UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
Commission file number 1-11398
CPI AEROSTRUCTURES, INC.
(Exact name of registrant as specified in its charter)
New York
(State or other jurisdiction of
incorporation or organization)
11-2520310
( I.R.S. Employer
Identification No.)
91 Heartland Blvd., Edgewood, New York 11717
(Address of principal executive offices)
(631) 586-5200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $.001 par value
Name of each exchange on which registered
NYSE American
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
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, and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-
K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2
of the Exchange Act (check one):
Large accelerated filer ☐
Non-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 12-b-2 of the Exchange Act).
Yes ☐ No ☒
As of June 30, 2018 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the registrant’s common
stock (based on its reported last sale price on the NYSE American of $10.50) held by non-affiliates of the registrant was $82,667,519.
As of March 28, 2019, the registrant had 11,734,326 common shares, $.001 par value, outstanding.
Documents Incorporated by Reference:
Part III (Items 10, 11, 12, 13 and 14) from the definitive Proxy Statement for the 2018 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission no later than 120 days after the end of the Registrant’s fiscal year covered by this report.
PART I
PART II
PART III
PART IV
Item 1.
Item 1A.
Item 1B
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
16
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16
22
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
22
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
22
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
INDEX TO FINANCIAL STATEMENTS
2
3
3
9
14
14
14
14
15
15
22
25
25
25
25
25
25
25
26
26
28
PART I
Item 1. BUSINESS
General
CPI Aerostructures, Inc. (“CPI Aero®”, the “Company”, “us” or “we”) is a United States (“U.S.”) supplier of aircraft parts for fixed wing aircraft and helicopters
in both the commercial and defense markets. We are a manufacturer of structural aircraft parts and aerosystems. Additionally, we leverage our global supply chain
skills to assist our customers in managing a diverse worldwide supplier market by providing “one stop shopping” for an assortment of aerospace parts. Within the
global aerostructures 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 U.S. Department of Defense, primarily the United States Air Force (“USAF”). In addition to our assembly
operations, we provide engineering, program management, supply chain management, and maintenance, repair and overhaul (“MRO”) services.
We are a subcontractor for leading defense prime contractors such as Northrop Grumman Corporation (“NGC”), Lockheed Martin Corporation (“Lockheed”),
Sikorsky Aircraft Corporation, a Lockheed company (“Sikorsky”), Bell Helicopter Textron, Inc. (“Bell”), Raytheon and Collins Aerospace (“Collins”). 52% and
56% of our revenue in 2018 and 2017, respectively, was generated by subcontracts with defense prime contractors.
Among the key programs for which CPI Aero provides key structural components, assemblies, or aerospace systems are the NGC E-2D Advanced Hawkeye
surveillance aircraft, the Lockheed F-35 joint strike fighter, the Sikorsky UH-60M BLACK HAWK® helicopter, the Collins DB-110 reconnaissance system, the
Raytheon Company (“Raytheon”) Next Generation Jammer Mid-Band electronic warfare system, the Collins TacSAR pod, the Bell AH-1Z Viper attack helicopter,
the Sikorsky MH-53E mine countermeasure helicopter and Sikorsky CH-148 variant helicopter, and the F-16 Falcon and T-38C trainer aircraft for the U.S.
government. Key civilian aircraft programs include the Gulfstream Aerospace Corporation (“Gulfstream”) G650, the Honda Aircraft Company, Inc. (“Honda”)
HondaJet and HondaJet Elite business jets, the Embraer S.A. (“Embraer”) Phenom 300 light business jet, the Embraer E175-E2 regional airliner, and the Sikorsky
S-92® helicopter.
We also operate as a subcontractor to prime commercial contractors, including Sikorsky, Honda, Embraer and The Triumph Group (“Triumph”), in the production
of commercial aircraft parts. 37% and 36% of our revenue in 2018 and 2017, respectively, was generated by commercial contract sales.
CPI Aero has over 38 years of experience as a contractor. Most members of our management team have held management positions at large aerospace contractors,
including NGC and GKN Aerospace (“GKN”). Our technical team possesses extensive technical expertise and program management and integration capabilities.
Our competitive advantage lies in our ability to offer large contractor capabilities with the flexibility and responsiveness of a small company, while staying
competitive in cost and delivering superior quality products.
CPI Aero acquired Welding Metallurgy, Inc. including its wholly owned subsidiary Compac Development Corp. (“Compac”) (together referred to as “WMI”) on
December 20, 2018. This acquisition is referred to throughout this document as the “WMI Acquisition”. WMI has provided specialty welding services and metal
fabrications to the defense and commercial aerospace industry since 1979. Its customers include GKN Corporation, Sikorsky, Lockheed, Boeing and NGC.
Additionally, WMI specializes in electromechanical systems, harness and cable assemblies, electronic equipment and printed circuit boards. Compac specializes in
the manufacture of RFI/EMI (Radio Frequency Interference Electro - Magnetic Interference) shielded enclosures for electronic components.
CPI Aero was incorporated under the laws of the State of New York in January 1980 under the name Composite Products International, Inc. CPI Aero changed its
name to Consortium of Precision Industries, Inc. in April 1989 and to CPI Aerostructures, Inc. in July 1992. In January 2005, we began doing business under the
name CPI Aero®, a registered trademark of the Company. Our principal office is located at 91 Heartland Blvd., Edgewood, New York 11717 and our telephone
number is (631) 586-5200.
3
We maintain a website located at www.cpiaero.com . Our corporate filings, including our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our
Current Reports on Form 8-K, our proxy statements and reports filed by our officers and directors under Section 16-(a) of the Securities Exchange Act, and any
amendments to those filings, are available, free of charge, on our website as soon as reasonably practicable after we electronically file such material with the
Securities and Exchange Commission. We do not intend for information contained in our website to be a part of this Annual Report on Form 10-K.
Significant Contracts
Some of our significant contracts are as follows:
Military Aircraft - Subcontracts with Prime Contractors
NGC E-2D “Advanced Hawkeye” The NGC E-2 is an all-weather, carrier-based tactical airborne early warning aircraft. The twin turboprop aircraft was designed
and developed in the 1950s by the Grumman Aircraft Company for the U.S. Navy as a replacement for the E-1 Tracer. The U.S. Navy aircraft has been
progressively updated with the latest variant, the NGC E-2D, first flying in 2007. In 2008, we received an initial $7.9 million order from NGC to provide structural
kits used in the production of Outer Wing Panels (“OWP”) for the NGC E-2D. We initially valued the long-term agreement at approximately $98 million over an
eight-year period, with the potential to be in excess of $195 million over the life of the aircraft program. In November 2014, we received a second multi-year
contract worth approximately $86.1 million through 2021 from NGC for OWP kits for use in the manufacture of complete wings for the NGC E-2D and the NGC
C-2A Greyhound aircraft. The cumulative orders we have received on this program through January 2019 exceed $150 million.
In addition, we announced in January 2016 that we won an award to supply structural components and kits for the OWP on the NGC E-2D that will be
manufactured for Japan. We will be responsible for component source selection, supply chain management, delivery of kits, and will provide manufacturing
engineering services to NGC during the integration of the components into the OWP. The contract from NGC is valued at between $25 million and $30 million
through 2019, depending on the number of aircraft ordered by Japan. To date, we have received orders totaling $10.4 million.
Sikorsky UH-60 “BLACK HAWK®” The Sikorsky UH-60 helicopter is the leader in multi-mission-type aircraft. Among the mission configurations it serves are
troop transport, medical evacuation, electronic warfare, attack, assault support, and special operations. More than 3,000 Sikorsky UH-60 helicopters are in use
today, operating in 29 countries. We have been producing gunner window and fuel panel assemblies for Sikorsky since 2010, and have long-term agreements from
Sikorsky to manufacture gunner window assemblies, fuel panel assemblies, and perform MRO services on stabilators for the Sikorsky UH-60 helicopter through
2022.
In 2017, we signed long-term supply agreements with Sikorsky to manufacture fuel panel and gunner window assemblies for the Sikorsky UH-60M helicopter,
valued at up to approximately $21 million and $8.2 million for a period of five years, respectively. In September 2018, the Company received a series of purchase
orders from Sikorsky totaling more than $8 million for the manufacture of Hover Infra Red Suppression Systems (“HIRSS”) in support of older model BLACK
HAWK® helicopters.
Bell / Textron AH-1Z “Viper” Attack Helicopter The Bell AH-1Z is a twin-engine attack helicopter used by the U.S. Marine Corps, which began full-rate
production in December 2010. In January 2017, we received an indefinite-delivery / indefinite-quantity (“IDIQ”) contract from Bell for the manufacture of engine
cowl and support assemblies, with a potential value of $14.8 million. In March 2018, we received an amendment to the IDIQ contract which extended the period of
performance by one year and is valued at $3.8 million. This increased the total potential value of the IDIQ contract to $18.6 million through 2021.
Sikorsky MH-53E “Sea Dragon” The Sikorsky MH-53E is the U.S. Navy’s primary airborne mine countermeasures aircraft. In May 2017, we received a contract
from Sikorsky to provide MRO services for an initial quantity of 15 tow hook assemblies through 2022, with a potential value of $1 million, depending on the level
of repair that is required. We have previously manufactured new tow hook assemblies under a spares contract awarded by Sikorsky in 2010.
Raytheon Next Generation Jammer Mid-Band (“NGJ”) The Raytheon NGJ is an external jamming pod that will disrupt and degrade enemy aircraft and ground
radar and communication systems and will replace the ALQ-99 system on the U.S. Navy’s EA-6B Growler carrier-based electronic warfare aircraft. Raytheon
received a $1 billion sole source contract from the U.S. Navy in April 2016 for the engineering and manufacturing development (“EMD”) phase. CPI Aero has
contracts with Raytheon valued at more than $19 million to assemble the NGJ pod structural housing and air management systems required during the EMD phase.
After a successful development program, the U.S. Navy plans to install Raytheon NGJ pods on 138 EA-18G Growlers during the Raytheon NGJ pod production
phase. There are two pods per aircraft. We estimate that the total value to CPI Aero of the production phase could be in excess of an additional $150 million
through 2030.
Collins DB-110 “Reconnaissance Pod” CPI Aero has a contract with Collins to manufacture pod structures for the DB-110 reconnaissance system, which is used
primarily on exported F-16 aircraft.
Collins “TacSAR” Pod The Collins TacSAR pod is a long-range synthetic aperture radar system designed for overland and maritime reconnaissance and
surveillance, and is being developed by Collins with Selex ES, now Leonardo, S.p.A. Collins awarded CPI Aero a sole-source one-year development contract
valued at under $1 million, to begin engineering and design support in 2017. CPI Aero expects to receive an initial production order in early 2019. The work being
performed by CPI Aero is similar to work performed by CPI Aero during the pre-production phase of the DB-110. The TacSAR pod system complements the DB-
110 to provide all-weather reconnaissance and surveillance and will contain some structural components common to the DB-110.
Lockheed F-35 “Lightning II” The Lockheed F-35 Lightning II, also known as the Joint Strike Fighter, is a family of single-seat, single-engine, all-weather
stealth multirole fighters designed to perform ground attack, aerial reconnaissance, and air defense missions. The DoD plans to acquire over 2,400 F-35’s by 2034
and 11 other countries also have plans to acquire the aircraft. We are a Tier 1 supplier to Lockheed and manufacture four different door lock assemblies for the F-
35. In 2015, CPI Aero was awarded a multi-year contract to supply lock assemblies for the arresting gear door on the F-35A Conventional Takeoff and Landing
variant aircraft, estimated at up to $10.6 million through 2021. We made our first delivery under the contract in May 2017. In November 2017, we announced an
additional $15.8 million multi-year contract to manufacture canopy actuation drive shaft assemblies through 2022 for the F-35A, F-35B, and F-35C aircraft.
Sikorsky CH-148 “Cyclone” The Sikorsky CH-148, a military variant of the Sikorsky S-92®, is a twin-engine, multi-role shipboard helicopter being
manufactured by Sikorsky for the Royal Canadian Air Force (“RCAF”). The Sikorsky CH-148 is to be operated by the RCAF and will conduct anti-submarine
warfare, surveillance, and search and rescue missions from Royal Canadian Navy warships. In 2016, Sikorsky awarded CPI Aero purchase orders valued at
approximately $6.5 million to manufacture the weapon pylons. CPI Aero will produce weapon pylons for 28 aircraft with deliveries through 2018.
4
Commercial Aircraft - Subcontracts with Prime Contractors
Gulfstream G650 In March 2008, Spirit Aerosystems, Inc. (“Spirit”) awarded us a contract to provide leading edges for the Gulfstream G650 business jet, a
commercial program that Spirit was supporting. In December 2014, Spirit transferred its work-scope on this program to Triumph. We continue to provide leading
edges for the Gulfstream G650 as our purchase orders and long-term agreement have been transferred to Triumph.
HondaJet Elite In July 2018, we received a long-term agreement from Honda to manufacture the noise attenuating engine inlet for its recently debuted HondaJet
Elite business jet. CPI Aero has manufactured engine inlet assemblies for the original HondaJet aircraft since 2011. We have received approximately $36.5 million
in orders on this program through December 2018. We estimate the potential value of this program to be approximately $70 million.
Sikorsky S-92® Helicopter The Sikorsky S-92® performs search and rescue missions, heads of state missions, and a variety of transport missions for offshore oil
and gas crews, utility, and airline passengers. Sikorsky has delivered more than 275 Sikorsky S-92® helicopters since 2004. In June 2017, CPI Aero announced a
follow-on contract with Sikorsky to provide 15 different deliverable items for the Sikorsky S-92®, including door assemblies, cover assemblies, and various
installation kits used by Sikorsky to complete the final assembly of the Sikorsky S-92®.
Embraer Phenom 300 In May 2012, Embraer awarded us a contract to manufacture engine inlets for the Embraer Phenom 300. We have received approximately
$34 million in orders on this program through June 2018. We estimate the potential value of the program to be in excess of $40 million.
Embraer E175-E2 The E-Jet E2 family of aircraft was launched by Embraer in 2013 and included three new airplanes, the E175-E2, the E190-E2, and the E195-
E2. We were selected by Embraer to supply various structural components used in the manufacture of engine pylon fairings for the Embraer E175-E2 aircraft,
valued at approximately $16 million. The Embraer E175-E2 is scheduled for entry into service in 2021.
Sales and Marketing
We are recognized within the aerospace industry as a Tier 1 or Tier 2 supplier to major aircraft suppliers. Additionally, we may bid for military contracts set aside
specifically for small businesses.
We are awarded contracts for our products and services through the process of competitive bidding. This process begins when we first learn, formally or otherwise,
of a potential contract from a prospective customer and concludes after all negotiations are completed upon award. When preparing our response to a prospective
customer for a potential contract, we evaluate the contract requirements and determine and outline the services and products we can provide to fulfill the contract at
a competitive price. Each contract also benefits from various additional services that we offer, including program management, engineering, and global supply
chain program management, which streamlines the vendor management and procurement process and monitors the progress, timing, and quality of component
delivery.
Our average sales cycle, which generally commences at the time a prospective customer issues a request for proposal and ends upon delivery of the final product to
the customer, varies widely.
