UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to __________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction | (IRS Employer Identification Number) |
| of incorporation or organization) |
| (Address of principal executive offices) | (Zip code) |
(Registrant’s telephone number including area code)
| Securities registered pursuant to Section 12(b) of the Act: | ||
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of May 11, 2023, the registrant had shares of common stock, $.001 par value, outstanding.
INDEX
Part I - Financial Information
2
Part I - Financial Information
Item 1 – Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, | ||||||||
| 2023 (Unaudited) | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Insurance recovery receivable | ||||||||
| Contract assets | ||||||||
| Inventory | ||||||||
| Refundable income taxes | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Property and equipment, net | ||||||||
| Deferred tax asset | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Litigation settlement obligation | ||||||||
| Contract liabilities | ||||||||
| Loss reserve | ||||||||
| Current portion of line of credit | ||||||||
| Current portion of long-term debt | ||||||||
| Operating lease liabilities, current | ||||||||
| Income tax payable | ||||||||
| Total Current Liabilities | ||||||||
| Line of credit | ||||||||
| Long-term operating lease liabilities | ||||||||
| Long-term debt, net of current portion | ||||||||
| Total Liabilities | ||||||||
| Shareholders’ Equity: | ||||||||
| Common stock - $ par value; authorized shares, and shares, respectively, issued and outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Shareholders’ Equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenue | $ | $ | ||||||
| Cost of sales | ||||||||
| Gross profit | ||||||||
| Selling, general and administrative expenses | ||||||||
| Income from operations | ||||||||
| 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-unrestricted shares | $ | $ | ( | ) | ||||
| Income (loss) per common share-restricted shares | $ | $ | ( | ) | ||||
| Income (loss) per common share, diluted | $ | $ | ( | ) | ||||
| Shares used in computing income (loss) per common share, basic: | ||||||||
| Unrestricted shares | ||||||||
| Restricted shares | ||||||||
| Total shares | ||||||||
| Shares used in computing income (loss) per common share, diluted | ||||||||
See Notes to Condensed Consolidated Financial Statements
4
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)
| Common Stock Shares | Common Stock Amount | Additional Paid-in Capital | Accumulated Deficit | Total Shareholders’ Equity (Deficit) | ||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | ( | ) | ( | ) | |||||||||||||
| Net Loss | — | ( | ) | ( | ) | |||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Balance at January 1, 2023 | $ | $ | $ | ( | ) | |||||||||||||||
| Net Income | — | |||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
See Notes to Condensed Consolidated Financial Statements
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| 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 | ||||||||
| Stock-based compensation | ||||||||
| Deferred income taxes | ||||||||
| Bad debt expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) decrease in accounts receivable | ( | ) | ||||||
| Increase in insurance receivable | ( | ) | ||||||
| Increase in contract assets | ( | ) | ( | ) | ||||
| Decrease in inventory | ||||||||
| Decrease in prepaid expenses and other assets | ||||||||
| Decrease in operating right-of-use assets | ||||||||
| Increase in accounts payable and accrued expenses | ||||||||
| Increase (decrease) in contract liabilities | ( | ) | ||||||
| Increase in settlement of litigation obligation | ||||||||
| Decrease in lease liabilities | ( | ) | ( | ) | ||||
| Decrease in loss reserve | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payments on long-term debt | ( | ) | ( | ) | ||||
| Debt issuance costs paid | ( | ) | ||||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 1. | INTERIM FINANCIAL STATEMENTS |
Basis of Presentation
The Company consists of CPI Aerostructures, Inc. (“CPI Aero”), Welding Metallurgy, Inc. (“WMI”), a wholly owned subsidiary of CPI Aero, and Compac Development Corporation, a wholly owned subsidiary of WMI (collectively, the “Company”, “we”, “us”, or “our”).
The condensed consolidated interim financial statements of the Company as of March 31, 2023 and for the three months ended March 31, 2023 and 2022 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and notes normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations. The consolidated balance sheet at December 31, 2022 has been derived from audited consolidated financial statements, but does not include all of the information and notes required by U.S. GAAP. The Company believes that the disclosures are adequate to make the information presented not misleading.
All adjustments that, in the opinion of the management, are necessary for a fair presentation for the periods presented have been reflected. Such adjustments are of a normal, recurring nature. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “Form 10-K”). The results of operations for interim periods are not necessarily indicative of the operating results to be expected for the full year or any other interim period.
An operating segment, in part, is a component of an enterprise whose operating results are regularly reviewed by the chief operating decision maker (the “CODM”) to make decisions about resources to be allocated to the segment and assess its performance. Operating segments may be aggregated only to a limited extent. The Company’s CODM, the Chief Executive Officer, reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. The Company has determined that it has a single operating and reportable segment.
The
Company maintains its cash in four financial institutions. The balances are insured by the Federal Deposit Insurance Corporation.
From time to time, the Company’s balances may exceed insurance limits. As of March 31, 2023, the Company had $
Recently Issued Accounting Standards - Adopted
In the first quarter of 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), using a modified retrospective method, which did not result in a significant impact on the Company’s financial statements.
7
| 2. | REVENUE RECOGNITION |
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. This is known as the over time revenue recognition. 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 as a percentage of total estimated costs at completion of the contract.
The Company also has contracts that are considered point in time. Under the point in time revenue recognition model, revenue is recognized when control of the components has transferred to the customer; in most cases this will be based on shipping terms.
Contracts with Customers and Performance Obligations
The majority of the Company’s revenues are from long-term contracts with the U.S. government as well military and commercial contractors. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. For the Company, the contract under Accounting Standards Codification Topic 606 (“ASC 606”) is typically established upon execution of a purchase order either in accordance with a long-term customer contract or on a standalone basis.
