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 August 9, 2024, the registrant had shares of common stock, $.001 par value, outstanding.
Part I - Financial Information
Item 1 - Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, | ||||||||
| 2024
(Unaudited) |
December 31, 2023 |
|||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowance for credit losses | ||||||||
| Contract assets, net | ||||||||
| 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 | ||||||||
| Contract liabilities | ||||||||
| Loss reserve | ||||||||
| Current portion of line of credit | ||||||||
| Current portion of long-term debt | ||||||||
| Operating lease liabilities, current | ||||||||
| Income taxes payable | ||||||||
| Total Current Liabilities | ||||||||
| Line of credit, net of current portion | ||||||||
| Long-term operating lease liabilities | ||||||||
| Long-term debt, net of current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (see note 11) | ||||||||
| 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
1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Income from operations | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income before provision for income taxes | ||||||||||||||||
| Provision for income taxes | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Income per common share, basic | $ | $ | $ | $ | ||||||||||||
| Income per common share, diluted | $ | $ | $ | $ | ||||||||||||
| Shares used in computing income per common share: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
2
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
| Common Stock Shares | Common Stock Amount | Additional Paid-in Capital | Accumulated Deficit | Total Shareholders’ Equity | ||||||||||||||||
| Balance at January 1, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net income | — | |||||||||||||||||||
| Issuance of common stock upon settlement of restricted stock, net | ||||||||||||||||||||
| Stock-based compensation expense | — | |||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net income | — | |||||||||||||||||||
| Issuance of common stock upon settlement of restricted stock, net | ||||||||||||||||||||
| Stock-based compensation expense | — | |||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance at January 1, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net income | — | |||||||||||||||||||
| Issuance of common stock upon settlement of restricted stock, net | ||||||||||||||||||||
| Stock-based compensation expense | — | |||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net income | — | |||||||||||||||||||
| Issuance of common stock upon settlement of restricted stock, net | ||||||||||||||||||||
| Stock-based compensation expense | — | |||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
See Notes to Condensed Consolidated Financial Statements
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| For the Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt issuance cost | ||||||||
| Stock-based compensation | ||||||||
| Deferred income taxes | ||||||||
| Provision for credit losses | ||||||||
| Amortization of operating lease right-of-use assets | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Increase in accounts receivable | ( | ) | ( | ) | ||||
| Decrease in insurance receivable | ||||||||
| Decrease (increase) in contract assets | ( | ) | ||||||
| Decrease in inventory | ||||||||
| Decrease in prepaid expenses and other assets | ||||||||
| (Decrease) increase in accounts payable and accrued expenses | ( | ) | ||||||
| (Decrease) increase in contract liabilities | ( | ) | ||||||
| Decrease in settlement of litigation obligation | ( | ) | ||||||
| Decrease in operating lease liabilities | ( | ) | ( | ) | ||||
| Decrease in loss reserve | ( | ) | ( | ) | ||||
| Increase in income taxes payable | ||||||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Principal payments on line of credit | ( | ) | ||||||
| Principal payments on long-term debt | ( | ) | ( | ) | ||||
| Repayments of insurance financing obligation | ( | ) | ||||||
| Debt issuance costs paid | ( | ) | ||||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net decrease in cash | ( | ) | ( | ) | ||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
4
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 June 30, 2024 and for the three and six months ended June 30, 2024 and 2023 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, 2023 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, 2023 (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 multiple 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 June 30, 2024, the Company had $
Recently Issued Accounting Standards – Not Adopted
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which focuses on the rate reconciliation and income taxes paid. ASU No. 2023-09 requires a public business entity (“PBE”) to disclose, on an annual basis, a tabular rate reconciliation using both percentages and currency amounts, broken out into specified categories with certain reconciling items further broken out by nature and jurisdiction to the extent those items exceed a specified threshold. In addition, all entities are required to disclose income taxes paid, net of refunds received disaggregated by federal, state/local, and foreign and by jurisdiction if the amount is at least 5% of total income tax payments, net of refunds received. For PBEs, the new standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. An entity may apply the amendments in this ASU prospectively by providing the revised disclosures for the period ending December 31, 2025 and continuing to provide the pre-ASU disclosures for the prior periods, or may apply the amendments retrospectively by providing the revised disclosures for all period presented. We expect this ASU to only impact our disclosures with no impacts to our results of operations, cash flows, and financial condition.