Because of the complexities inherent in the aerospace industry, the time from the initial request for proposal to award ranges from as little as a few weeks to
several years. Additionally, our contracts have ranged from six months to as long as ten years. Also, repeat and follow-on jobs for current contracts frequently
provide additional opportunities with minimal start-up costs and rapid rates to production.
The Market
We have positioned our Company to take advantage of opportunities in the military aerospace market but to a broad customer base thereby reducing the impact of
direct government contracting limitations. Our success as a subcontractor to defense prime contractors has provided us with opportunities to act as a subcontractor
to prime contractors in the production of commercial aircraft structures, which also reduced our exposure to government spending decisions.
5
Over time, our Company has expanded both in size and capabilities, with growth in our operational and global supply chain program management. These
expansions have allowed us the ability to supply more complex aerostructure assemblies and aerosystems and structures in support of our government-based
programs as well as to pursue opportunities within the commercial and business jet markets. Our capabilities have also allowed us to acquire MRO and kitting
contracts.
Approximately $4.3 million and $3.1 million of our revenue for the years ended December 31, 2018 and 2017, respectively, was from customers outside the U.S.
All other revenue for each of the years ended December 31, 2018 and 2017 has been attributable to customers within the U.S. We have no assets outside the U.S.
Government-based contracts that are subject to national defense budget and procurement funding decisions which, accordingly, drives demand for our business in
that market. Government spending and budgeting for procurement, operations and maintenance are affected not only by military action, but also by the related
fiscal consequences of these actions, as well as the political process.
Backlog
We produce custom assemblies pursuant to long-term contracts and customer purchase orders. Backlog consists of aggregate values under such contracts and
purchase orders, excluding the portion previously included in operating revenues on the basis of cost-to-cost input method accounting, and including estimates of
future contract price escalation. 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 December 31, 2018 and 2017 was as follows:
Backlog
(Total)
Funded
Unfunded
Total
December 31, 2018
December 31, 2017
$
$
94,474,000 $
362,906,000
457,380,000 $
71,059,000
317,667,000
388,726,000
Approximately 80% of the total amount of our backlog at December 31, 2018 was attributable to government contracts. Our backlog attributable to government
contracts at December 31, 2018 and 2017 was as follows:
Backlog
(Government)
Funded
Unfunded
Total
December 31, 2018
December 31, 2017
$
$
80,812,000 $
305,582,000
386,394,000 $
58,919,000
242,367,000
301,286,000
Our backlog attributable to commercial contracts at December 31, 2018 and 2017 was as follows:
Backlog
(Commercial)
Funded
Unfunded
Total
December 31, 2018
December 31, 2017
$
$
13,662,000 $
57,324,000
70,986,000 $
12,140,000
75,300,000
87,440,000
Our unfunded backlog is primarily comprised of the long-term contracts that we received from Spirit and NGC during 2008, Honda and Bell during 2011, Cessna,
Sikorsky and Embraer during 2012 and Raytheon during 2016. These long-term contracts are expected to have yearly orders which will be funded in the future.
Approximately 81% of the funded backlog at December 31, 2018 is expected to be recognized as revenue during 2019.
Material and Parts
We subcontract production of substantially all parts incorporated into our products to third-party manufacturers under firm fixed price orders. Our decision to
purchase certain components generally is based upon whether the components are available to meet required specifications at a cost and with a delivery schedule
consistent with customer requirements. From time to time, we are required to purchase custom made parts from sole suppliers and manufacturers in order to meet
specific customer requirements.
6
We obtain our raw materials from several commercial sources. Although certain items are only available from limited sources of supply, we believe that the loss of
any single supplier would not have a material adverse effect on our business.
Competition
We face competition in our role as both a prime contractor to the U.S. Government and as a Tier 1 or Tier 2 subcontractor to military and commercial aircraft
manufacturers. For certain unrestricted contracts for the U.S. Government, we may compete against well-established prime contractors, including NGC, Lockheed
and Boeing. All of these competitors possess significantly larger infrastructures, greater resources and the capabilities to respond to much larger contracts. We
believe that our competitive advantage lies in our ability to offer large contractor capabilities with the flexibility and responsiveness of a small company, while
staying competitive in cost and delivering superior quality products. While larger prime contractors compete for significant modification awards, they generally do
not compete for awards in smaller modifications, spares and replacement parts, even for aircraft for which they are the original manufacturer. In certain instances,
the large prime contractors often subcontract much of the work they win to their Tier 1 suppliers so we also may act as a subcontractor to some of these major
prime contractors. Further, in some cases, these companies are not permitted to bid, for example when the U.S. Government designates a contract as a Small
Business Set-Aside. In these restricted contracts for the U.S. Government, CPI Aero typically competes against numerous small business competitors. We believe
we compete effectively against the smaller competitors because smaller competitors generally do not have the expertise we have in responding to requests for
proposals for government contracts, nor will they typically have the more than 35 years of past performance in conducting more than 2000 contracts for the U.S.
Government.
We also compete at the Tier 1 and Tier 2 levels for work for major subcontracts with OEMs in both the military and commercial markets. We often compete
against much larger Tier 1 suppliers, such as Triumph Group, Spirit AeroSystems, Kaman Aerospace, GKN, Ducommun, LMI Aerospace, and Precision Castparts
Corp. We believe that we can compete effectively with these larger companies by delivering products with the same level of quality and performance at a better
value for our customer.
Government Regulation
Environmental Regulation
We are subject to regulations administered by the U.S. Environmental Protection Agency, the U.S. Occupational Safety and Health Administration, various state
agencies and county and local authorities acting in cooperation with federal and state authorities. Among other things, these regulatory bodies impose restrictions
to control air, soil and water pollution, to protect against occupational exposure to chemicals, including health and safety risks, and to require notification or
reporting of the storage, use and release of certain hazardous chemicals and substances. The extensive regulatory framework imposes compliance burdens and risks
on us. Governmental authorities have the power to enforce compliance with these regulations and to obtain injunctions or impose civil and criminal fines in the
case of violations.
The Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) imposes strict, joint and several liability on the present and
former owners and operators of facilities that release hazardous substances into the environment. The Resource Conservation and Recovery Act of 1976 (“RCRA”)
regulates the generation, transportation, treatment, storage and disposal of hazardous waste. In New York State, the handling, storage and disposal of hazardous
substances are governed by the Environmental Conservation Law, which contains the New York counterparts of CERCLA and RCRA. In addition, the
Occupational Safety and Health Act, which requires employers to provide a place of employment that is free from recognized and preventable hazards that are
likely to cause serious physical harm to employees, obligates employers to provide notice to employees regarding the presence of hazardous chemicals and to train
employees in the use of such substances.
Our operations require the use of a limited amount of chemicals and other materials for painting and cleaning, including solvents and thinners, which are classified
under applicable laws as hazardous chemicals and substances. We have obtained a permit from the Town of Islip, New York, Building Division in order to
maintain a paint booth containing flammable liquids.
Federal Aviation Administration Regulation
We are subject to regulation by the Federal Aviation Administration (“FAA”) under the provisions of the Federal Aviation Act of 1958, as amended. The FAA
prescribes standards and licensing requirements for aircraft and aircraft components. We are subject to inspections by the FAA and may be subjected to fines and
other penalties (including orders to cease production) for noncompliance with FAA regulations. Our failure to comply with applicable regulations could result in
the termination of or our disqualification from some of our contracts, which could have a material adverse effect on our operations.
7
Government Contract Compliance
Our government contracts and sub-contracts are subject to the procurement rules and regulations of the U.S. Government. Many of the contract terms are dictated
by these rules and regulations. Specifically, cost-based pricing is determined under the Federal Acquisition Regulation (“FAR”), which provide guidance on the
types of costs that are allowable in establishing prices for goods and services under U.S. Government contracts. For example, costs such as those related to
charitable contributions, advertising, interest expense, and public relations are unallowable, and therefore not recoverable through sales. During and after the
fulfillment of a government contract, we may be audited in respect of the direct and allocated indirect costs attributed thereto. These audits may result in
adjustments to our contract costs. Additionally, we may be subject to U.S. Government inquiries and investigations because of our participation in government
procurement. Any inquiry or investigation can result in fines or limitations on our ability to continue to bid for government contracts and fulfill existing contracts.
We believe that we are in compliance with all federal, state and local laws and regulations governing our operations and have obtained all material licenses and
permits required for the operation of our business.
The U.S. Government generally has the ability to terminate our contracts, in whole or in part, without prior notice, for convenience or for default based on
performance. If a U.S. Government contract were to be terminated for convenience, we generally would be protected by provisions covering reimbursement for
costs incurred on the contract and profit on those costs, but not the anticipated profit that would have been earned had the contract been completed. In the unusual
circumstance where a U.S. Government contract does not have such termination protection, we attempt to mitigate the termination risk through other means.
Termination resulting from our default may expose us to liability and could have a material adverse effect on our ability to compete for other contracts. The U.S.
Government also has the ability to stop work under a contract for a limited period of time for its convenience. In the event of a stop work order, we generally
would be protected by provisions covering reimbursement for costs incurred on the contract to date and for costs associated with the temporary stoppage of work
on the contract. However, such temporary stoppages and delays could introduce inefficiencies for which we may not be able to negotiate full recovery from the
U.S. Government, and could ultimately result in termination for convenience or reduced future orders on certain contracts. Additionally, we may be required to
continue to perform for some period of time on certain of our U.S. Government contracts, even if the U.S. Government is unable to make timely payments.
Insurance
We maintain a $2 million general liability insurance policy, a $100 million products liability insurance policy and a $5 million umbrella liability insurance policy.
Additionally, we maintain a $10 million director and officers’ insurance policy. We believe this coverage is adequate for the types of products presently marketed
because of the strict inspection standards imposed on us by our customers before they take possession of our products. Additionally, the FAR generally provides
that we will not be held liable for any loss of or damage to property of the U.S. Government that occurs after the U.S. Government accepts delivery of our products
and that results from any defects or deficiencies in our products unless the liability results from willful misconduct or lack of good faith on the part of our
managerial personnel.
Proprietary Information
None of our current assembly processes or products is protected by patents. We rely on proprietary know-how and information and employ various methods to
protect the processes, concepts, ideas and documentation associated with our products. These methods, however, may not afford complete protection and there can
be no assurance that others will not independently develop such processes, concepts, ideas and documentation.
CPI Aero® is a registered trademark of the Company.
Employees
As of March 28, 2019, we had 281 full-time employees. We employ temporary personnel with specialized disciplines on an as-needed basis. None of our
employees are members of a union. We believe that our relations with our employees are good.
8
Item 1A. RISK FACTORS
In addition to other risks and uncertainties described in this Annual Report on Form 10-K, the following material risk factors should be carefully considered in
evaluating our business because such factors may have a significant impact on our business, operating results, liquidity and financial condition. As a result of the
risk factors set forth below, actual results could differ materially from those projected in any forward-looking statements.
Risks related to our business
We depend on government contracts for a significant portion of our revenues.
We are a supplier, either directly or as a subcontractor, to the U.S. Government and its agencies. Government subcontracts accounted for 52% of our revenue in
2018 and 57% of our revenue in 2017. In addition, 11% percent of revenue for 2018 and 8% of revenue for 2017 was derived from prime government contract
sales. We depend on government contracts for a significant portion of our business. If we are suspended or barred from contracting with the U.S. Government, if
our reputation or relationship with individual federal agencies were impaired, or if the U.S. Government otherwise ceased doing business with us or significantly
decreased the amount of business it does with us, our business, prospects, financial condition and operating results would be materially adversely affected.
We face risks relating to government contracts.
The funding of U.S. Government programs is subject to congressional budget authorization and appropriation processes. For many programs, U.S. Congress
appropriates funds on a fiscal year basis even though a program may extend over several fiscal years. Consequently, programs are often only partially funded
initially and additional funds are committed only as Congress makes further appropriations. We cannot predict the extent to which total funding and/or funding for
individual programs will be included, increased or reduced in budgets approved by Congress or be included in the scope of separate supplemental
appropriations. In the event that appropriations for any of our programs becomes unavailable, or is reduced or delayed, our contract or subcontract under such
program may be terminated or adjusted by the U.S. Government, which could have a material adverse effect on our future sales under such program, and on our
financial position, results of operations and cash flows.
We also cannot predict the impact of potential changes in priorities due to military transformation and planning and/or the nature of war-related activity on
existing, follow-on or replacement programs. A shift of government priorities to programs in which we do not participate and/or reductions in funding for or the
termination of programs in which we do participate, unless offset by other programs and opportunities, could have a material adverse effect on our financial
position, results of operations and cash flows.
In addition, the U.S. Government generally has the ability to terminate contracts, in whole or in part, without prior notice, for convenience or for default based on
performance. In the event of termination for the U.S. Government’s convenience, contractors are generally protected by provisions covering reimbursement for
costs incurred on the contracts and profit on those costs but not the anticipated profit that would have been earned had the contract been completed. Termination by
the U.S. Government of a contract for convenience could also result in the cancellation of future work on that program. Termination by the U.S. Government of a
contract due to our default could require us to pay for re-procurement costs in excess of the original contract price, net of the value of work accepted from the
original contract. Termination of a contract due to our default may expose us to liability and could have a material adverse effect on our ability to compete for
contracts.
If we fail to comply with government procurement laws and regulations, we could lose business and be liable for various penalties or sanctions.
We must comply with laws and regulations relating to the formation, administration, and performance of U.S. government contracts. These laws and regulations
include the Federal Acquisition Regulations, Defense Federal Acquisition Regulations, the Truth in Negotiations Act, Cost Accounting Standards, and laws,
regulations, and orders restricting the use and dissemination of classified information under the U.S. export control laws and the export of certain products and
technical information and safeguarding of contractor information systems. Certain government contracts provide audit rights by government agencies, including
with respect to performance, costs, business systems, internal controls and compliance with applicable laws and regulations. In complying with these laws and
regulations, we may incur significant costs, and non-compliance may result in the imposition of fines and penalties, including contractual damages. If we fail to
comply with these laws and regulations or if a government audit, review, or investigation uncovers improper or illegal activities, we may be subject to civil
penalties, criminal penalties, or administrative sanctions, including suspension or debarment from contracting with the U.S. government. Our reputation could
suffer harm if allegations of impropriety were made or found against us, which could adversely affect our operating performance and may result in additional
expenses and possible loss of revenue.
We are subject to U.S. government inquiries and investigations, including periodic audits of costs that we determine are reimbursable under U.S.
government contracts.
U.S. government agencies, including the Defense Contract Audit Agency and the Defense Contract Management Agency, routinely audit government contractors.
These agencies review our performance under contracts, cost structure and compliance with applicable laws, regulations, and standards, as well as the adequacy of
and our compliance with our internal control systems and policies. Any costs found to be misclassified or inaccurately allocated to a specific contract will be
deemed non-reimbursable, and to the extent already reimbursed, must be refunded. Any inadequacies in our systems and policies could result in withholds on
billed receivables, penalties and reduced future business. Furthermore, if any audit, inquiry or investigation uncovers improper or illegal activities, we could be
subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and
suspension or debarment from doing business with the U.S. government. We also could suffer reputational harm if allegations of impropriety were made against
us, even if such allegations are later determined to be false.
9
We have risks associated with competing in the bidding process for contracts.