To determine the proper revenue recognition for our contracts, we must evaluate whether two or more contracts should be combined and accounted for as a single contract, and whether the combined or single contract should be accounted for as one performance obligation or more than one performance obligation. This evaluation requires significant judgment, and the decision to combine a group of contracts or to separate a contract into multiple performance obligations could change the amount of revenue and profit recorded in a period. A performance obligation is a promise within a contract to transfer a distinct good or service to the customer in exchange for payment and is the unit of account for recognizing revenue. The Company’s performance obligations in its contracts with customers are typically the sale of each individual product contemplated in the contract or a single performance obligation representing a series of products when the contract contains multiple products that are substantially the same. The Company has elected to account for shipping performed after control over a product has transferred to a customer as fulfillment activities. When revenue is recognized in advance of incurring shipping costs, the costs related to the shipping are accrued. Shipping costs are included in costs of sales. The Company provides warranties on many of its products; however, since customers cannot purchase such warranties separately and they do not provide services beyond standard assurances, warranties are not separate performance obligations.
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when or as the performance obligation is satisfied. For contracts with more than one performance obligation, the Company allocates the transaction price to each performance obligation based on its estimated standalone selling price. When standalone selling prices are not available, the transaction price is allocated using an expected cost plus margin approach as pricing for such contracts is typically negotiated on the basis of cost.
The contracts with the U.S. government and military contractors 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.
8
The Company generally utilizes the portfolio approach to estimate the amount of revenue to recognize for its contracts and groups contracts together that have similar characteristics. Contract gross profit margins are calculated using the estimated costs for either the individual contract or the portfolio as applicable. Significant judgment is used to determine which contracts are grouped together to form a portfolio. The portfolio approach is utilized only when the result of the accounting is not expected to be materially different than if applied to individual contracts.
The Company’s contracts are often modified to account for changes in contract specifications and requirements. The Company considers contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. The effect of a contract modification on the transaction price, and the measure of progress for the performance obligation to which it relates, are recognized prospectively when the remaining goods or services are distinct and on a cumulative catch-up basis when the remaining goods or services are not distinct.
The Company also has contracts that are considered point in time. Under the point in time revenue recognition model, revenue is recognized when control of the components has transferred to the customer.
Contract Estimates
Certain contracts contain forms of variable consideration, such as price discounts and performance penalties. The Company generally estimates variable consideration using the most likely amount based on an assessment of all available information (i.e., historical experience, current and forecasted performance) and only to the extent it is probable that a significant reversal of revenue recognized will not occur when the uncertainty is resolved.
In applying the cost-to-cost input method, the Company compares the actual costs incurred relative to the total estimated costs expected at completion to determine its progress towards satisfying its performance obligation and to calculate the corresponding amount of revenue to recognize. For any costs incurred that do not depict the Company’s performance in transferring control of goods or services to the customer, the Company excludes such costs from its input method measure of progress as the amounts are not reflected in the price of the contract. Costs that are inputs to the satisfaction of a performance obligation include labor, materials and subcontractors’ costs, other direct costs and an allocation of indirect costs.
Changes to the original estimates may be required during the life of the contract. Estimates are reviewed quarterly and the effect of any change in the total estimated costs expected at completion for a contract is reflected in revenue in the period the change becomes known. ASC 606 involves considerable use of estimates and judgment in determining revenues, costs and profits and in assigning the amounts to accounting periods. For instance, management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from the customer, and overhead cost rates, among other variables. The Company continually evaluates all of the factors related to the assumptions, risks and uncertainties inherent with the application of the cost-to-cost input method; however, it cannot be assured that estimates will be accurate. If estimates are not accurate, or a contract is terminated which will affect estimates at completion, the Company is required to adjust revenue in the period the change is determined.
When changes are required for the estimated total revenue on a contract, these changes are recognized on a cumulative catch-up basis in the current period. A significant change in one or more estimates could affect the profitability of one or more of our performance obligations. If estimates of total costs to be incurred exceed estimates of total consideration the Company expects to receive, a provision for the remaining loss on the contract is recorded in the period in which the loss becomes evident.
Capitalized Contract Acquisition Costs and Fulfillment Costs
Contract acquisition costs are those incremental costs that the Company incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. The Company does not typically incur contract acquisition costs or contract fulfillment costs that are subject to capitalization in accordance with the guidance in Accounting Standards Codification Subtopic 340-40, “Other Assets and Deferred Costs—Contracts with Customers.”
Disaggregation of Revenue
The following tables present the Company’s revenue disaggregated by contract type and revenue recognition method:
Three months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Aerostructure | $ | $ | ||||||
| Aerosystems | ||||||||
| Kitting and Supply Chain Management | ||||||||
| Total | $ | $ | ||||||
Three months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenue recognized using over time revenue recognition model | $ | $ | ||||||
| Revenue recognized using point in time revenue recognition model | ||||||||
| Total | $ | $ | ||||||
9
Transaction Price Allocated to Remaining Performance Obligations
As
of March 31, 2023, the aggregate amount of transaction price allocated to the remaining performance obligations was approximately
$
| 3. | CONTRACT ASSETS AND LIABILITIES |
Contract assets represent revenue recognized on contracts in excess of amounts invoiced to the customers and the Company’s right to consideration is conditional on something other than the passage of time. Amounts may not exceed their net realizable value. Under the typical payment terms of our government as well as military contractor contracts, the customer retains a portion of the contract price until completion of the contract, as a measure of protection for the customer. Our government and military contractor contracts therefore typically result in revenue recognized in excess of billings, which we present as contract assets. Contract assets are classified as current assets. The Company’s contract liabilities represent customer payments received or due from the customer in excess of revenue recognized. Contract liabilities are classified as current liabilities.
