NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. | INTERIM
FINANCIAL STATEMENTS |
The
Company consists of CPI Aerostructures, Inc. (“CPI Aero”), Welding Metallurgy, Inc. (“WMI”), a wholly
owned subsidiary of CPI Aero, and Compac Development Corporation, a wholly owned subsidiary of WMI (collectively, the “Company”).
An
operating segment, in part, is a component of an enterprise whose operating results are regularly reviewed by the chief operating
decision maker (the “CODM”) to make decisions about resources to be allocated to the segment and assess its performance.
Operating segments may be aggregated only to a limited extent. The Company’s CODM, the Chief Executive Officer, reviews
financial information presented on a consolidated basis, accompanied by disaggregated information about revenues for purposes
of making operating decisions and assessing financial performance. The Company has determined that it has a single operating and
reportable segment.
The
consolidated financial statements of the Company as of September 30, 2021 and for the three and nine months ended September 30,
2021 and 2020 (as restated) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”). Certain information and notes normally included in financial statements prepared in accordance with generally
accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant
to those rules and regulations. The consolidated balance sheet at December 31, 2020 (as restated) has been derived from audited
consolidated financial statements, as restated (see Note 14 for more information on the effect of the restatement), but does not
include all of the information and notes required by U.S. GAAP. The Company believes that the disclosures are adequate to make
the information presented not misleading.
All
adjustments that, in the opinion of the management, are necessary for a fair presentation for the periods presented have been
reflected. Such adjustments are of a normal, recurring nature. It is suggested that these consolidated financial statements be
read in conjunction with the consolidated financial statements and notes thereto included in the Company’s comprehensive
Annual Report on Form 10-K/A for the year ended December 31, 2020 (the “Comprehensive Form 10-K/A”), as restated.
The results of operations for interim periods are not necessarily indicative of the operating results to be expected for the full
year or any other interim period.
The
Company maintains its cash in four financial institutions. The balances are insured by the Federal Deposit Insurance Corporation.
From time to time, the Company’s balances may exceed insurance limits. As of September 30, 2021, the Company had $3,231,722
of uninsured balances. The Company limits its credit risk by selecting financial institutions considered to be highly creditworthy.
The
Company currently has a shareholders’ deficit and has experienced losses from operations and negative cash flows from operations
in prior periods that collectively represent significant risk to the Company to continue to operate as a going concern. To address
this risk, the Company has (i) negotiated and executed a further amendment to its Amended and Restated Credit Agreement with the
lenders named therein and BankUnited N.A. as Sole Arranger, Agent and Collateral Agent (as amended from time to time, the “Credit
Agreement” or the “BankUnited Facility”), effective April 12, 2022 which extended the maturity date of the credit
facility to September 30, 2023, (ii) obtained and is seeking additional progress payment and advance payment customer contract
funding provisions, (iii) maintained procedures to reduce investments in inventory and contract assets, (iv) remained focused
on its military segment which has proven to be less susceptible to COVID-19 related impacts and (v) maintained a strong (approximately
$138 million) backlog of funded orders, 96% of which are for military programs. Based upon management’s assessment of
the identified significant risks and the execution of the plans described above, management believes that substantial risk does
not exist as to whether the Company’s liquidity and debt resources will be sufficient to meet its obligations as a going concern
through a year and a day from the date of this filing.
The
outbreak of the COVID-19 coronavirus was declared a pandemic by the World Health Organization during our first quarter of 2020.
During the latter part of our first quarter and subsequent to our quarter end, the COVID-19 pandemic grew, causing non-essential
businesses to shut down and many people to observe the shelter-in-place directive from our state government. Our business and
operations and the industries in which we operate have been impacted by public and private sector policies and initiatives in
the United States (“U.S.”) to address the transmission of COVID-19, such as the imposition of travel restrictions
and the adoption of remote work. The COVID-19 pandemic has contributed to a general slowdown in the global economy, has adversely
impacted the businesses of certain of our customers and suppliers, and, if it continues for an extended period of time, it could
adversely impact our results of operations and financial condition. In response to the COVID-19 impact on our business, we have
been and continue to actively mitigate costs. We have also been taking actions to preserve capital and protect the long-term needs
of our businesses, including negotiating progress payments with our customers and reducing discretionary spending. For more information
on the current and potential impact of the COVID-19 pandemic on our business, see Risk Factors “The impact of the coronavirus
(COVID-19) pandemic on our operations, supply chain, and customers has impacted and could continue to have a material adverse
effect on our business, financial position, results of operations and/or cash flows” included in Part I, Item 1A of
our Comprehensive Form 10-K/A.
The
Company recognizes revenue when it transfers control of a promised good or service to a customer in an amount that reflects the
consideration it expects to be entitled to in exchange for the good or service. The majority of the Company’s performance
obligations are satisfied over time as the Company (i) sells products with no alternative use to the Company and (ii) has an enforceable
right to recover costs incurred plus a reasonable profit margin for work completed to date. Under the over time revenue recognition
model, revenue and gross profit are recognized over the contract period as work is performed based on actual costs incurred and
an estimate of costs to complete and resulting total estimated costs at completion.
The
Company also has contracts that are considered point in time. Under the point in time revenue recognition model, revenue is recognized
when control of the components has transferred to the customer; in most cases this will be based on shipping terms.
Contracts
with Customers and Performance Obligations
The
majority of the Company’s revenues are from long-term contracts with the U.S. government and commercial contractors. The
Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified,
payment terms are identified, the contract has commercial substance and collectability of consideration is probable. For the Company,
the contract under Accounting Standards Codification Topic 606 (“ASC 606”) is typically established upon execution
of a purchase order either in accordance with a long-term customer contract or on a standalone basis.
To
determine the proper revenue recognition for our contracts, we must evaluate whether two or more contracts should be combined
and accounted for as a single contract, and whether the combined or single contract should be accounted for as one performance
obligation or more than one performance obligation. This evaluation requires significant judgment, and the decision to combine
a group of contracts or to separate a contract into multiple performance obligations could change the amount of revenue and profit
recorded in a period. A performance obligation is a promise within a contract to transfer a distinct good or service to the customer
in exchange for payment and is the unit of account for recognizing revenue. The Company’s performance obligations in its
contracts with customers are typically the sale of each individual product contemplated in the contract or a single performance
obligation representing a series of products when the contract contains multiple products that are substantially the same. The
Company has elected to account for shipping performed after control over a product has transferred to a customer as fulfillment
activities. When revenue is recognized in advance of incurring shipping costs, the costs related to the shipping are accrued.
Shipping costs are included in costs of sales. The Company provides warranties on many of its products; however, since customers
cannot purchase such warranties separately and they do not provide services beyond standard assurances, warranties are not separate
performance obligations.
A
contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when or as the
performance obligation is satisfied. For contracts with more than one performance obligation, the Company allocates the transaction
price to each performance obligation based on its estimated standalone selling price. When standalone selling prices are not available,
the transaction price is allocated using an expected cost plus margin approach as pricing for such contracts is typically negotiated
on the basis of cost.
The
contracts with the U.S. government typically are subject to the Federal Acquisition Regulation, 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 contracts is based on the specific negotiations with each customer and any taxes imposed by governmental
authorities are excluded from revenue. The transaction price is primarily comprised of fixed consideration as the customer typically
pays a fixed fee for each product sold. The Company does not adjust the amount of revenue to be recognized under a customer contract
for the effects of the time value of money when the timing difference between receipt of payment and transferring the good or
service is less than one year.
The
majority of the Company’s performance obligations are satisfied over time as the Company (i) sells products with no alternative
use to the Company and (ii) has an enforceable right to recover costs incurred plus a reasonable profit margin for work completed
to date. The Company uses the cost-to-cost input method to measure progress for its performance obligations because it best depicts
the transfer of control to the customer which occurs as the Company incurs costs on its contracts.
The
Company generally utilizes the portfolio approach to estimate the amount of revenue to recognize for its contracts and groups
contracts together that have similar characteristics. Significant judgment is used to determine which contracts are grouped together
to form a portfolio. The portfolio approach is utilized only when the result of the accounting is not expected to be materially
different than if applied to individual contracts.
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 or changes the existing enforceable rights and obligations.
The effect of a contract modification on the transaction price, and the measure of progress for the performance obligation to
which it relates, are recognized prospectively when the remaining goods or services are distinct and on a cumulative catch-up
basis when the remaining goods or services are not distinct.
The
Company also has contracts that are considered point in time. Under the point in time revenue recognition model, revenue is recognized
when control of the components has transferred to the customer; in most cases this will be based on shipping terms.
Contract
Estimates
Certain
contracts contain forms of variable consideration, such as price discounts and performance penalties. The Company generally estimates
variable consideration using the most likely amount based on an assessment of all available information (i.e., historical experience,
current and forecasted performance) and only to the extent it is probable that a significant reversal of revenue recognized will
not occur when the uncertainty is resolved.
In
applying the cost-to-cost input method, the Company compares the actual costs incurred relative to the total estimated costs expected
at completion to determine its progress towards satisfying its performance obligation and to calculate the corresponding amount
of revenue to recognize. For any costs incurred that do not depict the Company’s performance in transferring control of
goods or services to the customer, the Company excludes such costs from its input method measure of progress as the amounts are
not reflected in the price of the contract. Costs that are inputs to the satisfaction of 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 quarterly 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 and judgment in determining revenues, costs and profits and in assigning the amounts
to accounting periods. For instance, management must make assumptions and estimates regarding labor productivity and availability,
the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation,
execution by our subcontractors, the availability and timing of funding from the customer, and overhead cost rates, among other
variables. The Company continually evaluates all of the factors 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 which will affect estimates at completion, the Company is required to adjust revenue
in the period the change is determined.