We obtain many of our contracts through a competitive bidding process. In the bidding process, we face the following risks:
● we must bid on programs in advance of their completion, which may result in unforeseen technological difficulties or cost overruns;
● we must devote substantial time and effort to prepare bids and proposals for competitively awarded contracts that may not be awarded to us; and
●
awarded contracts may not generate sales sufficient to result in profitability.
We are subject to strict governmental regulations relating to the environment, which could result in fines and remediation expense in the event of non-
compliance.
We are required to comply with extensive and frequently changing environmental regulations at the federal, state and local levels. Among other things, these
regulatory bodies impose restrictions to control air, soil and water pollution, to protect against occupational exposure to chemicals, including health and safety
risks, and to require notification or reporting of the storage, use and release of certain hazardous substances into the environment. This extensive regulatory
framework imposes significant compliance burdens and risks on us. In addition, these regulations may impose liability for the cost of removal or remediation of
certain hazardous substances released on or in our facilities without regard to whether we knew of, or caused, the release of such substances. Furthermore, we are
required to provide a place of employment that is free from recognized and preventable hazards that are likely to cause serious physical harm to employees,
provide notice to employees regarding the presence of hazardous chemicals and to train employees in the use of such substances. Our operations require the use of
a limited amount of chemicals and other materials for painting and cleaning that are classified under applicable laws as hazardous chemicals and substances. If we
are found not to be in compliance with any of these rules, regulations or permits, we may be subject to fines, remediation expenses and the obligation to change our
business practice, any of which could result in substantial costs that would adversely impact our business operations and financial condition.
We may be subject to fines and disqualification for non-compliance with Federal Aviation Administration (“FAA”) regulations.
We are subject to regulation by the FAA under the provisions of the Federal Aviation Act of 1958, as amended. The FAA prescribes standards and licensing
requirements for aircraft and aircraft components. We are subject to inspections by the FAA and may be subjected to fines and other penalties (including orders to
cease production) for noncompliance with FAA regulations. Our failure to comply with applicable regulations could result in the termination of or our
disqualification from some of our contracts, which could have a material adverse effect on our operations and financial condition.
If our subcontractors or suppliers fail to perform their contractual obligations, our contract performance and our ability to obtain future business and
our profitability could be materially and adversely impacted.
Most of our contracts involve subcontracts with other companies upon which we rely to perform a portion of the services that we must provide to our customers.
There is a risk that we may have disputes with our subcontractors, including disputes regarding the quality and timeliness of work performed by the subcontractor,
customer concerns about the subcontract, our failure to extend existing task orders or issue new task orders under a subcontract, or our hiring of personnel of a
subcontractor. A failure by one or more of our subcontractors to satisfactorily provide on a timely basis the agreed-upon supplies or perform the agreed-upon
services may materially and adversely impact our ability to perform our obligations as the prime contractor. Subcontractor performance deficiencies could result in
a customer eliminating our ability to progress bill or terminating our contract for default. A prohibition on progress billing may have an adverse effect upon our
cash flow and profitability and a default termination could expose us to liability and have a material adverse effect on our ability to compete for future contracts
and orders. In addition, a delay in our ability to obtain components and equipment parts from our suppliers may affect our ability to meet our customers’ needs and
may have a material adverse effect upon our profitability.
Due to fixed contract pricing, increasing contract costs exposes us to reduced profitability and the potential loss of future business.
Operating margin is adversely affected when contract costs that cannot be billed to customers are incurred. This cost growth can occur if estimates to complete a
contract increase due to technical challenges or if initial estimates used for calculating the contract price were incorrect. The cost estimation process requires
significant judgment and expertise. Reasons for cost growth may include unavailability and productivity of labor, the nature and complexity of the work to be
performed, the effect of change orders, the availability of materials, the effect of any delays in performance, availability and timing of funding from the customer,
natural disasters, and the inability to recover any claims included in the estimates to complete. A significant increase in cost estimates on one or more programs
could have a material adverse effect on our financial position or results of operations.
10
We use estimates when accounting for contracts. Changes in estimates could affect our profitability and our overall financial position.
We primarily recognize revenue from our contracts over the contractual period pursuant to Accounting Standards Codification Topic 606 (“ASC 606”). Pursuant to
ASC 606 revenue and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at the
completion of the contract. Recognized revenues that will not be billed under the terms of the contract until a later date are recorded on our consolidated balance
sheet as an asset captioned “Contract assets.” Contracts where billings to date have exceeded recognized revenues are recorded on our balance sheet as a liability
captioned “Contract liabilities.” Changes to the original estimates may be required during the life of the contract. Estimates are reviewed monthly and the effect of
any change in the estimated gross margin percentage for a contract is reflected in the consolidated financial statements in the period the change becomes known.
ASC 606 requires the use of considerable estimates in determining revenues and profits and in assigning the amounts to accounting periods. As a result, there can
be a significant disparity between earnings (both for accounting and taxes) as reported and actual cash received by us during any reporting period. We continually
evaluate all of the issues related to the assumptions, risks and uncertainties inherent with the application of ASC 606; however, there is no assurance that our
estimates will be accurate. If our estimates are not accurate or a contract is terminated, we will be forced to adjust revenue in later periods. Furthermore, even if our
estimates are accurate, we may have a shortfall in our cash flow and we may need to borrow money to pay for costs until the reported earnings materialize to actual
cash receipts.
If the contracts associated with our backlog were terminated, our financial condition would be adversely affected.
The maximum contract value specified under each contract that we enter into is not necessarily indicative of the revenues that we will realize under that contract.
Because we may not receive the full amount we expect under a contract, we may not accurately estimate our backlog because the earnings of revenues on programs
included in backlog may never occur or may change. Cancellations of pending contracts or terminations or reductions of contracts in progress could have a
material adverse effect on our business, prospects, financial condition or results of operations. As of December 31, 2018, our backlog was approximately $457.4
million, of which 20.7% was funded and 79.3% was unfunded.
We may be unable to attract and retain personnel who are key to our operations.
Our success, among other things, is dependent on our ability to attract and retain highly qualified senior officers and engineers. Competition for key personnel is
intense. Our ability to attract and retain senior officers and experienced, top rate engineers is dependent on a number of factors, including prevailing market
conditions and compensation packages offered by companies competing for the same talent. The inability to hire and retain these persons may adversely affect our
production operations and other aspects of our business.
We are subject to the cyclical nature of the commercial aerospace industry, and any future downturn in the commercial aerospace industry or general
economic conditions could adversely impact the demand for our products.
Our business may be affected by certain characteristics and trends of the commercial aerospace industry or general economic conditions that affect our customers,
such as fluctuations in the aerospace industry’s business cycle, varying fuel and labor costs, intense price competition and regulatory scrutiny, certain trends,
including a possible decrease in aviation activity and a decrease in outsourcing by aircraft manufacturers or the failure of projected market growth to materialize or
continue. In the event that these characteristics and trends adversely affect customers in the commercial aerospace industry, they may reduce the overall demand
for our products.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a
result, current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our
common stock .
Our management determined that as of December 31, 2018, our internal control over financial reporting was not effective based on criteria created by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) set forth in Internal Control – Integrated Framework (2013).
11
Because of the material weakness identified in our internal control over financial reporting, our management was unable to report favorably as to the effectiveness
of our internal control over financial reporting and/or our disclosure controls and procedures, and we therefore implemented measures in 2019 and remediated the
material weakness. 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. If
we identify material weaknesses, such remedial measures could be expensive and time consuming and could potentially cause investors to lose confidence in the
accuracy and completeness of our financial reports, which could have an adverse effect on our stock price and potentially subject us to litigation. For more
information see, “Management’s Annual Report on Internal Control over Financial Reporting”.
On February 7, 2019, the audit committee of the Company’s board of directors determined based on the recommendation of management in consultation with
CohnReznick LLP, the Company’s independent registered public accounting firm, that our previously issued financial statements as of and for the three and nine
months ended September 30, 2018 should no longer be relied upon, due to an error that occurred in the Company’s billing process and resulted in the
overstatement of revenue for the three and nine months ended September 30, 2018. As a result, we amended and restated our financial statements as of and for the
three and nine months ended September 30, 2018.
We incur risk associated with new programs
New programs with new technologies typically carry risks associated with design changes, development of new production tools, increased capital and funding
commitments, ability to meet customer specifications, delivery schedules and unique contractual requirements, supplier performance, ability of the customer to
meet its contractual obligations to us, and our ability to accurately estimate costs associated with such programs. In addition, any new program may not generate
sufficient demand or may experience technological problems or significant delays in the regulatory or other certification or manufacturing and delivery schedule. If
we were unable to perform our obligations under new programs to the customer’s satisfaction, if we were unable to manufacture products at our estimated costs, or
if a new program in which we had made a significant investment was terminated or experienced weak demand, delays or technological problems, then our
business, financial condition and results of operations could be materially adversely affected. This risk includes the potential for default, quality problems, or
inability to meet specifications, as well as our inability to negotiate final pricing for program changes, and could result in low margin or forward loss contracts, and
the risk of having to write-off contract assets if it were deemed to be unrecoverable over the life of the program. In addition, beginning new work on existing
programs also carries risk associated with the transfer of technology, knowledge and tooling.
In order to perform on new programs we may be required to expend up-front costs which may not have been negotiated in our selling price. Additionally, we may
have made margin assumptions related to those costs, that in the case of significant program delays and/or program cancellations, or if we are not successful in
negotiating favorable margin on scope changes, could cause us to bear impairment charges which may be material, for costs that are not recoverable. Such charges
and the loss of up-front costs could have a material adverse impact on our liquidity.
We are presently classified as a small business and the loss of our small business status may adversely affect our ability to compete for government
contracts.
We are presently classified as a small business under certain of the codes under the North American Industry Classification Systems (“NAICS”) industry and
product specific codes which are regulated in the United States by the Small Business Administration. We are not considered a small business under all NAICS
codes. While we do not presently derive a substantial portion of our business from contracts which are set-aside for small businesses, we are able to bid on small
business set-aside contracts as well as contracts which are open to non-small business entities. As the NAICS codes are periodically revised, it is possible that we
may lose our status as a small business. The loss of small business status would adversely impact our eligibility for special small business programs and limit our
ability to partner with other business entities which are seeking to team with small business entities as may be required under a specific contract.
Cyber security attacks, internal system or service failures may adversely impact our business and operations.
Any system or service disruptions, including those caused by projects to improve our information technology systems, if not anticipated and appropriately
mitigated, could disrupt our business and impair our ability to effectively provide products and related services to our customers and could have a material
adverse effect on our business. We could also be subject to systems failures, including network, software or hardware failures, whether caused by us, third-party
service providers, intruders or hackers, computer viruses, natural disasters, power shortages or terrorist attacks. Cyber security threats are evolving and include,
but are not limited to, malicious software, unauthorized attempts to gain access to sensitive, confidential or otherwise protected information related to us or our
products, customers or suppliers, or other acts that could lead to disruptions in our business. Any such failures could cause loss of data and interruptions or delays
in our business, cause us to incur remediation costs or subject us to claims and damage our reputation. In addition, the failure or disruption of our communications
or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Although we utilize various procedures and controls to
monitor and mitigate the risk of these threats, there can be no assurance that these procedures and controls will be sufficient. Our property and business
interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption which would
adversely affect our business, results of operations and financial condition. Moreover, expenditures incurred in implementing cyber security and other procedures
and controls could adversely affect our results of operations and financial condition.
12
Our financial results may be adversely impacted by the failure to successfully execute or integrate acquisitions and joint ventures.
The Company may evaluate potential acquisitions or joint ventures that align with our strategic objectives. The success of such activity depends, in part, upon our
ability to identify suitable sellers or business partners, perform effective assessments prior to contract execution, negotiate contract terms, and, if applicable,
obtain customer and government approval. These activities may present certain financial, managerial, staffing and talent, and operational risks, including
diversion of management’s attention from existing core businesses, difficulties integrating or separating businesses from existing operations, and challenges
presented by acquisitions or joint ventures which may not achieve sales levels and profitability that justify the investments made. If the acquisitions or joint
ventures are not successfully implemented or completed, there could be a negative impact on our financial condition, results of operations and cash flows.
Risks related to our common stock
We may issue additional shares of capital stock in the future, which would increase the number of shares eligible for future resale in the public market
and may result in dilution to our shareholders.
As of December 31, 2018, we had 41,772 shares of common stock subject to outstanding common stock purchase options. In addition, we are not restricted from
issuing additional shares of our common stock or securities convertible into or exchangeable for our common stock. Because we may need to raise additional
capital in the future to continue to expand our business, among other things, we may conduct additional equity offerings. To the extent our common stock purchase
options are exercised or we conduct additional equity offerings, additional shares of our common stock will be issued, which will increase the number of shares
eligible for resale in the public market and may result in dilution to our shareholders. Sales of substantial numbers of such shares in the public market could
adversely affect the market price of such shares.
We have never declared or paid cash dividends on our capital stock and we do not anticipate paying cash dividends in the foreseeable future.
Our business requires significant funding. We currently plan to invest all available funds and future earnings in the development and growth of our business and do
not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, under the terms of our credit agreement with BankUnited,
N.A. and other lenders, we are restricted from paying cash dividends. As a result, capital appreciation, if any, of our common stock will be our shareholders’ sole
source of potential gain for the foreseeable future.
We are able to issue shares of preferred stock with greater rights than our common stock.
Our certificate of incorporation authorizes our board of directors to issue one or more series of preferred stock and set the terms of the preferred stock without
seeking any further approval from our shareholders. Any preferred stock that is issued may rank ahead of our common stock in terms of dividends, liquidation
rights or voting rights. If we issue preferred stock, it may adversely affect the market price of our common stock.
Anti-takeover provisions in our organizational documents and in New York law could delay a change in management and negatively impact our share
price or otherwise make a change in our management more difficult.
Certain provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of us even if such a change in
control would increase the value of our common stock and could prevent or hinder attempts by our shareholders to replace or remove our current board of directors
or management.
We have a number of provisions in place that will hinder takeover attempts and could reduce the market value of our common stock or prevent sale at a premium.
These provisions include:
●
●
●
●
●
the authorization of undesignated preferred stock, which makes it possible for the board of directors to issue preferred stock with voting or other rights or
preferences in a manner that could delay or prevent a transaction or a change in control;
a provision providing that shareholders may act by written consent without a meeting only if such written consent is signed by all shareholders;
a provision that specifies that special meetings of our shareholders may be called only by our board of directors or our chairman of the board, if one has
been elected, or our president;
the division of our board of directors into three classes, only one of which is elected annually; and
advance notice requirements by shareholders for director nominations and actions to be taken at annual meetings.
In addition, because we are incorporated in New York, we are governed by the provisions of Section 912 of the New York Business Corporation Law, which
generally prohibits a New York corporation from engaging in any of a broad range of business combinations with an “interested” shareholder for a period of five
years following the date on which the shareholder became an “interested” shareholder.
13
Item 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
Item 2.
PROPERTIES
CPI Aero’s executive offices and production facilities are situated in an approximately 171,000 square foot building located at 91 Heartland Blvd., Edgewood,
New York 11717. CPI Aero occupies this facility under a ten-year lease that commenced in June 2011. The current monthly base rent is $143,396, including real
estate taxes.
