RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

3 Months Ended

Mar. 31, 2019

Accounting Changes and Error Corrections [Abstract]

RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

15.       RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

On February 14, 2020, the Company filed a Form 8-K disclosing that the Audit & Finance Committee of the Company’s Board of Directors determined, based on the recommendation of management, that the Company’s consolidated financial statements which were included in its annual report on Form 10-K for the year ended December 31, 2018, quarterly reports on Forms 10-Q for the quarters ended March 31, 2018, June 30, 2018, and September 30, 2018 and quarterly reports on Forms 10-Q for the quarters ended March 31, 2019, June 30, 2019, and September 30, 2019 and related financial information should no longer be relied upon, and determined that the consolidated financial statements will be restated. The errors were uncovered as part of the preparation of the Company’s consolidated financial statements for the fiscal year ended December 31, 2019.

As a result, the Company restated the 2018 consolidated financial statements, which is referred to as the “Restatement.” The Restatement corrects errors which are discussed in detail within this footnote.

The errors primarily related to the timing of recognition of revenue from contracts with customers.

Restatement

The following is a discussion of the restatement adjustments that were made to the Company’s previously issued March 31, 2019 and March 31, 2018 consolidated financial statements.

(a) Revenue recognition

The Company recognizes revenues and profits for contracts with customers using the cost-to-cost percentage of completion method of accounting. Historically, for long-term programs, the Company applied the cost-to-cost percentage of completion method at the program level, that is, for the entire duration of expected production activity on a particular program. The Company estimated its revenue recognition utilizing the life of the program to both measure progress and estimate profit margin. Under this approach, the Company estimated the total expected customer purchases over the life of the program, which included unexercised and non-binding customer purchase options, which resulted in the recognition of $103.8 million and $100.9 million of misstated contract assets, contract liabilities and loss reserves for the three months ended March 31, 2019 and year ended December 31, 2018, respectively.

The Company has now concluded that its life of the program accounting was not an appropriate application of ASC Topic 606. Under ASC Topic 606, the performance obligation is the appropriate unit of accounting. The Company identifies performance obligations to customers once a contract is established in accordance with ASC Topic 606. For the Company, the contract under ASC Topic 606 is typically established upon execution of a purchase order either in accordance with a long-term customer agreement or on a standalone basis. The transaction price is also determined at the contract level and excludes amounts related to unexercised customer options. Similarly, the Company’s cost-to-cost input method to measure progress must consider only the costs incurred relative to the total expected costs of satisfying the performance obligations identified in the contract, exclusive of unexercised customer options.

To correct these errors, the related revenue was reversed in the period in which the accounting errors took place and recognized in subsequent periods as control of the goods or services in the contract passed to the customer over time based on a cost-to-cost input method measure of progress. Additionally, certain adjustments to contract assets and contract liabilities were made to the consolidated balance sheet at the end of the period in which the accounting errors occurred.

(b) Other

The Company corrected other immaterial misstatements relating to previously unrecorded audit adjustments.

(c) Income taxes

The Company has recorded tax adjustments related to the impact of the Restatement.

Impact on Consolidated Statements of Operations

The effect of the Restatement described above on the accompanying consolidated statements of operations for the three months ended March 31, 2019 and 2018 is as follows:

	Three Months Ended March 31, 2018
	As Previously			Revenue						Income			As
	Reported			Recognition			Other			Taxes			Restated
Revenue	$	18,191,623		$	(3,201,672	)	$	—		$	—		$	14,989,951
Cost of sales		14,141,755			27,862			(280,143	)		—			13,889,474
Gross profit		4,049,868			(3,229,534	)		280,143			—			1,100,477
Selling, general and administrative expenses		2,049,840			—			45,086			—			2,094,926
Income (loss) from operations		2,000,028			(3,229,534	)		235,057			—			(994,449	)
Interest expense		447,263			—			—			—			447,263
Income (loss) before provision for (benefit from) income taxes		1,552,765			(3,229,534	)		235,057			—			(1,441,712	)
Provision for (benefit from) income taxes		296,000			—			—			(294,805	)		1,195
Net income (loss)		1,256,765			(3,229,534	)		235,057			294,805			(1,442,907	)
Other comprehensive loss net of tax–Change in unrealized loss interest rate swap on int on interest rate swap		(5,800	)		—			—			—			(5,800	)
Comprehensive income (loss)	$	1,250,965		$	(3,229,534	)	$	235,057		$	294,805		$	(1,448,707	)
Income (loss) per common share – basic	$	0.14											$	(0.16	)
Income (loss) per common share – diluted	$	0.14											$	(0.16	)
Shares used in computing earnings (loss) per common share:
Basic		8,888,179												8,888,179
Diluted		8,940,385												8,888,179