When
changes are required for the estimated total revenue on a contract, these changes are recognized on a cumulative catch-up basis
in the current period. A significant change in one or more estimates could affect the profitability of one or more of our performance
obligations. If estimates of total costs to be incurred exceed estimates of total consideration the Company expects to receive,
a provision for the remaining loss on the contract is recorded in the period in which the loss becomes evident.
Capitalized
Contract Acquisition Costs and Fulfillment Costs
Contract
acquisition costs are those incremental costs that the Company incurs to obtain a contract with a customer that it would not have
incurred if the contract had not been obtained. The Company does not typically incur contract acquisition costs or contract fulfillment
costs that are subject to capitalization in accordance with the guidance in Accounting Standards Codification Subtopic 340-40,
“Other Assets and Deferred Costs—Contracts with Customers.”
Disaggregation
of Revenue
The
following tables present the Company’s revenue disaggregated by contract type:
| |
Three
months ended
September 30, | | |
Nine
months ended
September 30, | |
| |
2021 | | |
2020
(As Restated –
see Note 14) | | |
2021 | | |
2020
(As Restated –
see Note 14) | |
Aerostructures | |
$ | 8,709,511 | | |
$ | 8,855,694 | | |
$ | 25,591,865 | | |
$ | 25,353,015 | |
Aerosystems | |
| 7,391,645 | | |
| 4,303,930 | | |
| 23,563,365 | | |
| 7,814,912 | |
Kitting
and Supply Chain Management | |
| 7,797,592 | | |
| 12,417,094 | | |
| 27,863,454 | | |
| 29,007,945 | |
| |
$ | 23,898,748 | | |
$ | 25,576,718 | | |
$ | 77,018,684 | | |
$ | 62,175,872 | |
Transaction
Price Allocated to Remaining Performance Obligations
Our
backlog represents the estimated transaction prices on performance obligations to our customers for which work remains to be
performed. Backlog is converted into revenue in future periods as work is performed. As of September 30, 2021, the aggregate
amount of transaction price allocated to the remaining performance obligations was approximately $138 million. This
represents the amount of revenue the Company expects to recognize in the future on contracts with unsatisfied or partially
satisfied performance obligations as of September 30, 2021. The Company estimates that it will recognize approximately 19% of
this amount in the fourth quarter of fiscal year 2021 and the remainder by 2025.
3. | CONTRACT
ASSETS AND CONTRACT LIABILITIES |
Contract
assets represent revenue recognized on contracts in excess of amounts invoiced to the customers and the Company’s right
to consideration is conditional on something other than the passage of time. Amounts may not exceed their net realizable value.
Under the typical payment terms of our government contracts, the customer retains a portion of the contract price until completion
of the contract, as a measure of protection for the customer. Our government contracts therefore typically result in revenue recognized
in excess of billings, which we present as contract assets. Contract assets are classified as current. The Company’s contract
liabilities represent customer payments received or due from the customer in excess of revenue recognized. Contract liabilities
are classified as current.
Revenue
recognized for the periods ended September 30, 2021 and 2020 that was included in the contract liabilities balance as of January
1, 2021 and 2020, respectively, was approximately $1.6 million and $1.7 million, respectively.
The components of inventory consisted
of the following:
| |
| | | |
| | |
| |
September
30, 2021 | | |
December
31, 2020
(As Restated) | |
Raw materials | |
$ | 2,030,782 | | |
$ | 2,218,981 | |
Work in progress | |
| 1,766,429 | | |
| 2,645,548 | |
Finished
goods (includes completed components) | |
| 3,831,938 | | |
| 4,251,982 | |
Gross
inventory | |
| 7,629,149 | | |
| 9,116,511 | |
Inventory
reserves | |
| (2,649,221 | ) | |
| (2,730,223 | ) |
Inventory,
net | |
$ | 4,979,928 | | |
$ | 6,386,288 | |
5. | STOCK-BASED
COMPENSATION |
The
Company accounts for stock-based compensation based on the fair value of the stock or stock-based instrument on the date of grant.
The Company recognized a total of $154,649
and $141,101
of stock-based compensation expense for the three months ended September 30, 2021 and 2020, respectively, and a total of $723,474
and $677,489
of stock- based compensation expense for the nine months ended September 30, 2021 and 2020, respectively.
During
the three and nine months ended September 30, 2021, the Company granted 0 and 135,512 restricted stock units (“RSUs”),
respectively, to its board of directors as partial compensation for the 2021 year, and during the three and nine months ended
September 30, 2020, the Company granted 2,617 and 76,167 RSUs, respectively, to its board of directors as partial compensation
for the 2020 year. RSUs vest quarterly on a straight-line basis over a one-year period. For the three and nine months ended September
30, 2021, approximately $79,638 and $511,983, respectively, of non-cash compensation expense related to the RSU grants to the
board of directors are included in selling, general and administrative expenses, and for the three and nine months ended September
30, 2020, approximately $89,801 and $481,672, respectively, of non-cash compensation expense related to the RSU grants to the
board of directors are included selling, general and administrative expenses.
During
the three and nine months ended September 30, 2021, the Company granted 0 and 166,428 shares of common stock to 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.
For the three and nine months ended September 30, 2021, approximately $61,434 and $173,536, respectively, of compensation expense
are included in selling, general and administrative expenses and approximately $13,577 and $37,955, respectively, of compensation
expense are included in cost of sales for the three and nine months ended September 30, 2021, respectively, for shares of common
stock granted to employees between 2016 and 2020. For the three and nine months ended September 30, 2020, approximately $22,040
and $137,946, respectively, of compensation expense are included in selling, general and administrative expenses and approximately
$29,261 and $57,872, respectively, of compensation expense are included in cost of sales for shares of common stock granted to
employees between 2015 and 2019. During the three and nine months ended September 30, 2021, 41,199 shares were forfeited.
Fair
Value
At
September 30, 2021 and December 31, 2020, the fair values of cash, accounts receivable, accounts payable and accrued expenses
approximated their carrying values because of the short-term nature of these instruments.
| |
September
30, 2021 | |
| |
Carrying
Amount | | |
Fair
Value | |
Debt | |
| | |
| |
Short-term
borrowings and long-term debt | |
$ | 27,060,128 | | |
$ | 27,060,128 | |
| |
December
31, 2020 | |
| |
Carrying
Amount | | |
Fair
Value | |
Debt | |
| | | |
| | |
Short-term borrowings
and long-term debt | |
$ | 33,445,446 | | |
$ | 33,445,446 | |
We
estimated the fair value of debt using market quotes and calculations based on market rates.
7. | INCOME
(LOSS) PER COMMON SHARE |
Basic
and diluted income (loss) per common share for the three and nine months ended September 30, 2021 and September 30, 2020 is computed
using the weighted average number of common shares outstanding adjusted for the incremental shares attributed to outstanding options
to purchase common stock, as well as unvested RSUs. Incremental shares of 33,876 were used in the calculation of diluted income
per common share in the three and nine months ended September 30, 2021. Incremental shares of 23,247 were not used in the calculation
of diluted income per common share in the three and nine months ended September 30, 2020, respectively, as the Company is in a
loss position for those periods and these shares would be considered anti-dilutive.
Credit
Facility
On
March 24, 2016, the Company entered into the Credit Agreement. The BankUnited Facility originally provided for a revolving credit
loan commitment of $30 million (the “Revolving Loan”) and a $10 million term loan (“Term Loan”). The Revolving
Loan bears interest at a rate based upon a pricing grid, as defined in the Credit Agreement.
On
August 24, 2020, the Company entered into a Sixth Amendment and Waiver to the Credit Agreement (the “Sixth Amendment”).
Under the Sixth Amendment, the parties amended the Credit Agreement by extending the maturity date of the Revolving Loan and Term
Loan to May 2, 2022 and making conforming changes to the repayment schedule of the Term Loan. The availability under the Revolving
Loan was reduced by $6 million, to $24 million, and the outstanding principal amount on the Term Note was increased to approximately
$7,933,000.
On
May 11, 2021, the Company entered into a Waiver and Seventh Amendment (“Seventh Amendment”) to the Credit Agreement.
Under the Seventh Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan
and the Term Loan to July 31, 2022, and (b) amending the leverage ratio covenant for the fiscal quarters ending on and after March
31, 2021, to 4.0 to 1.0, determined at the end of each fiscal quarter for the trailing four-quarter period then ended (or, in
the case of the fiscal quarter ended March 31, 2021, determined on an annualized basis for the three-quarter period then ended).
Additionally, under the Seventh Amendment, BankUnited waived late delivery of certain financial information.
On
October 28, 2021, the Company entered into a Waiver and Eighth Amendment (the “Eighth Amendment”) to the Credit Agreement.
