CPI Aero(CVU) - 2021 Q3 - Quarterly Report

Part I - Financial Information Item 1 – Consolidated Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for CPI Aerostructures, Inc., with restated 2020 comparative periods due to inventory costing errors and insufficient reserves Consolidated Balance Sheets This section provides a summary of the company's financial position, highlighting key assets, liabilities, and shareholders' deficit Consolidated Balance Sheet Highlights (in USD) | Metric | September 30, 2021 (Unaudited) | December 31, 2020 (Restated) | | :--- | :--- | :--- | | Total Assets | $49,664,398 | $46,509,449 | | Total Current Assets | $42,944,810 | $37,687,226 | | Total Liabilities | $54,643,749 | $59,493,181 | | Total Current Liabilities | $29,815,315 | $30,012,252 | | Total Shareholders' Deficit | ($4,979,351) | ($12,983,732) | - Total assets increased by approximately $3.16 million, primarily due to higher accounts receivable and contract assets. Total liabilities decreased by approximately $4.85 million, while the total shareholders' deficit improved significantly, decreasing by approximately $8 million from year-end 2020[9] Consolidated Statements of Operations This section details the company's financial performance, including revenue, gross profit, and net income for the reported periods Statement of Operations Summary (in USD) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 (Restated) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 (Restated) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $23,898,748 | $25,576,718 | $77,018,684 | $62,175,872 | | Gross Profit | $3,651,984 | $4,207,031 | $12,168,674 | $6,176,354 | | Income (Loss) from Operations | $886,135 | $1,156,387 | $3,334,331 | ($2,782,632) | | Other Income | $4,795,000 | $0 | $4,795,000 | $0 | | Net Income (Loss) | $5,425,255 | $839,765 | $7,280,949 | ($3,878,151) | | EPS (Diluted) | $0.44 | $0.07 | $0.60 | ($0.33) | - Revenue for the third quarter of 2021 decreased by 6.6% YoY, while revenue for the first nine months increased by 23.9% YoY. Net income saw a substantial increase in both the three and nine-month periods, largely driven by $4.795 million in 'Other income' recognized in Q3 2021 from the forgiveness of a PPP loan[12][67] Consolidated Statements of Shareholders' Deficit This section outlines changes in the company's shareholders' deficit, reflecting the impact of net income and other equity adjustments - The accumulated deficit improved from ($85,001,524) at the beginning of 2021 to ($77,720,575) at September 30, 2021. This improvement was primarily due to a cumulative net income of $7,280,949 recorded during the nine-month period[14] Consolidated Statements of Cash Flows This section presents the company's cash inflows and outflows from operating, investing, and financing activities Cash Flow Summary for the Nine Months Ended September 30 (in USD) | Metric | 2021 | 2020 (Restated) | | :--- | :--- | :--- | | Net cash used in operating activities | ($1,313,333) | ($3,283,377) | | Net cash used in investing activities | ($19,305) | ($11,888) | | Net cash (used) provided by financing activities | ($1,590,318) | $2,832,251 | | Net decrease in cash | ($2,922,956) | ($463,014) | | Cash at beginning of period | $6,033,537 | $5,432,793 | | Cash at end of period | $3,110,581 | $4,969,779 | - Despite a significant net income of $7.28 million for the first nine months of 2021, net cash used in operating activities was $1.31 million. This was influenced by non-cash income from PPP loan forgiveness ($4.8M) and increases in accounts receivable and contract assets[16] Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements, including significant accounting policies and material events - The Company has identified a significant risk to its ability to continue as a going concern due to a shareholders' deficit and prior losses. Management believes this risk is mitigated through actions like extending its credit facility, securing customer funding, and focusing on its strong military backlog[24] - As of September 30, 2021, the company's backlog of remaining performance obligations was approximately $138 million, which is expected to be recognized as revenue by 2025[45] - On July 13, 2021, the Company received notification that its $4,795,000 Paycheck Protection Program (PPP) loan and accrued interest were fully forgiven. This was recognized as other income in the third quarter[67] - A class action lawsuit was settled for $3,600,000. After the company's $750,000 retention, the remainder will be paid by its directors' and officers' insurance carrier[84] - Financial statements for 2020 and 2019 were restated due to 'Inventory Costing Errors' and 'Insufficient Reserves', which increased the reported net loss for 2020 by $2,334,315 and for 2019 by $2,300,083. These errors did not affect previously reported revenue or cash flow[99][100] Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, liquidity, and capital resources, highlighting the impact of restatements, delisting risks, and the PPP loan forgiveness on results Recent Developments This section outlines significant recent events impacting the company, including delisting notices, financial restatements, and credit facility amendments - The company received delinquency notices from NYSE American for failure to timely file its quarterly and annual reports. It also failed to meet continued listing standards related to minimum stockholders' equity and recent losses, creating a risk of delisting[148][151] - Financial statements for 2019 and 2020 were restated due to significant 'Inventory Costing Errors' and 'Insufficient Reserves', which