Disaggregation of Revenue
The following tables present the Company’s revenue disaggregated by contract type and revenue recognition method:
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Government subcontracts | $ | $ | $ | $ | ||||||||||||
| Prime government contracts | ||||||||||||||||
| Commercial contracts | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
5
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenue recognized using over time revenue recognition model | $ | $ | $ | $ | ||||||||||||
| Revenue recognized using point in time revenue recognition model | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Favorable/(Unfavorable) Adjustments to Gross Profit
We review our Estimates at Completion (“EAC”) at least quarterly. Due to the nature of the work required to be performed on many of the Company’s performance obligations, the estimation of total revenue and cost at completion is complex, subject to many inputs, and requires significant judgment by management on a contract-by-contract basis. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities, and the related changes in estimates of revenues and costs. The risks and opportunities relate to management’s judgment about the ability and cost to achieve the schedule, consideration of customer-directed delays or reductions in scheduled deliveries, technical requirements, customer activity levels, and related variable consideration. Management must make assumptions and estimates regarding contract revenue and costs, including estimates of labor productivity and availability, the complexity and scope of the work to be performed, the availability and cost of materials including any impact from changing costs or inflation, the length of time to complete the performance obligation, the availability and timing of funding from our customer, and overhead cost rates, among others.
Changes in estimates of net sales, cost of sales, and the related impact to operating profit on contracts recognized over time are recognized on a cumulative catch-up basis, which recognizes the cumulative effect of the profit changes on current and prior periods based on a performance obligation’s percentage-of-completion in the current period. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations. Our EAC adjustments also include the establishment of, and changes to, loss provisions for our contracts accounted for on a percentage-of-completion basis.
Net EAC adjustments had the following impact on our gross profit during the six months ended June 30, 2024 and 2023:
| Six months ended | ||||||||
| June 30, 2024 | June 30, 2023 | |||||||
| Favorable adjustments | $ | $ | ||||||
| Unfavorable adjustments | ( | ) | ( | ) | ||||
| Net adjustments | $ | ( | ) | $ | ( | ) | ||
Transaction Price Allocated to Remaining Performance Obligations
As
of June 30, 2024, the aggregate amount of transaction price allocated to the remaining performance obligations was approximately
$
6
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.
June 30, 2024 |
December 31, 2023 |
|||||||
| Contract assets | $ | $ | ||||||
| Contract liabilities | ||||||||
Revenue
recognized for the six months ended June 30, 2024 and 2023 that was included in the contract liabilities balance as of January 1,
2024 and 2023, respectively, was approximately $
The components of inventory consisted of the following:
June 30, 2024 |
December 31, 2023 |
|||||||
| Raw materials | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| Inventory, net | $ | $ | ||||||
In 2009, the Company adopted the Performance Equity Plan 2009 (the “2009 Plan”). The 2009 Plan reserved common shares for issuance. The 2009 Plan provides for the issuance of either incentive stock options or nonqualified stock options to employees, consultants or others who provide services to the Company. The Company has shares available for grant under the 2009 Plan as of June 30, 2024.
In 2016, the Company adopted the 2016 Long Term Incentive Plan (the “2016 Plan”). The 2016 Plan reserved common shares for issuance, provided that no more than common shares be granted as incentive stock options. Awards may be made or granted to employees, officers, directors and consultants in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards. Any shares of common stock granted in connection with awards other than stock options and stock appreciation rights are counted against the number of shares reserved for issuance under the 2016 Plan as one and one-half shares of common stock for every one share of common stock granted in connection with such award. Any shares of common stock granted in connection with stock options and stock appreciation rights are counted against the number of shares reserved for issuance under the 2016 Plan as one share for every one share of common stock issuable upon the exercise of such stock option or stock appreciation right awarded. In the fourth quarter of 2020, the Company added shares to the 2016 Plan, which increased the number of shares reserved for issuance under the 2016 Plan to shares. In the second quarter of 2023, the Company added an additional shares to the 2016 Plan, which increased the number of shares for reserved for issuance under the 2016 Plan to shares. The Company has shares available for grant under the 2016 Plan as of June 30, 2024.
| Three
months ended June 30, |
Six
months ended June 30, |
|||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Cost of sales | $ | $ | $ | ( |
) | $ | ||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
7
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 period. At June 30, 2024, the weighted average remaining amortization period was .