	Three Months Ended March 31, 2019
	As Previously Reported		Revenue Recognition			Other			Income Taxes			As Restated
Revenue	$	25,583,531	$	(3,595,147	)	$	—		$	—		$	21,988,384
Cost of sales		20,167,721		(662,753	)		—			—			19,504,968
Gross profit		5,415,810		(2,932,394	)		—			—			2,483,416
Selling, general and administrative expenses		2,806,443		—			99,243			—			2,905,686
Income (loss) from operations		2,609,367		(2,932,394	)		(99,243	)		—			(422,270	)
Interest expense		510,769		—			—			—			510,769
Income (loss) before provision for (benefit from) income taxes		2,098,598		(2,932,394	)		(99,243	)		—			(933,039	)
Provision for (benefit from) income taxes		440,000		—			—			(438,323	)		1,677
Net income (loss)	$	1,658,598	$	(2,932,394	)	$	(99,243	)	$	438,323		$	(934,716	)
Income per common share – basic	$	0.14										$	(0.08	)
Income per common share – diluted	$	0.14										$	(0.08	)
Shares used in computing earnings per common share:
Basic		11,736,305											11,736,305
Diluted		11,792,818											11,736,305

Impact on Consolidated Balance Sheets

The effect of the Restatement described above on the accompanying consolidated balance sheets as of March 31, 2019 and December 31, 2018 is as follows:

	As of March 31, 2019
	As Previously Reported		Revenue Recognition			Other			Income Taxes			As Restated
ASSETS
Current Assets:
Cash	$	617,161	$	—		$	—		$	—		$	617,161
Restricted cash		2,000,000		—			—			—			2,000,000
Accounts receivable, net		6,583,155		—			—			—			6,583,155
Contract assets		120,749,918		(100,971,165	)		—			—			19,778,753
Inventory		11,090,995		—			(350,386	)		—			10,740,609
Refundable income taxes		435,000		—			—			(97	)		434,903
Prepaid expenses and other current assets		1,205,297		—			—			—			1,205,297
Total Current Assets		142,681,526		(100,971,165	)		(350,386	)		(97	)		41,359,878
Operating lease right-of-use assets		4,927,810		—			—			—			4,927,810
Property and equipment, net		3,533,038		—			—			—			3,533,038
Refundable income taxes		—		—			—			434,903			434,903
Deferred income taxes		486,664		—			—			(486,664	)		—
Other assets		229,552		—			—			—			229,552
Total Assets	$	151,858,590	$	(100,971,165	)	$	(350,386	)	$	(51,858	)	$	50,485,181
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Accounts payable	$	12,364,039	$	—		$	—		$	—		$	12,364,039
Accrued expenses		1,089,803		—			—			—			1,089,803
Contract liabilities		3,279,843		(3,190	)		—			—			3,276,653
Loss reserve		216,606		2,820,076			—			—			3,036,682
Current portion of long-term debt		2,506,099		—			—			—			2,506,099
Operating lease liabilities		1,593,243		—			—			—			1,593,243
Income taxes payable		253,798		—			—			(211,677	)		42,121
Total Current Liabilities		21,303,431		2,816,886			—			(211,677	)		23,908,640
Line of credit		23,738,685		—			—			—			23,738,685
Long-term operating lease liabilities		3,837,678		—			—			—			3,837,678
Long-term debt, net of current portion		3,601,883		—			—			—			3,601,883
Deferred income taxes		4,028,553		—			—			(4,028,553	)		—
Total Liabilities		56,510,230		2,816,886			—			(4,240,230	)		55,086,886
Shareholders' Equity (Deficit):
Common stock		11,736		—			—			—			11,736
Additional paid-in capital		70,917,811		—			—			—			70,917,811
Retained earnings (accumulated deficit)		24,418,813		(103,788,051	)		(350,386	)		4,188,372			(75,531,252	)
Total Shareholders’ Equity (Deficit)		95,348,360		(103,788,051	)		(350,386	)		4,188,372			(4,601,705	)
Total Liabilities and Shareholders’ Equity (Deficit)	$	151,858,590	$	(100,971,165	)	$	(350,386	)	$	(51,858	)	$	50,485,181