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Contract assets | $ | $ | ||||||
| Contract liabilities | ||||||||
| Net Contract assets | $ | $ | ||||||
Revenue
recognized for the three months ended March 31, 2023 and 2022 that was included in the contract liabilities balance as of January
1, 2023 and 2022, respectively, was approximately $
| 4. | INVENTORY |
The components of inventory consisted of the following:
March 31, 2023 | December 31, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| Gross inventory | ||||||||
| Inventory reserves | ( | ) | ( | ) | ||||
| Inventory, net | $ | $ | ||||||
10
| 5. | STOCK-BASED COMPENSATION |
| 2023 | 2022 | |||||||
| Cost of sales | $ | $ | ||||||
| Selling, general and administrative | ||||||||
| Total stock-based compensation expense | $ | $ | ||||||
The Company grants restricted stock units (“RSUs”) to its board of directors as partial compensation. These RSUs vest quarterly on a straight-line basis over a one-year period.
The Company grants shares of common stock (“Restricted Stock Awards”) to select employees. In the event that the employee’s employment is voluntarily terminated prior to certain vesting dates, portions of the shares may be forfeited. In addition, if certain Company performance criteria are not achieved, portions of these shares may be forfeited. shares were forfeited during the three months ended March 31, 2022, resulting in a reduction to stock-based compensation expense for the three months ended March 31, 2022 in selling, general and administrative expense of $.
| Restricted Stock Awards | Weighted Average Grant Date Fair Value of Restricted Stock Awards | RSUs | Weighted Average Grant Date Fair Value of RSUs | ||||||||||||||
| Non-vested – January 1, 2023 | $ | $ | |||||||||||||||
| Granted | $ | $ | |||||||||||||||
| Vested | $ | ( | ) | $ | |||||||||||||
| Forfeited | $ | ( | ) | $ | |||||||||||||
| Non-vested – March 31, 2023 | $ | $ | |||||||||||||||
As of March 31, 2023, unamortized stock-based compensation costs related to restricted share arrangements was $.
| 6. | FAIR VALUE |
Fair Value
At March 31, 2023 and December 31, 2022, the fair values of cash, accounts receivable and accounts payable approximated their carrying values because of the short-term nature of these instruments.
| March 31, 2023 | ||||||||
Carrying Amount | Fair Value | |||||||
| Debt | ||||||||
| Short-term borrowings and long-term debt | $ | $ | ||||||
| December 31, 2022 | ||||||||
Carrying Amount | Fair Value | |||||||
| Debt | ||||||||
| Short-term borrowings and long-term debt | $ | $ | ||||||
We estimated the fair value of debt using market quotes and calculations based on market rates.
11
| 7. | INCOME (LOSS) PER COMMON SHARE |
The Company complies with the accounting and disclosure requirements of FASB ASC Topic 260, “Earnings Per Share” and uses the two-class method in the calculation of earnings per share. Net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. During the three months ended March 31, 2023 and 2022, respectively, and as of March 31, 2023 and 2022, respectively, the Company had restricted shares of common stock that were considered participating securities and unrestricted shares of common stock outstanding. Earnings and losses are shared pro rata.
Basic and diluted income (loss) per common share is computed using the weighted average number of common shares outstanding. Diluted income (loss) per common share is adjusted for the incremental shares attributed to unvested RSUs. Incremental shares of were used in the calculation of diluted income per common share for the three months ended March 31, 2023. Incremental shares of were not used in the calculation of diluted income per common share for the three months ended March 31, 2022, as the Company was in a loss position for the three months ended March 31, 2022 and these shares would be considered anti-dilutive.
| Three months ended March 31, 2023 | Three months ended March 31, 2022 | |||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Income (loss) per common share, basic: | ||||||||
| Income (loss) per common share-unrestricted shares | $ | $ | ( | ) | ||||
| Income (loss) per common share-restricted shares | $ | $ | ( | ) | ||||
| Income (loss) per common share, diluted | $ | $ | ( | ) | ||||
| Shares used in computing income (loss) per common share, basic: | ||||||||
| Unrestricted shares | ||||||||
| Restricted shares | ||||||||
| Total shares | ||||||||
| Shares used in computing income (loss) per common share, diluted | ||||||||
| 8. | DEBT |
On
March 24, 2016, the Company entered into the Amended and Restated Credit Agreement with the lenders named therein and BankUnited
N.A. as Sole Arranger, Agent and Collateral Agent (as amended from time to time, the “Credit Agreement” or the “BankUnited
Facility”). The BankUnited Facility originally provided for a revolving credit loan commitment of $
On
March 23, 2023, the Company entered into a Twelfth Amendment to the Credit Agreement (the “Twelfth Amendment”). Under
the Twelfth Amendment, the parties amended the Credit Agreement by : (a) extending the maturity date of the Company’s existing
revolving line of credit and its existing term loan to
The
Credit Agreement, as amended, requires us to maintain the following financial covenants (subject to the exclusions provided for
in the previous paragraph): (a) minimum debt service coverage ratio of no less than
The
BankUnited Facility is secured by all of the Company’s assets and both the Revolving Loan and Term Loan bear interest at
the Prime Rate +
As
of March 31, 2023 and December 31, 2022, the Company had $
The
Term Loan had an aggregate principal amount of $
The maturities of long-term debt (excluding unamortized debt issuance costs) are as follows:
| For the Year Ending December 31, | |||||
| Remainder of 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| Total | $ | ||||
Included
in long-term debt are financing leases and other notes payable of $
12
The
Company has cumulatively paid approximately $
13
| 9. | MAJOR CUSTOMERS |
During
the three months ended March 31, 2023, our two largest customers accounted for
At
March 31, 2023,
At
March 31, 2023,
| 10. | LEASES |
The Company leases manufacturing and office space under an agreement classified as an operating lease. On November 10, 2021, the Company executed the second amendment to the lease agreement for its manufacturing and office space, which extends the lease agreement’s expiration date to April 30, 2026. The lease agreement 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 months ended March 31, 2023 and 2022, the Company’s operating lease expense was $
Future minimum lease payments under non-cancellable operating leases as of March 31, 2023 were as follows:
| For the Year Ending December 31, | |||||
| Remainder of 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total undiscounted operating lease payments | |||||
| Less imputed interest | ( | ) | |||
| Present value of operating lease payments | $ | ||||
14
The following table sets forth the ROU assets and operating lease liabilities as of:
March
31, | December 31, 2022 | |||||||
| Assets | ||||||||
| ROU assets, net | $ | $ | ||||||
| Liabilities | ||||||||
| Current operating lease liabilities | $ | $ | ||||||
| Long-term operating lease liabilities | ||||||||
| Total lease liabilities | $ | $ | ||||||
The
amortization expense of these assets under operating leases was $
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 March 31, 2023 and 2022 was $
The effective income tax rate for the three months ended March 31, 2023
is
The difference between the Company’s statutory tax rate and its effective rate is due to R&D credit and permanent tax differences.