| RSUs | Weighted Average Grant Date Fair Value of RSUs | |||||||
| Non-vested – January 1, 2024 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( | ) | $ | |||||
| Forfeited | $ | |||||||
| Non-vested – June 30, 2024 | $ | |||||||
The Company grants shares of common stock (“Restricted Stock Awards” or “RSAs”) to select employees. These shares have various vesting dates, ranging from vesting on the grant date to as late as from the date of grant. In the event that the employee’s employment is voluntarily terminated prior to certain vesting dates, portions of the shares may be forfeited. At June 30, 2024, the weighted average remaining amortization period was years.
Restricted Stock Awards | Weighted Average Grant Date Fair Value of Restricted Stock Awards | |||||||
| Non-vested – January 1, 2024 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( | ) | $ | |||||
| Forfeited | ( | ) | $ | |||||
| Non-vested – June 30, 2024 | $ | |||||||
The Company grants shares of common stock (“Performance Restricted Stock Awards” or “PRSAs”) to select officers as part of our long-term incentive program that will result in that number of PRSAs being paid out if the target performance metric is achieved. The award vesting is based on specific performance metrics related to accounts payable delinquency, debt, and net income during the performance period. The PRSAs vest at % or % and all three metrics must be met to vest at %. The PRSAs granted under this program will vest on the fourth anniversary of the grant date, subject to the aforementioned performance criteria. At June 30, 2024, the weighted average remaining amortization period was years.
The following table summarizes activity related to outstanding PRSAs for the six months ended June 30, 2024:
| PRSAs | Weighted Average Grant Date Fair Value of PRSAs | |||||||
| Non-vested – January 1, 2024 | $ | |||||||
| Granted | $ | |||||||
| Vested | $ | |||||||
| Forfeited | ( | ) | $ | |||||
| Non-vested – June 30, 2024 | $ | |||||||
8
The fair value of all RSUs, PRSAs and RSAs is based on the closing price of our common stock on the grant date. All RSUs, PRSAs, and Restricted Stock Awards vest and settle in common stock (on a one-for-one basis).
As of June 30, 2024, unamortized stock-based compensation costs related to restricted share arrangements was $.
Basic and diluted income per common share is computed using the weighted average number of common shares outstanding. Diluted income per common share is adjusted for the incremental shares attributed to unvested RSUs and RSAs. Incremental shares of and were used in the calculation of diluted income per common share for the three and six months ended June 30, 2024, respectively. Incremental shares of were used in the calculation of diluted income per common share for both the three and six months ended June 30, 2023.
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
February 20, 2024, the Company entered into a Thirteenth Amendment to the Credit Agreement (the “Thirteenth Amendment”).
Under the Thirteenth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Company’s
existing revolving line of credit to
The
Credit Agreement, as amended, requires us to maintain the following financial covenants: (a) minimum debt service coverage ratio
of no less than
The
BankUnited Facility is secured by all of the Company’s assets and the Revolving Loan bears interest at the Prime Rate +
As
of June 30, 2024 and December 31, 2023, the Company had $
The
Company has cumulatively paid approximately $
Also
included in long-term debt are financing leases of $
| For the Year Ending December 31, | ||||
| Remainder of 2024 | $ | |||
| 2025 | ||||
| Total | $ | |||
9
During
the six months ended June 30, 2024, our four largest customers accounted for
At
June 30, 2024,
At
June 30, 2024,
At
June 30, 2024,
The
Company leases manufacturing and office space under an agreement classified as an operating lease. On November 10, 2021, the Company
executed the second amendment to the lease agreement for its manufacturing and office space, which extends the lease agreement’s
expiration date to
The Company also leases office equipment in agreements classified as operating leases.