	As of December 31, 2018
	As Previously Reported		Revenue Recognition			Other			Income Taxes			As Restated
ASSETS
Current Assets:
Cash	$	4,128,142	$	—		$	—		$	—		$	4,128,142
Restricted cash		2,000,000		—			—			—			2,000,000
Accounts receivable, net		8,623,329		—			99,242			—			8,722,571
Contract assets		113,333,491		(95,744,625	)		—			—			17,588,866
Inventory		9,711,997		—			(350,386	)		—			9,361,611
Refundable income taxes		435,000		—			—			(97	)		434,903
Prepaid expenses and other current assets		1,972,630		—			—			—			1,972,630
Total Current Assets		140,204,589		(95,744,625	)		(251,144	)		(97	)		44,208,723
Property and equipment, net		2,545,192		—			—			—			2,545,192
Refundable income taxes		435,000		—			—			(97	)		434,903
Deferred income taxes		279,318		—			—			(279,318	)		—
Other assets		249,575		—			—			—			249,575
Total Assets	$	143,713,674	$	(95,744,625	)	$	(251,144	)	$	(279,512	)	$	47,438,393
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Accounts payable	$	9,902,481	$	—		$	—		$	—		$	9,902,481
Accrued expenses		1,558,160		—			—			—			1,558,160
Contract liabilities		3,588,500		1,664,079			—			—			5,252,579
Loss reserve		216,606		3,446,952			—			—			3,663,558
Current portion of long-term debt		2,434,981		—			—			—			2,434,981
Income taxes payable		115,000		—			—			(1,008	)		113,992
Total Current Liabilities		17,815,728		5,111,031			—			(1,008	)		22,925,751
Line of credit		24,038,685		—			—			—			24,038,685
Long-term debt, net of current portion		3,876,238		—			—			—			3,876,238
Deferred income taxes		4,028,553		—			—			(4,028,553	)		—
Other liabilities		531,124		—			—			—			531,124
Total Liabilities		50,290,328		5,111,031			—			(4,029,561	)		51,371,798
Shareholders’ Equity (Deficit):
Common stock		11,718		—			—			—			11,718
Additional paid-in capital		70,651,413		—			—			—			70,651,413
Retained earnings (accumulated deficit)		22,760,215		(100,855,656	)		(251,144	)		3,750,049			(74,596,536	)
Total Shareholders’ Equity (Deficit)		93,423,346		(100,855,656	)		(251,144	)		3,750,049			(3,933,405	)
Total Liabilities and Shareholders' Equity(Deficit)	$	143,713,674	$	(95,744,625	)	$	(251,144	)	$	(279,512	)	$	47,438,393

Cumulative Effect of Prior Period Adjustments

The following table presents the impact of the Restatement on the Company’s shareholders’ equity (deficit) as of January 1, 2018:

	Common Stock		Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity (Deficit)
Balance, January 1, 2018
(As previously reported)	$	8,864	$	53,770,617	$	20,548,652		$	(14,800	)	$	74,313,333
Adjustments:
Revenue recognition		—		—		(86,621,280	)		—			(86,621,280	)
Other		—		—		(280,143	)		—			(280,143	)
Income taxes		—		—		(697,012	)		—			(697,012	)
Cumulative restatement adjustments		—		—		(87,598,435	)		—			(87,598,435	)
Balance, January 1, 2018
(As Restated)	$	8,864	$	53,770,617	$	(67,049,783	)	$	(14,800	)	$	(13,285,102	)

Impact on Consolidated Statement of Cash Flows

The effect of the Restatement described above on the accompanying consolidated statement of cash flows for the three months ended March 31, 2019 is as follows:

	Three Months Ended March 31, 2019
	As Previously Reported			Restatement Adjustments			As Restated
Cash flows from operating activities:
Net income (loss)	$	1,658,598		$	(2,593,314	)	$	(934,716	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		209,261			—			209,261
Amortization of debt issuance cost		20,024			16,929			36,953
Cash expended in excess of rent expense		(28,012	)		—			(28,012	)
Stock-based compensation		330,787			—			330,787
Deferred income taxes		(207,346	)		207,346			—
Changes in operating assets and liabilities:
Decrease in accounts receivable		2,040,174			99,243			2,139,417
Increase in contract assets		(7,416,427	)		5,226,539			(2,189,888	)
Increase in inventory		(1,378,998	)		—			(1,378,998	)
Decrease in refundable income taxes		435,000			(435,000	)		—
Decrease in prepaid expenses and other current assets		558,845			(17,054	)		541,791
Increase in accounts payable and accrued expenses		1,993,200			—			1,993,200
Decrease in contract liabilities		(686,782	)		(1,667,144	)		(2,353,926	)
Decrease in loss reserve		—			(626,876	)		(626,876	)
Increase (decrease) in income taxes payable		138,798			(210,669	)		(71,871	)
Net cash used in operating activities		(2,332,878	)		—			(2,332,878	)
Cash flows from investing activities:
Purchase of property and equipment		(210,695	)		—			(210,695	)
Net cash used in investing activities		(210,695	)		—			(210,695	)
Cash flows from financing activities:
Payments of long-term debt		(603,037	)		—			(603,037	)
Payments of line of credit		(300,000	)		—			(300,000	)
Stock offering costs paid		(64,371	)		—			(64,371	)
Net cash used in financing activities		(967,408	)		—			(967,408	)
Net decrease in cash and restricted cash		(3,510,981	)		—			(3,510,981	)
Cash and restricted cash at beginning of period		6,128,142			—			6,128,142
Cash and restricted cash at end of period	$	2,617,161		$	—		$	2,617,161
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	551,635		$	—		$	551,635
Cash paid during the period for income taxes	$	90,202		$	—		$	90,202
Supplemental schedule of noncash investing and financing activities:
Equipment acquired under financing lease	$	399,800		$	—		$	399,800

Impact on Consolidated Statement of Cash Flows

The effect of the Restatement described above on the accompanying consolidated statement of cash flows for the three months ended March 31, 2018 is as follows:

	Three Months Ended March 31, 2018
	As Previously Reported			Restatement Adjustments			As Restated
Cash flows from operating activities:
Net income (loss)	$	1,256,765		$	(2,699,672	)	$	(1,442,907	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		153,297			—			153,297
Amortization of debt issuance cost		21,392			—			21,392
Cash expended in excess of rent expense		(17,692	)		—			(17,692	)
Stock-based compensation		303,940			(93,912	)		210,028
Bad debt expense		—			150,000			150,000
Common stock issued as employee compensation		45,913			—			45,913
Deferred income taxes		405,000			(405,000	)		—
Changes in operating assets and liabilities:
Decrease in accounts receivable		1,395,407			(150,000	)		1,245,407
(Increase) decrease in contract assets		(2,865,025	)		3,260,082			395,057
Increase in inventory		(49,100	)		—			(49,100	)
Decrease in prepaid expenses and other current assets		98,683			—			98,683
Decrease in accounts payable and accrued expenses		(3,247,776	)		(141,146	)		(3,388,922	)
Increase in contract liabilities		35,198			(3,091	)		32,107
Decrease in loss reserve		—			(27,456	)		(27,456	)
Increase (decrease) in income taxes payable		(109,327	)		110,195			868
Net cash used in operating activities		(2,573,325	)		—			(2,573,325	)
Cash flows from investing activities:
Purchase of property and equipment		(156,006	)		—			(156,006	)
Net cash used in investing activities		(156,006	)		—			(156,006	)
Cash flows from financing activities:
Payments of long-term debt		(418,306	)		—			(418,306	)
Proceeds from line of credit		2,000,000			—			2,000,000
Net cash used in financing activities		1,581,694			—			1,581,694
Net decrease in cash and restricted cash		(1,147,637	)		—			(1,147,637	)
Cash and restricted cash at beginning of period		1,430,877			—			1,430,877
Cash and restricted cash at end of period	$	283,240		$	—		$	283,240
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	429,614		$	—		$	429,614