| 12. | COMMITMENTS AND CONTINGENCIES |
Class Action Lawsuit
A consolidated class action lawsuit (captioned Rodriguez v. CPI Aerostructures, Inc., et al., No. 20-cv-01026) was filed in the U.S. District Court for the Eastern District of New York against the Company, Douglas McCrosson, the Company’s former Chief Executive Officer, Vincent Palazzolo, the Company’s former Chief Financial Officer, and the two underwriters of the Company’s October 16, 2018 offering of common stock, Canaccord Genuity LLC and B. Riley FBR. The Amended Complaint in the action asserted claims on behalf of two plaintiff classes: (i) purchasers of the Company’s common stock issued pursuant to and/or traceable to the Company’s offering conducted on or about October 16, 2018; and (ii) purchasers of the Company’s common stock between March 22, 2018 and February 14, 2020. The Amended Complaint alleged that the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act by negligently permitting false and misleading statements to be included in the registration statement and prospectus supplements issued in connection with its October 16, 2018 securities offering. The Amended Complaint also alleged that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated by the SEC, by making false and misleading statements in the Company’s periodic reports filed between March 22, 2018 and February 14, 2020. Plaintiff sought unspecified compensatory damages, including interest; rescission or a rescissory measure of damages; unspecified equitable or injunctive relief; and costs and expenses, including attorney’s fees and expert fees. On February 19, 2021, the Company moved to dismiss the Amended Complaint. Plaintiff submitted a brief in opposition to the motion to dismiss on April 23, 2021.
On
May 20, 2021, the parties reached a settlement in the amount of $
Shareholder Derivative Action
Four shareholder derivative actions, each based on substantially the same facts as those alleged in the class action discussed above, have been filed against 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 U.S. District Court for the Eastern District of New York. It purports to assert derivative claims against the individual defendants for violations of Section 10(b) and 21D of the Exchange Act, breach of fiduciary duty, and unjust enrichment and seeks to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct. The complaint also seeks declaratory, equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs. On October 26, 2020, the plaintiff filed an amended complaint. On January 27, 2021, the court stayed the action pursuant to a joint stipulation filed by the parties.
15
The second action (captioned Woodyard v. McCrosson, et al., Index No. 613169/2020) was filed on September 17, 2020, in the Supreme Court of the State of New York (Suffolk County). It purports to assert derivative claims against the individual defendants for breach of fiduciary duty and unjust enrichment, and seeks to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct, along with declaratory, equitable, injunctive and monetary relief, as well as attorneys’ fees and other costs. On December 22, 2020, the parties filed a joint stipulation staying the action pending further developments in the class action.
The third action (captioned Berger v. McCrosson, et al., No. 1:20-cv-05454) was filed on November 10, 2020, in the U.S. District Court for the Eastern District of New York. The complaint, which is based on the shareholder’s inspection of certain corporate books and records, purports to assert derivative claims against the individual defendants for breach of fiduciary duty and unjust enrichment, and seeks to implement reforms to the Company’s corporate governance and internal procedures and to recover on behalf of the Company an unspecified amount of monetary damages. The complaint also seeks equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs.
On March 19, 2021, the parties to the Moulton and Berger actions filed a joint stipulation consolidating the actions (under the caption In re CPI Aerostructures Stockholder Derivative Litigation, No. 20-cv-02092) and staying the consolidated action pending further developments in the class action.
The fourth action (captioned Wurst v. Bazaar, et al., Index No. 605244/2021) was filed on March 24, 2021, in the Supreme Court of the State of New York (Suffolk County). The complaint purports to assert derivative claims against the individual defendants for breach of fiduciary duty, unjust enrichment, and waste of corporate assets, and seeks to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct. The complaint also seeks declaratory, equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs. On April 12, 2021, the parties filed a joint stipulation staying the action pending further developments in the class action.
On June 13, 2022, the plaintiffs in the consolidated federal action informed the court that the Company and all defendants had reached an agreement in principle with all plaintiffs to settle the shareholder derivative lawsuits described above. On June 16, 2022, the plaintiffs in the consolidated federal action filed an unopposed motion for preliminary approval of the settlement. On July 22, 2022, the court referred the motion to the magistrate judge. The magistrate judge held a conference on September 9, 2022 in the consolidated federal action. On February 14, 2023, the magistrate judge recommended that the court grant the motion in its entirety.