For
the six months ended June 30, 2024 and 2023, the Company’s operating lease expense was $
Future minimum lease payments under non-cancellable operating leases as of June 30, 2024 were as follows:
| For the Year Ending December 31, | |||||
| Remainder of 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| Total undiscounted operating lease payments | |||||
| Less imputed interest | ( | ) | |||
| Present value of operating lease payments | $ | ||||
The following table sets forth the right-of-use assets and operating lease liabilities as of:
| June 30, 2024 | December 31, 2023 | |||||||
| Assets | ||||||||
| Right-of-use assets, net | $ | $ | ||||||
| Liabilities | ||||||||
| Current operating lease liabilities | $ | $ | ||||||
| Long-term operating lease liabilities | ||||||||
| Total lease liabilities | $ | $ | ||||||
The
Company’s weighted average remaining lease term for its operating leases is
10
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 June 30, 2024 and 2023 was $
The
effective income tax rate for the six months ended June 30, 2024 is
The Company may be involved in various claims, suits, assessments, investigations, and legal proceedings that arise from time to time in the ordinary course of its business. The Company accrues a liability when it is both probable a liability has been incurred and the amount of the loss can be reasonably estimated. The Company reviews these accruals at least quarterly and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant information. To the extent new information is obtained and the Company’s views on the probable outcomes of claims, suits, assessments, investigations, or legal proceedings change, changes in the Company’s accrued liabilities would be recorded in the period such determination is made. For some matters, the amount of liability is not probable or the amount cannot be reasonably estimated and, therefore, accruals have not been made.
The
Company reached a settlement with the SEC on June 20, 2024 related to the Company’s previously announced and filed restatements
of certain of its financial statements for fiscal periods between January 1, 2018 and December 31, 2022. Under the terms of this
settlement, if the Company fails to comply with various undertakings, a civil monetary penalty in the amount of $
11
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, 2023 (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.
Recent Developments
None.
Backlog
We produce custom assemblies pursuant to long-term contracts and customer purchase orders. Funded backlog consists of aggregate funded values under such contracts and purchase orders, excluding the portion previously included in operating revenues pursuant to Accounting Standards Codification Topic 606 (“ASC 606”). Unfunded backlog is the estimated amount of future orders under the expected duration of the programs. Substantially all of our backlog is subject to termination at will and rescheduling, without significant penalty. Funds are often appropriated for programs or contracts on a yearly or quarterly basis, even though the contract may call for performance that is expected to take a number of years. Therefore, our funded backlog does not include the full value of our contracts.
Our total backlog as of June 30, 2024 and December 31, 2023 is shown below. We are currently in customer negotiations which, when concluded, will result in an estimated amount of approximately $32 million of the June 30, 2024 Unfunded Backlog converting to Funded Backlog.
| Backlog (Total) |
June
30, 2024 |
December
31, 2023 |
||||||
| Funded | $ | 87,049,000 | $ | 118,218,000 | ||||
| Unfunded | 424,703,000 | 395,133,000 | ||||||
| Total | $ | 511,752,000 | $ | 513,351,000 | ||||
Approximately 96% of the total amount of our backlog at June 30, 2024 was attributable to government and military contractor contracts. Our backlog attributable to government contracts at June 30, 2024 and December 31, 2023 was as follows:
| Backlog
(Government) |
June
30, 2024 |
December
31, 2023 |
||||||
| Funded | $ | 83,957,000 | $ | 115,681,000 | ||||
| Unfunded | 408,503,000 | 383,574,000 | ||||||
| Total | $ | 492,460,000 | $ | 499,255,000 | ||||
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Our backlog attributable to commercial contracts at June 30, 2024 and December 31, 2023 was as follows:
| Backlog (Commercial) | June
30, 2024 | December
31, 2023 | ||||||
| Funded | $ | 3,092,000 | $ | 2,537,000 | ||||
| Unfunded | 16,200,000 | 11,559,000 | ||||||
| Total | $ | 19,292,000 | $ | 14,096,000 |
The total backlog at June 30, 2024 is primarily comprised of long-term programs with Raytheon (Next Generation Jammer (“NGJ”) – Mid Band Pods and Advanced Tactical Pods), Lockheed Martin (F-16 RI/DCC’s), Raytheon (B-52 Radar Racks), USAF (T-38 Classic Structural Modification Kits), Raytheon (Airborne Reconnaissance Pods) and Embraer (Phenom 300 Engine Inlets).
The funded backlog at June 30, 2024 is primarily from purchase orders under long-term contracts with Raytheon (NGJ – Mid Band Pods and Advanced Tactical Pods), USAF (T-38 Classic Structural Modification Kits), Sikorsky (CH-53K Welded Tubes), Sikorsky (UH-60 BLACKHAWK Gunner Windows), Raytheon (Airborne Reconnaissance Pods), Boeing (A-10 Main Landing Gear Pods), Lockheed Martin (F-16 RI/DCC’s), and Embraer (Phenom 300 Engine Inlets).
