CPI Aero(CVU) - 2020 Q1 - Quarterly Report

Part I Item 1 – Consolidated Financial Statements (Unaudited) Unaudited Q1 2020 financials show decreased assets, increased liabilities, a widened net loss, and negative operating cash flow, with critical subsequent events Consolidated Balance Sheets Total assets decreased to $42.3 million, liabilities increased to $52.5 million, and shareholders' deficit widened to $10.2 million by March 31, 2020 Consolidated Balance Sheet Highlights (Unaudited) | Balance Sheet Item | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash | $1,998,697 | $4,052,109 | | Total current assets | $33,403,441 | $34,831,456 | | Total assets | $42,251,352 | $44,339,580 | | Liabilities & Shareholders' Deficit | | | | Total current liabilities | $22,409,762 | $20,979,737 | | Total liabilities | $52,456,926 | $52,079,820 | | Total Shareholders' Deficit | $(10,205,574) | $(7,740,240) | Consolidated Statements of Operations Q1 2020 revenue decreased 23.3% to $16.9 million, resulting in a lower gross profit and a widened net loss of $2.8 million Consolidated Statements of Operations (Unaudited, for the three months ended March 31) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Revenue | $16,858,386 | $21,988,384 | | Gross Profit | $697,819 | $2,483,416 | | Loss from Operations | $(2,395,271) | $(422,270) | | Net Loss | $(2,812,519) | $(934,716) | | Loss per common share – basic | $(0.24) | $(0.08) | Consolidated Statements of Shareholders' Deficit Shareholders' deficit increased from $7.7 million to $10.2 million by March 31, 2020, primarily due to the $2.8 million net loss for the quarter - The total shareholders' deficit grew to $(10,205,574) at March 31, 2020, from $(7,740,240) at January 1, 2020, mainly due to the quarterly net loss of $(2,812,519)[10] Consolidated Statements of Cash Flows Q1 2020 saw net cash used in operations at $1.4 million, a $2.1 million net decrease in cash, ending with $3.4 million in cash and restricted cash Consolidated Statements of Cash Flows (Unaudited, for the three months ended March 31) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,427,522) | $(2,332,878) | | Net cash used in investing activities | $(3,200) | $(210,695) | | Net cash used in financing activities | $(622,690) | $(967,408) | | Net decrease in cash and restricted cash | $(2,053,412) | $(3,510,981) | | Cash and restricted cash at end of period | $3,379,381 | $2,617,161 | Notes to Consolidated Financial Statements (Unaudited) Notes detail accounting policies and key disclosures, crucially highlighting significant subsequent events such as a credit amendment, PPP loan, NYSE notice, stop-work order, and ongoing legal proceedings - The company has a single operating and reportable segment. Management believes its liquidity and debt resources are sufficient to meet obligations for at least one year, despite a continuing loss from operations and negative cash flow[16][22] - The company was notified it was part of the Defense Industrial Base Essential Critical Infrastructure Workforce, allowing it to remain open during the COVID-19 pandemic, but the full financial impact remains uncertain[29] - As of March 31, 2020, the company had approximately $211 million in remaining performance obligations (backlog), with 46% expected to be recognized as revenue in fiscal 2020[47] - Subsequent to the quarter end, on August 24, 2020, the company amended its credit agreement with BankUnited, extending maturity to May 2022, restructuring debt, and waiving certain covenant noncompliance[81][83] - On April 10, 2020, the company received a $4.8 million PPP loan. In April 2020, it received a stop-work order from Triumph Group for the G650 program, impacting $3.6 million in backlog[85][87] - The company is involved in multiple legal proceedings, including a class action lawsuit, shareholder derivative actions, and a non-public SEC investigation related to the restatement of prior financial statements[91][92][97] Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q1 2020's revenue decline and increased net loss to program timing, while highlighting strong backlog and subsequent liquidity actions Backlog Total backlog was $556.4 million as of March 31, 2020, with funded backlog increasing to $211.1 million, and government contracts comprising approximately 90% Backlog Comparison (in thousands) | Backlog Category | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Backlog | | | | Funded | $211,103 | $147,647 | | Unfunded | $345,268 | $414,231 | | Total | $556,371 | $561,878 | | Government Backlog | $499,133 | $496,702 | | Commercial Backlog | $57,238 | $65,176 | Results of Operations Q1 2020 revenue decreased 23.3% to $16.9 million due to program timing, leading to a 72% drop in gross profit and a widened net loss of $2.8 million - Revenue decreased by $5.1 million (23.3%) YoY, mainly due to timing on the Raytheon NGJ Pod program[121] - Gross profit decreased by $1.8 million (72%) YoY, also primarily due to lower gross profit from the nearly completed Raytheon Pod program[133] Net Adjustments to Gross Profit (Loss) | Adjustment Type | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Favorable adjustments | $373,040 | $675,968 | | Unfavorable adjustments | $(778,232) | $(164,789) | | Net adjustments | $(405,192) | $511,179 | - Net loss increased by 201.4% to $(2,812,519), or $(0.24) per share, driven by the decrease in revenue[138][140] Liquidity and Capital Resources Working capital decreased 20.6% to $11.0 million, with cash falling to $2.0 million, though management believes liquidity is sufficient