On
March 6, 2023, the court granted preliminary approval of the proposed settlement. The proposed
settlement is subject to final approval by the court. In addition to requiring final approval by the court, the proposed settlement
is subject to certain conditions, including the filing with the SEC of the stipulation of settlement agreed to by the Company
and plaintiff (the “Stipulation of Settlement”), and sending notice to potential class members. The terms of the proposed
settlement are set forth in the Stipulation of Settlement. Should the proposed settlement receive final approval from the Court,
it will result in the dismissal of the shareholder derivative lawsuits. As part of the proposed settlement, the Company has agreed
to undertake (or confirm that it has undertaken already) certain corporate governance reforms. In addition, the Company and/or
its insurer have agreed to pay a total of $
Litigation Settlement Obligation and Insurance Recovery Receivable Pertaining to the Class Action Lawsuit and Shareholder Derivative Action
The
attorneys’ fees for both the Class Action Lawsuit and the Shareholder Derivative Action will be covered and paid by our
directors’ and officers’ insurance carrier, after satisfaction of our $
16
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in this report.
Forward Looking Statements
When used in this Form 10-Q and in future filings by us with the Securities and Exchange Commission (the “SEC”), the words or phrases “will likely result,” “management expects” or “we expect,” “will continue,” “is anticipated,” “estimated” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The risks are included in Part I, Item 1A – Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2022 (the “Form 10-K”). We have no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.
Business Operations
We are engaged in the contract production of structural aircraft parts for fixed wing aircraft and helicopters in both the commercial and defense markets. We also have a strong and growing presence in the aerosystems sector of the market, with our production of various reconnaissance pod structures and fuel panel systems. Within the global aerostructure and aerosystem supply chain, we are either a Tier 1 supplier to aircraft original equipment manufacturers (“OEMs”) or a Tier 2 subcontractor to major Tier 1 manufacturers. We also are a prime contractor to the United States Department of Defense (“DOD”), primarily the United States Air Force (“USAF”). In conjunction with our assembly operations, we provide engineering, program management, supply chain management and kitting, and maintenance, repair and overhaul (“MRO”) services.
Impact of COVID-19
Our business and operations and the industries in which we operate have been impacted by public and private sector policies and initiatives in the U.S. to address the transmission of COVID-19, such as the imposition of travel restrictions and the adoption of remote work. The COVID-19 pandemic has contributed to a general slowdown in the global economy, has adversely impacted the businesses of certain of our customers and suppliers, and could adversely impact our results of operations and financial condition. In response to the COVID-19 impact on our business, we have been taking actions to preserve capital and protect the long-term needs of our businesses, including negotiating progress payments with our customers and reducing discretionary spending. For more information on the current and potential impact of the COVID-19 pandemic on our business, see Risk Factors included in Part I, Item 1A of our Form 10-K.
Recent Developments
On March 17, 2023, we received notice from NYSE American (the “Exchange”) that the Company is in compliance with all of the NYSE American LLC continued listing standards set forth in Part 10 of the NYSE American Company Guide (“Company Guide”), and that, specifically, the Company has resolved the continued listing deficiency with respect to Sections 1003(a)(i) and (ii) of the Company Guide referenced in the Exchange’s letter to the Company dated September 17, 2021, which was previously disclosed by the Company.
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.
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Our total backlog as of March 31, 2023 and December 31, 2022 was as follows:
| Backlog (Total) | March 31, 2023 | December 31, 2022 | ||||||
| Funded | $ | 113,295,000 | $ | 122,148,000 | ||||
| Unfunded | 402,520,000 | 392,352,000 | ||||||
| Total | $ | 515,815,000 | $ | 514,500,000 | ||||
Approximately 98% of the total amount of our backlog at March 31, 2023 was attributable to government and military contractor contracts. Our backlog attributable to government and military contractor contracts at March 31, 2023 and December 31, 2022 was as follows:
| Backlog (Government/Military Contractors) | March 31, 2023 | December 31, 2022 | ||||||
| Funded | $ | 110,466,000 | $ | 119,133,000 | ||||
| Unfunded | 394,345,000 | 384,652,000 | ||||||
| Total | $ | 504,811,000 | $ | 503,785,000 | ||||
Our backlog attributable to commercial contracts at March 31, 2023 and December 31, 2022 was as follows:
| Backlog (Commercial) | March 31, 2023 | December 31, 2022 | ||||||
| Funded | $ | 2,829,000 | $ | 3,015,000 | ||||
| Unfunded | 8,175,000 | 7,700,000 | ||||||
| Total | $ | 11,004,000 | $ | 10,715,000 | ||||
The total backlog at March 31, 2023 is primarily comprised of long-term programs with Raytheon (Next Generation Jammer – Mid Band Pod), USAF (T-38), Boeing (A-10 Main Landing Gear Pod), Northrop Grumman (E-2D), Raytheon (B-52 Radar Rack), Collins Aerospace (MS-110 Pod), and Sikorsky UH-60 Gunner Window, Stabilator MRO and IR Module Assembly (HIRSS). Funded backlog is primarily from purchase orders under long-term contracts with USAF (T-38), Boeing (A-10 Main Landing Gear Pod), Sikorsky IR Module Assembly (HIRSS), Lockheed Martin F-16 Rudder Island, Northrop Grumman (E-2D) and Raytheon (Next Generation Jammer – Mid Band Pod).
Critical Accounting Policies
We make a number of significant estimates, assumptions and judgments in the preparation of our financial statements. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K, for a discussion of our critical accounting policies. There have been no significant changes to the application of our critical accounting policies during the quarter ended March 31, 2023.
Results of Operations
Revenue
Total Revenue for the three months ended March 31, 2023 was $22,016,668 compared to $20,135,097 for the same period last year, an increase of $1,881,571 or 9.3%. The increase was primarily related to increases in Raytheon Next Generation Jammer (“NGJ”) Pods and Lockheed Martin F-16V Rudder Island and Drag Chute Canisters (“RI/DCC”), partly offset by decreases in Northrop Grumman E-2D Advanced Hawkeye Wet Outer Wing Panels (“WOWP”) , Sikorsky UH-60 BLACKHAWK Hover Infrared Suppression System (“HIRSS”) Module Assemblies and GKN UH-60 BLACKHAWK Inlet Ducts.