Critical Accounting Estimates
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 estimates. There have been no significant changes to the application of our critical accounting estimates during the quarter ended June 30, 2024.
Results of Operations
Revenue
Total Revenue for the three months ended June 30, 2024 was $20,810,334 compared to $20,547,555 for the same period last year, an increase of $262,779 or 1.3%, driven primarily by increases in our Raytheon NGJ – Mid Band Pods, Raytheon Airborne Reconnaissance Pods and Sikorsky Welded Tubes programs, partly offset by decreases in our Northrop Grumman E-2D Advanced Hawkeye Outer Wing Panels (“OWP”) and our Sikorsky UH-60 BLACKHAWK Hover Infrared Suppression System (“HIRSS”) Module Assemblies programs.
Total Revenue for the six months ended June 30, 2024 was $39,891,477 compared to $42,564,223 for the same period last year, a decrease of $2,672,746 or 6.3%, driven primarily by decreases in our Sikorsky UH-60 BLACKHAWK Hover Infrared Suppression System (“HIRSS”) Module Assemblies, Northrop Grumman E-2D Advanced Hawkeye Outer Wing Panels (“OWP”) and Sikorsky UH-60 BLACKHAWK Stabilator MRO programs, partly offset by increases in our Raytheon Airborne Reconnaissance Pods, Sikorsky Welded Tubes and USAF T-38 Pacer Classic Structural Modification Kits programs.
Revenue from military subcontracts was $16,963,874 for the three months ended June 30, 2024 compared to $16,502,026 for the three months ended June 30, 2023, an increase of $461,848 or 2.8%, driven primarily by increases in our Raytheon NGJ – Mid Band Pods, Raytheon Airborne Reconnaissance Pods and Sikorsky Welded Tubes programs, partly offset by decreases in our Northrop Grumman E-2D Advanced Hawkeye Outer Wing Panels (“OWP”) and our Sikorsky UH-60 BLACKHAWK Hover Infrared Suppression System (“HIRSS”) Module Assemblies programs.
Revenue from military subcontracts was $31,965,642 for the six months ended June 30, 2024 compared to $35,174,919 for the six months ended June 30, 2023, a decrease of $3,209,277 or 9.12%, driven primarily by decreases in our Sikorsky UH-60 BLACKHAWK Hover Infrared Suppression System (“HIRSS”) Module Assemblies, Northrop Grumman E-2D Advanced Hawkeye Outer Wing Panels (“OWP”) and Sikorsky UH-60 BLACKHAWK Stabilator MRO programs, partly offset by increases in our Raytheon Airborne Reconnaissance Pods, Sikorsky Welded Tubes and USAF T-38 Pacer Classic Structural Modification Kits programs.
Revenue from government military contracts was $2,601,347 for the three months ended June 30, 2024 compared to $2,710,925 for the three months ended June 30, 2023, a decrease of $109,578 or 4.0%, driven primarily by a decrease in our DLA F-16 Wing Skins program, partly offset by an increase in our USAF T-38 Pacer Classic Structural Modification Kits program.
Revenue from government military contracts was $5,383,228 for the six months ended June 30, 2024 compared to $4,118,959 for the six months ended June 30, 2023, an increase of $1,264,269 or 30.7%, driven primarily by an increase in our USAF T-38 Pacer Classic Structural Modification Kits program, partly offset by a decrease in our DLA F-16 Wing Skins program.
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Revenue from commercial subcontracts was $1,245,113 for the three months ended June 30, 2024 compared to $1,334,604 for the three months ended June 30, 2023, a decrease of $89,491 or 6.7%, primarily on a decrease in our Embraer Phenom Engine Inlet Assemblies program.
Revenue from commercial subcontracts was $2,542,607 for the six months ended June 30, 2024 compared to $3,270,345 for the six months ended June 30, 2023, a decrease of $727,738 or 22.3%, primarily on a decrease in our Embraer Phenom Engine Inlet Assemblies program.
Cost of Sales
Total Cost of Sales for the three months ended June 30, 2024 and 2023 was $15,694,910 and $15,943,555, respectively, a decrease of $248,645 or 1.6%.