Under the Eighth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan
and the Term Loan to December 31, 2022, (b) reducing the availability under the Revolving Loan from $24 million to $21 million
while eliminating the requirement to maintain a minimum $3.0 million in a combination of Revolving Loan availability and unrestricted
cash, (c) providing for the repayment of an additional $750,000 of the principal balance of the Term Loan in three installments
of $250,000 on November 30, 2021, December 31, 2021 and March 31, 2022 in addition to $200,000 regular monthly principal payments
through December 31, 2022, (d) amending the minimum debt service coverage ratio covenant for the fiscal quarters ending on and
after June 30, 2021 to provide for a ratio of 1.5 to 1.0, and (e) amending the maximum leverage ratio covenant as follows: for
the fiscal quarter ending on March 31, 2021 - 5.0 to 1.0; for the fiscal quarter ending June 30, 2021 - 4.75 to 1.0; for the fiscal
quarter ended September 30, 2021 - 4.25 to 1.0 and for the fiscal quarter ended December 31, 2021 and thereafter - 4.0 to 1.0,
determined at the end of each fiscal quarter for the trailing four-quarter period then ended (or, in the case of the fiscal quarter
ended March 31, 2021, determined on an annualized basis for the three-quarter period then ended). Additionally, under the Eighth
Amendment, BankUnited waived certain covenant non-compliance and waived temporarily, late delivery of certain financial information.
In connection with the Eighth Amendment, a $250,000 amendment fee (the “Amendment Fee”) was earned by the lenders
on December 31, 2021 which the Company elected to pay in kind and accrue and capitalize rather than pay in cash.
On
April 12, 2022 the Company entered into a Consent, Waiver and Ninth Amendment (the “Ninth Amendment”) to the Credit
Agreement. Under the Ninth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving
Loan and the Term Loan to September 30, 2023, (b) providing for the repayment of an additional $750,000 of the principal
balance of the Term Loan in three installments of $250,000 on September 30, 2022, December 31, 2022 and March 31,
2023 in addition to $200,000 regular monthly principal payments through December 31, 2022 and (c) increasing the interest
on the Revolving Loan, Term Loan, and the Amendment Fee as follows: through June 30, 2022, Prime Rate (as defined in the Credit
Agreement) plus 2.5%; from July 1, 2022 through August 31, 2022, Prime Rate plus 5%; from September 1, 2022 through
October 31, 2022, Prime Rate plus 6%; from November 1, 2022 through December 31, 2022, Prime Rate plus 7%;
and from January 1, 2023 through September 30, 2023, Prime Rate plus 8%. Additionally, under the Ninth Amendment, the Credit
Agreement financial covenants were amended as set forth in the following paragraph. BankUnited also waived or consented to certain
covenant non-compliance, waived temporarily or consented to, late delivery of certain financial information and waived permanently
late delivery of certain pro-forma budget information.
The
Credit Agreement, as amended, requires us to maintain the following financial covenants: (a) minimum debt service coverage ratio
of no less than 1.5 to 1.0 for the trailing four quarter period ended June 30, 2021 and December 31, 2021, 0.90 to
1.0 for the trailing four quarter period ended March 31, 2022, 0.95 to 1.0 for the trailing four quarter period ended
June 30, 2022, and 1.5 to 1.0 for the trailing four quarter period ended September 30, 2022 and for the trailing four
quarter periods ended thereafter; (b) maximum leverage ratio of no less than 4.75 to 1.0 for the trailing four quarter
period ended June 30, 2021, 5.35 to 1.0 for the trailing four quarter period ended September 30, 2021, 4.65 to
1.0 for the trailing four quarter period ended December 31, 2021, 7.30 to 1.0 for the trailing four quarter period ended
March 31, 2022, 6.30 to 1.0 for the trailing four quarter period ended June 30, 2022, and 4.0 to 1.0 for the
trailing four quarter period ended September 30, 2022 and for the trailing four quarter periods thereafter; (c) minimum net income
after taxes as of the end of each fiscal quarter being no less than $1.00 commencing June 30, 2022; and (d) a minimum adjusted
EBITDA at the end of each quarter of no less than $1.0 million (waived for the quarter ended March 31, 2022). The additional
principal payments, increase in interest and the Amendment Fee provided for in the Eight Amendment and Ninth Amendment are excluded
for purposes of calculating compliance with each of the financial covenants.
The
BankUnited Facility is secured by all of the Company’s assets and both the Revolving Loan and Term Loan bear interest at
the Prime Rate + 0.75% as of September 30, 2021.
As of September 30, 2021 the Company had $21,000,000 million outstanding under
the Revolving Loan.
The
Term Loan, as amended by the Ninth Amendment, had an aggregate principal amount of $5,583,333, payable in monthly installments,
as defined in the Credit Agreement, as of September 30, 2021.
PPP
Loan
On
April 10, 2020, we entered into the Paycheck Protection Program loan (“PPP Loan”), with BNB Bank (now part of Dime
Community Bank (“Dime”)) as the lender, in an aggregate principal amount of $4,795,000, pursuant to the Paycheck Protection
Program under the CARES Act. On November 2, 2020, the Company applied to the lender for full forgiveness of the PPP Loan as calculated
in accordance with the terms of the CARES Act, as modified by the Paycheck Protection Flexibility Act. On July 13, 2021, the Company
received notification through Dime that the PPP Loan and accrued interest thereon have been fully forgiven by the Small Business
Association and that the forgiveness payment date was July 1, 2021. The forgiveness of the PPP Loan has been recognized during
the Company’s third fiscal quarter ending September 30, 2021. The PPP Loan was evidenced by a promissory note (the “Note”)
and, subject to the terms of the Note, the PPP Loan had a fixed interest rate interest of one percent (1%) per annum, with the
first six months of interest deferred and had an initial term of two years. The SBA reserves the right to audit any PPP Loan,
for eligibility and other criteria, regardless of size. These audits may occur after forgiveness has been granted. In accordance
with the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), all borrowers are required to maintain their
PPP loan documentation for six years after the PPP Loan was forgiven and to provide that documentation to the SBA upon request.
All amounts are classified as current or long term in accordance with the Note terms.
Long
Term Debt Maturities
The
maturities of long-term debt (excluding unamortized debt issuance costs) are as follows:
Twelve months ending
September 30, | | |
| |
2022 | | |
$ | 3,367,825 | |
2023 | | |
| 2,591,928 | |
2024 | | |
| 66,311 | |
2025 | | |
| 31,330 | |
2026 | | |
| 2,734 | |
Total | | |
$ | 6,060,128 | |
Included
in the long-term debt are financing leases and other notes payable of $476,795 and $678,428 at September 30, 2021 and December
31, 2020, respectively, including a current portion of $217,825 and $255,833, respectively.
The
Company has cumulatively paid approximately $595,540 of total debt issuance costs in connection with the BankUnited Facility,
of which approximately $42,364 is included in other assets at September 30, 2021.
During
the nine months ended September 30, 2021, the Company’s four largest customers accounted for 34%, 21%, 11% and 10% of revenue.
During the nine months ended September 30, 2020, the Company’s three largest customers accounted for 39%, 12% and 10% of
revenue.
At
September 30, 2021, 44%, 18%, and 12% of contract assets were from the Company’s three largest customers. At December 31,
2020, 39%, 20%, 12%, and 9% of contract assets were from the Company’s four largest customers.
At
September 30, 2021, 45%,
13%, and 12% of our accounts receivable were from the Company’s three largest customers. At December 31, 2020, 29%, 24%, 15%,
and 13%
of accounts receivable were from the Company’s four largest customers.
The
Company leases a building and equipment. Under Accounting Standards Codification Topic 842, at contract inception we determine
whether the contract is or contains a lease and whether the lease should be classified as an operating or a financing lease. Operating
leases are included in ROU (right-of-use) assets and operating lease liabilities in our consolidated balance sheets.
The
Company leases manufacturing and office space under an agreement classified as an operating lease.
The
lease agreement, as amended, expires on April 30, 2026 and does not include any renewal options. The agreement provides for an
initial monthly base amount plus annual escalations through the term of the lease.
In
addition to the monthly base amounts in the lease agreement, the Company is required to pay real estate taxes and operating expenses
during the lease terms. The Company also leases office equipment in agreements classified as operating leases.
For
the three and nine months ended September 30, 2021, the Company’s operating lease expense was $466,869 and $1,400,607, respectively.
Future
minimum lease payments under non-cancellable operating leases as of September 30, 2021 were as follows:
| | |
| |
Twelve
months ending September 30, | | |
| |
2022 | | |
$ | 1,951,263 | |
2023 | | |
| 1,141,072 | |
2024 | | |
| 11,631 | |
Total
undiscounted operating lease payments | | |
| 3,103,966 | |
Less imputed interest
(between 4.0% - 6.0%) | | |
| (104,902 | ) |
Present value of operating
lease payments | | |
$ | 2,999,064 | |
The
following table sets forth the ROU assets and operating lease liabilities as of September 30, 2021:
| |
| |
Assets | |
| |
ROU
assets-net | |
$ | 2,790,731 | |
| |
| | |
Liabilities | |
| | |
| |
| | |
Current operating lease
liabilities | |
$ | 1,862,933 | |
Long-term
operating lease liabilities | |
| 1,136,131 | |
Total
ROU liabilities | |
$ | 2,999,064 | |
The Company’s weighted
average remaining lease term for its operating leases is 1.6 years.
Income
taxes are accounted for under the asset and liability method whereby deferred tax assets and liabilities are recognized for future
tax consequences attributable to the temporary differences between the consolidated financial statements carrying amounts of assets
and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes
the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be realized. The Company’s policy is to record estimated
interest and penalties related to uncertain tax positions in income tax expense.
The
provision for income tax for the three months ended September 30, 2021 and 2020 was $3,374 and $7,614 respectively.
The provision for income tax for the nine months ended September 30, 2021 and 2020 was $7,702 and $9,714 respectively.