led to a material weakness in internal controls and increased previously reported net losses[153][154][157] - The company entered into multiple amendments (Seventh, Eighth, and Ninth) to its BankUnited credit facility to extend maturity dates to September 30, 2023, and modify financial covenants[164][165][166] - The company's $4,795,000 PPP loan was fully forgiven in July 2021, which was recognized as income in the third quarter[169] Backlog This section provides an overview of the company's funded and unfunded backlog, indicating future revenue potential Backlog Summary (in USD) | Backlog Type | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Funded | $137,699,000 | $169,567,000 | | Unfunded | $267,770,000 | $306,618,000 | | Total | $405,469,000 | $476,185,000 | - Total backlog decreased from $476.2 million at year-end 2020 to $405.5 million at the end of Q3 2021. Approximately 96% of the total backlog is attributable to government contracts[176][177] Results of Operations This section analyzes the company's revenue, gross profit, and net income performance for the current and comparative periods Revenue Performance (YoY) | Period | Revenue (2021) | Revenue (2020, Restated) | Change (%) | | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30 | $23,898,748 | $25,576,718 | -6.6% | | Nine Months Ended Sep 30 | $77,018,684 | $62,175,872 | +23.9% | - Gross profit for Q3 2021 decreased 13.2% YoY to $3.65 million, while for the nine-month period it increased 97% YoY to $12.17 million, driven by higher revenue and a more favorable program mix[199][200] - Net income for Q3 2021 was $5.4 million, a 541% increase from $0.8 million in Q3 2020. This was primarily due to the $4.795 million forgiveness of the PPP loan[205][209] Liquidity and Capital Resources This section assesses the company's ability to meet its short-term and long-term financial obligations, including working capital and cash balances - Working capital increased by 71.1% to $13.1 million at September 30, 2021, from $7.7 million at December 31, 2020[211] - The cash balance decreased from $6.0 million at the end of 2020 to $3.1 million at September 30, 2021[216] - Management believes existing resources, including the amended BankUnited Facility, are sufficient to meet working capital needs for at least the next 12 months[218][227] Item 3 – Quantitative and Qualitative Disclosures About Market Risk This section is not applicable to the company for this reporting period - The company has indicated that there are no quantitative and qualitative disclosures about market risk to report[231] Item 4 – Controls and Procedures Management concluded that disclosure controls and procedures were ineffective due to material weaknesses in internal control over financial reporting, particularly concerning inventory accounting and IT controls, with remediation efforts underway - Management, including the CEO and CFO, concluded that disclosure controls and procedures were not effective as of September 30, 2021, due to identified material weaknesses[233] - Material weaknesses were identified in several areas, including: insufficiently documented accounting policies, inadequate cut-off procedures, poor monitoring of inventory costing, insufficient processes for establishing loss reserves, and weak IT general controls[239] - Specific issues leading to the restatement included duplicate labor costs in inventory, unit of measure errors, incorrect average cost calculations, and failure to properly accrue for inventory or defer under-absorbed overhead[241][243] - Remediation efforts initiated in 2021 include hiring a new CFO and Controller, designing new month-end accruals, implementing software changes, and establishing new procedures for inventory management and reserve accounting[244] Part II - Other Information Item 1 – Legal Proceedings This section refers to Note 12 for details on legal proceedings, including a settled class action lawsuit largely covered by insurance - For information on legal proceedings, the report directs readers to Note 12, Commitments and Contingencies, in the financial statements[256] Item 1A – Risk Factors This section updates and adds to the company's risk factors, including potential delisting, going concern issues, geopolitical disruptions, and increased competition for skilled labor - An amended risk factor highlights the significant risk of the company's common stock being delisted from the NYSE American due to late filings and failure to meet continued listing standards for stockholders' equity[259][260][262] - A new risk factor addresses the significant risk to the company's ability to continue as a going concern, citing its shareholders' deficit, prior losses, and negative cash flows[267][268] - New risks related to the Russian invasion of Ukraine are disclosed, including potential disruptions to economies, supply chains, and the availability and price of raw materials[270][271] - The company notes increased competition for skilled machinists and growing scrutiny from stakeholders regarding Environmental, Social, and Governance (ESG) responsibilities as new risk factors[281][283] Other Items (Items 2, 3, 4, 5, 6) This section covers remaining Part II items, noting no unregistered sales, defaults, or mine safety disclosures, and lists the exhibits filed with the report - There were no unregistered sales of equity securities, defaults upon senior securities, or other material information to report under Items 2, 3, and 5[286][287][289] - Item 6 lists the exhibits filed with the Form 10-Q, which include Section 302 and 906 certifications by the CEO and CFO, as well as Inline XBRL documents[290]