Item 3.
LEGAL PROCEEDINGS
None.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
14
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information
Our common stock is listed on the NYSE American under the symbol CVU.
On March 25, 2019, the closing sale price for our common stock on the NYSE American was $6.60. On March 25, 2019, there were 181 holders of record of our
common stock and, we believe, over 2,200 beneficial owners of our common stock.
Dividend Policy
To date, we have not paid any dividends on our common shares. Any payment of dividends in the future is within the discretion of our board of directors (subject
to the limitation on dividends contained in the Bank United Credit Facility, as described more fully in Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operations) and will depend on our earnings, if any, our capital requirements and financial condition and other relevant factors. Our
board of directors does not intend to declare any cash or other dividends in the foreseeable future, but intends instead to retain earnings, if any, for use in our
business operations.
Recent Sales of Unregistered Securities, Use of Proceeds from Registered Securities
There have been no sales of unregistered equity securities for the three months ended December 31, 2018. There have been no repurchases of our outstanding
common stock during the three months ended December 31, 2018.
15
Item 6.
SELECTED FINANCIAL DATA
Not applicable.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Annual Report on Form 10-K and in future filings by us with the Securities and Exchange Commission, 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 “Item 1A: Risk Factors” and “Item 7: Management’s
Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on 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.
You should read the financial information set forth below in conjunction with our consolidated financial statements and notes thereto.
Certain Transactions
The following transactions occurred during the periods covered by this Management’s Discussion and Analysis of Financial Condition and Results of Operations:
On March 21, 2018, the Company entered into a Stock Purchase Agreement (the “Agreement”) with Air Industries Group (“Air Industries”), pursuant to which the
Company purchased from Air Industries all of the shares (the “Shares”) of Welding Metallurgy, Inc. (“WMI”), a wholly owned subsidiary of Air Industries (the
“Acquisition”). WMI is engaged in the manufacture of complex components and assemblies for the defense and commercial aircraft industries.
On December 20, 2018, CPI Aero completed the acquisition of WMI for a total purchase price of approximately $7.9 million subject to working capital
adjustments. The Company’s operating results include the operating results of WMI from the date of acquisition, which were not material to the consolidated
results of operations.
On October 19, 2018, the Company completed an underwritten public offering of 2,760,000 shares of its common stock, including 360,000 shares pursuant to the
underwriters’ full exercise of their over-allotment option, at a public offering price of $6.25 per share. The Company’s net proceeds from the offering, after
deducting underwriting discounts, commissions, and other offering expenses, were approximately $16.1 million. The Company used a portion of the proceeds of
the offering for the acquisition of WMI. Additionally, the Company used the balance of the net proceeds for general corporate purposes, which included working
capital, capital expenditures and debt repayment.
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 have
also recently expanded our presence in the aerosystems segment of the market, with our production of various reconnaissance pod structures and fuel panel
systems. Within the global aerostructure and aerosystem supply chain, we are either a Tier 1 supplier to aircraft OEMs or a Tier 2 subcontractor to major Tier 1
manufacturers. We also are a prime contractor to the U.S. Department of Defense, primarily the USAF. In conjunction with our assembly operations, we provide
engineering, program management, supply chain management and kitting, and MRO services.
Critical Accounting Policies
Revenue Recognition
Effective January 1, 2018, the Company adopted Accounting Standards Codification Topic 606 “Revenue from Contracts with Customers” (“ASC 606”) using the
modified retrospective method for all of its contracts. ASC 606 requires sales and gross profit to be recognized over the contract period as work is performed based
on the relationship between actual costs incurred and total estimated costs at the completion of the contract. Recognized revenues that will not be billed under the
terms of the contract until a later date are recorded as an asset captioned “Contract assets.” Contracts where billings to date have exceeded recognized revenues are
recorded as a liability captioned “Contract liabilities.” Changes to the original estimates may be required during the life of the contract. Estimates are reviewed
monthly and the effect of any change in the estimated gross margin percentage for a contract is reflected in cost of sales in the period the change becomes known.
ASC 606 involves considerable use of estimates in determining revenues, costs and profits and in assigning the amounts to accounting periods. As a result, there
can be a significant disparity between earnings (both for accounting and tax purposes) as reported and actual cash received during any reporting period. The
Company continually evaluates all of the issues related to the assumptions, risks and uncertainties inherent with the process; however, it cannot be assured that
estimates will be accurate. If estimates are not accurate or a contract is terminated, the Company is required to adjust revenue in later periods. Furthermore, even if
estimates are accurate, there may be a shortfall in cash flow and the Company may need to borrow money, or seek access to other forms of liquidity, to fund its
work in process or to pay taxes until the reported earnings materialize as actual cash receipts.
16
When changes are required for the estimated total revenue on a contract, these changes are recognized with an inception-to-date effect in the current period. Also,
when estimates of total costs to be incurred exceed estimates of total revenue to be earned, a provision for the entire loss on the contract is recorded in the period in
which the loss is determined.
Following the adoption of ASC 606, the Company’s revenue recognition for all of its contracts remained materially consistent with historical practice and there
was no impact in the year ended December 31, 2018 consolidated financial statements upon adoption.
In compliance with ASC 606, costs and estimated earnings in excess of billings on uncompleted contracts, on the December 31, 2017 balance sheet, have been
reclassified to contract assets. Additionally, billings in excess of costs and estimated earnings on uncompleted contracts and contract losses, on the December 31,
2017 balance sheet, have been combined and reclassified to contract liabilities.
Results of Operations
The following discussion provides an analysis of our results of operations and should be read in conjunction with the accompanying consolidated financial
statements and notes thereto. This discussion excludes the results of operations of WMI from its acquisition date of December 20, 2018 through December 31,
2018 as the impact was not material on the consolidated results.
Year Ended December 31, 2018 as Compared to the Year Ended December 31, 2017
Revenue . Revenue for the year ended December 31, 2018 was $83,929,270 compared to $81,283,148 for the year ended December 31, 2017, representing an
increase of $2,646,122.
Overall, revenue generated from prime government contracts for the year ended December 31, 2018 was $9,216,671 compared to $6,647,248 for the year ended
December 31, 2017, an increase of $2,569,422. This increase is a result of revenue recognized on the T-38C Pacer Classic III aircraft structural modification
program, as this program has transitioned from the start-up stage to the delivery stage.
Revenue generated from government subcontracts for the year ended December 31, 2018 was $43,440,742 compared to $45,080,617 for the year ended December
31, 2017, a decrease of $1,639,875. This decrease is the result of the E-2D program as this program transitions towards the end of deliveries on the most recent
multiyear order.
Revenue generated from commercial contracts was $31,271,857 for the year ended December 31, 2018 compared to $29,555,283 for the year ended December 31,
2017, an increase of $1,716,574. This increase is predominately the result of a $1.2 million increase in the Company’s Embraer program, as this program has
entered into a regular monthly delivery schedule.
Cost of sales. Cost of sales for the years ended December 31, 2018 and 2017 was $65,765,007 and $62,637,232, respectively, an increase of $3,127,775 or 5.0%.
The components of cost of sales were as follows:
Procurement
Labor
Factory overhead
Other contract costs (credit), net
Cost of Sales
Years ended
December 31,
2018
December 31,
2017
$
$
44,033,170 $
6,251,997
15,569,568
(89,728)
65,765,007 $
41,286,646
6,745,038
15,770,436
(1,164,888)
62,637,232
17
Procurement for the year ended December 31, 2018 was $44,033,170 compared to $41,286,646, an increase of $2,746,524 or 6.7%. The increase in procurement
was the result of a $1.5 million increase in procurement on the Company’s T-38 program, a $3.5 million increase in procurement on our Next Generation Jammer
program, a $2 million increase in procurement on our Bell Helicopter inlet program and a $1 million increase in procurement on our Embraer inlet program and
our G650 program, as these programs have moved into higher rate production, offset by a decrease in procurement on our E-2D program, as that program comes to
the end our the current multiyear order.
Labor costs for the year ended December 31, 2018 were $6,251,997 compared to $6,745,038 for the year ended December 31, 2017, a decrease of $493,041 or
7.3%. This decrease is predominately due to decreases in labor on our A-10 program, as we completed the assemblies from that program.
Other contract costs (credit), net for the year ended December 31, 2018 were ($89,728) compared to ($1,164,888), a decrease of the credit of $1,075,160. Other
contract costs relate to expenses recognized for changes in estimates and expenses predominately associated with loss contracts. In the year ended December 31,
2017, other contract costs are a credit, as we have incurred actual expenses on our A-10 program that had been previously recognized as part of the change in
estimate charge.
Gross profit . Gross profit for the year ended December 31, 2018 was $18,164,263 compared to $18,645,916 for the year ended December 31, 2017, a decrease of
$481,653. Gross profit percentage (“gross margin”) for the year ended December 31, 2018 was 21.6% compared to 22.9% for the same period last year,
predominately the result of fade in gross margin on the Company’s G650 program, as we experienced some production issues in 2018 which resulted in higher
labor costs than estimated.
Favorable/Unfavorable Adjustments to Gross Profit
During the years ended December 31, 2018 and 2017, circumstances required that we make changes in estimates to various contracts. Such changes in estimates
resulted in decreases in total gross profit as follows:
Favorable adjustments
Unfavorable adjustments
Net adjustments
18
Years Ended
December 31,
2018
December 31,
2017
$
($
241,000 $
(927,000)
686,000) ($
944,000
(1,984,000)
1,040,000)
During the year ended December 31, 2018 we had one contract which had approximately a $240,000 unfavorable adjustment caused by changing estimates on a
long-term program, that we are working with the customer to agree to contract extensions and are adjusting our long-term margin estimates. Also, we had two
contracts that had a $198,000 and $196,000 unfavorable adjustment caused by excess overhead and material costs incurred. There were no other material changes,
favorable or unfavorable, during the year ended December 31, 2018.
During the year ended December 31, 2017 we had one contract which had an approximately $822,000 of unfavorable adjustments caused by changing estimates on
a long-term program. We are working with the customer to agree to contract extensions and expect to decrease our selling price. Additionally, we had one contract
that had a gap in production, as well as a smaller than expected order quantity. The gap in production and low quantity has resulted in an unfavorable adjustment of
approximately $514,000. There were no other material changes, favorable or unfavorable, during the year ended December 31, 2017.
Selling, general and administrative expenses . Selling, general and administrative expenses for the year ended December 31, 2018 were $9,528,883 compared to
$8,449,594 for the year ended December 31, 2017, an increase of $1,079,289, or 12.8%. This increase was primarily due to a increase of approximately $874,000
in professional fees, predominately related to legal fees for the acquisition of WMI and an increase of approximately $339,000 in salaries.
Interest expense. Interest expense for the year ended December 31, 2018 was $1,989,417, compared to $1,698,914 for 2017, an increase of $290,503 or 17.1%. The
increase in interest expense is the result of an increase in the average amount of outstanding debt during 2018 as compared to 2017.
Income from operations . We had income from operations for the year ended December 31, 2018 of $8,635,380 compared to income from operations of
$10,196,322 for the year ended December 31, 2017. The decrease was predominately the result in the decrease in gross profit described above, and the increase in
selling, general and administrative expenses described above.
Provision for income taxes. Our historic effective tax rate has been between 30%-32% of taxable income. The rate has been below the previous statutory federal
income tax rate of 34% because of our ability to utilize the domestic production activity deduction, available to companies that do manufacturing within the United
States. The provision for income taxes in the year ended December 31, 2017 was $2,710,000, an effective tax rate of approximately 32%, which is comparable
with historic rates and prior to the change in the federal statutory rate.
The provision for income taxes for the year ended December 31, 2018 was approximately $4.5 million, an effective tax rate of approximately 67%. In February
2019, the Company received information that the net operating loss carryback that was utilized in 2014 was under examination and could possibly be disallowed
by the IRS. The Company has not received a written notice or tax assessment related to the possible disallowance of our net operating loss carryback. If we receive
written notice we have the ability to appeal the disallowance, as well as go to tax court to challenge the notice. Although the Company has not received any formal
documentation or notice of such disallowance, in accordance with ASC 740-10 “Accounting for Uncertainty in Tax Positions” the Company has recorded a
liability of approximately $3.1 million in the year ended December 31, 2018 for this uncertainty. The liability represents the maximum net tax adjustment for the
disallowance of the net operating loss carryback, computed at the pre-2018 tax rates, and tax savings of recording a net operating loss carryforward, calculated at
the current tax rates.
Business Outlook
The statements in the “Business Outlook” section and other forward-looking statements of this Annual Report on Form 10-K are subject to revision during the
course of the year in our quarterly earnings releases and SEC filings and at other times.
Liquidity and Capital Resources
General. At December 31, 2018, we had working capital of $98,350,176 compared to $78,137,801 at December 31, 2017, an increase of $20,212,375, or 25.9%.
This increase is predominately the result of increases in contract assets and WMI inventory.
Cash Flow. A large portion of our cash is used to pay for materials and processing costs associated with contracts that are in process which do not provide for
progress payments. Costs for which we are not able to bill on a progress basis are components of contract assets on our consolidated balance sheet 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 revenues 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 until the reported earnings materialize into actual cash receipts.
19
Several of our programs require us to expend up-front costs that may have to be amortized over a portion of production units. In the case of significant program
delays and/or program cancellations, we could be required to bear impairment charges, which may be material for costs that are not recoverable. Such charges and
the loss of up-front costs could have a material impact on our liquidity and results of operations.
We continue to work to obtain better payment terms with our customers, including accelerated progress payment arrangements, as well as exploring alternative
funding sources.
At December 31, 2018, our cash balance was $4,128,142 compared to $1,430,877 at December 31, 2017, an increase of $2,697,265. Our accounts receivable
balance at December 31, 2018 increased to $8,623,329 from $5,379,821 at December 31, 2017. Additionally, at December 31, 2018 we have $2,000,000 of
restricted cash, which is cash held in escrow pursuant to the WMI acquisition and the determination of a final working capital adjustment.
Bank Credit Facilities.
On March 24, 2016, the Company entered into a Credit Agreement with BankUnited, N.A. as the sole arranger, administrative agent and collateral agent and
Citizens Bank, N.A. (the “BankUnited Facility”). The BankUnited Facility provides 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 based upon a pricing grid, as defined in the agreement.
On August 15, 2018, the Company entered into a Third Amendment and Waiver to the Amended and Restated Credit Agreement (the “Amendment”) with the
Lenders named therein and BankUnited, N.A., as Sole Arranger, Agent, and Collateral Agent, dated as of March 24, 2016, as amended by the First Amendment
and Waiver to the Amended and Restated Credit Agreement dated as of May 9, 2016, as further amended by the Second Amendment to the Amended and Restated
Credit Agreement dated as of July 13, 2017 (collectively, the “Credit Agreement”).
Under the Amendment, the parties amended the Credit Agreement by, among other things, (i) extending the maturity date of the Company’s existing $30 million
Revolving Loan and its existing $10 million Term Loan to June 30, 2020, (ii) amending the leverage ratio covenant, (iii) amending the interest rates corresponding
to the leverage ratio, (iv) waiving non-compliance with the leverage ratio covenant for the trailing four fiscal quarters ended March 31, 2018 and June 30, 2018,
and (v) amending provisions relating to the consummation of a public offering of common stock so that if an offering results in gross proceeds of $7 million or
more, (A) the Company will prepay the loans in an amount equal to 25% of net proceeds of the offering (with $1.2 million applied to the Term Loan and the
remainder applied to the Revolving Loan) and (B) the Company will maintain a minimum of $3 million in either unrestricted cash in an account with BankUnited,
N.A., or in availability under the Revolving Loan.