The difference between the Company’s
statutory tax rate and its effective rate is due to the valuation allowance taken on the Company’s net operating loss carryforwards.
| 12. | COMMITMENTS
AND CONTINGENCIES |
Class
Action Lawsuit
As
previously disclosed, a consolidated class action lawsuit (captioned Rodriguez v. CPI Aerostructures, Inc., et al., No.
20-cv-01026) has been filed against the Company, Douglas McCrosson, the Company’s former Chief Executive Officer, Vincent
Palazzolo, the Company’s former Chief Financial Officer, and the two underwriters of the Company’s October 16, 2018
offering of common stock, Canaccord Genuity LLC and B. Riley FBR. The Amended Complaint in the action asserts claims on behalf
of two plaintiff classes: (i) purchasers of the Company’s common stock issued pursuant to and/or traceable to the Company’s
offering conducted on or about October 16, 2018; and (ii) purchasers of the Company’s common stock between March 22, 2018
through February 14, 2020. The Amended Complaint alleges that the defendants violated Sections 11, 12(a)(2), and 15 of the Securities
Act by negligently permitting false and misleading statements to be included in the registration statement and prospectus supplements
issued in connection with its October 16, 2018 securities offering. The Amended Complaint also alleges that the defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated
by the SEC, by making false and misleading statements in the Company’s periodic reports filed between March 22, 2018 through
February 14, 2020. Plaintiff seeks unspecified compensatory damages, including interest; rescission or a rescissory measure of
damages; unspecified equitable or injunctive relief; and costs and expenses, including attorney’s fees and expert fees.
On February 19, 2021, the Company moved to dismiss the Amended Complaint. Plaintiff submitted a brief in opposition to the motion
to dismiss on April 23, 2021.
The provision for income tax for the nine
months ended September 30, 2021 and 2020 was 7,702 and 9,714, respectively.
On
May 20, 2021, the parties reached a settlement in the amount of $3,600,000, subject to court approval. On July 9, 2021, Plaintiff
filed an unopposed motion for preliminary approval of the settlement. On November 10, 2021, a magistrate judge recommended that
the Court grant the motion for preliminary approval in its entirety. The motion remains pending. After satisfaction of our $750,000
retention, the Settlement Amount will be covered and paid by our directors’ and officers’ insurance carrier. As of
September 30, 2021, we have previously paid or accrued to our financial statements covered expenses totaling $750,000, and have
therefore met our directors’ and officers’ retention requirement, which caps the Company’s expenses pertaining
to the class action suit.
As
of September 30, 2021, in order to reflect the amounts owed from our directors’ and officers’ insurance carrier and
to the Plaintiffs, we have recorded to our balance sheet a litigation settlement obligation of $3,206,133 and an insurance recovery
receivable of $2,850,000; this obligation and receivable will be relieved from our balance sheet upon the payment of the Settlement
Amount to the Plaintiff by our directors’ and officers’ insurance carrier.
Shareholder
Derivative Action
Four
shareholder derivative actions have been filed against current members of our board of directors and certain of our current and
former officers.
The
first action (captioned Moulton v. McCrosson, et.al., No. 20-cv-02092) was filed in the United States District Court for
the Eastern District of New York, and purports to assert derivative claims against the individual defendants for violations of
Section 10(b) and 21(d) of the Exchange Act and breach of fiduciary duty, unjust enrichment, and contribution, and seeks to recover
on behalf of the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct.
The complaint also seeks declaratory, equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs.
On October 26, 2020, the plaintiff filed an amended complaint. On January 27, 2021, the Court stayed the action pursuant to a
joint stipulation filed by the parties.
The
second action (captioned Woodyard v. McCrosson, et al., Index No. 613169/2020) was filed on September 17, 2020, in the
Supreme Court of the State of New York (Suffolk County), and purports to assert derivative claims against the individual defendants
for breach of fiduciary duty and unjust enrichment, and seeks to recover on behalf of the Company for any liability the Company
might incur as a result of the individual defendants’ alleged misconduct, along with declaratory, equitable, injunctive
and monetary relief, as well as attorneys’ fees and other costs. On December 22, 2020, the parties filed a joint stipulation
staying the action pending further developments in the class action.
The
third action (captioned Berger v. McCrosson, et al., No. 1:20-cv-05454) was filed on November 10, 2020, in the United States
District Court for the Eastern District of New York, and purports to assert derivative claims against current and former members
of our board of directors, and certain of our current and former officers. The complaint, which is based on the shareholder’s
inspection of certain corporate books and records, purports to assert derivative claims against the individual defendants for
breach of fiduciary duty and unjust enrichment, and seeks to implement reforms to the Company’s corporate governance and
internal procedures and to recover on behalf of the Company an unspecified amount of monetary damages. The complaint also seeks
equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs.
On
March 19, 2021, the parties to the Moulton and Berger actions filed a joint stipulation consolidating the actions (under
the caption In re CPI Aerostructures Stockholder Derivative Litigation, No. 20-cv-02092) and staying the consolidated action
pending further developments in the class action.
The
fourth action (captioned Wurst v. Bazaar, et al., Index No. 605244/2021) was filed on March 24, 2021, in the Supreme Court
of the State of New York (Suffolk County), and purports to assert derivative claims against the Company’s current and former
executive officers, certain board members, and the Company as a nominal defendant. The complaint purports to assert derivative
claims against the individual defendants for breach of fiduciary duty, unjust enrichment, and waste of corporate assets, and seeks
to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’
alleged misconduct. The complaint also seeks declaratory, equitable, injunctive, and monetary relief, as well as attorneys’
fees and other costs. On April 12, 2021, the parties filed a joint stipulation staying the action pending further developments
in the class action.
Each
of these derivative actions is based substantially on the same facts alleged in the class action complaint summarized above.
SEC
Investigation
On
May 22, 2020, the Company received a subpoena from the SEC Division of Enforcement (the “Division”) seeking documents
and information relating, among other things, to previously disclosed errors in and restatement of the Company’s financial
statements, the Company’s October 16, 2018 equity offering and the recent separation of the Company’s former Chief
Financial Officers. By letter dated March 12, 2021, the Division Staff notified the Company that the Division has concluded its
investigation and, based on the information the Division has as of such date, it does not intend to recommend an enforcement action
by the SEC against the Company. The Division’s notice was provided under the guidelines described in the final paragraph
of Securities Act Release No. 5310 which states in part that the notice “must in no way be construed as indicating that
the party has been exonerated or that no action may ultimately result from the staff’s investigation.”
Restatement
due to Inventory Costing Errors and Insufficient Reserves
As
previously reported, on June 4, 2021, the audit and finance committee (the “Audit and Finance Committee”) of the board
of directors of the Company determined, based on the recommendation of management and in consultation with CohnReznick LLP (“CohnReznick”),
then the Company’s independent registered public accounting firm, that the Company’s financial statements which were
included in its Annual Report on Form 10-K for the year ended December 31, 2020 and Quarterly Reports on Form 10-Q for the quarters
ended March 31, 2020, June 30, 2020, and September 30, 2020 as filed with the SEC should no longer be relied upon due to errors
in such financial statements relating to the recording and reporting of inventory costing and related internal controls (the “Inventory
Costing Errors”) and that management’s reports on the effectiveness of internal control over financial reporting,
press releases, and investor communications describing the Company’s financial statements for such periods should no longer
be relied upon. The Company’s management identified the Inventory Costing Errors during its inventory testing procedures
for the preparation of the Company’s financial statements for the quarterly period ended March 31, 2021. At the time of
the June 2021 disclosure, the Company estimated and disclosed that the Inventory Costing Errors were expected to increase 2020
net loss reported on the Annual Report on Form 10-K for the year ended December 31, 2020 by $1.9 million to $2.3 million. The
Company has determined that the Inventory Costing Errors increased 2020 net loss by $2,010,084.
The
correction of the Inventory Costing Errors resulted in the determination that certain contracts were in a loss position and certain
inventory items required additional reserves. The Company reevaluated the sufficiency of its provisions for loss contracts and
inventory reserves that it had previously recorded and concluded that increases to these reserves were required. The insufficient
reserves resulting from such reserve increases are referred to as “Additional Inventory Reserves” and “Loss
Contract Reserve” and are together referred to as the “Insufficient Reserves.” It was further determined by
management that the appropriate starting point for increasing the Insufficient Reserves was during the fourth quarter of 2019.
On
November 16, 2021, the Audit and Finance Committee determined, based on the analysis and recommendation of management and in consultation
with CohnReznick, that the Company’s financial statements as of and for the period ended December 31, 2019 which were included
in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 should no longer be relied upon
due to errors in such financial statements relating to the recording and reporting of the Insufficient Reserves, that, similarly,
management’s reports on the effectiveness of internal control over financial reporting, press releases, and investor communications
describing the Company’s financial statements for such period should no longer be relied upon, and stated that the Company
expected to restate its Annual Report on Form 10-K for the years ended December 31, 2020 and December 31, 2019, and its Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2020, June 30, 2020, and September 30, 2020 as filed with the SEC (the “Original
Forms 10-Q”) by filing a Comprehensive Form 10-K/A.
The
Company, upon conducting an analysis of the impact of the Insufficient Reserves on previously reported financial results, determined
that net loss for the years ended December 31, 2020 and 2019 was $324,231 and $2,189,728, respectively, greater than the net loss
reported in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2019.