Revenue from military subcontracts was $18,672,893 for the three months ended March 31, 2023 compared to $17,196,495 for the three months ended March 31, 2022, an increase of $1,476,398 or 8.6%. The increase was primarily related to increases in Raytheon NGJ Pods and Lockheed Martin F-16V RI/DCC Module Assemblies, partly offset by decreases in Northrop Grumman WOWP’s, Sikorsky UH-60 BLACKHAWK HIRRS Module Assemblies, GKN UH-60 BLACKHAWK Inlet Ducts and Sikorsky UH-60 BLACKHAWK Fuel Panels.
Revenue from government military contracts was $1,408,034 for the three months ended March 31, 2023 compared to $1,529,472 for the three months ended March 31, 2022, a decrease of $121,438 or 7.9%. The decrease was primarily related to a decrease in Defense Logistics Agency (“DLA”) F-16 Structural Wing Components and MRO Services, partly offset by an increase in USAF T-38 Pacer Classic Structural Modification Kits.
Revenue from commercial subcontracts was $1,935,741 for the three months ended March 31, 2023 compared to $1,409,130 for the three months ended March 31, 2022, an increase of $526,610 or 37.4%. The increase was primarily the result of higher revenue recognized on Embraer Phenom Engine Inlet Assemblies, partly offset by lower revenue recognized on the Gulfstream G650 Wing Fixed Leading Edges.
Cost of Sales
Total Cost of Sales for the three months ended March 31, 2023 and 2022 was $17,354,152 and $16,700,488, respectively, an increase of $653,664 or 3.9%.
The components of the cost of sales were as follows:
| Three months ended | ||||||||
| March 31, 2023 | March 31, 2022 | |||||||
| Procurement | $ | 12,074,601 | $ | 11,171,725 | ||||
| Labor | 1,854,863 | 1,986,268 | ||||||
| Factory overhead | 3,779,878 | 4,267,639 | ||||||
| Other cost of sales | (355,190 | ) | (725,144 | ) | ||||
| Cost of sales | $ | 17,354,152 | $ | 16,700,488 | ||||
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Procurement for the three months ended March 31, 2023 was $12,074,601 compared to $11,171,725 for the three months ended March 31, 2022, an increase of $902,876 or 8.1%. The increase was primarily related to increases in Raytheon NGJ Pods and Lockheed Martin RI/DCC Module Assemblies, partly offset by decreases in the Northrop Grumman WOWP’s and Sikorsky HIRRS Module Assemblies.
Labor costs for the three months ended March 31, 2023 were $1,854,863 compared to $1,986,268 for the three months ended March 31, 2022, a decrease of $131,405 or 6.6%. The decrease was primarily related to decreases in Northrop Grumman WOWP’s and Sikorsky HIRRS Module Assemblies.
Factory overhead for the three months ended March 31, 2023 was $3,779,878 compared to $4,267,639 (which included a $134,628 severance charge recorded in factory overhead during the three months ended March 31, 2022) for the three months ended March 31, 2022, a decrease of $487,761 or 11.4%. This decrease was primarily the result of lower salary and benefit costs, factory supplies and delivery charges. Excluding the $134,628 severance charge recorded during the three months ended March 31, 2022, the factory overhead for the three months ended March 31, 2023 decreased $353,133 or 7.8% from the factory overhead for the three months ended March 31, 2022. This decrease was primarily the result of lower salary and benefit costs, factory supplies and delivery charges.
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. For the three months ended March 31, 2023, there was a reduction of these costs in the amount of $355,190 compared to a reduction of these costs in the amount of $725,144 for the three months ended March 31, 2022, a decrease of $369,954 or 51.0%. The decrease is primarily the result of a lower level of loss contract reserve reduction for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.
Gross Profit
Gross profit and gross profit percentage (“gross margin”) for the three months ended March 31, 2023 was $4,662,516 and 21.2%, respectively, compared to $3,434,609 and 17.1%, respectively, for the three months ended March 31, 2022, an increase of $1,227,907 and 410 basis points, respectively, for the reasons noted above.
Favorable/Unfavorable Adjustments to Gross Profit
During the three months ended March 31, 2023 and 2022, circumstances required that we make changes in estimates to various contracts. Such changes in estimates resulted in changes in total gross profit as follows:
| Three months ended | ||||||||
| March 31, 2023 | March 31, 2022 | |||||||
| Favorable adjustments | $ | 825,981 | $ | 1,277,058 | ||||
| Unfavorable adjustments | (1,546,986 | ) | (958,997 | ) | ||||
| Net adjustments | $ | (721,005 | ) | $ | 318,062 | |||
For the three months ended March 31, 2023, we evaluated all contractual data and revised estimated gross profit percentages accordingly. We had 23 contracts with favorable adjustments and 31 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 March 31, 2023 were $2,869,058 compared to $3,137,657 (which included a $637,206 severance charge recorded in selling, general and administrative expenses during the three months ended March 31, 2022) for the three months ended March 31, 2022, a decrease of $268,599 or 8.6%. The decrease was primarily the result of lower salary and benefit expenses as well as lower insurance expenses. Excluding the aforementioned $637,206 severance charge as well as $263,148 of restricted stock forfeitures recorded during the three months ended March 31, 2022, the selling, general and administrative expenses for the three months ended March 31, 2023 increased $105,459 or 3.8% from the selling, general and administrative expenses for the three months ended March 31, 2022. This increase was primarily the result of increased salary and benefits partly offset by lower insurance expenses.
Interest expense
Interest expense for the three months ended March 31, 2023 was $610,896, compared to $328,608 for the three months ended March 31, 2022, an increase of $282,288 or 85.9%. The increase was the result of higher year-over-year interest rates charged on our outstanding debt under the Credit Agreement, partially offset by a year-over-year decrease in the amount of our outstanding debt under the Credit Agreement.
