CPI Aero(CVU) - 2018 Q4 - Annual Report

Government Contracts and Revenue - Government subcontracts accounted for 52% of revenue in 2018 and 57% in 2017, indicating a significant reliance on U.S. Government contracts[65] - The company faces risks related to government contract funding, which is subject to congressional budget authorization and appropriation processes[66] - Termination of contracts by the U.S. Government for convenience could result in the cancellation of future work and adversely affect financial performance[68] - Revenue for the year ended December 31, 2018 was $83,929,270, an increase of $2,646,122 compared to $81,283,148 in 2017, representing a growth of 3.2%[129] - Revenue from prime government contracts increased to $9,216,671, up by $2,569,422 or 38.6% from $6,647,248 in 2017[130] - Revenue from government subcontracts decreased to $43,440,742, down by $1,639,875 or 3.6% from $45,080,617 in 2017[131] - The Company’s government contracts are subject to U.S. government procurement rules, which dictate allowable costs for pricing[240] Financial Performance and Condition - The company reported a net income of $2.21 million for the year ended December 31, 2018, compared to $1.73 million in 2017, representing a growth of 27.8%[218] - Net income decreased to $2,211,563 in 2018, down 61.6% from $5,767,634 in 2017[219] - Income per common share (basic and diluted) was $0.23 in 2018, compared to $0.65 in 2017, reflecting a decline of 64.6%[219] - Gross profit for the year ended December 31, 2018 was $18,164,263, a decrease of $481,653, with a gross margin of 21.6% compared to 22.9% in 2017[139] - Selling, general and administrative expenses increased to $9,528,883, an increase of $1,079,289 or 12.8% from $8,449,594 in 2017[144] - Interest expense rose to $1,989,417, an increase of $290,503 or 17.1% compared to $1,698,914 in 2017[145] - The provision for income taxes for the year ended December 31, 2018 was approximately $4.5 million, with an effective tax rate of approximately 67%[148] Internal Controls and Compliance - A material weakness in internal control over financial reporting was identified as of December 31, 2018, which could affect investor confidence and stock price[90] - The independent auditor expressed an adverse opinion on the effectiveness of internal control over financial reporting as of December 31, 2018[182] - Management's evaluation concluded that internal controls were not effective as of December 31, 2018, due to the identified material weakness[177] - The company plans to implement new control procedures in Q1 2019 to ensure proper revenue recognition[178] - The company has established disclosure controls and procedures to ensure timely and accurate reporting as required by the Securities Exchange Act[169] Acquisitions and Growth - The company completed the acquisition of Welding Metallurgy, Inc. for approximately $7.9 million, which is expected to enhance its capabilities in manufacturing complex components for the defense and commercial aircraft industries[119] - The acquisition of Welding Metallurgy, Inc. (WMI) on December 20, 2018, represents approximately 10% of total assets and 14% of revenue on a pro forma basis[171] - CPI acquired Welding Metallurgy, Inc. (WMI) on December 20, 2018, which is included in the consolidated financial results from the acquisition date[227] Cash Flow and Capital Structure - Cash balance at December 31, 2018 was $4,128,142, an increase of $2,697,265 from $1,430,877 in 2017[156] - The company raised approximately $16.1 million from a public offering of 2,760,000 shares at a price of $6.25 per share, with proceeds allocated for the acquisition and general corporate purposes[120] - The company has 41,772 shares of common stock subject to outstanding purchase options, and future capital needs may lead to additional equity offerings, potentially diluting existing shareholders[103] - The company reported a net cash used in operating activities of $(2,535,038) for 2018, compared to $1,572,498 in 2017[223] - Cash and restricted cash at the end of 2018 was $6,128,142, significantly up from $1,430,877 at the end of 2017[223] Risks and Challenges - The company faces risks associated with new programs, including potential delays, technological problems, and the inability to meet customer specifications, which could adversely affect financial results[94] - Cybersecurity threats and internal system failures pose risks that could disrupt business operations and lead to financial losses, despite the company's efforts to mitigate these risks[98][99] - Competition for key personnel is intense, and the inability to attract and retain qualified staff may adversely affect production operations[86] - The company is exposed to risks associated with fixed contract pricing, which can lead to reduced profitability if contract costs increase unexpectedly[81] - The company is subject to strict environmental regulations, which could lead to fines and remediation expenses if non-compliance occurs[76] Assets and Liabilities - Total current assets increased to $140.20 million in 2018 from $120.38 million in 2017, representing a growth of 16.1%[216] - Total liabilities decreased to $50.76 million in 2018 from $49.26 million in 2017, a reduction of 3.0%[216] - Shareholders' equity rose to $93.42 million in 2018, up from $74.31 million in 2017, indicating an increase of 25.8%[216] - The company has total debt of $5,433,333, with $2,100,000 due within one year[165] - Capital lease obligations total $927,693, with $334,981 due within one year[165] - Operating leases total $5,893,457, with $1,720,750 due within one year[165] Revenue Recognition - The company recognized revenues based on the relationship between actual costs incurred and total estimated costs, which may lead to significant disparities between reported earnings and actual cash received[84] - The company has implemented ASC 606 for revenue recognition, which requires sales and gross profit to be recognized over the contract period based on actual costs incurred[122] - The Company adopted ASC 606 for revenue recognition, which requires sales and gross profit to be recognized over the contract period based on actual costs incurred and total estimated costs[232] - The Company may need to adjust revenue in later periods if estimates are not accurate or if a contract is terminated[233] - The Company continually evaluates estimates related to revenue, costs, and profits, which may lead to significant disparities between reported earnings and actual cash received[232]