after a credit facility amendment - Working capital decreased by $2.9 million to $11.0 million at March 31, 2020[141] - The company's cash balance was $2.0 million, with an additional $1.4 million in restricted cash[147] - A subsequent amendment to the BankUnited credit facility in August 2020 waived covenant violations and prospectively waived late delivery of financial statements for the first three quarters of 2020[150] - As of March 31, 2020, the company had $26.7 million outstanding under its Revolving Loan[151] Item 3 – Quantitative and Qualitative Disclosures About Market Risk This section is not applicable for the reporting period - Not applicable[154] Item 4 – Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were ineffective due to material weaknesses, prompting significant remediation efforts - Management concluded that the Company's internal control over financial reporting was not effective as of December 31, 2019, and disclosure controls were not effective as of March 31, 2020[157][173] - Material weaknesses were identified in: Control Environment, Risk Assessment, Control Activities and Monitoring; Revenue Recognition Accounting; Accounting for Significant Non-Routine Complex Transactions; and Information Technology General Controls (ITGC)[160][163][165][166] - Remediation efforts include hiring new finance leadership, updating revenue recognition policies with external advice, and planning to implement an improved ITGC testing program[169][170][172] Part II Item 1 – Legal Proceedings The company faces significant legal and regulatory matters, including a working capital dispute, class action lawsuit, shareholder derivative actions, and a non-public SEC investigation - The company is in a legal dispute with Air Industries seeking a judgment of approximately $3.5 million related to a working capital adjustment from the WMI acquisition[174] - A consolidated class action lawsuit has been filed against the company, its officers, and underwriters, alleging violations of the Securities Act and Exchange Act related to false statements in financial reports and offering documents[175][178] - Two shareholder derivative actions have been filed, based on similar facts as the class action, alleging breach of fiduciary duty[179][180] - On May 22, 2020, the company received a subpoena from the SEC Division of Enforcement as part of an investigation into the financial restatements and other matters. The company intends to cooperate fully[183] Item 1A – Risk Factors The company faces significant risks from financial restatement and material weaknesses, the COVID-19 pandemic, and general business operations, including government contract dependence and cybersecurity threats Risks Related to the Restatement and Material Weaknesses Financial restatement and material weaknesses pose severe risks, including eroded investor confidence, stock delisting, litigation, and hindering future capital raises - The restatement may continue to erode investor confidence, negatively impact the stock price, and result in further litigation[187] - Material weaknesses in internal controls, if not remediated, could adversely affect the ability to report financial results accurately and on time[188] - The company is currently ineligible to use its Form S-3 shelf registration statement, which could adversely affect its ability to raise future capital[202] - Failure to regain compliance with NYSE American timely filing rules could lead to delisting of the common stock[204][205] Risks Related to COVID-19 The COVID-19 pandemic poses significant risks to supply chain, costs, customer demand, and liquidity, with uncertainty regarding full forgiveness of the $4.8 million PPP loan - The COVID-19 pandemic could disrupt the supply chain, increase costs, and cause delays or limit the ability of customers to perform[209] - The pandemic could negatively impact liquidity and cash flows, potentially making it difficult to obtain additional financing if needed[210] - There is a risk that the company may not meet the standards for full forgiveness of its $4.8 million PPP Loan[213] Risks Related to our Business Business risks include heavy dependence on government contracts, fixed-price contract profitability, backlog termination, cybersecurity threats, and potential limitations on tax NOLs - A significant portion of revenue comes from government contracts, which are subject to budget uncertainties and can be terminated for convenience[215][216] - Fixed-price contracts expose the company to reduced profitability if contract costs increase unexpectedly[226] - The company's backlog is not guaranteed revenue, as demonstrated by the Triumph Group's cancellation of G650 orders, which reduced backlog by $3.6 million[230][231] - The ability to use approximately $93 million in federal NOLs could be substantially limited if the company experiences an "ownership change" under Section 382 of the Internal Revenue Code[246][247] Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - None[251] Item 3 – Defaults Upon Senior Securities There were no defaults upon senior securities to report for the period - None[252] Item 4 – Mine Safety Disclosures This section is not applicable to the company - Not applicable[253] Item 5 – Other Information There was no other information to report for the period - None[254] Item 6 – Exhibits This section lists the exhibits filed with the report, including Section 302 and 906 certifications by the CEO and CFO, and the XBRL financial data - Exhibits filed include CEO and CFO certifications (31.1, 31.2, 32) and XBRL data (101)[250]