Total Cost of Sales for the six months ended June 30, 2024 and 2023 was $31,222,304 and $33,297,707, respectively, a decrease of $2,075,403 or 6.2%.
The components of the cost of sales were as follows:
| Three months ended | Six months ended | ||||||||||||
| June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | ||||||||||
| Procurement | $ | 10,118,041 | $ | 9,470,763 | $ | 19,483,061 | $ | 20,958,854 | |||||
| Labor | 1,800,940 | 1,867,283 | 3,598,730 | 3,722,146 | |||||||||
| Factory overhead | 3,770,396 | 4,266,566 | 8,037,491 | 8,046,445 | |||||||||
| Other cost of sales | 5,533 | 338,942 | 103,022 | 570,262 | |||||||||
| Cost of sales | $ | 15,694,910 | $ | 15,943,555 | $ | 31,222,304 | $ | 33,297,707 | |||||
Procurement for the three months ended June 30, 2024 was $10,118,041 compared to $9,470,763 for the three months ended June 30, 2023, an increase of $647,278 or 6.8%, driven primarily by higher procurement for our Raytheon NGJ – Mid Band Pods program.
Procurement for the six months ended June 30, 2024 was $19,483,061 compared to $20,958,854 for the six months ended June 30, 2023, a decrease of $1,475,793 or 7.0%, driven primarily by lower procurement for our Sikorsky UH-60 BLACKHAWK Hover Infrared Suppression System (“HIRSS”) Module Assemblies program.
Labor costs for the three months ended June 30, 2024 were $1,800,940 compared to $1,867,283 for the three months ended June 30, 2023, a decrease of $66,343 or 3.6%.
Labor costs for the six months ended June 30, 2024 were $3,598,730 compared to $3,722,146 for the six months ended June 30, 2023, a decrease of $123,416 or 3.3%.
Factory overhead for the three months ended June 30, 2024 was $3,770,396 compared to $4,266,566 for the three months ended June 30, 2023, a decrease of $496,170 or 11.6%. The decrease was primarily the result of lower employee insurance costs.
Factory overhead for the six months ended June 30, 2024 was $8,037,491 compared to $8,046,445 for the six months ended June 30, 2023, a decrease of $8,594 or 0.1%.
Other cost of sales relates to items that can increase or decrease cost of sales such as changes in inventory reserves, changes in loss contract provisions, absorption variances and direct charges to cost of sales. Other cost of sales for the three months ended June 30, 2024 was $5,533 compared to a $338,943 for the three months ended June 30, 2023, a decrease of $333,410 or 98.4%. The decrease is primarily the result of a lower level of direct charges to cost of sales during the three months ended June 30, 2024 as compared to the three months ended June 30, 2023.
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Other cost of sales for the six months ended June 30, 2024 was $103,022 compared to $570,262 for the six months ended June 30, 2023, a decrease in cost of $467,240 or 81.9%. The decrease is primarily the result of a lower level of direct charges to cost of sales during the six months ended June 30, 2024 as compared to the six months ended June 30, 2023.
Gross Profit
Gross profit and gross profit percentage (“gross margin”) for the three months ended June 30, 2024 was $5,115,424 and 24.6%, respectively, compared to $4,604,000 and 22.4%, respectively, for the three months ended June 30, 2023, an increase of $511,424, or 11.1%, and 220 basis points, respectively, for the reasons noted above and a favorable year-over-year mix.
Gross profit and gross profit percentage (“gross margin”) for the six months ended June 30, 2024 was $8,669,173 and 21.7%, respectively, compared to $9,266,516 and 21.8%, respectively, for the six months ended June 30, 2023, a decrease of $597,343, or 6.4%, and 10 basis points, respectively, for the reasons noted above.
Favorable/Unfavorable Adjustments to Gross Profit
During the six months ended June 30, 2024 and 2023, circumstances required that we make changes in estimates to various contracts. Such changes in estimates resulted in changes in total gross profit as follows:
| Six months ended | ||||||||
| June 30, 2024 | June 30, 2023 | |||||||
| Favorable adjustments | $ | 1,490,839 | $ | 1,913,135 | ||||
| Unfavorable adjustments | (2,849,017 | ) | (2,189,848 | ) | ||||
| Net adjustments | $ | (1,358,178 | ) | $ | (276,713 | ) | ||
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended June 30, 2024 were $2,775,935 compared to $2,806,480 for the three months ended June 30, 2023, a decrease of $30,545 or 1.1%. The decrease was primarily the result of lower personnel related expenses.