As of December 31, 2018, the Company was not in compliance with the leverage and net profit financial covenants contained in the BankUnited Facility, as
amended. The Bank has waived the provisions of these covenants as of December 31, 2018.
As of December 31, 2018, the Company had $24.0 million outstanding and as of December 31, 2017, the Company had $22.8 million outstanding under the
BankUnited Facility.
We believe that our existing resources, together with the availability under our credit facility, will be sufficient to meet our current working capital needs for at
least the next 12 months from the date of issuance of our consolidated financial statements.
The Term Loan had an initial amount of $10 million, payable in monthly installments, as defined in the agreement, which matures on June 30, 2020. The maturities
of the Term Loan are included in the maturities of long-term debt.
In May 2016, the Company entered into an interest rate swap with the objective of reducing its exposure to cash flow volatility arising from interest rate
fluctuations associated with certain debt. The notional amount, maturity date, and currency of this contract match those of the underlying debt. The Company has
designated this interest rate swap contract as a cash flow hedge. During the month of June 2018, the interest rate swap matured and the Company realized a net
gain of approximately $7,000.
20
Contractual Obligations. The table below summarizes information about our contractual obligations as of December 31, 2018 and the effects these obligations are
expected to have on our liquidity and cash flow in the future years.
Contractual Obligations
Total
Less than 1 year
Payments Due By Period
1-3 years
4-5 years
After 5 years
Debt
$
5,433,333 $
2,100,000 $
3,333,333
—
Capital Lease Obligations
927,693
334,981
464,125 $
128,587
Operating Leases
5,893,457
1,720,750
3,570,349
602,358
Total Contractual Cash Obligations
$
12,254,483 $
4,155,731 $
7,367,807 $
730,945 $
—
—
—
—
Inflation. Inflation historically has not had a material effect on our operations.
21
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Management does not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure
under this item.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information appears following Item 15 of this Report and is incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management has established disclosure controls and procedures designed to ensure that information it is required to disclose in the reports that it
files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within time periods
specified in the Securities and Exchange Commission rules and forms. Such disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information the Company is required to disclose in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the Company’s management to allow timely decisions regarding required disclosure.
In connection with the filing of the Company’s quarterly report on Form 10-Q as of and for the three and nine months ended September 30, 2018 (the “Original
Form 10-Q”), the Company’s Chief Executive Officer and Chief Financial Officer evaluated the Company’s disclosure controls and procedures and concluded that
the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) were effective as of
September 30, 2018.
Subsequent to that evaluation, in connection with the restatement of the Company’s financial statements as of and for the three and nine months ended September
30, 2018, discussed in Note 1 to the condensed financial statements included in the Form 10-Q/A filed with the Securities and Exchange Commission on February
27, 2019, the Chief Executive Officer and Chief Financial Officer reevaluated the effectiveness of the Company’s disclosure controls and procedures as of
September 30, 2018, and determined that a material weakness existed in the Company’s internal control over financial reporting. The Chief Executive Officer and
Chief Financial Officer have identified the following material weakness in the Company’s internal control over financial reporting: that the review control
procedures failed to identify, in a timely manner, the miscoding of an invoice in the Company’s records and the resulting overstatement of revenue. Because the
foregoing material weakness in the Company’s internal control over financial reporting had not been remediated by or before the filing of the Original Form 10-Q,
the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective at
the reasonable assurance level as of September 30, 2018. In addition, because the material weakness was not discovered until February of 2019, the Company’s
Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective at the reasonable
assurance level as of December 31, 2018. Our evaluation excluded WMI which was acquired on December 20, 2018. On a pro forma basis, as of and for the year
ended December 31, 2018, WMI represented approximately 10% of total assets and 14% of revenue. These percentages are not expected to differ significantly for
the period post acquisition. In accordance with guidance issued by the SEC, companies are allowed to exclude acquisitions from their assessment of internal
control over financial reporting during the first year subsequent to the acquisition while integrating with acquired operations.
Exchange Act Rules 13a-15(e) and 15d-15(e) define “disclosure controls and procedures” to mean controls and procedures of a company that are designed to
ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Commission’s rules and forms. The definition further states that disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that the information required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or
persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
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.
22
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as
defined in Exchange Act Rule 13a-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 generally accepted accounting principles 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 generally
accepted accounting principles, 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. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation.
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on criteria established in Internal Control- Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, and the material
weakness described above, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2018. The
effectiveness of our internal control over financial reporting as of December 31, 2018, has been audited by CohnReznick LLP, an independent registered public
accounting firm, as stated in their report, which was adverse due to the material weakness and appears herein.
Changes in Internal Control over Financial Reporting
The Company has reviewed its financial closing process and has identified the corrective action to remediate the control failure that was the cause of this error and
expects to implement this control, as well as, certain other procedures in the first quarter of 2019. The new control will independently reconcile shipments of
product to the Company’s billings by contract in order to ensure proper revenue recognition. The Company believes that the corrective action and implementation
of the new control procedures will provide reasonable assurance that this type of error will not occur in the future.
23
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of CPI Aerostructures, Inc.
Adverse Opinion on Internal Control over Financial Reporting
We have audited CPI Aerostructures, Inc. and Subsidiaries’ (the Company’s) internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As
described in Management’s Annual Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over
financial reporting at Welding Metallurgy, Inc. and subsidiary (WMI), which was acquired on December 20, 2018 and whose consolidated financial statements
constitute 7.5% of total assets and 0.1% of total revenues of the consolidated financial statement amounts as of and for the year ended December 31, 2018.
Accordingly, our audit did not include the internal control over financial reporting at WMI. In our opinion, because of the effect of the material weakness described
in the following paragraph on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial
reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.
A material weakness is a control 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
following material weakness has been identified and included in management’s assessment. The Company did not have adequate review controls over the coding
of invoices in the revenue recognition process. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our
audit of the 2018 consolidated financial statements, and this report does not affect our report dated April 1, 2019, on those consolidated financial statements.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance
sheets and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows of the Company, and our report dated
April 1, 2019, expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.
/s/ CohnReznick LLP
Jericho, New York
April 1, 2019
24
Item 9B.
OTHER INFORMATION
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
See Item 14.
Item 11. EXECUTIVE COMPENSATION
See Item 14.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
See Item 14.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
See Item 14.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Items 10, 11, 12, 13 and 14 will be contained in our definitive proxy statement for our 2019 Annual Meeting of Shareholders, to be
filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year covered by this report pursuant to Regulation 14A under
the Exchange Act, and incorporated herein by reference.
25
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. The following consolidated financial statements are filed as a part of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2018 and 2017
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017
Notes to Consolidated Financial Statements
Exhibit Number
Name of Exhibit
No. in Document
3.1
3.1(a)
3.2
10.20
10.23
10.31
10.32
10.33
10.34
10.35
14
**21
**23.1
**31.1
**31.2
**32.1
Certificate of Incorporation of the Company, as amended. (1)
Certificate of Amendment of Certificate of Incorporation filed on July 14, 1998. (2)
Amended and Restated By-Laws of the Company. (3)
Performance Equity Plan 2009 (4)
Agreement of Lease, dated June 30, 2011, between Heartland Boys II L.P. and CPI Aerostructures Inc. (5)
Amended and Restated Credit Agreement, dated as of March 24, 2016, as amended on May 6, 2016, among
CPI Aerostructures, Inc., the several lenders from time to time party thereto, and Bank United, N.A. (6)
Amended and Restated Continuing General Security Agreement, dated as of March 24, 2016 (6)
First Amendment to the Amended and Restated Credit Agreement, dated as of May 6, 2016 (7)
Second Amendment to the Amended and Restated Credit Agreement, dated as of July 13, 2017
Third Amendment to the Amended and Restated Credit Agreement, dated as of August 15, 2018 (8)
3.1
3.1(a)
3.2
10.1
10.1
Code of Business Conduct and Ethics
Subsidiaries of the Registrant
Consent of CohnReznick LLP
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
***101.INS
XBRL Instance Document
***101.SCH
XBRL Taxonomy Extension Schema Document
***101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
***101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
***101.LAB
XBRL Taxonomy Extension Label Linkbase Document
***101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
26
**Filed herewith.
***XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as
amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these
sections.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Filed as an exhibit to the Company’s Registration Statement on Form S-1 (No. 33-49270) declared effective on September 16, 1992 and incorporated
herein by reference.
Filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 1998 and incorporated herein by reference.
Filed as an exhibit to the Company’s Current Report on Form 8-K dated November 13, 2007 and incorporated herein by reference.
Included as Appendix A to the Company’s Proxy Statement filed on April 30, 2009.
Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 and incorporated herein by reference
Filed as an exhibit to the Company’s Current Report on Form 8-K dated March 24, 2016 and incorporated herein by reference.
Filed as an exhibit to the Company’s Current Report on Form 8-K dated May 9, 2016 and incorporated herein by reference.
Filed as an exhibit to the Company’s Current Report on Form 8-K dated August 15, 2018 and incorporated herein by reference.
27
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2018 and 2017
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017
Notes to Consolidated Financial Statements
28
F-1
F-2
F-3
F-4
F-5
F-6 - F-21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
To the Board of Directors and
Stockholders of CPI Aerostructures, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of CPI Aerostructures, Inc. and Subsidiaries (the Company) as of December 31, 2018 and 2017,
and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the years in the two-year period
ended December 31, 2018, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its
cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States
of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal
control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 1, 2019, expressed an adverse opinion.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ CohnReznick LLP
We have served as the Company’s auditor since 2004.
Jericho, New York
April 1, 2019
F- 1
CONSOLIDATED BALANCE SHEETS
ASSETS
Current Assets:
Cash
Restricted cash
Accounts receivable, net
Contract assets
Inventory
Refundable income taxes
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Refundable income taxes
Deferred income taxes
Other assets
Total Assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
Accrued expenses
Contract liabilities
Current portion of long-term debt
Line of credit
Income taxes payable
Total current liabilities
Long-term debt, net of current portion
Deferred income taxes
Other liabilities
Total Liabilities
Commitments
Shareholders’ Equity:
Common stock - $.001 par value; authorized 50,000,000 shares,
11,718,246 and 8,864,319 shares, respectively, issued and outstanding
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
F- 2
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
December 31,
2018
December 31,
2017
$
$
$
4,128,142 $
2,000,000
8,623,329
113,333,491
9,711,997
435,000
1,972,630
140,204,589
2,545,192
435,000
279,318
249,575
143,713,674 $
9,902,481 $
1,558,160
3,805,106
2,434,981
24,038,685
115,000
41,854,413
3,876,238
4,028,553
531,124
50,290,328
1,430,877
—
5,379,821
111,158,551
1,685,378
—
727,809
120,382,436
2,046,942
—
1,566,818
188,303
124,184,499
15,129,872
1,911,421
246,330
2,009,000
22,838,685
109,327
42,244,635
7,019,468
—
607,063
49,871,166
8,863
53,770,618
20,548,652
(14,800)
74,313,333
124,184,499
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11,715
70,651,416
22,760,215
—
93,423,346
143,713,674 $
$
Years ended December 31,
Revenue
Cost of sales
Gross profit
Selling, general and administrative expenses
Income from operations
Other expense:
Other income (expense)
Interest expense
Total other expense, net
Income before provision for income taxes
Provision for income taxes
Net income
Other comprehensive income (loss), net of tax
Change in unrealized (gain) loss-interest rate swap
Comprehensive income
Income per common share-basic
Income per common share-diluted
Shares used in computing earnings per common share:
Basic
Diluted
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
2018
2017
$
83,929,270 $
81,283,148
65,765,007
62,637,232
18,164,263
18,645,916
9,528,883
8,635,380
8,449,594
10,196,322
28,709
(1,989,417)
(1,960,708)
6,674,672
4,463,109
2,211,563
(19,774)
(1,698,914)
(1,718,688)
8,477,634
2,710,000
5,767,634
14,800
(5,800)
2,226,363 $
0.23 $
5,761,834
0.65
0.23 $
0.65
$
$
$
8,831,064
8,838,445
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9,480,948
9,489,630
F- 3
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years ended December 31, 2018 and 2017
Common
Stock
Shares
Common
Stock
Amount
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
Balance at January 1, 2017
Net income
Change in unrealized loss from interest rate
swap
Common stock issued upon exercise of
options
Common stock issued as employee
compensation
Stock based compensation expense
Balance at December 31, 2017
Net income
Change in unrealized loss from interest rate
swap
Common stock issued in share offering, net
of expenses
Common stock issued as employee
compensation
Stock based compensation expense
8,739,836 $
—
8,738 $
—
52,824,950 $
—
14,781,018 $
5,767,634
(9,000) $
—
67,605,706
5,767,634
—
3,334
5,550
115,599
—
3
6
116
—
(3)
50,776
894,895
—
—
—
—
(5,800)
(5,800)
—
—
—
—
50,782
895,011
8,864,319
8,863
53,770,618
—
—
—
—
—
—
2,760,000
2,760
16,163,357
5,130
88,797
5
87
45,908
671,533
20,548,652
2,211,563
(14,800)
—
74,313,333
2,211,563
—
—
—
—
14,800
14,800
—
16,166,117
—
—
45,913
671,620
Balance at December 31, 2018
11,718,246 $
11,715 $
F- 4
93,423,346
70,651,416 $
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22,760,215 $
— $
Years ended December 31,
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
Debt issuance costs
Deferred rent
Stock based compensation expense
Common stock issued as employee compensation
Loss on disposal of fixed asset
Deferred income taxes
Adjustment for maturity of interest rate swap
Bad debt expense
Changes in operating assets and liabilities, net of effects of acquisition:
(Increase) decrease in accounts receivable
Increase in contract assets
Increase in prepaid expenses and other current assets
Increase in refundable income taxes
(Decrease) increase in accounts payable and accrued expenses
Increase (decrease) in contract liabilities
Decrease in other liabilities
Increase in income taxes payable
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchase of property and equipment
Proceeds from sale of fixed assets
Purchase of WMI
Net cash used in investing activities
Cash flows from financing activities:
Net proceeds from sale of common stock
Payment of line of credit
Proceeds from line of credit
Payment of long-term debt
Debt issuance costs
Net cash provided by (used in) financing activities
Net increase in cash and restricted cash
Cash and restricted cash at beginning of year
Cash and restricted cash at end of year
Supplemental schedule of noncash investing and financing activities
Equipment acquired under capital lease
Cashless exercise of stock options
Supplemental schedule of cash flow information:
Cash paid for interest
Cash paid for income taxes
F- 5
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
2018
2017
$
2,211,563 $
5,767,634
710,197
95,942
(70,764)
671,620
45,913
—
5,337,053
20,600
125,000
(1,796,225)
(2,174,941)
(51,570)
(870,000)
(7,696,024)
911,901
(10,976)
5,673
(2,535,038)
(559,037)
—
(6,050,906)
(6,609,943)
16,166,117
(6,500,000)
7,700,000
(3,314,789)
(209,082)
13,842,246
4,697,265
1,430,877
6,128,142 $
616,291
85,571
(30,680)
895,011
50,782
21,010
2,384,980
—
150,000
2,984,792
(11,580,025)
(257,706)
—
1,627,689
(1,246,178)
—
103,327
1,572,498
(281,922)
42,480
—
(239,442)
—
(4,100,000)
4,500,000
(1,341,765)
—
(941,765)
391,291
1,039,586
1,430,877
649,410 $
— $
146,192
202,500
$
$
$
1,578,627
144,718
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2,134,574 $
10,947 $
$
$
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company consists of CPI Aerostructures, Inc. (“CPI”) and Welding Metallury, Inc. (“WMI”), a wholly owned subsidiary acquired on December 20, 2018 and
Compac Development Corporation (“Compac”), a wholly owned subsidiary of WMI, collectively the “Company.”