Considering
both the Inventory Costing Errors and the Insufficient Reserves, the Company determined that the net loss for the years ended
December 31, 2020 and 2019 was $2,334,315 and $2,300,083, respectively, greater than the net loss reported in the Annual
Report on Form 10-K for the fiscal year ended December 31, 2020 and the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2019 and net loss for the quarters ended March 31, 2020, June 30, 2020 is $544,836 and $763,730, respectively,
greater than the net loss reported in the respective Quarterly Reports on Form 10-Q for such periods and the net income for the
quarter ended September 30, 2020 was $24,556 more than the net income reported in the Quarterly Report for such period.
The
Inventory Costing Errors resulted from software processing and coding errors, inconsistent units of measure being used for quantities
ordered and quantities received of certain purchased parts, incorrect accruals to accounting periods of the cost of certain goods
received and the Company not having a procedure to address over- or under-absorbed overhead costs at the end of accounting periods.
The Inventory Costing Errors affected the income reported with respect to the Company’s product lines for which revenue
is recognized when a product ships to customers, which accounted for approximately 15% of total 2020 revenue (the “Non-POC
Contracts”). The Inventory Costing Errors did not affect income reported with respect to the Company’s products for
which revenue is recognized over time using percentage of completion accounting (the “POC Contracts”). The Loss Contract
Reserve and the Additional Inventory Reserves also only affected the income reported with respect to the Company’s Non-POC
Contracts, and did not affect the income reported with respect to the Company’s POC Contracts. The Inventory Costing Errors
and the Insufficient Reserves did not affect either prior reported revenue or cash flow for fiscal 2020 and 2019.
Management
has considered the effect of the Inventory Costing Errors and the Insufficient Reserves on the Company’s prior conclusions
of the adequacy of its internal control over financial reporting and disclosure controls and procedures as of the end of each
of the applicable periods. As a result of the Inventory Costing Errors and the Insufficient Reserves, management determined that
a material weakness existed in the Company’s internal control over financial reporting as of the end of the quarterly periods
ended March 31, 2020, June 30, 2020, September 30, 2020 and for the years ended December 31, 2020 and 2019. See Part II Item 9A
– Controls and Procedures included in the Comprehensive Form 10-K/A for a description of these matters.
As
a result of the restatement caused by the Inventory Costing Errors and Insufficient Reserves, the Company reported net loss for
the years ended December 31, 2020 and December 31, 2019 which was $2,334,315 and $2,300,083, respectively, greater than the net
loss reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “Original Form
10-K”) and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, net loss for the
quarters ended March 31, 2020 and June 30, 2020 which was $544,836 and $763,730, respectively, greater than the net loss reported
in the respective Original Forms 10-Q, and net income for the quarter ended September 30, 2020 which was $24,556 greater than
the net income reported in the Original Form 10-Q. The Inventory Costing Errors and the Insufficient Reserves did not affect reported
revenue or cash flows for the years ended December 31, 2020 or December 31, 2019, or for the quarters ended March 31, June 30
and September 30, 2020.
The
Comprehensive Form 10-K/A contains our audited restated annual financial statements as of and for the years ended December 31,
2020 and 2019, as well as our unaudited restated quarterly financial statements as of and for the quarters ended March 31, 2020,
June 30, 2020 and September 30, 2020. The restatement is discussed in more detail within Part II, Item 8 Note 17, “Restatement
of Previously Issued Consolidated Financial Statements” in the notes to the consolidated financial statements included in
our Comprehensive Form 10-K/A.
Amendments
to BankUnited Facility
On
May 11, 2021, we entered into the Seventh Amendment. Under the Seventh Amendment, the parties amended the Credit Agreement by
(a) extending the maturity date of the Revolving Loan and the Term Loan to July 31, 2022, and (b) amending the leverage ratio
covenant for the fiscal quarters ending on and after March 31, 2021, to 4.0 to 1.0, determined at the end of each fiscal quarter
for the trailing four-quarter period then ended (or, in the case of the fiscal quarter ended March 31, 2021, determined on an
annualized basis for the three-quarter period then ended). Additionally, under the Seventh Amendment, BankUnited waived late delivery
of certain financial information.
On
October 28, 2021, we entered into the Eighth Amendment. Under the Eighth Amendment, the parties amended the Credit Agreement by
(a) extending the maturity date of the Revolving Loan and the Term Loan to December 31, 2022, (b) reducing the availability under
the Revolving Loan from $24 million to $21 million while eliminating the requirement to maintain a minimum $3.0 million in a combination
of Revolving Loan availability and unrestricted cash, (c) providing for the repayment of an additional $750,000 of the principal
balance of the Term Loan in three installments of $250,000 on November 30, 2021, December 31, 2021 and March 31, 2022 in addition
to $200,000 regular monthly principal payments through December 31, 2022, (d) amending the minimum debt service coverage ratio
covenant for the fiscal quarters ending on and after June 30, 2021 to provide for a ratio of 1.5 to 1.0, and (e) amending the
maximum leverage ratio covenant as follows: for the fiscal quarter ending on March 31, 2021 - 5.0 to 1.0; for the fiscal quarter
ending June 30, 2021 - 4.75 to 1.0; for the fiscal quarter ending September 30, 2021 - 4.25 to 1.0 and for the fiscal quarter
ended December 31, 2021 and thereafter - 4.0 to 1.0, determined at the end of each fiscal quarter for the trailing four-quarter
period then ended (or, in the case of the fiscal quarter ended March 31, 2021, determined on an annualized basis for the three-quarter
period then ended). Additionally, under the Eighth Amendment, BankUnited waived certain covenant non-compliance and waived temporarily,
late delivery of certain financial information. In connection with the Eighth Amendment, a $250,000 amendment fee (the “Amendment
Fee”) was earned by the lenders on December 31, 2021 which the Company elected to pay in kind and accrue and capitalize
rather than pay in cash.
On
April 12, 2022 the Company entered into a Consent, Waiver and Ninth Amendment (the “Ninth Amendment”) to the Credit
Agreement. Under the Ninth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving
Loan and the Term Loan to September 30, 2023, (b) providing for the repayment of an additional $750,000 of the principal
balance of the Term Loan in three installments of $250,000 on September 30, 2022, December 31, 2022 and March 31,
2023 in addition to $200,000 regular monthly principal payments through December 31, 2022 and (c) increasing the interest
on the Revolving Loan, Term Loan, and the Amendment Fee as follows: through June 30, 2022, Prime Rate (as defined in the Credit
Agreement) plus 2.5%; from July 1, 2022 through August 31, 2022, Prime Rate plus 5%; from September 1, 2022 through
October 31, 2022, Prime Rate plus 6%; from November 1, 2022 through December 31, 2022, Prime Rate plus 7%;
and from January 1, 2023 through September 30, 2023, Prime Rate plus 8%. Additionally, under the Ninth Amendment, the Credit
Agreement financial covenants were amended as set forth in the following paragraph. BankUnited also waived or consented to certain
covenant non-compliance, waived temporarily or consented to, late delivery of certain financial information and waived permanently
late delivery of certain pro-forma budget information.
The
Credit Agreement, as amended, requires us to maintain the following financial covenants: (a) minimum debt service coverage ratio
of no less than 1.5 to 1.0 for the trailing four quarter period ended June 30, 2021 and December 31, 2021, 0.90 to
1.0 for the trailing four quarter period ended March 31, 2022, 0.95 to 1.0 for the trailing four quarter period ended
June 30, 2022, and 1.5 to 1.0 for the trailing four quarter period ended September 30, 2022 and for the trailing four
quarter periods ended thereafter; (b) maximum leverage ratio of no less than 4.75 to 1.0 for the trailing four quarter
period ended June 30, 2021, 5.35 to 1.0 for the trailing four quarter period ended September 30, 2021, 4.65 to
1.0 for the trailing four quarter period ended December 31, 2021, 7.30 to 1.0 for the trailing four quarter period ended
March 31, 2022, 6.30 to 1.0 for the trailing four quarter period ended June 30, 2022, and 4.0 to 1.0 for the
trailing four quarter period ended September 30, 2022 and for the trailing four quarter periods thereafter; (c) minimum net income
after taxes as of the end of each fiscal quarter being no less than $1.00 commencing June 30, 2022; and (d) a minimum adjusted
EBITDA at the end of each quarter of no less than $1.0 million (waived for the quarter ended March 31, 2022). The additional
principal payments, increase in interest and the Amendment Fee provided for in the Eight Amendment and Ninth Amendment are excluded
for purposes of calculating compliance with each of the financial covenants.
NYSE American Delinquency Notices; NYSE American
Exchange Delisting Proceedings
On May 25, 2021, we received a notice from NYSE American LLC (the “Exchange”)
stating that our failure to timely file our Quarterly Report on Form 10-Q for the three months ended March 31, 2021 caused us to be out
of compliance with the Exchange’s continued listing standards under the timely filing criteria included in Section 1007 of the NYSE
American Company Guide (the “Company Guide”). Also, our failure to timely file our (i) Quarterly Report on Form 10-Q for the
three months ended June 30, 2021 and Quarterly Report on Form 10-Q for the three months ended September 30, 2021 constituted and (ii)
Annual Report on Form 10-K for the year ended December 31, 2021 remains, additional noncompliance with the Exchange’s continued
listing standards under the timely filing criteria included in Section 1007 of the Company Guide.