Income (Loss) Before Provision for Income Taxes
Income (Loss) before provision for income taxes for the three months ended March 31, 2023 was $1,182,562 compared to $(31,656) for the three months ended March 31, 2022, an increase of $1,214,218 for the reasons noted above.
Provision for Income Taxes
Provision for income taxes for the three months ended March 31, 2023 was $199,257 compared to $1,275 for the three months ended March 31, 2022, an increase of $197,982. The increase in the provision for income tax is the result of the Company’s valuation allowance on its deferred tax asset being partially released at December 31, 2022, resulting in the change in the deferred asset for the three months ending March 31, 2023 being recorded through the Company’s statement of operations for the three months ending March 31, 2023. For the three months ending March 31, 2022 the company’s deferred tax assets were fully offset by the valuation allowance, therefore there was only minimum state tax income expense recorded to the Company’s statement of operations during the three months ending March 31, 2022.
The effective income tax rate for the three months ended March 31, 2023 is 16.8%. The difference between the effective income tax rate for the three months ended March 31, 2023 and the statutory income tax rate of 21% for the three months ended March 31, 2023 is due to the estimated R&D credit, state income taxes and permanent tax differences.
19
Net Income (Loss) and Earnings (Loss) per Share
Net income (loss) for the three months ended March 31, 2023 of $983,305 or $0.08 per basic and diluted share, compared to $(32,931) or $(0.00) for the three months ended March 31, 2022, an increase of $1,016,236 for the reasons noted above. Basic and diluted income per share for the three months ended March 31, 2023 was calculated using 12,520,189 and 12,608,189 weighted average basic and diluted shares outstanding, respectively. Basic and diluted (loss) per share for the three months ended March 31, 2022 was calculated using 12,363,143 weighted average basic and diluted shares outstanding.
Excluding the $771,834 severance charge recorded in the first quarter of 2022 as referred to above under Cost of Sales and Selling, General and Administrative Expenses, net income for the three months ended March 31, 2023 increased $244,402 or 33.1% from net income for the three months ended March 31, 2022.
Excluding the aforementioned severance charge, basic and diluted earnings per share for the three months ended March 31, 2023 increased $0.02 or 33.3% from basic and diluted earnings per share for the three months ended March 31, 2022.
20
Liquidity and Capital Resources
General
At March 31, 2023, we had working capital of $13,736,671 compared to $12,896,602 at December 31, 2022, an increase of $840,069 or 6.5%. This increase was primarily the result of an increase in contract assets and accounts receivable and a decrease in accrued expenses, partly offset by an increase in contract liabilities and accounts payable.
Cash Flow
A large portion of our cash flow is used to pay for materials and processing costs associated with contracts that are in process and which do not provide for progress payments. Costs and related earnings for which we do not bill on a progress basis, and which, as a result, we bill upon shipment of products, are components of contract assets on our consolidated balance sheets and represent the aggregate costs and related earnings for uncompleted contracts for which the customer has not yet been billed. These costs and earnings are recovered upon shipment of products and presentation of billings in accordance with contract terms.
Because ASC 606 requires us to use estimates in determining revenue, costs and profits and in assigning the amounts to accounting periods, there can be a significant disparity between earnings (both for accounting and tax purposes) as reported and actual cash that we receive during any reporting period. Accordingly, it is possible that we may have a shortfall in our cash flow and may need to borrow money or take steps to defer cash outflows until the reported earnings materialize into actual cash receipts.
Some of our programs require us to expend up-front costs that may have to be amortized over a portion of production units. In the case of significant program delays and/or program cancellations, we could experience margin degradation, which may be material for costs that are not recoverable. Such charges and the loss of up-front costs could have a material impact on our liquidity and results of operations.
We continuously work to improve our payment terms from our customers, including accelerated progress payment arrangements, as well as exploring alternate funding sources.
At March 31, 2023, we had cash of $3,997,924 compared to $3,847,225 at December 31, 2022, an increase of $150,699 or 3.9%. This increase was primarily the result of cash flow from operations, partly offset by repayment of long-term debt and debt issuance costs.
Bank Credit Facilities
On March 24, 2016, the Company entered into an Amended and Restated Credit Agreement with the lenders named therein and BankUnited N.A. as Sole Arranger, Agent and Collateral Agent (as amended from time to time, the “Credit Agreement” or the “BankUnited Facility”). The Credit Agreement originally provided for a revolving credit loan commitment of $30 million (the “Revolving Loan”) and a $10 million term loan (“Term Loan”). The Revolving Loan bears interest at a rate as defined in the Credit Agreement.
On March 23, 2023, the Company entered into a Twelfth Amendment to the Credit Agreement (the “Twelfth Amendment”). Under the Twelfth Amendment, the parties amended the Credit Agreement by : (a) extending the maturity date of the Company’s existing revolving line of credit and its existing term loan to November 30, 2024 (under the terms of the Credit Agreement, the outstanding principal balance of the term loan will be repaid by June 30, 2023); (b) providing for reduction of the aggregate maximum principal amount of all revolving line of credit loans to $20,520,000 from October 1, 2023 through December 31, 2023, $19,800,000 from January 1, 2024 through March 31, 2024, $19,080,000 from April 1, 2024 through June 30, 2024, $18,360,000 from July 1, 2024 through September 30, 2024, and $17,640,000 from October 1, 2024 and thereafter, and for payments to be made by the Company to comply therewith (if any such payments are necessary), on the first day of each such period; and (c) payment of a $250,000 capitalized fee incurred in connection with the Eighth Amendment to the Credit Agreement, which the Company entered into on October 28, 2021 (the “Eighth Amendment”) in two installments, the first installment to be paid on June 1, 2023 in the amount of $116,667 and the second installment to be paid July 1, 2023 in the amount of $133,333, together with all unpaid interest accrued at the term loan interest rate on the capitalized fee through each such date.