Selling, general and administrative expenses for the six months ended June 30, 2024 were $5,489,839 compared to $5,675,538 for the six months ended June 30, 2023, a decrease of $185,699 or 3.3%. The decrease was primarily the result of lower personnel related expenses.
Interest expense
Interest expense for the three months ended June 30, 2024 was $587,971, compared to $541,655 for the three months ended June 30, 2023, an increase of $46,316 or 8.6%. 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.
Interest expense for the six months ended June 30, 2024 was $1,220,106, compared to $1,152,551 for the six months ended June 30, 2023, an increase of $67,555 or 5.9%. 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 Before Provision for Income Taxes
Income before provision for income taxes for the three months ended June 30, 2024 was $1,751,518 compared to $1,255,865 for the three months ended June 30, 2023, an increase of $495,653 or 39.5% for the reasons noted above.
Income before provision for income taxes for the six months ended June 30, 2024 was $1,959,228 compared to $2,438,427 for the six months ended June 30, 2023, a decrease of $479,199 or 19.7% for the reasons noted above.
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Provision for Income Taxes
Provision for income taxes for the three months ended June 30, 2024 was $341,572 compared to $98,789 for the three months ended June 30, 2023, an increase of $242,783, or 245.8%. The increase in the provision for income tax is primarily the result of the partial release of approximately $121,000 of the Company’s valuation allowance on its deferred tax asset recorded during the three months ending June 30, 2023.
The effective income tax rate for the three months ended June 30, 2024 is 19.5%. The difference between the effective income tax rate for the three months ended June 30, 2024 and the statutory income tax rate of 21% for the three months ended June 30, 2024 is primarily due estimated R&D credit, state income taxes and permanent tax differences.
Provision for income taxes for the six months ended June 30, 2024 was $381,044 compared to $298,046 for the six months ended June 30, 2023, an increase of $82,998, or 27.8%. The increase in the provision for income tax is primarily the result of the partial release of approximately $121,000 of the Company’s valuation allowance on its deferred tax asset recorded during the three months ending June 30, 2023.
The effective income tax rate for the six months ended June 30, 2024 is 19.4%. The difference between the effective income tax rate for the six months ended June 30, 2024 and the statutory income tax rate of 21% for the six months ended June 30, 2024 is primarily due estimated R&D credit, state income taxes and permanent tax differences.
Net Income and Earnings per Share
Net income for the three months ended June 30, 2024 was $1,409,946 compared to $1,157,076 for the three months ended June 30, 2023, an increase of $252,870 or 21.9% for the reasons noted above.
Basic and diluted income per share for the three months ended June 30, 2024 of $0.11 compared to $0.09 for the three months ended June 30, 2023, an increase of $0.02, or 22.2%.
Basic and diluted income per share for the three months ended June 30, 2024 was calculated using 12,440,426 and 12,554,153 weighted average basic and diluted shares outstanding, respectively, as compared to 12,558,793 and 12,625,241 weighted average basic and diluted shares outstanding, respectively, for the three months ended June 30, 2023.
Net income for the six months ended June 30, 2024 was $1,578,184 compared to $2,140,381 for the six months ended June 30, 2023, a decrease of $562,197 or 26.3% for the reasons noted above.
Basic income per share for the six months ended June 30, 2024 of $0.13 compared to $0.17 for the six months ended June 30, 2023, a decrease of $0.04, or 23.5%. Diluted income per share for the six months ended June 30, 2024 of $0.12 compared to $0.17 for the six months ended June 30, 2023, a decrease of $0.05, or 29.4%.
Basic and diluted income per share for the six months ended June 30, 2024 was calculated using 12,515,824 and 12,656,753 weighted average basic and diluted shares outstanding, respectively, as compared to 12,539,652 and 12,606,100 weighted average basic and diluted shares outstanding, respectively, for the six months ended June 30, 2023.
Liquidity and Capital Resources
General
At June 30, 2024, we had working capital of $16,239,499 compared to $15,402,381 at December 31, 2023, an increase of $837,118 or 5.4%. The increase was driven primarily by lower contract liabilities and higher accounts receivable, partly offset by lower cash and contract assets.