CPI is a U.S. supplier of aircraft parts for fixed wing aircraft and helicopters in both the commercial and defense markets. We manufacture complex aerostructure
assemblies, as well as aerosystems. Additionally, we supply parts for maintenance, repair and overhaul (“MRO”) and kitting contracts.
CPI acquired WMI on December 20, 2018 and the year ended December 31, 2018 operating results include the operating results of WMI from the date of
acquisition, which were not material.
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
Acquisition of WMI
On December 20, 2018 (the “WMI Acquisition Date”), pursuant to the Stock Purchase Agreement (the “Agreement”), dated as of March 21, 2018, with Air
Industries Group (“Air Industries”), the Company purchased from Air Industries all of the outstanding shares of WMI, previously a wholly owned subsidiary of
Air Industries (the “WMI Acquisition”) (See Note 2).
Public Offering
On October 19, 2018 the Company completed an underwritten public offering of 2,760,000 shares of its common stock, including 360,000 shares pursuant to the
underwriters’ full exercise of their over-allotment option, at a public offering price of $6.25 per share. The Company’s net proceeds from the offering, after
deducting underwriting discounts, commissions, and other offering expenses, were approximately $16.1 million.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
requires the use of estimates by management. Actual results could differ from these estimates.
Business Combinations
The Company applied business combination accounting for the WMI Acquisition in accordance with ASC 805, “Business Combinations” (“ASC 805”). Business
combination accounting requires that the assets acquired and liabilities assumed be recorded at their respective estimated fair values at the date of acquisition. The
excess purchase price over fair value of the net assets acquired is recorded as goodwill. In determining estimated fair values, we are required to make estimates and
assumptions that affect the recorded amounts, including, but not limited to, expected future cash flows, discount rates, remaining useful lives of long-lived assets,
useful lives of identified intangible assets, replacement or reproduction costs of property and equipment and the amounts to be recovered in future periods from
acquired net operating losses and other deferred tax assets. Our estimates in this area impact, among other items, the amount of depreciation and amortization,
impairment charges in certain instances if the asset becomes impaired, and income tax expense or benefit that we report. Our provisional estimates of fair value are
based upon assumptions believed to be reasonable, but which are inherently uncertain. See Note 2 for a summary and status of the application of business
combination accounting.
Revenue Recognition
Effective January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the
modified retrospective method for all of its contracts. ASC 606 requires sales and gross profit to be recognized over the contract period as work is performed based
on the relationship between actual costs incurred and total estimated costs at the completion of the contract. Recognized revenues that will not be billed under the
terms of the contract until a later date are recorded as an asset captioned “Contract assets.” Contracts where billings to date have exceeded recognized revenues are
recorded as a liability captioned “Contract liabilities.” Changes to the original estimates may be required during the life of the contract. Estimates are reviewed
monthly and the effect of any change in the estimated gross margin percentage for a contract is reflected in revenue in the period the change becomes known. ASC
606 involves considerable use of estimates in determining revenues, costs and profits and in assigning the amounts to accounting periods. As a result, there can be
a significant disparity between earnings (both for accounting and tax purposes) as reported and actual cash received during any reporting period. The Company
continually evaluates all matters that could have an impact on the assumptions, risks and uncertainties inherent with the process; however, it cannot be assured that
estimates will be accurate. If estimates are not accurate or a contract is terminated, the Company is required to adjust revenue in later periods. Furthermore, even if
estimates are accurate, there may be a shortfall in cash flow and the Company may need to borrow money, or seek access to other forms of liquidity, to fund its
work in process or to pay taxes until the reported earnings materialize as actual cash receipts.
F- 6
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
When changes are required for the estimated total revenue on a contract, these changes are recognized with an inception-to-date effect in the current period. Also,
when estimates of total costs to be incurred exceed estimates of total revenue to be earned, a provision for the entire loss on the contract is recorded in the period in
which the loss is determined.
Following the adoption of ASC 606, the Company’s revenue recognition for all of its contracts remained materially consistent with historical practice and there
was no material impact in the year ended December 31, 2018 consolidated financial statements upon adoption.
In compliance with ASC 606, costs and estimated earnings in excess of billings on uncompleted contracts, on the December 31, 2017 consolidated balance sheet,
have been reclassified to contract assets. Additionally, billings in excess of costs and estimated earnings on uncompleted contracts and contract losses, on the
December 31, 2017 consolidated balance sheet, have been combined and reclassified to contract liabilities.
In addition, the Company recognizes revenue for parts supplied for certain MRO contracts and for WMI when finished goods have been transferred to the
customer and there are no other obligations to customers after the title of the goods have transferred. Title of goods are transferred based on shipping terms for
each customer - for shipments with terms of FOB Shipping Point, title is transferred upon shipment; for shipments with terms of FOB Destination, title is
transferred upon delivery.
Government Contracts
The Company’s government contracts are subject to the procurement rules and regulations of the U.S. government. Many of the contract terms are dictated by
these rules and regulations. Specifically, cost-based pricing is determined under the Federal Acquisition Regulation (“FAR”), which provides guidance on the
types of costs that are allowable in establishing prices for goods and services under U.S. government contracts. For example, costs such as those related to
charitable contributions, advertising, interest expense, and public relations are unallowable, and therefore not recoverable through sales. During and after the
fulfillment of a government contract, the Company may be audited in respect of the direct and allocated indirect costs attributable thereto. These audits may result
in adjustments to the Company’s contract cost, and/or revenue.
When contractual terms allow, the Company invoices its customers on a progress basis.
Cash
The Company maintains its cash in five financial institutions. The balances are insured by the Federal Deposit Insurance Corporation. From time to time, the
Company’s balances may exceed these limits. As of December 31, 2018 and 2017, the Company had approximately $4,034,000 and $1,377,000, respectively, of
uninsured balances. The Company limits its credit risk by selecting financial institutions considered to be highly credit worthy.
Restricted Cash
During the year ended December 31, 2018, the Company adopted Accounting Standards Update No. 2016-08, Statement of Cash Flows - Restricted Cash, (“ASU
2016-18”), which requires the inclusion of restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period
and end-of-period total amounts shown on the statements of cash flows. The Company's restricted cash balance is $2,000,000 as of December 31, 2018, which is
cash held in escrow pursuant to the WMI acquisition and the determination of a final working capital adjustment.
Accounts Receivable
Accounts receivable are reported at their outstanding unpaid principal balances. The Company writes off accounts when they are deemed to be uncollectible.
F- 7
Property and Equipment
Depreciation and amortization of property and equipment is provided by the straight-line method over estimated useful lives of the respective assets or the lease
term if shorter, for leasehold improvements.
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
Rent
We recognize rent expense on a straight-line basis over the expected lease term. Within the provisions of certain leases there are escalations in payments over the
lease term. The effects of the escalations have been reflected in rent expense on a straight-line basis over the expected lease term.
Long-Lived Assets
The Company reviews its long-lived assets and intangibles with definite lives for impairment whenever changes in circumstances indicate that the carrying amount
of an asset may not be fully recoverable. As a result of its review, the Company does not believe that any such change has occurred. If such changes in
circumstance are present, a loss is recognized to the extent the carrying value of the asset is in excess of the fair value of cash flows expected to result from the use
of the asset and amounts expected to be realized upon its eventual disposition.
Short-Term Debt
The fair value of the Company’s short-term debt is estimated based on the current rates offered to the Company for debt of similar terms and maturities. Using this
method, the fair value of the Company’s short-term debt was not significantly different than the stated value at December 31, 2018 and 2017.
Derivatives
Our use of derivative instruments has primarily been to hedge interest rates. These derivative contracts are entered into with financial institutions. We do not use
derivative instruments for trading purposes and we have procedures in place to monitor and control their use.
We record these derivative financial instruments on the consolidated balance sheet at fair value. For derivative instruments that are designated and qualify as a cash
flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive loss and
reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
Any ineffective portion of the gain or loss on the derivative instrument for a cash flow hedge is recorded in the results of operations immediately. For derivative
instruments not designated as hedging instruments, the gain or loss is recognized in the results of operations immediately.
In May 2016, the Company entered into an interest rate swap with the objective of reducing our exposure to cash flow volatility arising from interest rate
fluctuations associated with certain debt. The notional amount, maturity date, and currency of this contract match those of the underlying debt. The Company has
designated this interest rate swap contract as a cash flow hedge. The Company measures ineffectiveness by comparing the cumulative change in the forward
contact with the cumulative change in the hedged item.
As a result of the use of derivative instruments, the Company is exposed to risk that the counterparties may fail to meet their contractual obligations. Recent
adverse developments in the global financial and credit markets could negatively impact the creditworthiness of our counterparties and cause one or more of our
counterparties to fail to perform as expected. To mitigate the counterparty credit risk, we only enter into contracts with carefully selected major financial
institutions based upon their credit ratings and other factors, and continually assess the creditworthiness of counterparties. To date, all counterparties have
performed in accordance with their contractual obligations.
F- 8
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
Fair Value
At December 31, 2018 and 2017, the fair values of cash, accounts receivable and accounts payable approximated their carrying values because of the short-term
nature of these instruments.
Debt
Short-term borrowings and long-term debt
$
30,349,903 $
30,349,903 $
31,893,894 $
31,893,894
2018
Carrying
Amount
Fair Value
2017
Carrying
Amount
Fair Value
We estimated the fair value of debt using market quotes and calculations based on market rates.
The following tables present the fair values of liabilities measured on a recurring basis as of December 31, 2017:
Description
Interest Rate Swap
Total
Total
18,781
18,781
$
$
Fair Value Measurements 2017
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
— $
— $
18,781
18,781
—
—
The fair value of the Company’s interest rate swap was determined by comparing the fixed rate set at the inception of the transaction to the “replacement swap
rate,” which represents the market rate for an offsetting interest rate swap with the same notional amounts and final maturity date. The market value is then
determined by calculating the present value of the interest differential between the contractual swap and the replacement swap.
As of December 31, 2017, $18,781 was included in other liabilities related to the fair value of the Company’s interest rate swap and $15,000, net of tax of
approximately $4,000 was included in accumulated other comprehensive loss.
During June 2018, the interest rate swap matured and the Company realized a net gain of approximately $7,000.
Earnings Per Share
Basic earnings per common share is computed using the weighted-average number of shares outstanding. Diluted earnings per common share is computed using
the weighted-average number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock. Incremental
shares of approximately 35,000 were used in the calculation of diluted earnings per common share in 2018. Incremental shares of 6,772 were not included in the
diluted earnings per share calculations at December 31, 2018, as their exercise price was in excess of the Company’s quoted market price and, accordingly, these
shares are not assumed to be exercised for the diluted earnings per share calculation. Incremental shares of approximately 35,000 were used in the calculation of
diluted earnings per common share in 2017. Incremental shares of 45,249 were not included in the diluted earnings per share calculations at December 31, 2017, as
their exercise price was in excess of the Company’s quoted market price and, accordingly, these shares are not assumed to be exercised for the diluted earnings per
share calculation.
F- 9
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
Income taxes
Income taxes are accounted for under the asset and liability method in accordance with ASC 740, “Income Taxes,” (“ASC 740”) 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.
Recently Issued but not Adopted Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases” (Topic 842) (“ASU 2016-02”), which sets out the principles for the
recognition, measurement, presentation and disclosure of leases for both lessees and lessors. Originally, entities were required to adopt ASU 2016-02 using a
modified retrospective approach at the beginning of the earliest comparative period presented in the financial statements and the recognition of a cumulative-effect
adjustment to the opening balance of retained earnings. The FASB subsequently issued Accounting Standards Update No. 2018-10 and Accounting Standards
Update No. 2018-11 in July 2018, which provide clarifications and improvements to ASU 2016-02 (collectively, the “new lease standard”). Accounting Standards
Update No. 2018-11 also provides the optional transition method which allows companies to apply the new lease standard at the adoption date instead of at the
earliest comparative period presented and continue to apply the provisions of the previous lease standard in its annual disclosures for the comparative periods. The
new lease standard requires lessees to present a right-of-use asset and a corresponding lease liability on the balance sheet. Lessor accounting is substantially
unchanged compared to the current accounting guidance. Additional footnote disclosures related to leases will also be required.
On January 1, 2019, the Company expects to adopt the new lease standard using the optional transition method. The comparative financial information will not be
restated and will continue to be reported under the previous lease standard in effect during those periods. In addition, the new lease standard provides a number of
optional practical expedients in transition. The Company expects to elect the package of practical expedients. As such, the Company will not reassess whether
expired or existing contracts are or contain a lease; will not need to reassess the lease classifications or reassess the initial direct costs associated with expired or
existing leases. The Company will not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the
Company.
The new lease standard also provides practical expedients for an entity’s ongoing accounting. The Company expects to elect the short-term lease recognition
exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU assets or lease liabilities, and this includes not
recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company expects to elect the practical expedient to not
separate lease and non-lease components for certain classes of assets (office buildings).
On January 1, 2019, the Company expects to recognize right of use assets and lease liabilities in the range of approximately $5,300,000 to $5,800,000 and no
adjustment to the accumulated deficit. The Company does not expect the adoption of the new lease standard to impact its consolidated statement of operations or
its consolidated statement of cash flows.
F- 10
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
2. BUSINESS COMBINATIONS
As discussed in Note 1, the Company completed the WMI Acquisition on December 20, 2018. The acquisition was accounted for as a business combination in
accordance with ASC Topic 805. Accordingly, the Company is required to determine and record the fair value of the assets acquired, including any potential
intangible assets, and liabilities assumed at the date of acquisition. The acquisition was considered a stock purchase for tax purposes.
The purchase price for the acquisition was $7.9 million, which is subject to a post-closing working capital adjustment. As such, $2 million of the purchase price
was held in escrow at closing subject to the completion of the working capital adjustment and in the event of other contingencies. The escrowed amount is shown
as restricted cash on the consolidated balance sheet as of December 31, 2018. The working capital adjustment is based on the historical values of components of
working capital as defined in the Agreement. Based on the working capital statement prepared by the Company and delivered to Air Industries on March 20, 2019,
the Company has concluded that it is more likely than not, that the purchase price will be reduced sufficiently such that at a minimum, the full amount in escrow
will be retained by the Company. The final working capital statement presented to Air Industries is expected to be reviewed and the purchase price adjustment
finalized not later than the third quarter of 2019.