21
The Credit Agreement, as amended, requires us to maintain the following financial covenants (subject to the exclusions provided for in the previous paragraph): (a) minimum debt service coverage ratio of no less than 1.5 to 1.0 for the trailing four quarter period ended March 31, 2022, 0.95 to 1.0 for the trailing four quarter period ended June 30, 2022, and 1.5 to 1.0 for the trailing four quarter period ended September 30, 2022 and for the trailing four quarter periods ended thereafter; (b) maximum leverage ratio of no less than 7.30 to 1.0 for the trailing four quarter period ended March 31, 2022, 6.30 to 1.0 for the trailing four quarter period ended June 30, 2022, 5.0 to 1.0 for the trailing four quarter period ended September 30, 2022 and 4.0 to 1 for the trailing four quarter periods thereafter; (c) minimum net income after taxes as of the end of each fiscal quarter being no less than $1.00 commencing June 30, 2022; and (d) a minimum adjusted EBITDA at the end of each quarter of no less than $1.0 million (waived for the quarter ended March 31, 2022). The additional principal payments, increase in interest and the Amendment Fee provided for in the Eight Amendment and Ninth Amendment to the Credit Agreement, which the Company entered into on April 12, 2022 (the “Ninth Amendment”) are excluded for purposes of calculating compliance with each of the financial covenants.
The BankUnited Facility is secured by all of the Company’s assets and both the Revolving Loan and Term Loan bear interest at the Prime Rate + 3.50%. The Prime Rate was 8.00% as of March 31, 2023 and as such, the Company’s interest rate on both the Revolving Loan and Term Loan was 11.50% as of March 31, 2023.
As of March 31, 2023 and December 31, 2022, the Company had $21,000,000 outstanding under the Revolving Loan.
As of March 31, 2023, the Term Loan, as amended by the Twelfth Amendment, had an aggregate principal amount of $983,333, payable in monthly installments, as defined in the Twelfth Amendment, as compared to an aggregate principal amount outstanding as of December 31, 2022 of $1,583,333.
There is currently no availability for borrowings under the Revolving Loan and the Company finances its operations from internally generated cash flow.
Liquidity
We believe that our existing resources as of March 31, 2023 will be sufficient to meet our current working capital needs for at least the next 12 months from the date of issuance of our consolidated financial statements. However, our working capital requirements can vary significantly, depending in part on the timing of new program awards and the payment terms with our customers and suppliers. If our working capital needs exceed our cash flows from operations, we would look to our cash balances and availability for borrowings under our borrowing arrangement to satisfy those needs, as well as potential sources of additional capital, which may not be available on satisfactory terms and in adequate amounts, if at all.
Contractual Obligations
For information concerning our contractual obligations, see Contractual Obligations under Item 7 of Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2022.
Inflation
Inflation historically has not had a material effect on our operations, although the current inflationary environment in the U.S., and its impact on interest rates, the supply chain, the labor market and general economic conditions, are factors that the Company actively monitors in an attempt to mitigate and manage potential negative impacts on and risks faced by the Company. The majority of the Company’s long term contracts with its customers reflect fixed pricing and its long term contracts with its suppliers reflect fixed pricing. When bidding for work, the Company takes inflation risk and supply side pricing risk into account in its proposals.
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4 – Controls and Procedures
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that:
| ● | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of internal control over financial reporting for the twelve months ended December 31, 2022 based on criteria established in Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In connection with this evaluation, management identified deficiencies that constituted material weaknesses in our internal control over financial reporting as of December 31, 2022. For more information on these deficiencies, see Item 9A. Controls and Procedures, included in our Annual Report on Form 10-K.
22
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
During 2023, the Company intends to implement new controls designed to remediate the aforementioned 2022 material weaknesses.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
23
Part II - Other Information
Item 1 – Legal Proceedings
Reference is made to Note 12 entitled “Commitments and Contingencies” to our unaudited condensed consolidated financial statements included in this Quarterly Report for a discussion of current legal proceedings, which discussion is incorporated herein by reference.
Item 1A – Risk Factors
“Item 1A. Risk Factors” of our Form 10-K for the year ended December 31, 2022, includes a discussion of significant factors known to us that could materially adversely affect our business, financial condition, or results of operations. There have been no material changes from the risk factors disclosed in the Annual Report.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 – Defaults Upon Senior Securities
None.
Item 4 – Mine Safety Disclosures
Not applicable.
Item 5 – Other Information
None.
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Item 6 – Exhibits
| Exhibit No. | Description |
| 10.1 | Twelfth Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 23, 2023). |
| 31.1* | Section 302 Certification by Chief Executive Officer and President |
| 31.2* | Section 302 Certification by Chief Financial Officer (Principal Accounting Officer) |
| 32.1** | Section 906 Certification by Chief Executive Officer and Chief Financial Officer |
| 101.INS** | Inline XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| 104** | Cover Page Interactive Data File. The cover page XBRL tags are embedded within the Inline XBRL document. |
* Filed herewith
** Furnished herewith
Attached as Exhibit 101 to this report are the following formatted in Inline XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Statement of Operations for the three months ended March 31, 2023 and 2022, (ii) Condensed Consolidated Balance Sheet as of March 31, 2023 and December 31, 2022, (iii) Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2023 and 2022, (iv) Condensed Consolidated Statement of Changes in Equity for the three months ended March 31, 2023 and 2022 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 15, 2023 | By. | /s/ Dorith Hakim |
| Dorith Hakim | ||
Chief Executive Officer and President (Principal Executive Officer) | ||
| Dated: May 15, 2023 | By. | /s/ Andrew L. Davis |
| Andrew L. Davis | ||
Chief Financial Officer (Principal Financial and Accounting Officer) | ||
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