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.
16
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 June 30, 2024, we had cash of $1,936,697 compared to $5,094,794 at December 31, 2023, a decrease of $3,158,097 or 62%. This decrease was primarily the result of cash flow used in operating activities and repayment of debt.
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 February 20, 2024, the Company entered into a Thirteenth Amendment to the Credit Agreement (the “Thirteenth Amendment”). Under the Thirteenth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Company’s existing revolving line of credit to August 31, 2025; and (b) setting the aggregate maximum principal amount of all revolving line of credit loans to $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, $17,640,000 from October 1, 2024 through December 31, 2024, $16,920,000 from January 1, 2025 through March 31, 2025, $16,200,000 from April 1, 2025 through June 30, 2025 and $15,480,000 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.
The Credit Agreement, as amended, requires us to maintain the following financial covenants: (a) minimum debt service coverage ratio of no less than 1.5 to 1.0 for trailing four fiscal quarter periods; (b) maximum leverage ratio of no less than 4.0 to 1.0 for trailing four fiscal quarter periods; (c) minimum net income after taxes as of the end of each fiscal quarter being no less than $1.00; and (d) a minimum adjusted EBITDA at the end of each fiscal quarter of no less than $1.0 million. The additional principal payments, increase in interest and the Amendment Fee provided for in the Eighth Amendment (entered into on October 28, 2021) and Ninth Amendment to the Credit Agreement (entered into on April 12, 2022) are excluded for purposes of calculating compliance with each of the financial covenants.
The BankUnited Facility is secured by all of the Company’s assets and the Revolving Loan bears interest at the Prime Rate + 3.50%. The Prime Rate was 8.50% as of June 30, 2024 and as such, the Company’s interest rate on the Revolving Loan was 12.00% as of June 30, 2024.
As of June 30, 2024 and December 31, 2023, the Company had $18,840,000 and $20,040,000 outstanding under the Revolving Loan, respectively.
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 June 30, 2024 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.
17
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, 2023.
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, 2023 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 a deficiency that constituted a material weakness in our internal control over financial reporting as of December 31, 2023, pertaining to income tax accounting. For more information on this deficiency, see Item 9A. Controls and Procedures, included in our Annual Report on Form 10-K. Based on management’s evaluation of internal control over financial reporting for the twelve months ended December 31, 2023, and as of June 30, 2024, our disclosure controls and procedures were not effective as of June 30, 2024 due to the aforementioned material weakness pertaining to income tax accounting.
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.
The Company has begun to develop new controls designed to remediate the aforementioned 2023 material weakness pertaining to income tax accounting, which the Company intends to implement during 2024.
Changes in Internal Control Over Financial Reporting
During the quarter ended June 30, 2024, we implemented the following changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting as follows: (a) we replaced the Company’s outside tax accounting and tax return preparer with a new firm (the “Tax Accounting Firm”); (b) we retained the Tax Accounting Firm (i) to prepare the Company’s income tax accounting and disclosures for the quarter ended June 30, 2024 and (ii) to review the income tax accounting and disclosures prepared by the predecessor firm for the quarter ended March 31, 2024 prior to the filing of the Form 10-Q for the quarter ended March 31, 2024; (c) we updated our financial risk assessment to reflect tax accounting as a high risk area, and (d) we adopted a tax accounting review checklist provided by our Sarbanes-Oxley consulting firm for use by CPI’s finance management in reviewing the quarterly and annual work of the Tax Accounting Firm, beginning with the tax accounting for the quarter ended June 30, 2024.
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Part II - Other Information
Item 1 – Legal Proceedings
None.
Item 1A – Risk Factors
“Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023, 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 |
| 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 and six months ended June 30, 2024 and 2023, (ii) Condensed Consolidated Balance Sheet as of June 30, 2024 and December 31, 2023, (iii) Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2024 and 2023, (iv) Condensed Consolidated Statement of Changes in Equity for the three and six months ended June 30, 2024 and 2023 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: August 13, 2024 | By. | /s/ Dorith Hakim |
| Dorith Hakim | ||
Chief Executive Officer and President (Principal Executive Officer) | ||
| Dated: August 13, 2024 | By. | /s/ Andrew L. Davis |
| Andrew L. Davis | ||
Chief Financial Officer (Principal Financial and Accounting Officer) | ||
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