our consolidated financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. If we become unable to continue as a going concern, we may have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our consolidated financial statements.
The Russian invasion of Ukraine and the retaliatory measures imposed by the United States, United Kingdom, European Union and other countries and the responses of Russia to such measures have caused significant disruptions to domestic and foreign economies.
The invasion of Ukraine by the Russian Federation had an immediate impact on the global economy resulting in higher prices for oil and other commodities. The U.S, United Kingdom, European Union and other countries responded to Russia’s invasion of Ukraine by imposing various economic sanctions and bans. Russia has responded with its own retaliatory measures. These measures have impacted the availability and price of certain raw materials. The invasion and retaliatory measures also disrupted economic markets. The global impact of these measures is continually evolving and cannot be predicted with certainty and there is no assurance that Russia’s invasion of Ukraine and responses thereto will not further disrupt the global economy and supply chain. Further, there is no assurance that even when the invasion of Ukraine ceases, that nations will not continue to impose sanctions and bans on other nations.
While these events have not interrupted our operations or materially impacted our ability to obtain raw materials, these or future developments resulting from the invasion of Ukraine such as a cyberattack on the United States, us or our suppliers, could make it difficult for or increase the cost of certain raw materials, or make it difficult to access debt and equity capital on attractive terms, if at all, and impact our ability to fund business activities and repay debt on a timely basis.
Russia’s invasion of Ukraine may alter countries’ willingness to rely on others as the source of certain products and material.
Historically, prime contractors and OEMs in the U.S. AD industry have relied upon suppliers outside the U.S. for products and raw materials. Russia’s invasion of Ukraine and the economic disruption resulting from retaliatory measures may cause many of these companies to rethink these strategies and seek sources of supply within the United States. To the extent they do so, it could disrupt domestic markets for raw materials and supplies, and the market for the skilled laborers we need to manufacture our products.
We cannot forecast with any certainty whether the disruptions caused by the Russian invasion of Ukraine, restrictions imposed by various governments in response thereto and resulting changes in business practices, may materially impact our business and our consolidated financial position, results of operations, and cash flows.
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Terrorist acts and acts of war may seriously harm our business, results of operations and financial condition.
U.S. and global responses to actual or potential military conflicts such as Russia’s invasion of Ukraine, terrorism, perceived nuclear, biological and chemical threats and other global political crises increase uncertainties with respect to the U.S. and other business and financial markets. Several factors associated, directly or indirectly, with actual or potential military conflicts, terrorism, perceived nuclear, biological and chemical and cyber threats, and other global political crises and responses thereto, may adversely affect the mix of products purchased by defense departments in the United States or other countries to platforms not serviced by us. A shift in defense budgets to product lines we do not produce could have a material adverse effect on our business, financial condition and results of operations.
In reading the risk factors set forth below, in each case, consider the additional uncertainties caused by global events such as COVID-19 and the war in Ukraine and terrorist acts.
We depend upon a select base of large prime defense contractors for the majority of our revenue, which subjects us to unique risks which may adversely affect us.
We currently generate a majority of our revenues by producing products for numerous programs under contracts with three significant prime defense contractors to the U.S. Government. These significant customers – Northrop Grumman, Raytheon and Lockheed Martin – constituted approximately 34%, 21% and 21%, respectively of our revenue for the nine months ended September 30, 2021. Our revenues from these customers are diversified over a number of different aerospace and defense products, programs and subsidiaries within these customers, however, any significant change in production rates by any of these customers would have a material effect on our results of operations and cash flows. There is no assurance that our current significant customers will continue to buy products from us at current levels, that we will retain any or all of our existing significant customers, or that we will be able to form new relationships with other customers upon the loss of one or more of our existing significant customers.
We are subject to intense competition for the skilled machinists necessary to manufacture our products.
We are subject to intense competition for the services of skilled machinists necessary to manufacture our products and those of other companies in the AD industry. The demand for these individuals may increase as other manufacturers seek to bring to the United States manufacturing processes currently outsourced overseas. If the United States economy undergoes a period of inflation, our labor costs may increase which could have a material adverse effect on our business, financial condition and results of operations.
Increased scrutiny from investors, lenders, and other market participants regarding our environmental, social, and governance, or sustainability responsibilities could expose us to additional costs and adversely impact our liquidity, results of operations, reputation, employee retention, and stock price.
There is an increasing focus from certain investors, customers, and other key stakeholders concerning corporate responsibility, specifically related to environmental, social, and governance (“ESG”) factors. Some investors may use ESG criteria to guide their investment strategies and, in some cases, may choose not to invest in us if they believe our policies relating to corporate responsibilities are inadequate.
The ESG factors by which companies’ corporate responsibility practices are assessed may change. This could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria. If we are unable to satisfy the new corporate responsibility criteria, investors may view our policies related to corporate responsibility as inadequate. We risk damage to our reputation in the event our corporate responsibility procedures or goals do not meet the standards or goals set by various constituencies. In addition, if our competitors’ corporate responsibility performance is perceived to be greater than ours, potential or current investors may elect to invest in our competitors instead. Further, in the event we communicate certain initiatives or goals related to ESG, we could fail, or be perceived to have failed, in our achievement of such initiatives or goals. If we fail to satisfy the expectations of investors and other key stakeholders, or our initiatives are not executed as planned, our reputation, employee retention, and willingness of our customers and suppliers to do business with us, financial results, and stock price could be materially and adversely affected.
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.
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Item 6 – Exhibits
| Exhibit 31.1 | Section 302 Certification by Chief Executive Officer and President |
| Exhibit 31.2 | Section 302 Certification by Chief Financial Officer (Principal Accounting Officer) |
| Exhibit 32.1 | Section 906 Certification by Chief Executive Officer and Chief Financial Officer |
| Exhibit 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.* |
| Exhibit 101.SCH | Inline XBRL Taxonomy Extension Schema Document.* |
| Exhibit 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document.* |
| Exhibit 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document.* |
| Exhibit 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document.* |
| Exhibit 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| Exhibit 104 | Cover Page Interactive Data File. The cover page XBRL tags are embedded within the Inline XBRL document. |
| * | Submitted electronically 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, 2021 and 2020 (restated), (ii) Condensed Consolidated Balance Sheet as of September 30, 2021 and December 31, 2020 (restated), (iii) Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2021 and 2020 (restated), (iv) Condensed Consolidated Statement of Changes in Shareholders’ Deficit for the three and nine months ended September 30, 2021 and 2020 (restated) and (v) Notes to Condensed Consolidated Financial Statements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CPI AEROSTRUCTURES, INC. | ||
| Dated: May 13, 2022 | By. | /s/ Dorith Hakim |
Dorith Hakim Chief Executive Officer and President (Principal Executive Officer) | ||
| Dated: May 13, 2022 | By. | /s/ Andrew L. Davis |
| Andrew L. Davis Chief Financial Officer (Principal Financial and Accounting Officer) |
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