The Company is in process of determining the acquisition date fair values of the assets and liabilities acquired and has recorded provisional estimates as of the
acquisition date. As the Company completes this process and additional information becomes known concerning the acquired assets and assumed liabilities,
management will likely make adjustments to the fair value of the amounts provisionally recorded in the opening balance sheet of WMI during the measurement
period, which is no longer than a one-year period following the acquisition date. The determination of the fair values of the acquired assets and liabilities assumed
(and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. If the final aggregate fair
value of the net assets acquired is less than the final purchase price paid then the Company may be required to record goodwill. Conversely, if the final aggregate
fair value of the net assets acquired is in excess of the final purchase price paid then the Company may potentially conclude that the purchase of WMI was a
“bargain purchase.”
As stated above, the Company has determined the following provisional estimates of the fair value of the assets acquired and liabilities assumed from WMI:
Other current assets
Accounts receivable
Inventory
Current liabilities
Total
Provisional
Fair Values
1,274,000
1,522,000
7,969,000
4,813,000
5,952,000
$
$
The following table presents the unaudited pro forma revenue and net income for the period presented as if the WMI Acquisition had occurred on January 1, 2017
based on the provisional estimates of the fair value of the net assets acquired:
Revenue
Net income (loss)
F- 11
Year Ended December 31,
2018
$
$
97,780,960
3,190,457
$
$
2017
94,412,148
(1,330,366)
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
The pro forma results presented above include the impact of eliminating parent company charges from Air Industries for general expenses and interest, net of tax.
3. REVENUE RECOGNITION
The majority of the Company’s revenues are from long-term contracts with the U.S. government and commercial contractors. The contracts with the U.S.
government typically are subject to the FAR 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 contractors are based on the specific negotiations with each customer.
The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified and payment terms are
identified.
To determine the proper revenue recognition method, the Company evaluates whether two or more contracts should be combined and accounted for as one single
contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant
judgment and the decision to combine a group of contracts or separate the combined or single contract into multiple performance obligations could change the
amount of revenue and profit recorded in a given period.
All of the Company’s current long-term contracts have a single performance obligation as the promise to transfer the goods or services is not separately identifiable
from other promises in the contracts and, therefore, not distinct. 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 performance obligations or changes the existing
enforceable rights and obligations. All of the Company’s contract modifications are for goods or services that are not distinct from the existing contract due to the
significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract
modification on the transaction price and the measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue
(either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
Revenues for the Company’s long-term contracts are recognized over time as the Company performs its obligations because of continuous transfer of control to the
customer. The continuous transfer of control to the customer is supported by clauses in contracts that either allow the customer to unilaterally terminate the
contract for convenience, pay the Company for costs incurred plus a reasonable profit and the products and services have no alternative use or the customer
controls the work in progress.
Because of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection
of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. The Company uses
the cost-to-cost input method to measure progress for its contracts because it best depicts the transfer of assets to the customer which occurs as the Company incurs
costs on its contracts.
In applying the cost-to-cost input method, the Company compares the actual costs incurred relative to the total estimated costs to determine its progress towards
contract completion and to calculate the corresponding amount of estimated revenue and estimated gross profit recognized. For any costs incurred that do not
contribute to a performance obligation, the Company excludes such costs from its input method of revenue recognition as the amounts are not reflective in
transferring control of the asset to the customer. Costs to fulfill 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 monthly and the effect of any
change in the estimated gross margin for a contract is reflected in revenue in the period the change becomes known. Contract estimates involve considerable use of
estimates in determining revenues and profits and in assigning the amounts to accounting periods. As a result, there can be a significant disparity between earnings
(both for accounting and tax purposes) as reported and actual cash received during any reporting period. The Company continually evaluates all of the issues
related to the assumptions, risks and uncertainties inherent with the 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, the Company is required to adjust revenue in later periods. Furthermore, even if estimates are
accurate, there may be a shortfall in cash flow and the Company may need to borrow money, or seek access to other forms of liquidity, to fund its work in process
or to pay taxes until the reported earnings materialize as actual cash receipts.
F- 12
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
For the Company’s uncompleted contracts, contract assets include unbilled amounts and when the estimated revenues recognized exceeds the amount billed to the
customer and right to payment is not just subject to the passage of time. Amounts may not exceed their net realizable value. Contract assets are classified as
current. The Company’s contract liabilities consist of billings in excess of estimated revenues recognized and contract losses. Contract liabilities are classified as
current. The Company’s contract assets and liabilities are reported in a gross position at the end of each reporting period.
Revenue recognized for the year ended December 31, 2018, that was included in the contract liabilities at January 1, 2018, was zero.
The Company’s remaining performance obligations represents the transaction price of its long-term contracts for which work has not been performed. As of
December 31, 2018, the aggregate amount of transaction price allocated to the remaining performance obligations was approximately $78,934,000. The Company
estimates that it expects to recognize approximately 97% of its remaining performance obligations in 2019.
In addition, the Company recognizes revenue for products manufactured by WMI and parts supplied for certain MRO contracts at a point in time following the
transfer of control to the customer, which typically occurs upon shipment or delivery, depending on the terms of the underlying contract. Revenue recognized from
WMI in 2018 was immaterial.
Revenue from long-term contracts transferred to customers over time and revenue from MRO contracts transferred at a point in time accounted for approximately
95% and 5%, respectively, of revenue for the year ended December 31, 2018.
Revenue by long-term contract type for the year ended December 31, 2018 is as follows:
Government subcontracts
Commercial contracts
Prime government contracts
4. CONTRACT ASSETS AND CONTRACT LIABILITIES
Net contract assets (liabilities) consist of the following:
$
$
43,440,742
31,271,857
9,216,671
83,929,270
Contract assets
Contract liabilities
Net contract assets (liabilities)
Contract assets
Contract liabilities
Net contract assets (liabilities)
December 31, 2018
U.S. Government
48,358,481 $
(3,780,866)
44,577,615 $
Commercial
64,975,010 $
(24,240)
64,950,770 $
Total
113,333,491
(3,805,106)
109,528,385
December 31, 2017 (1)
U.S. Government
54,591,601 $
(224,339)
54,367,262 $
Commercial
56,566,950 $
(21,991)
56,544,959 $
Total
111,158,551
(246,330)
110,912,221
$
$
$
$
(1) On January 1, 2018, as a result of the adoption of ASC 606, the Company reclassified costs and estimated earnings in excess of billings on uncompleted contracts to contract assets and
billings in excess of costs and estimated earnings on uncompleted contracts and contract losses to contract liabilities.
F- 13
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
The increase or decrease in the Company’s net contract assets (liabilities) from January 1, 2018 to December 31, 2018 was primarily due to costs incurred on
newer programs, like the new design of the HondaJet engine inlet ($3 million increase), for which the Company has not begun billing at a steady rate. Additionally,
the Company experienced some delays in shipping on the G650 program which increased contract assets by $8 million. This has been offset by a decrease in
contract assets on our E-2D program ($2 million decrease) which is shipping on a regular schedule and a decrease in contract assets on our Next Generation
Jammer Pod program ($7 million decrease).
Revisions in the estimated gross profits on contracts and contract amounts are made in the period in which the circumstances became known requiring the
revisions. During the year ended December 31, 2018, the effect of such revisions in total estimated contract profits resulted in a decrease to the total gross profit to
be earned on the contracts of approximately $686,000 from that which would have been reported had the revised estimates been used as the basis of recognition of
contract profits since inception of the contracts. During the year ended December 31, 2017, the effect of such revisions was a decrease to total gross profit of
approximately $1.0 million.
Although management believes it has established adequate procedures for estimating costs to uncompleted open contracts, it is possible that additional significant
costs could occur on contracts prior to completion.
5. ACCOUNTS RECEIVABLE
Accounts receivable consists of trade receivables as follows:
Billed receivables
Less: allowance for doubtful accounts
6. INVENTORY
The components of inventory consisted of the following:
Raw Materials
Work In Progress
Finished Goods
7. PROPERTY AND EQUIPMENT
Machinery and equipment
Computer equipment
Furniture and fixtures
Automobiles and trucks
Leasehold improvements
Less accumulated depreciation and amortization
December 31,
2018
2017
8,898,329 $
(275,000)
8,623,329 $
5,529,821
(150,000)
5,379,821
December 31,
2018
2017
3,379,986 $
4,495,980
1,836,031
9,711,997 $
918,799
431,403
335,176
1,685,378
$
$
$
$
December 31,
Estimated
2018
2017
Useful Life (years)
$
$
2,879,707
3,973,406
707,726
13,162
1,994,253
9,568,254
7,023,062
2,545,192
$
$
5 to 10
5
7
5
Lesser of lease
term or 10 years
2,461,047
3,476,454
610,323
13,162
1,798,823
8,359,809
6,312,867
2,046,942
F- 14
Depreciation and amortization expense for the years ended December 31, 2018 and 2017 was $710,197 and $616,291, respectively.
During the years ended December 31, 2018 and 2017, the Company acquired $651,775 and $146,192, respectively, of property and equipment under capital leases.
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
8. LINE OF CREDIT
On March 24, 2016, the Company entered into a Credit Agreement with BankUnited, N.A. as the sole arranger, administrative agent and collateral agent and
Citizens Bank N.A. (the “BankUnited Facility”). The BankUnited Facility provides 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 based upon a pricing grid, as defined in the agreement.
On August 15, 2018, the Company entered into a Third Amendment and Waiver to the Amended and Restated Credit Agreement (the “Amendment”) with the
Lenders named therein and BankUnited, N.A., as sole arranger, agent, and collateral agent, dated as of March 24, 2016, as amended by the First Amendment and
Waiver to the Amended and Restated Credit Agreement dated as of May 9, 2016, as further amended by the Second Amendment to the Amended and Restated
Credit Agreement dated as of July 13, 2017 (collectively, the “Credit Agreement”).
Under the Amendment, the parties amended the Credit Agreement by, among other things, (i) extending the maturity date of the Company’s existing $30 million
Revolving Loan and its existing $10 million Term Loan to June 30, 2020, (ii) amending the leverage ratio covenant, (iii) amending the interest rates corresponding
to the leverage ratio, (iv) waiving non-compliance with the leverage ratio covenant for the trailing four fiscal quarters ended March 31, 2018 and June 30, 2018,
and (v) amending provisions relating to the consummation of a public offering of common stock so that if an offering results in gross proceeds of $7 million or
more, (A) the Company will prepay the loans in an amount equal to 25% of net proceeds of the offering (with $1.2 million applied to the Term Loan and the
remainder applied to the Revolving Loan) and (B) the Company will maintain a minimum of $3 million in either unrestricted cash in an account with BankUnited,
N.A., or in availability under the Revolving Loan.
Pursuant to the Amendment, on October 19, 2018, the Company used $4.1 million of the net proceeds of its public offering completed on October 19, 2018 for
prepayments of loans under the BankUnited Facility, including $1.2 million applied to the term loan and $2.9 million applied to the revolving line of credit.
As of December 31, 2018, the Company was not in compliance with the leverage and net profit financial covenants contained in the BankUnited Facility, as
amended. The bank has waived the provisions of these covenants as of December 31, 2018. As of December 31, 2018, the Company had $24.0 million outstanding
under the Restated Agreement bearing interest at 5.72%.
The BankUnited Facility is secured by all of the Company’s assets.
9. LONG-TERM DEBT
In May 2016, the Company entered into an interest rate swap with the objective of reducing its exposure to cash flow volatility arising from interest rate
fluctuations associated with certain debt. The notional amount, maturity date and currency of this contract match those of the underlying debt. The Company has
designated this interest rate swap contract as a cash flow hedge. The interest rate swap ended in accordance with its terms as of June 1, 2018.
On August 15, 2018, the Company entered into a Third Amendment and Waiver to the Amended and Restated Credit Agreement (the “Amendment”) with the
Lenders named therein and BankUnited, N.A., as sole arranger, agent, and collateral agent, dated as of March 24, 2016, as amended by the First Amendment and
Waiver to the Amended and Restated Credit Agreement dated as of May 9, 2016, as further amended by the Second Amendment to the Amended and Restated
Credit Agreement dated as of July 13, 2017 (collectively, the “Credit Agreement”).
F- 15
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
Under the Amendment, the parties amended the Credit Agreement by, among other things, (i) extending the maturity date of the Company’s existing $30 million
Revolving Loan and its existing $10 million Term Loan to June 30, 2020, (ii) amending the leverage ratio covenant, (iii) amending the interest rates corresponding
to the leverage ratio, (iv) waiving non-compliance with the leverage ratio covenant for the trailing four fiscal quarters ended March 31, 2018 and June 30, 2018,
and (v) amending provisions relating to the consummation of a public offering of common stock so that if an offering results in gross proceeds of $7 million or
more, (A) the Company will prepay the loans in an amount equal to 25% of net proceeds of the offering (with $1.2 million applied to the Term Loan and the
remainder applied to the Revolving Loan) and (B) the Company will maintain a minimum of $3 million in either unrestricted cash in an account with BankUnited,
N.A., or in availability under the Revolving Loan.
The Company paid to BankUnited, N.A. commitment and agent fees in the amount of $209,082, together with out-of-pocket costs, expenses, and reasonable
attorney’s fees incurred by BankUnited, N.A. in connection with the Amendment.
The Company paid approximately $463,000 of total debt issuance costs in connection with the BankUnited Facility of which approximately $141,000 is included
in other assets and $50,000 is a reduction of long-term debt at December 31, 2018.
The Term Loan had an initial amount of $10 million, payable in monthly installments, as defined in the agreement, which matures on June 30, 2020.
The maturities of the long-term debt (excluding unamortized debt issuance costs) are as follows:
Year ending December 31,
2019
2020
2021
2022
2023
$
$
2,434,981
3,647,234
150,225
107,078
21,509
6,361,026
Also included in long-term debt are capital leases and notes payable of $592,712 and $555,209 at December 31, 2018 and 2017, respectively, including a current
portion of $334,981 and $175,667, respectively.
The cost of assets under capital leases was $2,625,052 and $1,975,642 at December 31, 2018 and 2017, respectively. Accumulated depreciation of assets under
capital leases was approximately $1,517,000 and $1,300,000 at December 31, 2018 and 2017, respectively.
10. COMMITMENTS
The Company leases an office and warehouse facility under a non-cancelable operating lease which expires in April 2022. The aggregate future commitment under
this agreement is as follows:
Year ending December 31,
2019
2020
2021
2022
$
$
1,720,750
1,763,275
1,807,074
602,358
5,893,457
Rent expense for the years ended December 31, 2018 and 2017 was $1,608,701 and $1,608,701, respectively.
F- 16
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
11. INCOME TAXES
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as U.S. Tax Reform. The U.S. Tax Reform makes broad
and complex changes to the U.S. tax code and includes significant provisions impacting the Company’s 2017 and 2018 effective tax rate. The changes include, but
are not limited to, a reduction in the U.S. federal corporate tax rate from 35% to 21% effective for tax years beginning after December 31, 2017. As a result, the
Company believes that the most significant impact on its 2017 consolidated financial statements was the reduction of approximately $207,000 in deferred tax
assets and liabilities.