In
accordance with Section 1007 of the Company Guide, the Company was provided a six-month initial period to regain compliance with the timely
filing criteria. On November 17, 2021, the Company submitted a request for additional time in which to file the delayed filings, which
included a plan to regain compliance with Section 1007 of the Company Guide. On November 23, 2021, the Company was notified that the Exchange
had accepted the Company’s plan to regain compliance with the continued listing standards and was granted a period through April
14, 2022 in which to file the delayed filings and any subsequently delayed filings. On March 25, 2022, the Company requested and on April
8, 2022 the Exchange granted an additional extension up to the maximum cure period ending on May 24, 2022. The Company does not believe
it will complete the filings of its Annual Report on Form 10-K for the year ended December 31, 2021 or its Quarterly Report on Form 10-Q
for the three months ended March 31, 2022 by the end of the cure period. The notices the Company has received from the Exchange indicate
that if the Company does not complete these filings by May 24, 2022, the Exchange staff will initiate delisting proceedings as appropriate.
On September 17, 2021, we received notice from the Exchange indicating
that the Company does not meet the continued listing standards set forth in Part 10 of the Company Guide. The Company is not in compliance
with Section 1003(a)(i) of the Company Guide since it has stockholders’ equity of less than $2.0 million and losses from continuing
operations and/or net losses in two of its three most recent fiscal years and Section 1003(a)(ii) of the Company Guide since it has stockholders’
equity of less than $4.0 million and losses from continuing operations and/or net losses in three of its four most recent fiscal years.
The Company is therefore subject to the procedures and requirements of Section 1009 of the Company Guide and was required to, and timely
did, submit a plan to the Exchange addressing how the Company intends to regain compliance with the continued listing standards by March
17, 2023 (the “Plan”). On November 19, 2021, we received notice from the Exchange that it accepted the Plan, subject to periodic
review, including quarterly monitoring, for compliance with the Plan. If the Company’s common stock is not delisted from the Exchange
as a result of the Company’s delayed filings as described above and (i) the Company is not in compliance with the continued listing
standards by March 17, 2023 or (ii) the Company does not make progress consistent with the Plan during the plan period, the Exchange staff
may initiate delisting proceedings as appropriate.
See Part II, Item 1A Risk Factors “If
our common stock is delisted from the NYSE American exchange, our business, financial condition, results of operations and stock price
could be adversely affected, and the liquidity of our stock and our ability to obtain financing could be impaired.”
Extension
of Lease Agreement on Corporate Headquarters, Manufacturing and Office Space
On
November 10, 2021, the Company executed a second amendment to the lease agreement for its manufacturing and office space, which
extends the lease agreement’s expiration date to April 30, 2026.
Cost
reduction initiative
During
the first quarter of 2022, the Company began a cost reduction initiative designed to improve operational efficiency and reduce
costs during fiscal year 2022. Management is reallocating resources and reducing operating and general administrative expenses
to more properly align the Company’s costs to anticipated near-term revenue given the timing differences between the conclusion
of certain mature programs and the commencement of new programs in 2022. The Company executed a headcount reduction and furlough
action in March 2022 and is implementing cost controls and cuts during the balance of fiscal year 2022. The Company anticipates
recording severance costs related to the headcount reduction in its first fiscal quarter of 2022 and the cost reductions of these
actions are anticipated to positively impact the financial results of the Company beginning in the second fiscal quarter of 2022.
14. | RESTATEMENT
OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS |
As
previously reported, on June 4, 2021, the Audit and Finance Committee determined, based on the recommendation of management and
in consultation with CohnReznick that the Company’s financial statements which were included in its Annual Report on Form
10-K for the year ended December 31, 2020 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020, June 30, 2020,
and September 30, 2020 as filed with the SEC should no longer be relied upon due to the Inventory Costing Errors and that management’s
reports on the effectiveness of internal control over financial reporting, press releases, and investor communications describing
the Company’s financial statements for such periods should no longer be relied upon. The Company’s management identified
the Inventory Costing Errors during its inventory testing procedures for the preparation of the Company’s financial statements
for the quarterly period ended March 31, 2021. At the time of the June 2021 disclosure, the Company estimated and disclosed that
the Inventory Costing Errors were expected to increase 2020 net loss reported on the Annual Report on Form 10-K for the year ended
December 31, 2020 by $1.9 million to $2.3 million. The Company has determined that the Inventory Costing Errors increased 2020
net loss by $2,010,084.
The
correction of the Inventory Costing Errors resulted in the determination that certain contracts were in a loss position and certain
inventory items required additional reserves. The Company re-evaluated the sufficiency of its provisions for loss contracts and
inventory reserves that it had previously recorded and concluded that increases to these reserves were required. It was further
determined by management that the appropriate starting point for increasing the Insufficient Reserves was during the fourth quarter
of 2019.
On
November 16, 2021, the Audit and Finance Committee determined, based on the analysis and recommendation of management and in consultation
with CohnReznick, that the Company’s financial statements as of and for the period ended December 31, 2019 which were included
in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 should no longer be relied upon
due to errors in such financial statements relating to the recording and reporting of the Insufficient Reserves, that, similarly,
management’s reports on the effectiveness of internal control over financial reporting, press releases, and investor communications
describing the Company’s financial statements for such period should no longer be relied upon, and stated that the Company
expected to restate its Annual Report on Form 10-K for the years ended December 31, 2020 and December 31, 2019, and its Original
Forms 10-Q by filing a Comprehensive Form 10-K/A.
The
Company, upon conducting an analysis of the impact of the Insufficient Reserves on previously reported financial results, determined
that net loss for the years ended December 31, 2020 and 2019 was $ and $2,189,728, respectively, greater than the net loss
reported in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2019.
Considering
both the Inventory Costing Errors and the Insufficient Reserves, the Company determined that the net loss for the years ended
December 31, 2020 and 2019 was $2,334,315 and $2,300,083, respectively, greater than the net loss reported in the Annual
Report on Form 10-K for the fiscal year ended December 31, 2020 and the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2019 and net loss for the quarters ended March 31, 2020 and June 30, 2020 is $544,836 and $763,730, respectively,
greater than the net loss reported in the respective Quarterly Reports on Form 10-Q for such periods and the net income for the
quarter ended September 30, 2020 was $24,556 more than the net income reported in the Quarterly Report for such period.
The
Inventory Costing Errors resulted from software processing and coding errors, inconsistent units of measure being used for quantities
ordered and quantities received of certain purchased parts, incorrect accruals to accounting periods of the cost of certain goods
received and the Company not having a procedure to address over- or under-absorbed overhead costs at the end of accounting periods.
The Inventory Costing Errors affected the income reported with respect to the Company’s Non-POC Contracts. The Inventory
Costing Errors did not affect income reported with respect to the Company’s POC Contracts. The Loss Contract Reserve and
the Additional Inventory Reserves also only affected the income reported with respect to the Company’s Non-POC Contracts,
and did not affect the income reported with respect to the Company’s POC Contracts. The Inventory Costing Errors and the
Insufficient Reserves did not affect either prior reported revenue or cash flow for fiscal 2020 and 2019.
Management
has considered the effect of the Inventory Costing Errors and the Insufficient Reserves on the Company’s prior conclusions
of the adequacy of its internal control over financial reporting and disclosure controls and procedures as of the end of each
of the applicable periods. As a result of the Inventory Costing Errors and the Insufficient Reserves, management has determined
that a material weakness existed in the Company’s internal control over financial reporting as of the end of the quarterly
periods ended March 31, 2020, June 30, 2020, September 30, 2020 and for the years ended December 31, 2020 and 2019. See Part II
Item 9A – Controls and Procedures within the Comprehensive Form 10-K/A for a description of these matters.
As
a result of the restatement included caused by the Inventory Costing Errors and Insufficient Reserves, the Company reported net
loss for the years ended December 31, 2020 and December 31, 2019 which was $2,334,315 and $2,300,083, respectively, greater than
the net loss reported in the Original Form 10-K and the Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 2019, net loss for the quarters ended March 31, 2020 and June 30, 2020 which was $544,836 and $763,730, respectively, greater
than the net loss reported in the respective Original Forms 10-Q, and net income for the quarter ended September 30, 2020 which
is $24,556 greater than the net income reported in the Original Form 10-Q. The Inventory Costing Errors and the Insufficient Reserves
did not affect reported revenue or cash flows for the years ended December 31, 2020 or December 31, 2019, or for the quarters
ended March 31, June 30 and September 30, 2020.
2020
and 2019 Restatement
The
following is a discussion of the restatement adjustments that were made to the Company’s previously issued December 31,
2020 and December 31, 2019 consolidated financial statements due to the Inventory Costing Errors, Loss Contract Reserve and Additional
Inventory Reserves.
(a) Inventory Costing Errors
The
Company determined that the Inventory Costing Errors resulted in incorrectly reported inventory values and reported income for
the annual periods ended December 31, 2020 and December 31, 2019, and the quarterly periods ended March 31, 2020, June 30, 2020
and September 30, 2020. The Inventory Costing Errors were comprised of the following:
1)
Labor costs for work in process were overstated in the detailed inventory records due to an automated reversing entry not processing
correctly;
2)
A customized IT program to calculate weighted average cost was not tested thoroughly enough, which allowed errors in average cost
calculations to occur in certain situations;
3)
Units of measure were not consistent between quantities ordered and quantities received for certain classes of purchased parts,
which resulted in overstatements of inventory values due to units of measure not being consistent with unit prices on purchase
orders to suppliers;
4)
The cost of goods received which had not yet processed through the Company’s quality inspection process at the time of the
period-end accounting closes were not properly accrued to the period financial statements;
5)
The Company did not have a process to address over-absorbed or under-absorbed overhead costs at the end of each accounting period.
