INTERIM FINANCIAL STATEMENTS

9 Months Ended

Sep. 30, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

INTERIM FINANCIAL STATEMENTS

1. INTERIM FINANCIAL STATEMENTS

The condensed financial statements of CPI Aerostructures, Inc. (the “Company”) as of September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

The condensed balance sheet at December 31, 2017 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. All adjustments that, in the opinion of management, are necessary for a fair presentation for the periods presented have been reflected. Such adjustments are of a normal, recurring nature. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. 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 two financial institutions. The balances are insured by the Federal Deposit Insurance Corporation. From time to time, the Company’s balances may exceed these limits. As of September 30, 2018, the Company had $748,470 of uninsured balances. The Company limits its credit risk by selecting financial institutions considered to be highly creditworthy.

Effective January 1, 2018, the Company adopted Accounting Standards Codification Topic 606 Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective method for all of its contracts. ASC 606 requires sales and gross profit to be recognized over the contract period as work is performed based on the relationship between actual costs incurred and total estimated costs at the completion of the contract. Recognized revenues that will not be billed under the terms of the contract until a later date are recorded as an asset captioned “Contract assets.” Contracts where billings to date have exceeded recognized revenues are recorded as a liability captioned “Contract liabilities.” Changes to the original estimates may be required during the life of the contract. Estimates are reviewed monthly and the effect of any change in the estimated gross margin percentage for a contract is reflected in revenue in the period the change becomes known. ASC 606 involves considerable use of estimates in determining revenues, costs and profits and in assigning the amounts to accounting periods. As a result, there can be a significant disparity between earnings (both for accounting and tax purposes) as reported and actual cash received during any reporting period. The Company continually evaluates all of the issues related to the assumptions, risks and uncertainties inherent with the process; however, it cannot be assured that estimates will be accurate. If estimates are not accurate or a contract is terminated, the Company is required to adjust revenue in later periods. Furthermore, even if estimates are accurate, there may be a shortfall in cash flow and the Company may need to borrow money, or seek access to other forms of liquidity, to fund its work in process or to pay taxes until the reported earnings materialize as actual cash receipts.

When changes are required for the estimated total revenue on a contract, these changes are recognized with an inception-to-date effect in the current period. Also, when estimates of total costs to be incurred exceed estimates of total revenue to be earned, a provision for the entire loss on the contract is recorded in the period in which the loss is determined.

Following the adoption of ASC 606, the Company’s revenue recognition for all of its contracts remained materially consistent with historical practice and there was no material impact in the nine months ended September 30, 2018 condensed financial statements upon adoption.

In compliance with ASC 606, costs and estimated earnings in excess of billings on uncompleted contracts, on the December 31, 2017 balance sheet, has been reclassified to contract assets. Additionally, billings in excess of costs and estimated earnings on uncompleted contracts and contract losses, on the December 31, 2017 balance sheet, have been combined and reclassified to contract liabilities.

Restatement of Financial Statements

The Company determined that its previously issued financial statements as of and for the three and nine months ended September 30, 2018, as originally filed with the Securities and Exchange Commission on November 13, 2018, should no longer be relied upon due to an error in the financial statements that was identified by management.

The error occurred in the Company’s billing process and resulted in the overstatement of revenue for the three and nine months ended September 30, 2018. The identification of the error was made by management during the Company’s review of the billing process for the year ended December 31, 2018 in connection with the preparation of the Company’s 2018 financial statements. Management concluded that the error was limited to one instance and that the effect of correcting the error in the Company’s financial statements for the three and nine months ended September 30, 2018 is (i) a reduction of revenue and income before provision for income taxes of $927,257, (ii) a reduction of net income of $742,257 and (iii) a reduction of basic and fully diluted earnings per share of $0.08, for each such period. Additionally, as of September 30, 2018 there is (i) a reduction of contract assets of $927,257, (ii) an increase in deferred tax assets of $185,000 and (iii) a reduction of shareholders equity of $742,257.

Accordingly, the Company’s condensed statement of income and comprehensive income for the three and nine months ended September 30, 2018 and the Company’s condensed statement of shareholder’s equity for the nine months ended September 30, 2018 have been restated to record the effect of the error. The error did not have a material impact on the Company’s condensed balance sheet as of September 30, 2018 or the condensed statement of cash flows for the nine months ended September 30, 2018, although certain adjustments have been made to each of those statements to correspond to the adjustments made to the condensed statement of income and comprehensive income and condensed statement of shareholder’s equity.

On February 26, 2019, BankUnited, N.A., as Sole Arranger, Administrative Agent, Collateral Agent, and Lender, and Citizens Bank, N.A., as Lender, agreed to waive the Company’s non-compliance with the leverage ratio financial covenant and the EBITDA financial covenant of the BankUnited Facility as of September 30, 2018. The Company originally received a waiver for non-compliance on November 9, 2018 and as a result of the aforementioned restatement, the Company recalculated its covenants and determined that there was a change in the amounts and that a revised waiver would be required.

The following table summarizes the effects of the restatement resulting from the correction of this error.

	Nine Months Ended
	September 30, 2018
	Previously
	Reported		Adjustment		Restated
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME:
Revenue	$	58,397,420	$	927,257	$	57,470,163
Gross profit		13,433,164		927,257		12,505,907
Net income		3,842,143		742,257		3,099,886
Comprehensive income	$	3,856,943	$	742,257	$	3,114,686
Earnings per common share – basic	$	0.43	$	0.08	$	0.35
Earnings per common share – diluted	$	0.43	$	0.08	$	0.35
CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY:
Net income	$	3,842,143	$	742,257	$	3,099,886
Total shareholders’ equity	$	78,752,359	$	742,257	$	78,010,102

	Three Months Ended September 30, 2018
	Previously Reported		Adjustment		Restated
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME:
Revenue	$	19,944,558	$	927,257	$	19,017,301
Gross profit		4,798,478		927,257		3,871,221
Net income		1,328,153		742,257		585,896
Comprehensive income	$	1,348,753	$	742,257	$	606,496
Earnings per common share – basic	$	0.15	$	0.08	$	0.07
Earnings per common share – diluted	$	0.15	$	0.08	$	0.07