The provision for income taxes consists of the following:
Year ended December 31,
Current:
Federal
State
Deferred:
Federal
2018
2017
3,104,000 $
73,000
200,000
266,000
1,286,000
4,463,000 $
2,244,000
2,710,000
$
$
The difference between the income tax provision computed at the federal statutory rate and the actual tax provision is accounted for as follows:
December 31,
Taxes computed at the federal statutory rate
State income tax, net
Prior year true-up
Research and development tax credit
Change in federal statutory rate
Uncertain tax position
Permanent differences
Provision for income taxes
F- 17
2018
2017
1,381,000 $
58,000
18,000
(164,000)
—
3,128,000
42,000
4,463,000 $
2,882,000
176,000
2,000
(235,000)
(207,000)
—
92,000
2,710,000
$
$
The components of deferred income tax assets and liabilities are as follows:
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
Deferred Tax Assets:
Allowance for doubtful accounts
Credit carryforwards
Deferred rent
Stock options
Restricted stock
Other
Interest on uncertain tax position
Net operating loss carryforward
Deferred Tax Assets
Deferred Tax Liabilities:
Prepaid expenses
Revenue recognition
Property and equipment
State taxes
Deferred tax liabilities
Net Deferred Tax Assets (Liabilities)
2018
2017
60,000 $
1,255,000
117,000
12,000
88,000
8,000
654,000
863,000
3,057,000
159,000
3,137,000
404,000
—
3,700,000
(643,000) $
32,000
1,986,000
126,000
102,000
90,000
1,000
—
750,000
3,087,000
141,000
1,036,000
276,000
67,000
1,520,000
1,567,000
$
$
As of December 31, 2018, the Company had roughly $4,000,000 of gross net operating losses for federal tax purposes and $1,500,000 for state tax purposes which
will begin to expire in 2034.
The Company will recognize a tax benefit in the consolidated financial statements for an uncertain tax position only if management’s assessment is that the
position is “more likely than not” (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the
position. The term “tax position” refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in
measuring current or deferred income tax assets and liabilities for financial reporting purposes.
The provision for income taxes for the year ended December 31, 2018 was approximately $4.5 million, an effective tax rate of approximately 66%. In February
2019, the Company received information that the net operating loss carryback that was utilized in 2014 was under examination and could possibly be disallowed
by the Internal Revenue Service (“IRS”). The Company has not received a written notice or tax assessment related to the possible disallowance of our net operating
loss carryback. If the Company receives written notice the Company has the ability to appeal the disallowance, as well as go to tax court to challenge the notice.
Although the Company has not received any formal documentation or notice of such disallowance, in accordance with ASC 740-10 “Accounting for Uncertainty in
Tax Positions” the Company has recorded a liability of approximately $3.1 million as of December 31, 2018 for this uncertainty. The liability represents the
maximum net tax adjustment for the disallowance of the net operating loss carryback, computed at the pre-2018 tax rates, and tax savings of recording a net
operating loss carryforward, calculated at the current tax rates. In accordance with the Tax Cuts and Jobs Act that was enacted on December 22, 2017 (“U.S. Tax
Reform”), the Company has recorded a credit for income taxes of $207,000. The impact of the U.S. Tax Reform is primarily from revaluing our U.S. deferred tax
assets and liabilities based on the rates at which they are expected to reverse in the future. For U.S. federal tax purposes, the corporate statutory income tax rate was
reduced from 35% to 21%, effective for our 2018 tax year.
The following table indicates the changes to the Company’s uncertain tax position for the years ended December 31, 2018 and 2017 including interest and
penalties:
Balance, beginning of year
Additions
Reductions
Balance, end of year
Years Ended December 31,
2017
2018
$
$
— $
3,128,000
—
3,128,000 $
—
—
—
—
The Company files income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The Company generally is no longer subject to
U.S. or state examinations by tax authorities for taxable years prior to 2015. However, net operating losses utilized from prior years in subsequent years’ tax
returns are subject to examination until three years after the filing of subsequent years’ tax returns. The statute of limitations expiration in foreign jurisdictions for
corporate tax returns generally ranges between two and five years depending on the jurisdiction.
The Company’s policy is to record estimated interest and penalties related to uncertain tax positions in income tax expense. At December 31, 2018, the Company’s
consolidated balance sheet reflects cumulative provisions for interest and penalties of $654,000, related to potential interest.
F- 18
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
12. STOCK BASED COMPENSATION
The Company accounts for compensation expense associated with stock options and restricted stock units (“RSUs”) based on the fair value of the options and units
on the date of grant.
The Company used the modified transition method to establish the beginning balance of the additional paid-in capital pool related to the tax effects of employee
stock based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of the fair value method.
The Company’s net income for the years ended December 31, 2018 and 2017, includes approximately $718,000 and $946,000 of stock based compensation
expense, respectively, for the grant of stock options and RSUs.
In January 2018, the Company granted 58,578 RSUs to its board of directors as partial compensation for the 2018 year. On January 1, 2017, the Company granted
59,395 RSUs to its board of directors as partial compensation for the 2017 year. RSUs vest quarterly on a straight-line basis over a one-year period. The
Company’s net income for the years ended December 31, 2018 and 2017 includes approximately $524,000 and $550,000, respectively, of noncash compensation
expense related to the RSU grants to the board of directors. This expense is recorded as a component of selling, general and administrative expenses. In addition,
for the year ended December 31, 2018, the Company granted 5,130 shares of common stock to various employees and approximately $10,000 of compensation
expense is included in selling, general and administrative expenses and approximately $36,000 of compensation expense is included in cost of sales for this grant.
In addition, for the year ended December 31, 2017, the Company granted 5,550 shares of common stock to various employees and approximately $13,300 of
compensation expense is included in selling, general and administrative expenses and approximately $37,500 of compensation expense is included in cost of sales
for this grant.
In March 2018, the Company granted 68,764 shares of common stock to various employees. In the event that any of these employees voluntarily terminates their
employment prior to certain dates, portions of the shares may be forfeited. In addition, if certain Company performance criteria are not achieved, portions of these
shares may be forfeited. These shares will be expensed during various periods through March 2022 based upon the service and performance thresholds. For the
year ended December 31, 2018, approximately $88,100 of compensation expense is included in selling, general and administrative expenses and approximately
$18,400 of compensation expense is included in cost of revenue for this grant.
In August 2016 and March 2017, the Company granted 98,645 and 73,060 shares of common stock, respectively, to various employees. In the event that any of
these employees voluntarily terminates their employment prior to certain dates, portions of the shares may be forfeited. In addition, if certain Company
performance criteria are not achieved, portions of these shares may be forfeited. These shares will be expensed during various periods through March 2021 based
upon the service and performance thresholds. For the years ended December 31, 2018 and 2017, approximately $0 and $219,000, respectively, of compensation
expense is included in selling, general and administrative expenses and approximately $0 and $46,300, respectively, of compensation expense is included in cost of
sales for this grant.
In March 2018, 12,330 and 9,130 of the shares granted in 2016 and 2017, respectively, were forfeited because the Company failed to achieve certain performance
criteria for the year ended December 31, 2017. In addition, on March 22, 2018, these employees returned 7,552 common shares, valued at approximately $62,000,
to pay the employees’ withholding taxes.
In March 2017, 12,330 of the shares granted in August 2016 were forfeited because the Company failed to achieve certain performance criteria for the year ended
December 31, 2016. In addition, on March 9, 2017, these employees returned 4,525 common shares, valued at approximately $33,000, to pay the employees’
withholding taxes.
In 2009, the Company adopted the Performance Equity Plan 2009 (the “2009 Plan”). The 2009 Plan reserved 500,000 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 options’ exercise price is equal to the closing price of the Company’s shares on the day of issuance, except for incentive stock options granted to any person
possessing more than 10% of the total combined voting power of all classes of Company stock, which are exercisable at 110% of the closing price of the
Company’s shares on the date of issuance.
F- 19
The Company has 211,175 shares available for grant under the 2009 Plan.
In 2016, the Company adopted the 2016 Long Term Incentive Plan (the “2016 Plan”). The 2016 Plan reserved 600,000 common shares for issuance, provided that,
no more than 200,000 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.
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
The Company has 119,910 shares available for grant under the 2016 Plan.
The Company did not grant any stock options in 2018 or 2017.
A summary of the status of the Company’s stock option plans is as follows:
Outstanding at January 1, 2017
Granted during period
Exercised
Forfeited/Expired
Outstanding at December 31, 2017
Granted during period
Exercised
Forfeited/Expired
Outstanding at December 31, 2018
Weighted
Average
Exercise
Price
Average
remaining
contractual
term
(in years)
Aggregate
Intrinsic
Value
1.58
1.10
10.43
—
8.10
10.62
11.05
—
—
14.81
Options
149,466 $
—
(25,000)
(44,217)
80,249 $
—
—
(38,477)
41,772 $
7.58
0.29 $
Vested at December 31, 2018
41,772 $
7.58
0.29 $
F- 20
0
0
The Company’s stock options granted to non-employee directors vest immediately upon grant and have a maximum contractual term of five years. Stock options
granted to employees vest over three years and have a maximum contractual term of ten years. The expected option term is calculated utilizing historical data of
option exercises.
During the year ended December 31, 2017, no stock options were exercised for cash. During the same period, 25,000 options were exercised, pursuant to
provisions of the stock option plan, where the Company received no cash and 21,666 shares of its common stock in exchange for the 25,000 shares issued in the
exercise. The 21,666 shares that the Company received were valued at $202,580, the fair market value of the shares on the dates of exercise.
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
The intrinsic value of stock options exercised during the year ended December 31, 2017 was approximately $31,300.
The fair value of all options vested during the year ended December 31, 2017 was approximately $82,000.
13. EMPLOYEE BENEFIT PLAN
On September 11, 1996, the Company’s board of directors instituted a defined contribution plan under Section 401(k) of the Internal Revenue Code (the “Code”).
On October 1, 1998, the Company amended and standardized its plan as required by the Code. Pursuant to the amended plan, qualified employees may contribute a
percentage of their pretax eligible compensation to the Plan and the Company will match a percentage of each employee’s contribution. Additionally, the
Company has a profit-sharing plan covering all eligible employees. Contributions by the Company are at the discretion of management. The amount of
contributions recorded by the Company in 2018 and 2017 amounted to $237,568 and $361,682, respectively.
14. MAJOR CUSTOMERS
Eleven percent of revenue in 2018 and 8% of revenue in 2017 were directly attributable to the U.S. Government. Twenty two percent and 6% of accounts
receivable at December 31, 2018 and 2017, respectively, were from the U. S. Government.
In addition, in 2018, 24%, 16% and 12% of our revenue were to our three largest commercial customers, respectively. In 2017, 25%, 23% and 12% of our revenue
were to our three largest commercial customers, respectively. At December 31, 2018, 20%, 18% and 17% of accounts receivable were from our three largest
commercial customers. At December 31, 2017, 44%, 18% and 13% of accounts receivable were from our three largest commercial customers.
At December 31, 2018 and 2017, 2% and 4%, respectively, of contract assets were from the U.S. Government.
At December 31, 2018, 39%, 14%, 13%, and 13% of contract assets were from our four largest commercial customers. At December 31, 2017, 32%, 20%, 12%,
and 10% of contract assets were from our four largest commercial customers.
In 2018 and 2017, approximately 5% and 4%, respectively, of our revenue was from a customer who is located outside the United States.
F- 21
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES
behalf by the undersigned, thereunto duly authorized.
Dated: April 1, 2019
CPI AEROSTRUCTURES, INC.
(Registrant)
By:
/s/ Vincent Palazzolo
Vincent Palazzolo
Chief Financial Officer and Secretary
(Principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature
/s/ Terry Stinson
Terry Stinson
/s/ Eric Rosenfeld
Eric Rosenfeld
/s/ Douglas McCrosson
Douglas McCrosson
/s/ Vincent Palazzolo
Vincent Palazzolo
/s/ Walter Paulick
Walter Paulick
/s/ Harvey Bazaar
Harvey Bazaar
/s/ Michael Faber
Michael Faber
/s/ Carey Bond
Carey Bond
Title
Date
Chairman of the Board of Director s
April 1, 2019
Chairman Emeritus of the Board of
Directors
Chief Executive Officer and
President
Chief Financial Officer and Secretary
(Principal financial and accounting officer)
Director
Director
Director
Director
F- 22
April 1, 2019
April 1, 2019
April 1, 2019
April 1, 2019
April 1, 2019
April 1, 2019
April 1, 2019
CPI AEROSTRUCTURES, INC. 10-K
EXHIBIT 21.1
SUBSIDIARIES OF RESGISTRANT
Welding Metallurgy, Inc.
Compac Development Corporation
CPI AEROSTRUCTURES, INC. 10-K
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Registration Nos. 333-11669, 333-42403, 333-130077, 333-164687
and 333-212837) and on Form S-3 (Registration Number 333-220090), of our report dated April 1, 2019, on our audits of the consolidated financial
statements of CPI Aerostructures, Inc. as of December 31, 2018 and 2017 and for each of the years in the two-year period ended December 31, 2018, and of
our report dated April 1, 2019 which expresses an adverse opinion on the effectiveness of internal control over financial reporting of CPI Aerostructures, Inc.
as of December 31, 2018, because of a material weakness, included in this Annual Report on Form 10-K of CPI Aerostructures, Inc. for the year ended
December 31, 2018.
Exhibit 23.1
/s/ CohnReznick LLP
Jericho, New York
April 1, 2019
CPI AEROSTRUCTURES, INC. 10-K
I, Douglas McCrosson, certify that:
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
EXHIBIT 31.1
1.
2.
3.
4.
5.
(a)
(b)
(c)
(d)
(a)
(b)
I have reviewed this Annual Report on Form 10-K of CPI Aerostructures, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f) for the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal
quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and to the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Dated: April 1, 2019
CPI AEROSTRUCTURES, INC.
(Registrant)
By:
/s/ Douglas McCrosson
Douglas McCrosson
Chief Executive Officer, President and Director
(Principal executive officer)
CPI AEROSTRUCTURES, INC. 10-K
I, Vincent Palazzolo, certify that:
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
EXHIBIT 31.2
1.
2.
3.
4.
5.
(a)
(b)
(c)
(d)
(a)
(b)
I have reviewed this Annual Report on Form 10-K of CPI Aerostructures, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f) for the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal
quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and to the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Dated: April 1, 2019
CPI AEROSTRUCTURES, INC.
(Registrant)
By:
/s/ Vincent Palazzolo
Vincent Palazzolo
Chief Financial Officer and Secretary
(Principal financial and accounting officer)
CPI AEROSTRUCTURES, INC. 10-K
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of CPI Aerostructures, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2018 as filed with the
Securities and Exchange Commission (the “Report”), the undersigned, in the capacities and on the date indicated below, hereby certifies pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.
2.
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Dated: April 1, 2019
Dated: April 1, 2019
CPI AEROSTRUCTURES, INC.
(Registrant)
By:
/s/ Douglas McCrosson
Douglas McCrosson
Chief Executive Officer, President and Director
(Principal executive officer)
CPI AEROSTRUCTURES, INC.
(Registrant)
By:
/s/ Vincent Palazzolo
Vincent Palazzolo
Chief Financial Officer and Secretary
(Principal financial and accounting officer)