(b)
Loss Contract Reserve
After
correcting its financial statements for the Inventory Costing Errors, the Company determined that is was a party to some contracts
to deliver product upon which the Company would lose money, and thus the Company’s Loss Contract Reserve was increased accordingly
for the year ended December 31, 2020 and December 31, 2019, and for the quarterly periods ended March 31, 2020, June 30, 2020
and September 30, 2020.
(c) Additional
Inventory Reserves
After
correcting its financial statements for the Inventory Costing Errors, the Company determined that its inventory required additional
reserves to reflect current market value and demand, and thus the Company’s Inventory Reserves were increased accordingly
for the year ended December 31, 2020 and December 31, 2019, and for the quarterly periods ended March 31, 2020, June 30, 2020
and September 30, 2020.
(d)
Income taxes
There
were no material tax adjustments to the Company’s provision for/(benefit from) income taxes or net deferred tax assets (liabilities)
related to the impact of the 2020 and 2019 restatement.
The following tables present the impact of the restatement
on the Company’s previously reported financial statements as of December 31, 2020 and September 30, 2020:
Impact on Consolidated
Balance Sheets
The effect of the Restatement described above on the accompanying
consolidated balance sheet as of December 31, 2020 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
Consolidated Balance Sheet as at December 31, 2020 | |
| |
As Previously Reported | | |
Inventory Costing Errors | | |
Loss Contract Reserve | | |
Additional Inventory Reserve | | |
As Restated | |
ASSETS | |
| | |
| | |
| | |
| | |
| |
Current Assets: | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash | |
$ | 6,033,537 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 6,033,537 | |
Accounts receivable, net | |
| 4,962,906 | | |
| | | |
| | | |
| | | |
| 4,962,906 | |
Contract assets | |
| 19,729,638 | | |
| | | |
| | | |
| | | |
| 19,729,638 | |
Inventory | |
| 9,567,921 | | |
| (1,875,950 | ) | |
| | | |
| (1,305,683 | ) | |
| 6,386,288 | |
Refundable income taxes | |
| 40,000 | | |
| | | |
| | | |
| | | |
| 40,000 | |
Prepaid expenses and other current assets | |
| 534,857 | | |
| | | |
| | | |
| | | |
| 534,857 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total Current Assets | |
| 40,868,859 | | |
| (1,875,950 | ) | |
| — | | |
| (1,305,683 | ) | |
| 37,687,226 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Operating lease right-of-use assets | |
| 4,075,048 | | |
| | | |
| | | |
| | | |
| 4,075,048 | |
Property and equipment, net | |
| 2,521,742 | | |
| | | |
| | | |
| | | |
| 2,521,742 | |
Intangibles, net | |
| 250,000 | | |
| | | |
| | | |
| | | |
| 250,000 | |
Goodwill | |
| 1,784,254 | | |
| | | |
| | | |
| | | |
| 1,784,254 | |
Other assets | |
| 191,179 | | |
| | | |
| | | |
| | | |
| 191,179 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total Assets | |
$ | 49,691,082 | | |
$ | (1,875,950 | ) | |
$ | — | | |
$ | (1,305,683 | ) | |
$ | 46,509,449 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities and Shareholders’
Deficit | |
| | | |
| | | |
| | | |
| | | |
| | |
Current Liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Accounts payable | |
$ | 12,092,684 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 12,092,684 | |
Accrued expenses | |
| 5,693,518 | | |
| 244,403 | | |
| | | |
| | | |
| 5,937,921 | |
Contract liabilities | |
| 1,650,549 | | |
| | | |
| | | |
| | | |
| 1,650,549 | |
Loss reserve | |
| 800,971 | | |
| | | |
| 1,208,276 | | |
| | | |
| 2,009,247 | |
Current portion of long-term debt | |
| 6,501,666 | | |
| | | |
| | | |
| | | |
| 6,501,666 | |
Operating lease liabilities | |
| 1,819,237 | | |
| | | |
| | | |
| | | |
| 1,819,237 | |
Income taxes payable | |
| 862 | | |
| 86 | | |
| | | |
| | | |
| 948 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total Current Liabilities | |
| 28,559,487 | | |
| 244,489 | | |
| 1,208,276 | | |
| — | | |
| 30,012,252 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Line of credit | |
| 20,738,685 | | |
| | | |
| | | |
| | | |
| 20,738,685 | |
Long-term operating lease liabilities | |
| 2,537,149 | | |
| | | |
| | | |
| | | |
| 2,537,149 | |
Long-term debt, net of current portion | |
| 6,205,095 | | |
| | | |
| | | |
| | | |
| 6,205,095 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total Liabilities | |
| 58,040,416 | | |
| 244,489 | | |
| 1,208,276 | | |
| — | | |
| 59,493,181 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Shareholders’ Deficit: | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock | |
| 11,951 | | |
| | | |
| | | |
| | | |
| 11,951 | |
Additional paid-in capital | |
| 72,005,841 | | |
| | | |
| | | |
| | | |
| 72,005,841 | |
Accumulated deficit | |
| (80,367,126 | ) | |
| (2,120,439 | ) | |
| (1,208,276 | ) | |
| (1,305,683 | ) | |
| (85,001,524 | ) |
Total Shareholders’ Deficit | |
| (8,349,334 | ) | |
| (2,120,439 | ) | |
| (1,208,276 | ) | |
| (1,305,683 | ) | |
| (12,983,732 | ) |
Total Liabilities and Shareholders’ Deficit | |
$ | 49,691,082 | | |
$ | (1,875,950 | ) | |
$ | — | | |
$ | (1,305,683 | ) | |
$ | 46,509,449 | |
The effect of the Restatement described above on the accompanying
consolidated statement of operations for the three and nine months ended September 30, 2020 is as follows:
| |
| | |
| | |
| | |
| | |
| |
| |
Consolidated Statement of Operation For the three months ended September 30, 2020 (Unaudited) | |
| |
| |
| |
As Previously Reported | | |
Inventory
Costing
Errors | | |
Loss Contract Reserve | | |
Inventory Reserve | | |
As Restated | |
Revenue | |
$ | 25,576,718 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 25,576,718 | |
Cost of sales | |
| 21,394,243 | | |
| 112,446 | | |
| (206,159 | ) | |
| 69,157 | | |
| 21,369,687 | |
Gross profit | |
| 4,182,475 | | |
| (112,446 | ) | |
| 206,159 | | |
| (69,157 | ) | |
| 4,207,031 | |
Selling, general and administrative expenses | |
| 3,050,644 | | |
| | | |
| | | |
| | | |
| 3,050,644 | |
Profit from operations | |
| 1,131,831 | | |
| (112,446 | ) | |
| 206,159 | | |
| (69,157 | ) | |
| 1,156,387 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Other expense: | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| (309,008 | ) | |
| | | |
| | | |
| | | |
| (309,008 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Provision for income taxes | |
| 7,614 | | |
| — | | |
| — | | |
| — | | |
| 7,614 | |
Net Income | |
$ | 815,209 | | |
$ | (112,446 | ) | |
$ | 206,159 | | |
$ | (69,157 | ) | |
$ | 839,765 | |
Income per common share - basic | |
$ | 0.07 | | |
$ | (0.01 | ) | |
$ | 0.02 | | |
$ | (0.01 | ) | |
$ | 0.07 | |
Income per common share - diluted | |
$ | 0.07 | | |
$ | (0.01 | ) | |
$ | 0.02 | | |
$ | (0.01 | ) | |
$ | 0.07 | |
Basic | |
| 11,894,469 | | |
| — | | |
| — | | |
| — | | |
| 11,894,469 | |
Diluted | |
| 11,894,469 | | |
| — | | |
| — | | |
| — | | |
| 11,917,149 | |
| |
|
| | |
|
| | |
|
| | |
|
| | |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
Consolidated Statement of Operation For the nine months ended September 30, 2020 (Unaudited) | |
| |
| |
| |
As Previously Reported | | |
Inventory Costing
Errors | | |
Loss Contract Reserve | | |
Inventory Reserve | | |
As Restated | |
Revenue | |
$ | 62,175,872 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 62,175,872 | |
Cost of sales | |
| 54,715,508 | | |
| 938,689 | | |
| (6,753 | ) | |
| 352,074 | | |
| 55,999,518 | |
Gross profit | |
| 7,460,364 | | |
| (938,689 | ) | |
| 6,753 | | |
| (352,074 | ) | |
| 6,176,354 | |
Selling, general and administrative expenses | |
| 8,958,986 | | |
| | | |
| | | |
| | | |
| 8,958,986 | |
Loss from operations | |
| (1,498,622 | ) | |
| (938,689 | ) | |
| 6,753 | | |
| (352,074 | ) | |
| (2,782,632 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Other expense: | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| (1,085,805 | ) | |
| | | |
| | | |
| | | |
| (1,085,805 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Provision for income taxes | |
| 9,714 | | |
| — | | |
| — | | |
| — | | |
| 9,714 | |
Net loss | |
$ | (2,594,141 | ) | |
$ | (938,689 | ) | |
$ | 6,753 | | |
$ | (352,074 | ) | |
$ | (3,878,151 | ) |
Loss per common share - basic | |
$ | (0.22 | ) | |
$ | (0.08 | ) | |
$ | 0.00 | | |
$ | (0.03 | ) | |
$ | (0.33 | ) |
Loss per common share - diluted | |
$ | (0.22 | ) | |
$ | (0.08 | ) | |
$ | 0.00 | | |
$ | (0.03 | ) | |
| (0.33 | ) |
Basic | |
| 11,862,506 | | |
| — | | |
| — | | |
| — | | |
| 11,862,506 | |
Diluted | |
| 11,862,506 | | |
| — | | |
| — | | |
| — | | |
| 11,862,506 | |
Cumulative Effect of Prior Period Adjustments
The following table presents the impact of the Restatement
on the Company’s shareholders’ deficit as of December 31, 2019 (as restated), March 31, 2020 (as restated), June 30,
2020 (as restated), September 30, 2020 (as restated) and December 31, 2020 (as restated):
| |
| | |
| | |
| | |
| | |
| |
| |
Common Stock Shares | | |
Common Stock | | |
Additional Paid-in Capital | | |
Accumulated Deficit | | |
Total Shareholders’ Deficit | |
Balance, December 31, 2019
(As Restated) | |
| 11,818,830 | | |
$ | 11,819 | | |
$ | 71,294,629 | | |
$ | (81,346,771 | ) | |
$ | (10,040,323 | ) |
Net Loss (as previously reported) | |
| | | |
| | | |
| | | |
$ | (2,812,519 | ) | |
$ | (2,812,519 | ) |
Inventory Costing Errors | |
| — | | |
| — | | |
| — | | |
| (315,999 | ) | |
| (315,999 | ) |
Loss Contract Reserve | |
| — | | |
| — | | |
| — | | |
| (9,371 | ) | |
| (9,371 | ) |
Inventory Reserve | |
| — | | |
| — | | |
| — | | |
| (219,466 | ) | |
| (219,466 | ) |
Cumulative restatement adjustments | |
| — | | |
| — | | |
| — | | |
| (544,836 | ) | |
| (544,836 | ) |
Net Loss (as restated) | |
| | | |
| | | |
| | | |
| (3,357,355 | ) | |
| (3,357,355 | ) |
Stock-based compensation | |
| 18,388 | | |
| 18 | | |
| 347,167 | | |
| — | | |
| 347,185 | |
Balance, March 31, 2020
(As Restated) | |
| 11,837,218 | | |
$ | 11,837 | | |
$ | 71,641,796 | | |
$ | (84,704,126 | ) | |
$ | (13,050,493 | ) |
Net Loss (as previously reported) | |
| | | |
| | | |
| | | |
$ | (596,831 | ) | |
$ | (596,831 | ) |
Inventory Costing Errors | |
| — | | |
| — | | |
| — | | |
| (510,244 | ) | |
| (510,244 | ) |
Loss Contract Reserve | |
| — | | |
| — | | |
| — | | |
| (190,035 | ) | |
| (190,035 | ) |
Inventory Reserve | |
| — | | |
| — | | |
| — | | |
| (63,451 | ) | |
| (63,451 | ) |
Cumulative restatement adjustments | |
| — | | |
| — | | |
| — | | |
| (763,730 | ) | |
| (763,730 | ) |
Net Loss (as restated) | |
| | | |
| | | |
| | | |
| (1,360,561 | ) | |
| (1,360,561 | ) |
Stock-based compensation | |
| 18,388 | | |
| 19 | | |
| 189,184 | | |
| — | | |
| 189,203 | |
Balance, June 30, 2020
(As Restated) | |
| 11,855,606 | | |
$ | 11,856 | | |
$ | 71,830,980 | | |
$ | (86,064,687 | ) | |
$ | (14,221,851 | ) |
Net Income (as previously reported) | |
| | | |
| | | |
| | | |
$ | 815,209 | | |
$ | 815,209 | |
Inventory Costing Errors | |
| — | | |
| — | | |
| — | | |
| (112,446 | ) | |
| (112,446 | ) |
Loss Contract Reserve | |
| — | | |
| — | | |
| — | | |
| 206,159 | | |
| 206,159 | |
Inventory Reserve | |
| — | | |
| — | | |
| — | | |
| (69,157 | ) | |
| (69,157 | ) |
Cumulative restatement adjustments | |
| — | | |
| — | | |
| — | | |
| 24,556 | | |
| 24,556 | |
Net Income (as restated) | |
| | | |
| | | |
| | | |
| 839,765 | | |
| 839,765 | |
Stock-based compensation | |
| 70,571 | | |
| 70 | | |
| 141,031 | | |
| — | | |
| 141,101 | |
Balance, September 30, 2020
(As Restated) | |
| 11,926,177 | | |
$ | 11,926 | | |
$ | 71,972,011 | | |
$ | (85,224,922 | ) | |
$ | (13,240,985 | ) |
Net Income | |
| | | |
| | | |
| | | |
$ | 1,273,703 | | |
$ | 1,273,703 | |
Inventory Costing Errors | |
| — | | |
| — | | |
| — | | |
| (1,071,395 | ) | |
| (1,071,395 | ) |
Loss Contract Reserve | |
| — | | |
| — | | |
| — | | |
| 99,921 | | |
| 99,921 | |
Inventory Reserve | |
| — | | |
| — | | |
| — | | |
| (78,831 | ) | |
| (78,831 | ) |
Cumulative restatement adjustments | |
| — | | |
| — | | |
| — | | |
| (1,050,305 | ) | |
| (1,050,305 | ) |
Net Income (as restated) | |
| | | |
| | | |
| | | |
| 223,398 | | |
| 223,398 | |
Stock-based compensation | |
| 25,094 | | |
| 25 | | |
| 33,830 | | |
| — | | |
| 33,855 | |
Balance, December 31, 2020
(As Restated) | |
| 11,951,271 | | |
$ | 11,951 | | |
$ | 72,005,841 | | |
$ | (85,001,524 | ) | |
$ | (12,983,732 | ) |
Impact on Consolidated Statement of Cash Flows
The effect of the Restatement described above on the accompanying
consolidated statement of cash flows for the nine months ended September 30, 2020 is as follows:
| |
| | |
| | |
| | |
| | |
|
| |
| |
Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 (Unaudited) | |
| |
As Previously Reported | | |
Inventory Costing Errors | | |
Loss Contract Reserve | | |
Inventory Reserve | | |
As Restated | |
Cash flows from operating activities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Net Loss | |
$ | (2,594,141 | ) | |
$ | (938,689 | ) | |
$ | 6,753 | | |
$ | (352,074 | ) | |
$ | (3,878,151 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Depreciation and amortization | |
| 769,690 | | |
| | | |
| | | |
| | | |
| 769,690 | |
Amortization of debt issuance cost | |
| 80,764 | | |
| | | |
| | | |
| | | |
| 80,764 | |
Cash expended in excess of rent expense | |
| (115,932 | ) | |
| | | |
| | | |
| | | |
| (115,932 | ) |
Stock-based compensation expense | |
| 677,489 | | |
| | | |
| | | |
| | | |
| 677,489 | |
Bad debt expense | |
| (47,410 | ) | |
| — | | |
| — | | |
| — | | |
| (47,410 | ) |
Changes in operating assets and liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Increase in accounts receivable | |
| (232,310 | ) | |
| | | |
| | | |
| | | |
| (232,310 | ) |
Increase in contract assets | |
| (3,128,460 | ) | |
| | | |
| | | |
| | | |
| (3,128,460 | ) |
Increase in inventory | |
| (2,850,707 | ) | |
| 852,222 | | |
| | | |
| 352,074 | | |
| (1,646,411 | ) |
Decrease in prepaid expenses and other current assets | |
| 121,075 | | |
| | | |
| | | |
| | | |
| 121,075 | |
Decrease in refundable income taxes | |
| 439,445 | | |
| — | | |
| — | | |
| — | | |
| 439,445 | |
Increase in accounts payable and accrued expenses | |
| 5,770,902 | | |
| 86,467 | | |
| | | |
| | | |
| 5,857,369 | |
Decrease in contract liabilities | |
| (1,092,266 | ) | |
| | | |
| | | |
| | | |
| (1,092,266 | ) |
Decrease in loss reserve | |
| (1,081,516 | ) | |
| | | |
| (6,753 | ) | |
| | | |
| (1,088,269 | ) |
Net cash used in operating activities | |
| (3,283,377 | ) | |
| — | | |
| — | | |
| — | | |
| (3,283,377 | ) |
Cash flows from investing activities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Purchase of property and equipment | |
| (11,888 | ) | |
| — | | |
| — | | |
| — | | |
| (11,888 | ) |
Net cash used in investing activities | |
| (11,888 | ) | |
| — | | |
| — | | |
| — | | |
| (11,888 | ) |
Cash flows from financing activities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Proceeds from PPP loan | |
| 4,795,000 | | |
| | | |
| | | |
| | | |
| 4,795,000 | |
Payments on long-term debt | |
| (1,855,209 | ) | |
| | | |
| | | |
| | | |
| (1,855,209 | ) |
Debt issuance costs | |
| (107,540 | ) | |
| — | | |
| — | | |
| — | | |
| (107,540 | ) |
Net cash provided by financing activities | |
| 2,832,251 | | |
| — | | |
| — | | |
| — | | |
| 2,832,251 | |
Net decrease in cash and restricted cash | |
| (463,014 | ) | |
| | | |
| | | |
| | | |
| (463,014 | ) |
Cash and restricted cash at beginning of year | |
| 5,432,793 | | |
| — | | |
| — | | |
| — | | |
| 5,432,793 | |
Cash and restricted cash at end of year | |
$ | 4,969,779 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 4,969,779 | |
Supplemental schedule of cash flow information: | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash paid during the year for interest | |
$ | 1,156,126 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 1,156,126 | |
Cash (received) from income taxes | |
$ | (449,749 | ) | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | (449,749 | ) |